Only one week ago, Intel sent Wall Street IT stocks reeling when it announced its profits were not as good as it hoped.
But that situation was further compounded at the end of the week after Eckhard Pfeiffer, CEO of Compaq, told his shareholders that its Q1 sales will match last year?s Q1, with profits at break-even. What?s worse is that problem might continue into Q2.
What is going on?
Pfeiffer said in an official statement that it ?fully intends to expand its business and grow its market share.? But he conceded that had to be done carefully, following Compaq?s acquisition of Digital.
Compaq claims that the problems are mostly due to commercial pressures in North America and it is true that the company seems to make many more price cuts in the US than in Europe. But part of Compaq?s problem there seems to be that it needs to speed up its Optimised Distribution Model (ODM), in order to cut prices and stay competitive.
Two weeks ago, Compaq opened a new Call Centre in Glasgow and told the assembled trade press that it had plans for going direct but that it would only sell its products to ?sophisticated users? - primarily people who knew exactly what they wanted to buy.
According to David Petts, who manages the UK Call Centre, direct sales will only be a very small fraction of total sales, most of which will continue to be pushed through the channel.
But can the US channel differ that much from the UK channel? Pfeiffer said: ?We looked closely at our market and business plan once it became clear that sales out of our North American commercial channels were not meeting our expectations. We are putting in place price reductions and aggressive promotions in the first and second quarter to reduce these channel inventories.? In short, Compaq US has been stuffing its channel with product.
That, in itself, is not unusual, given Compaq?s indirect channel model, and particularly happens before quarters end, to shift stock. But taken in conjunction with Intel?s warning last week, there could be more to the announcements from the computing giants than meets the eye.
Pfeiffer told analysts and journalists at a conference call on Friday that the problem reflected a lack of sales in the first quarter. ?It is not a product issue, there is plenty of product,? he said. Intel was coy about its profit warning last week, saying it was unclear what the shortfall in products was. But in the same week, Intel also formally introduced its Celeron (formerly Covington) processor, essentially a cut-down Pentium II, and aimed at re-capturing market share in the entry level, sub $750-dollar market.
As Intel refuses to comment on how many Pentium IIs it has sold, or even made, it is hard to be sure whether the reason for the shortfall is to do with lack of sales in that arena. Certainly, Intel has pushed millions of advertising dollars into promoting the Pentium II, complete with BunnyPeople and co-operative marketing with its channel.
Intel is moving fast to persuade its customers to move to all of the different platforms, said Mark Davison, director of processors at Datrontech. He said: ?I would expect the Celeron from all manufacturers, but higher up the chain, the first tier vendors are all designing to entry level markets.?
He said that his company?s customers, the system builders and assemblers which constitute tiers two to three, were already picking up what he described as ?a large share of the small to medium enterprise (SME) business.?
The whole deal is about manufacturing, however. Davison agreed that system builders were able to build PCs at a lower cost than tier one manufacturers. He said that they knew how to buy at the right prices and how to build, as well.
Two weeks ago, Compaq?s Petts said that the new model -- ODM -- was likely to be up and running by the middle of this year. It, like many other tier one vendors, is revising its model for manufacturing, given the speed of processors released from Intel released through this year.
The whole question is whether Pfeiffer?s difficulties are, as Compaq claimed, local, or whether there is something else dragging down its Q1 and possibly Q2 results. And if it affects Compaq, companies like Packard Bell, Dell and Gateway might also have to tighten their belts.
A source at Intel, who insisted on anonymity, told the VNU Newswire: ?Our company has repositioned the Celeron product. We want our tier one customers to use the faster Pentium IIs.?
That was denied by an Intel representative who said: ?We are still analysing the problem that caused the profit warning here.? The representative said that Friday?s profit warning from Compaq was unrelated. ?You?d have to talk to them about that,? the representative said.
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