Update: Compaq moves to cut more jobs

Compaq Computer Corp. today announced plans to lay off another 4,000 workers because of continued weak demand for its systems, increasing the total number of jobs that are due to be eliminated this year by the computer vendor to 8,500.

Compaq said it expects second-quarter operating earnings to be consistent with current projections by financial analysts, with revenue coming in at about $8.4 billion -- down 9% on a sequential basis and $600 million less than the company's original goal. The earnings forecast is also down from Compaq's initial guidance for the quarter, and the company indicated that more cutbacks are needed to cope with an increasingly global slowdown in IT spending.

"We are committed to taking aggressive actions during this period of slow demand to make permanent improvements in our business model," said Michael Capellas, Compaq's chairman and CEO, in a statement. "It is now clear that the economic slowdown is spreading overseas, and we will therefore move more swiftly and go even deeper in our structural cost reduction programs."

This is the second time that Compaq has increased its cutback plans since initially saying in March that 5,000 jobs were being targeted (see story). A month later, when it reported a 74% drop in first-quarter net income, the company raised the job reduction figure to 7,000, with 4,500 due to come through layoffs and the remainder via attrition (see story).

But during a conference call after today's announcement, Jeff Clarke, Compaq's chief financial officer, said the attrition rate at the company had been lower than expected. As a result, he added, the 2,500 jobs earmarked for elimination through attrition will now be cut through layoffs along with an additional 1,500 positions.

When all the cuts are made, Compaq will have reduced its workforce by about 12%. The company said the new layoffs are primarily taking place in its Access business unit, a combination of its corporate and consumer PC operations that was set up earlier this year, as well as in its supply chain and administrative departments.

About 3,500 of the targeted jobs have actually been eliminated thus far, "and the savings are already apparent," Clarke said. "However, further actions are required, and we will address these with similar urgency." He noted that the revenue shortfall in the second quarter resulted primarily from weak sales in Europe, where economic conditions appear to be worsening.

Compaq expects to save about $900 million in annual costs through the workforce reduction program. But the company said it will take a $490 million charge against its second-quarter earnings in order to pay for the new layoffs and "related asset impairments" stemming mainly from last month's decision to phase out development of the Alpha microprocessor. The second-quarter results are scheduled to be announced July 25.

Like other technology vendors, Compaq is struggling to cope with IT spending cutbacks and delays by corporate users reacting to the sluggish economy. Already this week, other vendors that have announced layoffs or issued warnings about their financial results include NCR Corp., Silicon Graphics Inc. and Alcatel SA.

Despite its struggles and the expanded layoffs, though, Compaq hasn't completely stopped hiring new workers. Clarke said the company added about 750 employees to its professional services operation during the second quarter, as part of a plan disclosed last month under which Compaq is trying to reduce its reliance on hardware sales (see story).

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