European Press Conference Remarks
President & CEO
Compaq Computer Corp.
Oslo Press Conference
September 19. 1996
Good morning, everyone. I'm glad you could be with us.
13 years ago this month, I joined Compaq with the initial charter of building Compaq's business in Europe.
At the end of that year ... 1983 ... Compaq's worldwide sales reached $111 million -- the highest first-year sales in American business history.
Fast forward 13 years ... and financial analysts estimate Compaq's full year 1996 sales at $18.2 billion ... placing us among the world's top 200 corporations.
Analyst estimates also call for full-year operating profit of $1.7 billion ... and net income of $1.2 billion.
For the last decade ... we've been making the entire world our market.
Our success as a truly global company that serves more than 100 countries ... is evidenced by our holding the top worldwide PC market share for the last two and half years running -- 10.2%.
Today, Compaq is not only the largest supplier of personal computers.
We're also the world's fifth largest company in computer sales ... having overtaken Hitachi and Digital Equipment Corporation in 1995.
This morning ... I want to talk to you about:
· our 1996 performance to date ...
· our outlook for the second half ...
· and most important ... our new blueprint for the future -- our roadmap for redefining Compaq and extending our global leadership.
Let's begin with a quick look back to the second quarter's solid financial performance.
[2 Quarter Results]
In the quarter ... worldwide sales grew 14 percent to $4 billion.
Net income increased 9 percent to $267 million.
And earnings per share rose to $ .96 ... compared with $ .90 reported in the 1995 second quarter ... exceeding analysts' projections.
Of real significance in the quarter ... Compaq's gross margins returned to 23 percent.
This was the result of global operational improvements in the areas of logistics and asset management ... as well as the beginning of a major new product cycle.
Our cash balance increased 86 percent over the first quarter to $1.9 billion.
This performance prompted a Dean Witter financial analyst to observe that "the truly dramatic improvement in its balance sheet puts Compaq in a class by itself in the PC industry." Eugene Glazer, quoted in Investor's Business Daily, 7/25/96
Turning to the first half ... worldwide sales increased 27 percent to $8.2 billion.
Net income for the half rose 8 percent to $501 million.
Sales were strong for the half in most regions.
For example ...
· North America was up 39 percent ...
· Europe/Middle East/Africa ... 14 percent
· Asia Pacific ... 24 percent ...
· and Latin America ... 60 percent.
· [Japan = -1.7%]
Compaq remains the No. 1 supplier of desktop PCs ... the No. 1 supplier of Pentium PCs ... and the No. 1 PC server vendor by a wide margin.
Our stock has responded to this continuing momentum.
In fact it closed last Friday at a new record high of $60 1/2.
['96 WW Unit Growth]
On a global basis ... the PC market is maintaining its strong growth this year.
True, we are not seeing the 20-plus percent growth of years past.
But market researchers are forecasting worldwide unit growth of between 17 and 19 percent this year ... which translates to shipments of about 70 million PCs.
As early as 1999 ... annual PC shipments worldwide could exceed 100 million units.
Consider the factors driving this market.
The PC business is becoming far more global.
Computing and communications are merging so quickly that the era of personal computing is becoming the era of personal communications.
On the commercial side ... the corporate Pentium upgrade cycle is only partly completed.
And the Windows NT 4.0 cycle is just beginning. (Upgrading to NT requires a Pentium or higher.)
On the consumer side ... ongoing price reductions ... ease-of-use enhancements ... newly affordable multimedia functionality ... and new software applications are stimulating global demand.
[The Digital Revolution]
Without question ... the single most significant factor encouraging PC use is the Internet ... which has become the key catalyst for exploding global connectivity.
These days ... more and more people believe that if you are not on the Net ... you're really out of it.
As a result, the Net is driving millions of new consumers around the world to PCs ... and creating major new demand for servers and internetworking equipment.
Think about it: The Net -- with its ever richer content ... growing population of users ... and emerging infrastructure for commerce -- is helping fulfill the promise of the PC.
The Internet is making every one of the millions of Compaq PCs in the hands of our customers more valuable.
PCs are becoming must-have tools for electronic education ... recreation ... and commerce.
At the same time ... the more consumers get "wired" ... the more need there is for Compaq servers and networking products and services.
So where does Compaq play in this rising tide of PC demand?
Our outlook calls for a strong second half.
In fact, we believe we're in an excellent position to gain market share and achieved improve profitability for the balance of this year.
Why do I believe this?
For starters ... we retain the industry leadership position by several measures: market share... product breadth ... global presence ... and product cycle strength.
Consider our product life cycles ... which are coming faster and faster.
[Product line: Pentiums]
Since early June ... we've been rolling out a multitude of major new product lines that can be integrated into an enterprise solution.
Here's a quick rundown.
In early June ... we introduced a new class of Pentium Pro servers -- the ProLiant 5000 -- that deliver midrange-system performance at half the cost of proprietary systems.
IDC just reported that nearly 80 percent of the PC servers and superservers shipped with Pentium Pro processors during the second quarter were ProLiant 5000s.
Concurrently ... we introduced network-based software tools that reduce implementation and support costs.
[Product line: Portables]
Then in mid June ... we introduced a new range of thinner, lighter-weight notebook PCs that incorporate faster processors, richer multimedia, and the industry's first 28.8 BPS cellular modem with advanced telephony ... all of which puts Compaq on the road to regaining portables leadership.
In mid July ... we announced the industry's first family of home PCs that are designed for five distinct consumer market segments and offer five new form factors ... including
· the first full-featured flat panel desktop home PC;
· the first PCs to bring arcade quality graphics to home computers;
· and the first mobile computer designed for the consumer market.
In late July ... we launched a complete redesign of our entire commercial desktop PC line ... incorporating Intelligent Manageability across the line and consolidating all models under a single brand name--Deskpro.
For those unfamiliar with Intelligent Manageability ... it enables customers to manage, inventory, and troubleshoot the desktop PCs on their network from one location.
Market research firm Dataquest noted the real significance of our new Deskpros ... and wrote:
"The machines are designed for advanced manufacturing logistics, which increase availability and shorten delivery time for customers ... and allows Compaq to make more efficient use of its production capacity." Martin Reynolds, Dataquest, July 96
In July ... we also dramatically expanded network manageability for all customers.
We introduced Compaq Netelligent hardware and software products that make it far simpler to install, configure, and manage network devices ... while ensuring maximum network availability and minimum cost of ownership.
In August ... we announced the formation of our Workstation Division ... which plans to launch a family of powerful, industry-standard Windows NT workstations worldwide in the fourth quarter.
These workstations will meet the most demanding needs of design, engineering, and financial professionals ... at costs far lower than proprietary UNIX/RISC workstations.
In late August ... we announced customized service and support offerings for customers who are betting their business on the SAP R/3 distributed enterprise environment.
We'll provide the most coordinated service response and high levels of availability for Compaq customers running mission-critical R/3 Windows NT solutions on our servers.
One week ago ... we launched the first industry standard router ... rounding out our networking product line of NICs, hubs, and switches.
[Wealth Of Leadership Products]
What should you infer from this wealth of leadership products and services announced in just the last three and a half months?
First, Compaq has the strongest product lineup in its history ... and has many new leadership products yet to announce this year.
Second, rather than simply make products that connect users to the Internet ... our new product lines will help customers make the leap from connectivity to competitive advantage in the age of the Internet.
And third, the expertise of Compaq and our strategic partners now extends well beyond the desktop and the laptop ... to the entire realm of corporate computing and its integration with the Internet.
Just ask our customers -- customers like General Motors ... brokerage firm Smith Barney ... or UBS ... BMW ... German Post AG ... and many, many others.
In essence, Compaq has learned how to blend an enterprise computer company and a consumer electronics company.
As I look back on the first half of the 1990s ... I see not only a global but also a fast-forward company.
Between 1991 and the end of 1995 ...
· our worldwide market share has grown 31 percent a year compounded;
· our sales have grown 46 percent a year;
· our net income by 66 percent a year;
· and our stock value by nearly 50 percent a year.
All of that said ... Compaq will be the first to acknowledge that unprecedented change lies ahead for the information industry.
[External Market Forces]
It's not simply that the Internet is restructuring the industry... causing competitors from a multitude of industries to converge on the information technology marketplace.
It's also that our customers' requirements are changing.
More and more ...they require bundled network solutions and higher levels of global service and support.
That's why we're supplanting strategic assumptions that served us well in the first half of the 1990s ... with new ones attuned to the changed market realities of the second half.
That's why we're methodically identifying new competitive threats and figuring out how we will deal with them.
In fact ...it's fair to say that Compaq is launching an internal revolution all over again, a revolution as far reaching as the one we launched in 1991.
Only this time we're reinventing Compaq from a position of strength and PC leadership -- not crisis.
And this time ... we have set for ourselves an even bolder leadership goal than the prior one of "No. 1 in '96."
We have jumped to a competitive playing field that is far broader and more complex than the PC industry -- the worldwide computer industry.
[New Leadership Objective]
Within this market ... we intend to be one of the top three global computer companies by the year 2000 -- networking people and information.
Today ... as I mentioned ... we are No. 5.
Over the next four years ... we will strive to overtake at least two of the three major competitors immediately ahead of us ... and perpetuate our legacy of growth.
We will measure ourselves against their relevant computing and communications businesses that sell products and services to end customers.
Now ... this is not a quest for bigness ... for the sake of bigness.
[Corp. Goal = Customer Satisfaction]
The raison d'être for this revolution is to achieve industry-leading customer satisfaction and loyalty as well as outstanding long-term growth for our shareholders.
How do we create loyal customers? By sharpening our focus on customer solutions. And by staying ahead of customers and anticipating their needs.
[New Organization Structure]
And that's the reason why ... on July 2 ... we announced a significant new organization structure.
We created three new customer-focused business groups -- Enterprise Computing ... PC Products ... and Consumer Products -- that reflect the way customers think about and use information technology.
We believe this multiple business model will enable us to grow our core businesses ... invest in and build new businesses ... increase our global presence ... empower decision making closer to the market .. and strengthen our market focus on strategic markets.
[Enterprise Computing Group]
Let's take a quick look at these business groups ... beginning with Enterprise Computing.
This business group gathers together:
· Server Products Division
· Enterprise Storage and Options Division
· Our new Workstation Division
· Our new Enterprise Solutions Division
· Our new Internet Solutions Division -- which heightens our focus on the Internet
· And our Networking Products Division
This business group expands our emphasis on enterprise computing ... positioning Compaq as an end-to-end supplier of computing solutions.
It's devoted entirely to servers, workstations, networking, and the Internet ... sharpening our focus on the client/server paradigm.
We will leverage our leadership server position into a long-term relationship with customers ... by pulling products from across Compaq into distributed enterprise solutions ... and by providing customers with a migration path to the Internet era.
Let's turn to our next business group -- PC Products.
Within this group ... you'll find:
· Our Desktop PC Division
· Portable PC Division
· Our new Options Division, combing portables and desktop options
· New focus on small and medium business solutions
· New Communications Products Division
This group will support our corporate strategy to grow and improve the performance of our core business while investing in new strategic markets.
As regards our core business ... the PC Group will not only sustain and grow Compaq's leadership in desktop PCs .. but also regain leadership in the portables market no later than 1998.
As for investing in new markets ... the PC Group will build an external communications products business based on Compaq's development of modems ... PC cards ... and other wired and wireless products.
At the same time ... we will develop products and solutions for small and medium-size businesses around the world.
Our third group is Consumer Products.
This group was formalized just over a year ago and has been hard at work delivering what customers truly want in a home PC..
This group is now targeting specific products to five key market segments of home PC users.
Compaq will continue to provide consumers with new functionality and simplicity ... ensuring that our PCs are nearly as easy to use as home appliances ... attractive and complementary to home decor ... and enabling quick access to the computer features consumers use most often.
Our new business groups make clear that Compaq is no longer in one business ... but in three different businesses ... each with different customers ... competitors ... business models ... and strategic objectives.
At the same, time these businesses are synergistic.
They benefit from the Compaq brand known internationally for quality and reliability.
Their linkage enables global economies of purchasing, manufacturing, and distribution ... and opportunities to bundle multiple products into value add solutions.
[How Will We Measure Progress]
How will we chart our progress en route to our new leadership objective?
We have three separate but highly interdependent measures.
First ... the level of customer satisfaction we provide ... ultimately resulting in industry-leading customer loyalty.
Second, the economic value add or EVA we create for our shareholders.
EVA is an excellent indicator of stock performance ... and measures Compaq's ability to generate wealth in excess of the cost of capital we employ.
Our third measure is the relative size of Compaq to other global computer companies.
We're fully aware of the magnitude of the challenge we have set for ourselves.
Yet we're equally aware of the magnitude of the benefits once we succeed.
In July ... Business Week wrote a story that comprehended the scope of our internal revolution.
The magazine wrote: "If the Crossroads plan is successful ... Compaq will have created the blueprint for the computer company of the next century: a giant with the nimbleness of a consumer electronics maker and the all encompassing service and support capabilities of big computer companies such as HP and IBM."
That captures the essence of what the new Compaq is about.
When people look back on the influential companies that led the way into the next millennium and into the new information age, we are absolutely determined that Compaq will be one of the leaders.
European Press Conference Remarks