Compaq, Kodak warn on profits

Sony is one of Kodak's new digital competitors

Photography giant Eastman Kodak and personal computer maker Compaq Computer have both warned that profits in the fourth quarter will be lower than previously expected.

Both companies blamed slow consumer demand for their products, as well as inventory cutbacks, for the drop in earnings.

Kodak said it now expected earnings per share of 65-75 cents in the fourth quarter, more than 33% lower than previously forecast. Compaq revised its EPS estimate downwards to 28-30 cents - a level 8-10% below previous expectations.

The profit warnings were not entirely unexpected. A string of other top tech firms have issued similar warnings in recent weeks including Apple Computer, Gateway, Hewlett-Packard, Intel, Motorola and Nortel Networks.

Wavering confidence

Taken together, these further indications of falling demand are likely to add pressure for the US central bank to lower interest rates.

"While we had a good start to the fourth quarter, it is now clear that market confidence has wavered, and that we will be affected by the general softness in US consumer, small and medium business and dotcom markets," Compaq chairman and chief executive Michael Capellas said in a statement.

Compaq said its fourth-quarter revenues would drop to $11.2bn-11.4bn, compared with previous analyst expectations of $12.3bn and $10.4bn in the corresponding period of 1999.

Its warning was issued after the markets closed on Tuesday night but the stock was unchanged in after-hours electronic trading, with brokers saying the share had already been hit by the general gloomy sentiment surrounding tech stocks.

"What we're seeing now is what many other sectors in the consumer area have been seeing - computers and cars - and that is with the economy slowing down, consumers are pulling back," Kodak chairman Daniel Carp had said.

The company expects the slow growth to hit profits in the first half of next year as well.

Digital age

The US economic slowdown comes at a time when the company is struggling to redefine itself in an age of digital and online photography.

Kodak's bet is that consumers will move rapidly to adopt digital technology to take pictures.

But as consumers grow more cautious with their cash, this is less likely to happen.

The marketplace for digital imaging technology is also more crowded than traditional photography, with companies like Sony vying with Kodak, Fuji, and Olympus.

Dollar woes

The company also blamed its failure to offset the impact of the stronger dollar for the weaker profits. A stronger dollar makes US products more expensive to overseas buyers.

The company "will take aggressive action" to strengthen its balance sheet and cut costs, it said.

In a bid to increase cash flow, Kodak said it planned to cut capital spending by $200m, reduce stocks by $200m and impose hiring limits.