Compaq Computer will not make a significant profit in its Q1 1998 thanks to flat sales - an admission that has shocked analysts who expected it to make over $420 million profit.

Following this week?s warnings from Intel, Motorola, Advanced Micro Devices and Cabletron Systems, Compaq said cut-throat pricing and competition from other hardware vendors have led to the shortfall.

Eckhard Pfeiffer, president and chief executive of Compaq, 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 those channel inventories and accelerate implementation of our optimised distribution model."

Analysts were surprised by the revelation that Compaq will only break even, although they expressed relief that Compaq?s European and Asian businesses are not hit as hard as its US sales.

Pfeiffer claimed Compaq will maintain its competitive position and increase its market share, as it expects its turnover to reach a similar level to its Q1 1997. "Timing these pricing and promotional activities to coincide with the Digital Equipment acquisition will position us to take full advantage of that merger."

That statement suggests that US distributors will be offered Digital-branded hardware at bargain prices, as Compaq has admitted it will "consolidate its Compaq and Digital lines" after the merger. In the first quarter of 1997, Compaq made $387 million profit and turnover of $4.8 billion.