Compaq Computer Corp, the computer maker being acquired by rival Hewlett-Packard Co for US$24.3 billion, had a fourth-quarter profit as sales fell less than forecast. The company said first-quarter earnings will surpass analysts' estimates.
Net income was US$92 million, or US$0.05 a share, compared with a loss of US$672 million, or US$0.39, a year earlier, the Houston-based company said. Sales fell 26 percent to US$8.5 billion, Compaq said, beating the average estimate of US$8.02 billion in a Thomson Financial/First Call survey.
PHOTO: BLOOMBERG NEWS
The second-biggest personal-computer maker landed new corporate accounts and Chief Executive Michael Capellas pushed the sales force to focus on boosting market share in servers, storage devices and services, which are more profitable than PCs, the company said.
"It appears they executed very well," said Steven Salopek, a money manager at Banc One Investment Advisors, which owns Compaq shares. "Gross margins were better than I expected."
Compaq's gross profit margin in the quarter was 21 percent, the company said.
The shares rose as much as US$0.41 to US$11.51 in after-hours trading. They fell US$0.23 to US$11.17 in regular trading before earnings were released. The stock has fallen 37 percent in the past year.
Excluding a US$36 million loss for costs related to the pending acquisition, the company would have had a fourth-quarter profit of US$0.06 a share. On that basis, which doesn't conform to generally accepted accounting practices, Compaq topped analyst forecasts for a profit of US$0.01 a share.
Operating cash flow, the amount of cash generated by the company's operations, declined to US$143 million in the fourth quarter from US$277 million a year earlier.
Last year was very difficult for Compaq, Capellas said on a conference call.
"We focused on a substantial reduction in costs," Capellas said. "Although the business environment deteriorated throughout the year, we stayed the course."
The company forecast a first-quarter profit of US$0.01 on revenue of US$7.6 billion. Compaq was expected to break even on revenue of US$7.33 billion, the average forecast of analysts surveyed by First Call.
"Q1 is down more quarter to quarter than I would have guessed but they remain profitable, which was my top concern," said Dan Niles, an analyst for Lehman Brothers who owns no shares of Compaq. He described the fourth-quarter results as "awesome." Capellas reiterated his October forecast that spending on computer-related products will begin to pick up in the second half of this year.
The company's largest shareholder is Putnam Investment Management Inc, which as of November owned 81.6 million shares, or 4.8 percent.
Walter Hewlett, a Hewlett-Packard board member and son of co-founder William Hewlett, has criticized the Compaq purchase, saying the smaller rival's dependence on PCs would reduce Hewlett-Packard's profit.
Compaq's fourth-quarter performance "helps the climate for the merger," Mike Winkler, Compaq's executive vice president of Global Business Units, said in an interview. "Some of the naysayers from the [Hewlett and Packard] families have focused on a weak Compaq. This dispels that."
The results reinforce Hewlett-Packard's view that its forecast for a 5 percent revenue decline for the combined companies in 2002 and 2003 is conservative, said Hewlett-Packard spokeswoman Rebeca Robboy.
"From our perspective, Compaq executed well," Robboy said. "Contrary to what competitors are saying, Compaq is not distracted."
Hewlett-Packard will pay 95 times 2001 earnings for Compaq if the transaction is completed, said Todd Glass, a spokesman for Walter Hewlett.
"When you lower the bar to the floor, it's pretty easy to step over," Glass said. "We do not believe that Compaq's results mitigate the flaws in the proposed merger." Compaq's PC division, which accounted for 45 percent of its revenue, posted an operating loss of US$69 million on sales of US$3.78 billion, down 31 percent from a year earlier.
"We expect to restore profitability during the second half of this year," said Capellas. "We have more work to do [in cutting costs] and we will be even more aggressive in driving improvements around the world."
Capellas said PCs will remain a strategic business for Compaq.
Sales in the division that makes more-profitable servers and storage devices declined 34 percent to US$2.70 billion, with a US$56 million operating profit. The company's services division posted revenue growth of 3.6 percent to US$2.03 billion and had operating income of US$253 million.
"On the revenue side, we greatly exceeded our expectations and the Street's," said Winkler. "A lot of that revenue was for all businesses across the board."
The company, which has had trouble competing with the direct-distribution model of larger rival Dell Computer Corp, said it reduced inventory to US$1.4 billion, compared with US$2.1 billion of a year ago.
North American sales grew 4 percent from the third quarter while sales elsewhere were stronger, led by Europe's 31 percent increase and Latin America's 22 percent growth, said Chief Financial Officer Jeff Clarke on the conference call.
In the fourth quarter of 2000, Compaq's earnings were reduced by US$1.8 billion because of investment losses in Internet-venture firm CMGI Inc. The company reported a profit from operations of US$515 million, or US$0.30 a share.
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