Compaq turns a profit

January 16, 2002: 5:56 p.m. ET

Company surpasses estimates on much stronger-than-expected sales.

NEW YORK (CNN/Money) - Compaq on Wednesday logged a fourth-quarter profit that was far below what it reported in the same period a year earlier, but the results topped the expectations of most analysts.

At the same time, executives of the world's No. 2 PC maker raised the bar for the current quarter and said they were looking forward to accelerating growth in the second half of the year.

After the close of trading, Compaq (CPQ: down $0.30 to $11.10, Research, Estimates) said it earned 6 cents per share, excluding merger-related charges. That's down from an operating profit of 30 cents per share during the year-ago quarter.

Analysts generally had expected the company to turn a profit of a penny per share after it pre-announced a positive quarter earlier this month.

Executives of Compaq cited reduced costs and improvements in all its business lines for the upside surprise.

Including a $36 million charge, Compaq's net income for the quarter was $92 million, or 5 cents per share.

At $8.5 billion, Compaq's fourth-quarter revenue fell 26 percent from the year-ago quarter, but it was a 14 percent improvement over the third quarter and exceeded the $8 billion executives had told Wall Street to expect.

Executives of Compaq highlighted the sequential growth in all the company's enterprise businesses, continued growth in Compaq's services division and reductions in operating expenses.

Meanwhile, the company's PC business weighed on the bottom line, posting an operating loss for the quarter.

Compaq's gross margin, the percentage of sales left after subtracting product costs, was 20.6 percent in the fourth quarter, up 1.2 percentage points from the third quarter.

The company said increased volumes and a more profitable mix of products were responsible for the margin improvement.

"This is the fourth consecutive quarter of operating expense reductions and reflects the rapid completion of our restructuring program and stringent cost control," Jeff Clarke, Compaq's chief financial officer, told analysts during a teleconference Wednesday evening.

"It is also the seventh consecutive quarter that the company has generated cash from operations," Clarke added.

Compaq executives said they expect moderate growth in the first half of the year, with the pace picking up in the second half. But they also slightly raised expectations for the first quarter.

They said they are aiming for a first-quarter profit of a penny per share on roughly $7.6 billion in revenue. By First Call's count, analysts recently had expected Compaq to break even in the first quarter on sales of about $7.3 billion.

"While we did see some strengthening of the IT market in the fourth quarter, first-half growth will be moderate and pent-up demand should drive a stronger recovery in the second half of the year," said Compaq CEO Michael Capellas.

Earlier this month, Compaq, the world's second largest supplier of personal computers, said it had turned a profit in the fourth quarter, when it previously had expected to report a loss. However, it did not provide a specific estimate.

Analysts polled by First Call generally had expected the profit to be a penny per share.

When they reported the company's third-quarter results, Compaq executives told Wall Street to expect a loss of 3 cents per share in the fourth quarter.

Shares of Compaq (CPQ: Research, Estimates) fell 21 cents to $11.19 in New York Stock Exchange trade ahead of the earnings release. The company's stock has fallen more than 55 percent over the past year, with much of that decline coming last fall and earlier this winter.

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In addition to concerns about slack demand for PCs in both the consumer and commercial markets in the face of a weakening economy, investors have been worried about the potential impact on Compaq's business of Hewlett-Packard's (HWP: Research, Estimates) proposed $22 billion takeover offer.

The proposed deal -- which has come under increasing pressure from several key shareholders -- prompted speculation on Wall Street that Compaq's corporate customers, uncertain about the company's future, might turn elsewhere for their technology needs.

During Wednesday's call, Capellas defended the merger plan. "The merger with HP is the best way to extend our strategy," he said.

Compaq is the second-largest supplier of PCs, recently losing the No. 1 spot to Dell. But its hardware products run the gamut from handheld computers to servers, data-storage systems and mainframe computers.

The company also has growing and profitable information technology services business, which in the fourth quarter represented roughly 24 percent of its total revenue.

Revenue in Compaq's services unit was roughly $2 billion in the fourth quarter, an 8 percent improvement over the third quarter and 4 percent above the fourth quarter of 2000. That unit's operating profit was $253 million, or 12 percent of revenue.

In Compaq's enterprise computing segment - which includes servers and data-storage systems - revenue totaled $2.7 billion, and that unit posted operating income of $56 million.

The weak link in Compaq's business during the fourth quarter was its PC business, which logged revenue of $3.8 billion and an operating loss of $69 million.

Compaq has been struggling in the PC market amid dwindling demand and increased pricing pressure. The company has taken a number of steps over the past year to improve profits there, including laying off workers, outsourcing the production of its portable computers and working off inventories.

While the PC unit's losses have been narrowing, Compaq executives said they still have a way to go and they do not expect it to return to profitability until the second half of this year.