HP beats the Street

February 13, 2002: 5:44 p.m. ET

Computer maker exceeds recently raised expectations.

NEW YORK (CNN/Money) - Hewlett-Packard on Wednesday reported a fiscal first-quarter profit that beat recently raised expectations and improved over the prior quarter.

And executives of the world's second-largest computer company held up the stronger-than-expected results to defend its controversial proposal to buyout of rival Compaq Computer.

After the close of trading, HP said it earned 29 cents per share, excluding merger-related and other one-time charges, during the quarter ended Jan. 31.

That's a decline from the year-ago quarter but is better than the 19 cents per share it reported in the fiscal fourth-quarter.

Including charges, HP said its net income for the quarter was $484 million, or 25 cents per share.

At $11.4 billion, HP's first-quarter revenue rose 4.6 percent sequentially from $10.9 billion in the fourth quarter but fell from $12.4 billion in last year's first quarter.

Most analysts raised their forecasts for HP's fiscal first quarter after executives last week said an initial review of the company's revenue and earnings for the quarter showed they had exceeded most expectations.

The company had entered the quarter forecasting revenue below the $10.9 billion it reported in the prior quarter, and before last week's announcement, most analysts had expected the company to log a profit, excluding charges, of 16 cents per share.

HP is the No. 2 computer company worldwide, behind IBM. Its products include PCs and servers, imaging and printing peripherals, software and computer-related services.

The company's computing and imaging operations account for roughly 80 percent of sales, and executives said those businesses had benefited the most from stronger-than-expected consumer spending during the quarter.

"Within this tough environment, we generated a meaningful increase in overall revenue versus last quarter based on strong sales in consumer and commercial PCs and digital imaging products, as well as exceptional growth in outsourcing," Carly Fiorina, HP's chairman and CEO, told analysts during a teleconference Wednesday evening.

She also used the strong quarterly results as a selling point for HP's proposed $25 billion buyout of rival Compaq Computer, a deal that has come under scrutiny by some key shareholders, including the descendents of HP's founding partners.

Their concerns stem largely from the idea that a merger would increase HP's exposure to the flagging PC industry and low-end server business while jeopardizing its strong position in the printing and imaging business.

And in what has become an increasingly bitter war of words, Walter Hewlett, who has initiated a proxy fight trying to block the deal, has suggested that Fiorina is incapable of managing such a large transaction and leading the combined company.

Firing back, Fiorina said the company's performance in the most recent quarter suggest otherwise. "These results demonstrate that we know our business better than anyone else," she said.

"The people of HP can execute, and they've proven it," Fiorina added. "Think about the challenges these employees have had to face up to and overcome: a very difficult economic environment worldwide; an industry undergoing a rapid� transformation; intense competition; and a distracting proxy contest that none of us could have predicted, but one that we are determined to win."

She also reiterated the company's argument that a merger is necessary to remain competitive, and said Compaq's strength in areas such as storage systems and commercial PCs will help to offset HP's weaknesses.

"HP needs to take decisive actions to further improve our market position and profitability, especially in computing systems and commercial PCs," she said. "These businesses are important pieces of our broader portfolio, and must be sufficiently profitable in their own right."

She also stressed that the information technology industry is beginning to consolidate, making such a merger an imperative for future success.

"What these two companies can achieve together is greater than either one of them can achieve on its own," she said.

Shareholders from each company are expected to vote on the proposal late next month.

Looking ahead, HP Chief Financial Officer Robert Wayman said the company expects its revenue in the current quarter to be down modestly from the fiscal first quarter, while its gross margin, the percentage of sales remaining after subtracting product costs, will remain flat with the 26.9 percent it reported for the first quarter.

He did not provide a specific earnings-per-share estimate.

By First Call's count, analysts most recently had forecast second-quarter revenue of roughly $11.3 billion, slightly below the revenue it just reported for the first quarter. The most recent consensus earnings estimate was for 24 cents per share.