Shares of personal computer maker Compaq Computer moved higher in early trading today after the company announced that it had just managed to surpass Wall Street estimates for its third quarter, despite its profits tumbling by 78 percent.
Compaq shares were up 2.55 percent to 25.13 and have traded as high as 39.13 and as low as 22.94 during the past 52 weeks. The stock yesterday fell 10.3 percent or 2.81 points to 24.5 in anticipation of the company's earnings report.
The company announced today that it had revenues of $8.8 billion, an increase of 36 percent from the year-ago quarter, helped by a steady demand for PCs. Compaq posted an after-tax profit of $115 million, or 7 cents per share, a decline from $517 million, or 33 cents per share, from the year-ago quarter. Analysts had expected the PC maker to report earnings of 6 cents per share, according to First Call.
"We estimate this growth was more than two times the market and believe Compaq will achieve continued strong growth during the fourth quarter," Compaq president and chief executive Eckhard Pfeiffer said in a statement. "With a significant portion of the Digital sales force integration work accomplished, we are now ready to more actively communicate with our customers on the total capability of Compaq today."
But some analysts remain bearish on Compaq's revenue estimates for the fourth quarter, citing integration issues with its recent acquisition of Digital Equipment.
Ashok Kumar, an analyst at Piper Jaffray lowered his estimates for the company's revenues and earnings, saying that he has more conservative numbers for the fourth quarter and projects a slower recovery for Digital.
The third quarter was the first full quarter of operating the combined companies of Compaq and Digital, according to Compaq.
"The Compaq team took decisive implementation steps during the quarter to begin realizing synergies from the Digital acquisition," said Pfeiffer. "To date, the Digital integration activities are on track."
The company cites its balance sheet to show how the Compaq and Digital integration is proceeding smoothly, noting that gross margins improved sequentially to 24.9 percent, and the acquired services business had its strongest quarter in terms of year-over-year revenue growth in more than five years.
"With strong execution of our integration plans, we continue to believe earnings for the combined companies should be accretive as early as the fourth quarter," said Earl Mason, Compaq's senior vice president and chief financial officer.
Kumar pointed out that Compaq's purchase of Digital was part of the company's strategy to be an enterprise-wide vendor, but he noted that the slowdown in the global economy and strong competition is likely to challenge Compaq's Digital unit.
"[The IT service industry] is led by two formidable companies, IBM's Global Services unit and Electronic Data Systems," Kumar wrote in his research note. "Compaq clearly faces some major challenges in competing with these giants."