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Compaq beats Street estimates

The giant computer maker posts fourth-quarter earnings well in excess of Wall Street expectations.

Compaq Computer, the world's second-largest computer maker, today announced record fourth-quarter revenues and earnings that blew past Wall Street expectations, but many analysts voiced concern that the numbers looked better than they really were.

Shares of Compaq surged higher on the earnings news, jumping 3.3 percent to 50.88 in the morning session. The stock was trading above its 52-week high of 50.25.

The PC maker also said that the majority of the Digital Equipment merger is now successfully behind it, and the company is ready to embark on a new aggressive strategy. Compaq's three-fold strategy includes the continued sales of computers--in addition to corporate "enterprise" solutions and services--and an emerging Internet focus christened yesterday by its newly formed AltaVista Company.

The company announced worldwide sales of $10.9 billion for the fourth quarter ended December 31, 1998, an increase of 48 percent compared to the year-ago quarter. Compaq posted an after tax profit of $758 million, or 43 cents per share. A consensus of analysts polled by First Call expected the company to pull in 37 cents per share.

"The fourth quarter revenue and earnings results represent new records for Compaq and a key milestone in our successful integration of Digital Equipment Corporation," Compaq chief executive Eckhard Pfeiffer said in a statement. "1998 was a year of significant transformation for Compaq, and with our strong fourth quarter results, we enter the new year with a great deal of momentum and optimism."

"All of the upside was not true growth," said Ashok Kumar, an analyst at Piper Jaffray. "Compaq has a lot of accounting adjustments that helped boost the financials."

Compaq reversed several charges, including an in-process R&D charge to revalue AltaVista and a charge for collapsing Tandem Computer into the Compaq business entity.

"[The reversals] gave them a tremendous tax benefit," said Mark Specker, an analyst at SoundView Financial Group. Compaq's tax rate fell to 19 percent compared to 26 percent in the prior quarters. "If the tax rate had been at the full rate, as the company had guided, they would probably have reported earnings of 38 cents which is much closer to what the Street was expecting."

Kumar noted that Compaq also reported lower than expected operating expenses, which added to the bottom line.

"One segment that was fairly strong in the fourth quarter was the consumer retail side where Compaq picked up significant market share," said Kumar. "But on the commercial side, we are starting to see signs of a slowdown."

Compaq said the synergies from the Digital acquisition are now becoming more and more evident in the company's financial performance.

"We continue to see strong demand for Compaq products and services and the opportunity for continued market share gains and revenue growth," added Pfeiffer.

Combining Compaq's and Digital Equipment's 1997 fourth quarter sales, revenues in the 1998 quarter were up just 2 percent, reflecting Compaq's decision to exit some Digital businesses as the two joined forces. Compaq said sales of its computer products out of distribution channels to end users grew 43 percent from a year earlier. IBM also had strong gains here when it reported earnings last week.

An area Compaq continues to excel in is market share gain--though this isn't necessarily reflected well in earnings. Compaq said it had gained market share at more than three times the rate of the industry as a whole.

Gross profit margins improved 1.5 percentage points from the 1998 third quarter, to 26.4 percent, Compaq said. Operating expenses fell from the third quarter both in dollars and as a percentage of revenue, ending the quarter at 18 percent compared to 23 percent at the end of the third quarter.

Reuters contributed to this report.