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HP: Higher demand will boost earnings

Hewlett-Packard says its first-quarter earnings will be "substantially above" estimates because of a rise in consumer demand for both PCs and printing and imaging products.

Hewlett-Packard said Monday that its first-quarter earnings and sales would top estimates, based on "an uptick in consumer demand" for both PCs and printing and imaging products.

HP in November said its revenue would be down slightly from the fourth quarter, but now says sales will be up moderately for the quarter, which ends Jan. 31. HP reported sales of $10.9 billion in the fourth quarter.

The company said it expects to report earnings that are "substantially above" the First Call estimate of 16 cents a share. "Economic conditions around the world continue to be challenging, but consumer technology spending is clearly showing some strength," HP Chief Executive Carly Fiorina said in a statement.

Fiorina also said gross margins are improving in HP's PC, printing and services businesses. HP's news release comes after Compaq Computer reported a better-than-expected quarter.

Both companies have taken great pains to show they can execute well despite distractions stemming from Walter Hewlett's vocal bid to derail their planned $25 billion merger, which got a thumbs-up from European regulators last week.

HP's earnings preannouncement comes at a crucial time. The company has been duking it out with Hewlett in regulatory filings almost daily while trying to complete a merger that some critics have panned on the theory that no large tech merger has ever worked.

The company's better-than-expected outlook may help HP push its acquisition of Compaq, said analysts.

"HP's current execution success is bound to have some positive impact on its Compaq acquisition efforts," said Goldman Sachs analyst Laura Conigliaro. "We would imagine that Compaq's recent improvements as well as HP's own would help HP considerably in its efforts."

Both HP and Compaq have been meeting with institutional shareholders and advisory firms, such as Institutional Shareholder Services, to persuade them to vote in favor of the deal.

That legwork may be paying off, analysts say, noting that the tide may be turning in favor of the deal. After Compaq reported its better-than-expected quarter, some Wall Street analysts seemed to be more open to the deal. These analysts noted that Compaq's earnings at least counter the perception that both companies are struggling heading into their proposed merger.

At Compaq's analyst meeting, Chief Executive Michael Capellas noted that its largest shareholder, Putnam Investment Management, supported the merger. Putnam's support comes after news that Alliance Capital also favors the deal.

Last week, Capellas said he was more confident about the HP merger than he was about a month ago, Banc of America Securities analyst Joel Wagonfeld said in a research note. "We believe investors may have become more open to considering the potential merits of the proposed merger," he said.

HP appears to be using Compaq's formula to help it garner support. HP will report its earnings Feb. 13 with an analyst meeting scheduled for Feb. 27 in New York. However, some on Wall Street are still betting that shareholders will shoot the deal down.

"While EC approval is an obvious positive and momentum for the deal appears to be improving, we still believe the odds are greater that it does not happen," UBS Warburg analyst Don Young said in a research note.

A shareholder vote on the HP-Compaq deal is expected to take place sometime before March 28.