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Compaq comeback rolls on with earnings surprise

The computer maker beats third-quarter expectations by a penny per share in another sign the company is on the mend.

Compaq Computer on Tuesday beat third-quarter expectations by a penny a share in another sign the battered company is on the mend.

Stock price from October 1999 to present.  
 Source: Prophet Finance
Excluding investment gains, Compaq earned 30 cents a share, greater than analysts' expectations of 29 cents, according to FirstCall/Thomson Financial. Including gains, Compaq earned $550 million, or 31 cents per share, for the third quarter.

A year earlier, Compaq reported income of $140 million, or 8 cents a share.

Compaq swept past concerns that slowing PC sales would pull down sales figures, posting double-digit growth for the first time since the second quarter of 1999. Revenue jumped 22 percent to $11.2 billion from $9.2 billion a year ago. Compaq also showed good sequential sales growth from last quarter's $10.1 billion.

On the news, Compaq shares jumped $1 to $28 in after-hours trading.

Operating profit increased more than fivefold to $669 million from $789 million a year ago. Operating expenses declined 7 percent to $1.9 billion. Gross margins increased 0.7 percent to 23.9 percent.

"Compaq delivered a very strong performance in the third quarter, with significant growth in revenue and profitability," chief executive Michael Capellas told financial analysts in a conference call following the earnings announcement.

"These results tell a powerful story about solid execution across the company," he said, adding that revenue growth was the highest in Compaq's history.

While Dell Computer, IBM and Intel all felt the effects of the European currency crunch, Compaq saw revenue for Europe, the Middle East and Africa grow 8 percent from year-ago levels. North America grew 27 percent, Asia-Pacific 41 percent, Japan 52 percent and Latin America 28 percent.

Looking ahead, Compaq predicted a continuation of double-digit revenue growth, expecting 18 percent for the fourth quarter.

"I am pleased with our financial and market momentum," Capellas said. "I am confident that we will drive earnings growth of 40 percent in 2001."

Compaq's enterprise computing group--including PC servers, storage and high-end servers--posted revenue of $3.8 billion, up 19 percent from a year ago. The division accounted for 34 percent of the company's third-quarter revenue. Operating income for the group increased $302 million year over year to $597 million.

PC server revenue grew more than 40 percent for the second straight quarter to $1.6 billion. Server sales to Internet service providers contributed greatly to revenue growth, the company said.

Overall storage revenue grew 9 percent to $1.4 billion, with the enterprise segment up 44 percent. Compaq shipped 19,000 terabytes of storage capacity during the quarter, up 60 percent from a year earlier.

Revenue from Compaq's largest servers, including the new AlphaServer GS series, grew 5 percent to $813 million. Analysts have been watching this area carefully to see whether Compaq will be able to meet a goal of $1 billion in AlphaServer GS sales for 2000. During the third quarter, Compaq sold 400 AlphaServer GS systems.

Revenue from the company's global services group fell 2 percent from year-ago levels to $1.7 billion. The group, which represented 15 percent of Compaq's revenue, saw operating income fall 16 percent to $254 million.

"Capellas' direction is to take Compaq to more of a services provider company," said Gartner analyst Kevin Knox. "We're seeing some movement in the services space, but I think they're just starting to articulate a strategy."

The commercial PC group posted revenue of $3.5 billion, up 28 percent from a year earlier. Operating income rose $302 million to $133 million. The third quarter marks the division's second straight quarter of profitability after more than a year of losses.

The Consumer Group unexpectedly jumped to 19 percent of Compaq's overall revenue mix from 16 percent in the second quarter. The division's revenue rose 45 percent year over year to $2.1 billion, but operating income declined 3 percent to $63 million. The Consumer Group's revenue increase was driven in part by strong portable sales, up 50 percent from a year earlier.

Direct sales grew 200 percent year-over-year, in part driven by international expansion.

Compaq also saw an increase of beyond-the-box revenue double, such as software and services, but nowhere near Gateway's 50 percent of income.

Compaq is hoping sales of devices, such as the iPaq Pocket PC handheld computer and iPaq MP3 player, will continue to drive PC sales.

"Their consumer strategy is really focused on appliances and appliances that complement the PC," Technology Business Research analyst Lindy Lesperance said. "Compaq and Dell are going down the path of keeping the PC as kind of the hub all of these devices work around."