Compaq posts upside surprise, sees growth ahead

Larry Dignan
3 min read

Compaq Computer Corp. (NYSE: CPQ) reported Tuesday fourth quarter earnings of $332 million, or 19 cents a share, on sales of $10.5 billion. First Call consensus expected earnings of 16 cents a share.

The results were above estimates, but down from a year ago.

In the year ago period, Compaq reported earnings of $758 million, or 43 cents a share, on sales of $10.85 million.

But Compaq said the results showed the company was on the right track.

"During the second half of this year we took aggressive action to return Compaq to profitable growth, and fourth quarter results reflect our initial success where it matters most -- in the marketplace," said Michael Capellas, Compaq CEO, in a statement.

On a conference call with analysts, Capellas said he expected revenue growth of 15 percent in 2000, but saw first quarter sales down slightly because of a seasonal slowdown. Officials also said they were comfortable with 2000 consensus estimates of $1.08 a share.

Since reporting better-than-expected third quarter results three months ago, Compaq has seen its stock climb 66 percent after hitting a 2-year low. The stock rose more than 5 percent Monday to nearly 33, as Donaldson, Lufkin Jenrette upgraded CPQ to a "buy" and Robertson Stephens reiterated a "buy" rating ahead of the quarterly report.

Now attention turns to Compaq's outlook. The company has a few nagging questions, said analysts. These questions range from Compaq's plans for direct sales and its Internet strategy with CMGI (Nasdaq: CMGI).

Officials didn't get too specific, but promised to give analysts more details and guidance at its analyst meeting on Friday.

Compaq acknowledged it has more work to do, but said it has a clear strategy and innovative products such as its new iPaq access device. The company is also benefiting from its investment portfolio. Compaq said it had a net gain of $50 million from investments.

Compaq said its enterprise and services revenue was $5.3 billion, down 3 percent from a year ago, but up 8 percent from the third quarter. Enterprise products such as storage devices and servers saw sales of $3.5 billion. Service revenue was $1.8 billion.

Commercial PC sales lagged at $3.1 billion, down 19 percent from a year ago. The unit also operated at a loss. "With this recent agreement to purchase key Inacom assets, the introduction of our iPaq Internet device, and the forthcoming launch of Microsoft's Windows 2000 operating system, I am confident that our Commercial PC group is well positioned to return to profitable growth this year," said Capellas.

The picture looked better for Compaq's consumer PC business. Revenue for consumer PCs was up 24 percent to $2 billion in the quarter.

"We do not underestimate the challenges ahead, but are confident of our strategy and we are committed to accelerating our progress and delivering steadily increasing value for our shareholders," said Capellas.

For 1999, Compaq reported net income of $569 million, or 34 cents a share, on sales of $38.5 billion.