Houston-based Compaq surprised many yesterday by announcing that its commercial computing business is now profitable and by showing a 40 percent revenue gain in PC servers.
While Compaq only beat second-quarter earnings estimates by one penny, according to a consensus of analysts polled by First Call/Thomson Financial, revenue and net income showed stronger-than-expected growth.
This morning, Compaq shares jumped $1.44 to $29.50.
PaineWebber analyst Donald Young raised Compaq to "attractive" from "neutral" and upped his 12-month target to $35 a share. Chase Hambrecht & Quist analyst Walter Winnitzki raised Compaq to "strong buy" from "buy," while Kimberly Alexy of Prudential Securities reiterated her "strong buy." Bear Stearns and DLJ also upgraded Compaq, to "buy" from "attractive" and "top pick" from "buy," respectively.
With the exception of storage and services, all of Compaq's business units showed strong growth. The enterprise division posted revenue of $3.4 billion, up 9 percent year-over-year, and income of $467 million.
The company's commercial PC group returned to profitability with net income of $62 million on revenue of $3.3 billion. Consumer group revenue rose 32 percent to $1.6 billion, but operating income declined $15 million year-over-year to $31 million.
During a conference call with financial analysts yesterday, CEO Michael Capellas said Compaq expects third-quarter revenue to be $10.8 billion, a 17 percent increase from a year earlier.
Two divisions helped Compaq build momentum: the personal computing group and the PC server--or what Compaq calls Industry Standard Server--group.
"The big news is the PC business," Technology Business Research analyst Lindy Lesperance said. "Capellas had been really pushing (commercial computing group senior vice president) Mike Winkler to turn it around in the second quarter vs. the third."
Few analysts predicted the turnaround, which took Compaq's PC division from a first-quarter loss of $19 million to a $62 million second-quarter profit. The division, which had lost money for more than a year, wasn't expected to reach profitability until next quarter.
"We fundamentally re-engineered and restructured the business here," Winkler said. By using distribution assets obtained from Inacom and taking more business direct, Compaq cut a lot of the cost of producing PCs.
Direct sales account for 40 percent of commercial PCs sold in North America and 25 percent worldwide. That is on track with a year-end goal of 60 percent in North America and 40 percent worldwide.
The division's profits were buoyed by strong demand for Armada notebooks, up 31 percent year-over-year and 41 percent sequentially.
Compaq's low-cost Internet PC, the iPaq, also helped sales, with the company shipping its 100,000th unit in the quarter.
Demand for the iPaq handheld is so great, people have been flocking to eBay for the privilege of paying $300 over the selling price.
Winkler said the handhelds will be in short supply well into the fourth quarter.