Compaq Turns Fourth-Quarter ProfitCompaq Turns Fourth-Quarter Profit

Compaq, which needs to show Wall Street it can stand on its own if its proposed merger with Hewlett-Packard fails, Wednesday reported revenue for the quarter ended Dec. 31 of $8.5 billion, a 26% drop from the $11.5 billion in the fourth quarter last year. However, the company eked out a profit of $92 million, or 5 cents a share, compared with a loss of $672 million, or 39 cents per share, a year ago. Earlier in the month, the No. 2 computer maker had predicted revenue of $8 billion and a profit, reversing estimates it made in October that it would lose 3 cents a share on revenue of $7.6 billion to $7.8 billion.

The company said the proposed merger, which remains uncertain because of the opposition of family members of the HP founders who own a combined 18% stake, did not materially affect fourth-quarter results, pointing out that new sales orders with major customers for products and services were about $5 billion since the merger announcement Sept. 4.

"However, the planned merger could have an adverse effect on Compaq's revenue if customers delay, defer, or cancel these planned purchases pending closing of the planned merger with HP," company officials said in a statement. "While Compaq is attempting to mitigate this risk through customer assurance programs, prospective customers could be reluctant to purchase Compaq's products if they are uncertain about the direction of the combined company's product offerings and its willingness to support and service existing products." For the first quarter of this year, company officials estimated revenue would drop to $7.6 billion, or 1 cent a share, due to the seasonal dip in sales.

Uncertainty caused by the controversial merger has led some analysts to believe that Compaq leadership has been adrift. "Compaq needs a very clear, strong direction and business plan that makes sense and a focus on whatever it is they decide to do," says William Zachmann, analyst for IT research company Meta Group. "You don't get the sense that the focus is there right now. You get the sense, in fact, that they and HP, both, are treading water." Nevertheless, Compaq CEO Michael Capellas assured financial analysts during a conference call that the merger was still in the company's best interest. "The merger clearly has been controversial, but we remain firm in our conviction that it is in the best interest of shareholders, customers, partners, and employees," he said. "And we will work aggressively in the coming weeks to win shareholder and regulatory approval." Shareholders are likely to vote on the merger in March, Capellas told Reuters in an interview.

If the merger fails, Compaq would be left on its own to compete in the computer market, which has been hit hard in the recession. Compaq dominates the market for Intel-based servers, but lags behind No. 1 PC maker Dell Computer. To convince investors it can prosper without HP, Compaq needed to show progress in the corporate market. On that score the company's results were mixed. Fourth-quarter revenue for its Enterprise Computing division fell $1.4 billion, or 34%, from last year, and accounted for 32% of total revenue. Global Services, on the other hand, increased $72 million, or 4%, compared with 2000, accounting for 24% of revenue.

In the personal computer market, the company reported that revenue accounted for 45% of its total, up slightly from the 43% reported in the third quarter, but still less than the 50% in 1999. Fourth-quarter revenue in 2001 for its PC business declined $1.7 billion, or 31%, from a year ago.

For the year ended Dec. 31, revenue was $33.6 billion, declining 21% from $42.2 billion in 2000. The company reported a loss of $785 million, or 47 cents a share, in 2001, compared with a profit of $569 million, or 33 cents a share in 2000.