HP Triples Earnings: Does It Still Need Compaq?HP Triples Earnings: Does It Still Need Compaq?

Hewlett-Packard nearly tripled its first-quarter earnings from the same quarter a year ago, but the strong results only fueled a heated debate over whether the company should merge with rival Compaq. HP CEO Carly Fiorina says the company's performance, powered by sales of PCs, PDAs, and printers, shows HP isn't being distracted by winning support for its proposed $23.5 billion merger with Compaq (CPQ-NYSE). Yet total sales slipped during the quarter.

"It's a rare opportunity when a technology company can at the same time build substantial market leadership and substantially reduce its cost structure," Fiorina said last week.

The merger is scheduled for a March 19 vote by shareholders. But opponents of the deal, which include the families of the company's two co-founders, say the first-quarter results prove it doesn't need Compaq, which they say is overexposed in the low-margin PC business. "We believe HP needs to focus on its strengths," says board member Walter Hewlett, the deal's most vocal critic.

For the quarter ended Jan. 31, HP (HWP-NYSE) reported net income of $484 million compared with $141 million during the same quarter last year. Higher-than-expected consumer spending helped results, HP says. However, total revenue fell 8% from the year-ago quarter.

Revenue in the company's imaging and printing systems unit increased 2% compared with the fourth quarter, but was down 2% from a year earlier. Sales of PCs and handheld computers jumped 22% from the previous quarter but dropped 13% from last year. Though revenue from servers and storage fell 4% from the fourth quarter and 21% from the year-ago quarter, services revenue was up 1% from the fourth quarter and 2% from the first quarter of fiscal 2001.

Not all of HP's news was good. CFO Bob Wayman says the company expects a modest drop in second-quarter revenue compared with the first quarter. Continued weakness in corporate spending and a drop in consumer spending will contribute to the decline, he says.

HP's results make its merger with Compaq more likely, Bear Stearns analyst Andy Neff says. But the merger wouldn't solve the thorniest problems facing both companies. "Compaq has a weak business model and lacks execution; HP doesn't invest enough in technology and lacks focus," he says. "HP's ultimate success, with or without Compaq, comes down to an issue of execution."

On a pro forma basis, which excludes charges related to a number of completed and pending acquisitions, including the Compaq deal, the company reported net income of $564 million compared with $812 million a year ago. The company's pro forma revenue was $11.38 billion, down from $12.40 billion a year ago.