HP Chief Firm on Merger as Beats Street
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By Peter Henderson
SAN FRANCISCO (Reuters) - Hewlett-Packard Co. (NYSE:HWP - news) said on Wednesday it met its quarterly results forecast for the first time in more than a year, raising confidence that Chief Executive Carly Fiorina can muster the votes to pull off a merger with Compaq Computer Corp. (NYSE:CPQ - news).
Fourth-quarter net profit fell nearly 90 percent and Fiorina said she did not count on an economic recovery next year, but HP's printer sales were relatively strong and both consumer and business revenues rose from three months earlier.
Tough cost cutting led management to meet its own estimates for the first time since August 2000, giving Fiorina new leverage in the high-profile battle over the merger, which pits the most powerful businesswoman in America against the normally silent ``royal family'' of Silicon Valley.
``Despite the actions by some individuals, I think it's way too early to conclude that this merger will not occur,'' Fiorina said, referring to a rebellion against the merger by Hewlett and Packard family members.
``We remain convinced this merger will occur,'' she said, adding HP was talking with and would continue to engage the Packard foundation, which holds a majority of founding family shares and which has said it would consider fourth-quarter results while deciding which way to vote.
Hewlett-Packard shares jumped 6.9 percent, or $1.40 to $21.63 in afternoon trading and was the third most active issue on the New York Stock Exchange (news - web sites). Compaq, which was up $1.07, or 12 percent, at $9.87, was the most active.
Hewlett-Packard earned $361 million, or 19 cents per share, from continuing operations, down from $841 million, or 41 cents per share, a year earlier. Sales fell to $10.9 billion in the quarter from $13.3 billion a year ago.
Wall Street analysts on average had expected earnings of 8 cents per share and sales of $9.9 billion, according to research firm Thomson Financial/First Call.
``They delivered better-than-expected revenue results and better-than-expected earnings results so this would tend to increase shareholder confidence in the management team. So it is a positive that they got this done this way -- a positive for the merger,'' said Buckingham Research analyst Jay Stevens.
``Obviously a stronger stock price is going to make it easier to deal with some of the questions surrounding the merger,'' said Noel DeDora, a portfolio manager at Fremont Investment Advisors.
The spread between Compaq's share price and the price implied of the all-stock, $23.2 billion deal, narrowed to about 38 percent from more than 50, indicating broad, but diminishing, skepticism the deal would go through. The value on the deal has risen close to its original $25 billion level.
HP net profit, including charges and one-time items, dropped to $97 million, or 5 cents per share, from $922 million, or 45 cents per diluted share, in the year-earlier quarter. The fourth-quarter results included a $282 million pre-tax restructuring charge.
TWO SURPRISES
``There are really two big surprises in our results. The revenue line and the expense reductions. We beat expectations on both fronts. The revenue jump was very much as we predicted, but others, based upon what was going on around us, pulled back,'' Chief Financial Officer Bob Wayman said in a telephone interview, enjoying the first quarter in some time when management had delivered on its forecasts.
``We are very pleased to be able to, through this quarter, demonstrate that some of the uncertainties that people had worried about have been, at least for now, addressed.''
Fiorina said that the business was beginning to show signs of seasonality, despite the continuing difficult environment, a sign of economic normality analysts have been looking for.
Among its main units, HP printing and imaging sales rose 16 percent sequentially but fell 9 percent from a year earlier and the operating profit margin rose from the previous quarter.
Services showed mixed results with revenue up 2 percent from the previous quarter, hit by declining consulting revenue, which HP blamed on the weak economy, and boosted by outsourcing contracts to run corporations systems rose.
Sales of the top high-end Unix (news - web sites) computer, Superdome, were strong, although lower end server sales dropped.
Long term, HP planned on making an 8-10 percent profit margin for the larger enterprise systems, compared to a bare 3 percent margin on personal computers, executives said, but HP's personal computer division continued to lose money, despite improvement from the previous quarter, Wayman said.
Personal computers are one of the main points of contention between management and opponents of the Compaq deal, who say HP does not need a big, low-margin PC business.
PACKARD VOTE
After Hewlett and Packard family members with less than 10 percent of HP stock publicly opposed the merger last week, many analysts saw merger hopes tied to support from a Packard family trust with just over 10 percent of shares.
The David and Lucile Packard Foundation which has hired consultant Booz-Allen to evaluate the deal and has said it would closely monitor the fourth quarter results.
Fiorina said executives had spoken with and would continue to speak with the Packard foundation but that a decision seemed unlikely before December or January.
Hewlett-Packard said it expected fiscal first-quarter revenues to fall slightly from the fourth quarter. First-quarter margins and expenses would be flat compared with the fourth quarter, it said.
``The outlook for the first quarter of fiscal 2002 is generally in line with our current estimate with the expectation of a slight decline in sequential revenue due to normal seasonal factors,'' Merrill Lynch analyst Tom Kraemer said in a research note. |
