HP Q1 Earnings Sail Past Wall Street Expectations

With the fate of its $22 billion merger with Compaq Computer hanging in the balance, Hewlett-Packard announced its first quarter earnings at market close today, and you can bet CEO Carly Fiorina was grinning from ear-to-ear.

In a not-so-surprising home run for the Palo Alto, Calif.-based computer maker, HP reported Q1 revenue of $11.4 billion compared to fourth quarter revenue of $10.9 billion, resulting in 5 percent growth and a 25.7 percent to 26.9 percent increase in gross margins. Pro forma earnings per share was 29 cents, with cash flow ringing in at approximately $1.6 billion.

Industry analysts attribute HP’s turnaround to strong holiday computer sales and markedly improved fourth quarter results that brought HP back into the spotlight after a prolonged slump toward the end of 2001 when revenue dropped an alarming 89 percent. HP’s down period is said to be the result of a fragile economy and consumer reluctance to make significant computer purchases.

“We are facing the dual challenges of a weak global economy and rapid industry transformation, driven by advances in technology, changing customer requirements, and increased competition, ” said Fiorina in a prepared statement. “Our first quarter results demonstrate HP’s continued ability to stay focused on customers and effectively execute our business plan regardless of market conditions.”

Signs the computer maker would rise above Wall Street’s Q1 estimations came early today when HP shares rose 8 cents to $20.85. Compaq computer shares climbed 16 cents to $11.28.

Following positive quarterly earnings this week from Applied Materials and Network Appliance, many industry analysts are expecting earnings reports from HP and Dell Computer Corp. to serve as a litmus test for signs of overall economic recovery.

Despite the positive prognosis for HP, the company’s favorable earnings and boosted sales margin are expected to play a persuasive role in the company’s hotly debated merger with Compaq and sway a handful of shareholders to change their votes in favor of the merger.

The merger with Compaq is intended to strengthen many aspects of HP business, including servers, storage, PCs, and IT services and support.

The crux of the merger debate is between HP’s management team, headed by Fiorina and Chief Financial Officer Bob Wayman, versus a portion of HP shareholders related to the Hewlett and Packard sides of the family that founded the company. HP family members make up 18 percent of HP shareholders.

At the lead of the shareholder infighting is Walter Hewlett, son of HP co-founder William Hewlett, who has taken an aggressive stance against Fiorina and the Compaq merger over recent months. Hewlett believes that technology mergers of HP/Compaq proportion are doomed to fail and that HP is paying too much for Compaq. In turn, Hewlett has taken heavy criticism from HP board members for his verbal attacks against Fiorina.

Both sides continue to campaign vigorously against each other for shareholder support as the March 19 vote date approaches. Compaq shareholders will hand in their votes the following day.

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