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delivered pro forma quarterly results Wednesday that topped Wall Street estimates, but the company faces a slightly bumpy ride ahead.

The Memphis-based courier said first-quarter pro forma earnings were 61 cents a share, excluding charges, beating the 57 cents expected by Wall Street. But revenue was soft, coming in at $5.69 billion in the first quarter, missing Wall Street expectations by $100 million, while topping the year-ago $5.45 billion.

The company posted net income of $128 million, or 42 cents a share, on revenue of $5.69 billion, compared with earnings of $158 million, or 52 cents a share, on revenue of $5.45 billion a year ago. The latest quarter included a pretax charge of $132 million, or 27 cents a share after tax, related to an early retirement program, and a gain from a tax ruling of 8 cents a share. FedEx's cost side was also swollen by a 10% rise in its quarterly fuel expense to $322 million.

The company did much to improve yields, boosting operating margins on its express business to 3.7% from the year-ago 3.2%, while increasing margins on its ground business to 12.7% from 11.7%. In June, the company said it hopes to reach margins of 10% on its express business, which generated nearly 75% of company revenue in the first quarter.

But while the express business has performed well, ground shipments have tapered off, with average daily package volume growing 1% in the first quarter, missing analyst growth expectations that were as high as 10%. Furthermore, the company said it had lost much of the advantage in ground shipping gained a year ago when labor woes spurred customers to flee rival


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"The ground package growth rate was relatively low due to the difficult year-over-year comparison, as volume in the first quarter of fiscal 2003 included an estimated 140,000 to 150,000 daily packages as the result of a UPS work stoppage," the company said in a release. "The company estimates FedEx Ground has retained slightly over 50% of the volume."

With ground shipments helping support FedEx's earnings over the last year, news that last year's advantage has been slowly eroding is good news for rival UPS, where ground shipping is a core business. Analysts were unimpressed with FedEx's inability to retain more of the ground shipping business.

"Significant volume deceleration in ground and international priority represent the challenging competitive environment and weak global economy," said Jon Langenfeld, analyst at Baird, in reaction to the earnings. "FedEx ground deceleration is a positive for UPS and indicates that UPS has successfully overcome volume diversion experienced last year."

FedEx management also guided second-quarter earnings to the low end of current Wall Street estimates, telling investors it expects earnings between 80 cents and 90 cents a share, with 2004 earnings between $3 and $3.15 a share. That's below the 90 cents analysts expect the company to make next quarter and the $3.25 for the fiscal year.

But while earnings will be weaker than expected, the company's long-term drive to reduce costs through its headcount-reduction programs seems to be ahead of schedule. FedEx expects the cost of the program to come in at the high end of a $230 million to $290 million range in fiscal 2004, generating cost savings approaching $130 million. In fiscal 2005 and beyond, the estimated annual savings from these programs remains $150 million to $190 million.

"FedEx announced that the take rate for its early retirement program seemed to be at the high end of its targets to date, although it's noted that the cost savings did not kick in during the first quarter and should have minimal impact in the first half of 2004," said Ken Hoexter, analyst at Merrill Lynch, in a research note.

Investors had a lukewarm reaction to FedEx's results, boosting shares by 4 cents, or 0.1%, to $66.12. Rival UPS, the subject of a string of positive analyst comments

earlier in the week, was up 8 cents, or 0.1%, to $64.04.