Updated from 4:52 p.m. EST

Giving further evidence that the holiday retail season wasn't so dismal after all,



wrapped up $8.5 billion in fourth-quarter revenue, well above estimates the company provided only a few weeks ago.

The after-the-bell report on Wednesday could bring a little joy to weary investors. Still, the quarterly sales figure represents a year-over-year decline of 26%.

The computer giant enjoyed a 14% sequential revenue gain from the third quarter during a holiday season marked by fewer PC shoppers than usual, but more than previously anticipated in a stingy year. That was good enough for a 5- cents-a-share profit for the quarter. Excluding $36 million that Compaq attributes to merger expenses, the company trounced Street forecasts of a penny-a-share profit, as reported by Multex.com, with a remarkable 6-cents-a-share profit. Despite the good news, the earnings are down 80% from a year earlier.

Compaq shares sank 2.6% in Wednesday trading to $11.10 ahead of its quarterly report. But shares rose into positive territory in after-hours trading.

CEO Michael Capellas reiterated the caution investors heard Tuesday from chip giant


(INTC) - Get Report

, warning that Compaq is still cautious about the first quarter of 2002. Capellas predicted "only moderate growth" in the first half of the year.

He added, however, that "pent-up demand should drive a stronger recovery in the second half of the year." Compaq forecast an 11% revenue decline in the seasonally slow first quarter to $7.6 billion. Analyst consensus called for a conservative $7.3 billion, according to Multex.com. Compaq will give more specific full-year guidance next Friday when it holds a meeting with analysts in New York.

When the quarter began, Compaq was predicting 2% to 4% revenue improvement to between $7.6 billion and $7.8 billion. However, that was coming off a stifling third quarter for computer sales that saw Compaq suffer a 12% sequential drop in revenue and a 33% shortfall year over year.

Compaq boosted its overall gross margins sequentially in the quarter from 19.9% to 20.6%, reversing a sequential gross-margin slide of 1.6% from the second to third quarter. The company's PC business grew revenues 16% sequentially and increased margins by 3%. Compaq boasted that it cut $1.7 billion in operating expenses in 2002, as well as 9,400 employees.

TST Recommends

Rival and new worldwide PC market share leader


(DELL) - Get Report

has tested Compaq's ability to control costs by slashing prices on Dell computers and using its distribution efficiencies to pass along low component prices to customers as price savings.

Capellas sees the cheap component heyday of 2001 drawing to a close, however. "Component prices are starting to firm up," he said.

Michael Winkler, executive vice president of the company's Global Business Units, detailed higher DRAM prices and tightening supplies of flat-panel displays and CD read/write drives for PCs.

Additionally, Capellas applauded the gains made in Compaq segments that cater to corporate customers. The computer and server maker had double-digit sequential growth in enterprise computing (up 15%), high-performance servers (31%) and storage (14%). Compaq's darling, the Global Services group, turned in $2 billion in revenue, for 8% sequential and 4% year-over-year growth.

The embattled computer giant is fighting to get back its PC market lead from Dell and successfully execute a messy merger with




Compaq's revenue gains come despite investor uncertainty about the company's future. A dust-up among Hewlett-Packard board members has drawn Compaq into months-long agony over whether it will successfully complete its planned merger with H-P.

During the broad rally of tech shares in the fall of 2001, Compaq's stock gained only 17%, while equally troubled competitor



rocketed up 64%. In January trading, Compaq has risen another 17%. Capellas acknowledged that the proposed merger has been "controversial," but insisted he would continue to fight for its approval in the next few weeks.