Gazing Beyond H-P's Earnings Report

Hewlett-Packard (HWP) investors can be certain about first-quarter earnings for fiscal 2002, if nothing else.

The computer maker preannounced positive results Feb. 4, easing doubts about its December quarter. That means investors likely will look beyond this afternoon's earnings report and focus their nervous energy on the unsure outcome of the company's $25 billion acquisition of rival Compaq ( CPQ), the dissension among H-P's board of directors, and the tenure length of its CEO Carly Fiorina.

Hewlett-Packard pointed to higher PC and printing demand as the pillar supporting better-than-anticipated revenue and profits, as well as a jump in its gross margin.

Analysts' consensus calls for H-P to earn 25 cents a share on revenue of $11.19 billion, several notches above pre-Feb. 4 expectations. H-P's initial saw flat-to-worse revenue from the fourth quarter's $10.88 billion and flat earnings of about 19 cents a share. Dour consensus estimates called for earnings of 16 cents a share before the boxmaker set the market straight with its surprise upside guidance.

Compaq flourished in the December quarter, growing its revenue 14% sequentially on seasonal strength in PC sales.

Meanwhile, Gateway ( GTW) and IBM ( IBM) did not have a similar PC-related uptick. Gateway offered a Jan. 7 warning that revenue would be shy of Wall Street expectations, and IBM singled out its PC and printing division as a December underperformer.

It seems H-P will join the luckier faction of the sector, benefiting from a holiday surge that compensated for economic uncertainty and lagging corporate spending.

Now to the Merger

The company's preannouncement will aid its efforts to convince the market that more than four months of wrangling over its intent to acquire Compaq hasn't detracted from its focus, or its customers' confidence.

While Wall Street initially frowned on the deal announced by H-P on Sept. 3, 2001, punishing H-P and Compaq shares, the pairing wasn't officially jeopardized until November. At that point, members of both the Hewlett and Packard families announced their displeasure with the deal and rallied the support of the respective Hewlett and Packard foundations, which control at least 15% of H-P's shares, against the deal.

Since that announcement, Hewlett-Packard's share price has dropped 19% and Compaq's has fallen 21%, compared with a drop of only 4.1% for current PC leader Dell ( DELL).

In the two months following those salvos, Hewlett-Packard has used an aggressive print-advertising campaign to argue its case. Top executives have spoken at several meetings with H-P retirees, employees and managers to explain the deal's benefits. The company has sent letters to shareholders arguing its case, with merger opponents responding in kind.

In the past few months, a schism has split the board among current and former H-P execs and the founding families. That was illustrated by a pledge from Richard Hackborn to leave the board if the merger is quashed, and Walter Hewlett's admonitions that the marriage is a desperate attempt that will overload H-P with low-margin PC operations.

H-P shareholders will vote on the merger March 19, and Compaq on March 20. Compaq already has received Canadian and European regulator approval for the deal.

H-P will speak for itself Wednesday afternoon with its first-quarter earnings report.

As originally published, this story contained an error. Please see Corrections and Clarifications.

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