Compaq profit jumps, warns of euro impact

By : |October 25, 2000 0

Nicole Volpe

NEW YORK: Compaq Computer Corp. on Tuesday reported that its third-quarter
profit surged on strong sales across all its product lines, but the world’s No.
1 personal computer maker promptly spoiled the party by warning that its
fourth-quarter profit would be hurt by a weak euro.

The better-than-expected third-quarter profit and revenues, following a
series of disappointments from its rivals, signalled a turnaround for Compaq,
which a year ago was showing stagnant revenue growth, analysts said.

However, it was overshadowed when Compaq chief financial officer Jesse Greene
said in a conference call that the effect of the weak European currency would
lop as much as $100 million from pretax profits in the fourth quarter.

"People are going to have to adjust to the impact of currency in the
fourth quarter," said Gerard Klauer Mattison analyst David Bailey.
"But it still doesn’t change the story that this was a solid third
quarter."

The Houston-based company reported third-quarter net income of $550 million,
or 31 cents per share, including a net investment gain of $25 million, compared
with $140 million, or 8 cents, in the third quarter a year ago.

Excluding the investment gain, Compaq earned 30 cents per share, beating the
Wall Street estimate of 29 cents, as reported by First Call/Thomson Financial,
which compiles brokerage estimates.

Just over an hour after the results announcement, Compaq took the fizz out of
any celebration among its shareholders by saying that earnings per share in the
fourth quarter would likely to be around 37 cents, about 10 per cent below the
consensus analysts’ estimate of 41 cents.

"Expect earnings per diluted share of 37 cents," Greene said,
pointing out that Europe is one-third of Compaq’s total sales. In last year’s
fourth quarter, Compaq posted per share earnings of 19 cents.

Its share price soon suffered the consequences of the warning.

Compaq rose $1 to $28 in after-hours trade on Instinet following the results,
until the conference call in which the currency impact was revealed. Then shares
fell back to $25-1/2.

Still, Compaq chairman and chief executive Michael Capellas, in a statement
accompanying the third quarter earnings release expressed confidence about the
fourth quarter and next year. The company sees fourth-quarter revenue growth of
18 per cent to $12.4 billion.

"Looking forward, we expect continued strong revenue growth," he
said. "We are confident that we can achieve 18 per cent revenue growth and
strong earnings per share improvement in the fourth quarter."

Third-quarter revenues rose 22 per cent to $11.2 billion. Analysts expected
sales of $10.76 billion, according to First Call. Sales of its industry standard
servers, which are used to manage computer networks, as well as business data
storage and consumer sales all showed strong gains, Compaq said.

"People were taken a bit off guard" by the news of the currency
impact, said Bailey.

While Compaq said it showed sales growth in all its regions, it joined other
computer makers, such as Dell Computer Corp. and Apple Computer Inc., who have
been hurt by part to macroeconomics in Europe.

Sales grew 8 per cent in Europe, North American sales grew 27 per cent and
Asia-Pacific grew 41 per cent, Compaq said.

But the weak euro did hurt Compaq in the third quarter, as it has other big
technology companies, such as International Business Machines Corp. and Intel
Corp. Compaq said its European sales would have grown 21 per cent if not for the
effect of currency.

The weak euro cuts into sales already made, as it reduces their value when
translated back into dollars.

Analysts said they were heartened by executives not reneging on their 2001
guidance for growth.

"In 2001, we see earnings growth in excess of 40 per cent, consistent
with consensus estimates," said Capellas.

(C) Reuters Limited 2000.

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