The Houston-based company posted earnings of $758m (£460m), or 43 cents a share on revenue of $10.8bn. Analysts were expecting earnings of 37 cents a share, according to First Call Corp. "It was a lacklustre quarter, as a whole," said Ashok Kumar, analyst at Piper Jaffray who rates the company a "buy."
Services sales, which represents the business Compaq picked up from its Digital Equipment acquisition, rose to $1.7bn from $127m for the quarter and product sales benefited from strong holiday sales, gaining $1.9bn to $9.1bn for the quarter. Total revenue climbed 32 percent from the year-ago period.
Service revenue rose about 5 percent from the previous year PC sales were also in line with expectations, said Kumar.
Compaq has been working toward fitting DEC into its business, cutting about 20 percent of its workforce to pare down costs. This is a work in progress so more fine-tuning may be in the works. The PC maker also put in place a direct sales channel to go after the small business market in November.
The fourth quarter tends to be a strong quarter for the PC and server business, as consumers hit the malls and companies buy equipment for the coming year.
In services, Compaq locks horns with IBM, which has been strengthening that side of its business, and EDS, the U.S. leader in management consulting. For its PC market, Compaq duels with Gateway and a host of others in a market where margins are becoming tighter and tighter. Dell is a newcomer to the server market that is housed by the bigger boys: IBM, Compaq and a handful of other heavyweights. Going forward, Compaq is erring towards the side of caution. "I think they're being cautious because of its unit overhang from the fourth quarter," said Kumar.
Compaq shipped millions of PCs and equipment in the December quarter and may have overloaded its distribution channel, which could hurt earnings if they are forced to discount the products to clear out inventory.
On Tuesday, Compaq said it was spinning off its Alta Vista search engine. Kumar estimates AltaVista could be worth $2bn on the open market.
Compaq closed up 2 9/16 to 49 1/4 on Tuesday.