HP Cites Profit to Stir Support for Merger

SAN JOSE —  Hewlett-Packard Co. on Wednesday reported first-quarter profit that handily beat analysts’ recently raised forecasts, but executives said the company still needs to buy Compaq Computer Corp. to solve long-term problems.

HP is fighting hard to rally support for the $22.6-billion Compaq deal against intense opposition from dissident director Walter Hewlett, who said the strong earnings report proved that HP would be fine without taking on Compaq.

Chief Executive Carly Fiorina carefully used the earnings report to tout HP’s execution in a tough atmosphere and to lament the company’s holes--notably in business PCs, networked data-storage systems and low-end servers.

“These results demonstrate we know our business--better than anyone else,” she said. “The simple fact is, HP has a lot going for it, but there are also significant areas where a lot more is needed. And with Compaq, we have a detailed plan, not just platitudes, to address them.”

HP said its earnings excluding acquisition-related charges were $564 million, or 29 cents a share, in the quarter ended Jan. 31, down from $812 million, or 41 cents, a year ago, as revenue declined 8% to $11.4 billion.

Analysts were expecting 25 cents a share, according to Thomson Financial/First Call. The estimate had been 16 cents until last week, when HP said consumer demand for printers and computers had been surprisingly strong.

In fact, the results were so far beyond expectations that one analyst asked Fiorina during a conference call whether the numbers were “goosed” to help the company’s Compaq campaign.

“I will metaphorically, literally, look you in the eye and tell you these numbers are exactly what they appear to be,” she responded.

Even the impending earnings report didn’t quiet the infighting over the acquisition, as six HP directors accused Walter Hewlett of going too far in his criticism of Fiorina.

The directors sent Hewlett a letter complaining that he has mischaracterized the amount of time HP spent formulating its long-term strategy before the Palo Alto-based company decided to buy Houston-based Compaq. It also said he has suggested falsely that the board has just rubber-stamped Fiorina’s decisions.

On the New York Stock Exchange, HP shares rose 21 cents to $20.98 before the report and Compaq closed up 28 at $11.40.