HP earnings beat targets

Amid cost cuts and a price war with Dell, the No. 2 PC maker reports a rise in income.

Hewlett-Packard, the world's No. 2 maker of personal computers, said Wednesday that quarterly profit surged from a year earlier, when it had a tax charge for repatriating foreign earnings.

Net income for the third fiscal quarter, ended July 31, was $1.38 billion, or 48 cents per share. That's a rise from $73 million, or 3 cents per share, a year earlier, when HP had a charge of almost $1 billion, mainly in taxes, for returning income earned abroad. Revenue advanced to $21.9 billion from $20.8 billion.

HP, based in Palo Alto, Calif., reported earnings of 52 cents per share before special items, exceeding analysts' average forecast of 48 cents, as compiled by Reuters Estimates. Analysts had pegged revenue at $21.8 billion.

"HP delivered another solid quarter marked by strong revenue growth, improved margins and market share gains in key segments," said CEO Mark Hurd on a conference call following HP's earnings announcement. "This is a great company that can continue to improve across the board."

HP has been gaining market share at the expense of rival Dell, the No. 1 PC maker, as it cuts costs while chipping away at Dell's traditional price advantage. Hurd is eliminating 15,300 jobs, or 10 percent of the work force, to save $1.9 billion annually.

"As I have said before, cost and growth are different sides of the same coin. You will see us spend money to save money, and save money to spend money," Hurd said. About 10,000 jobs have been shed to this point, with the remainder expected to disappear during the company's fourth fiscal quarter, which ends in October, he said.

HP's PC group posted its best operating profit in years, Hurd said. Notebook shipments rose 14 percent, while desktops were up 5 percent, in what is usually the weakest operating period of the year for the company and the industry.

As usual, HP saw most of its profit from its imaging and printing group, which contributed $771 million of the overall $1.38 billion in net income. Printer supplies contribute to much of that profit, and Hurd wants to improve supplies growth by focusing on selling more to users and companies that use a lot of ink, he said.

On the enterprise side, server revenue was up 6 percent while storage revenue grew five percent. Software was the big story for HP during the quarter, when it agreed to purchase Mercury Interactive and turned a loss last quarter into a profit in this period. The Mercury deal will likely close in the fourth quarter and require a substantial cash charge to come out of HP's earnings, said Chief Financial Officer Bob Wayman.

HP expects demand to be strong across its various businesses in the upcoming quarter, increasing its guidance for its fourth quarter. The company also increased its inventory holdings in anticipation of a strong quarter in the PC market, and also because it received some great deals on certain components, Wayman said. HP buys processors from both Intel and Advanced Micro Devices, and both companies cut prices substantially during the quarter.

Reuters contributed to this report.
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