HP profit slips, but sales up

In the second fiscal quarter, revenue grew to $25.5 billion, up 13 percent compared with $22.6 billion in the same period a year ago. Net income was $1.78 billion, down 7 percent compared with $1.9 billion the previous year. Earnings per share were 65 cents, down a penny from the same period a year ago, when a one-time tax-settlement gain of 15 cents per share was recorded.

The world's largest PC maker's results narrowly beat Wall Street's expectations. But, the results weren't much of a surprise since being accidentally leaked by a company employee last week.

The company raised its revenue outlook for the year to between $100.5 billion and $100.9 billion, from its previous guidance of $99 billion.

The PC and imaging and printing businesses were mostly responsible for the positive gains. The Personal Systems Group performed the best of all the business segments, seeing revenue jump 24 percent year over year to $139 million. Notebook PC revenue was up 45 percent, desktops increased 9 percent, and workstations gained 19 percent.

"These are strong results," said an upbeat Chief Executive Mark Hurd during a conference call with reporters. "It's our strongest quarterly revenue growth since the year 2000."

Much of that success came from its retail partnerships. "Our global reseller partner network is a huge, competitive advantage for us and we love it," he said.

HP's largest competitor, Dell, has made noises about moving into the retail PC market, but Hurd batted away questions on the subject from reporters and analysts. When asked for his thoughts about whether Dell might alter its traditional direct-to-consumer sales model, Hurd said he had no comment. Dell lost its No. 1 market share position to HP last year, and has been looking for ways to turn the company around.

Hurd said the release of Microsoft's new operating system, Vista, didn't particularly help or hurt the company's PC sales in the second quarter.

"There's been some positive (effect) with Vista, we acknowledge that," he said. "We didn't look at (the release of) Vista as a Vista moment, but as an offering that would have some positive effects throughout the year."

Revenue for the Imaging and Printing Group was up 6 percent in the last year, and shipments of printers grew by 11 percent, but HP was also able to increase its operating margins for the printing business to more than 16 percent in the quarter. The second quarter is typically HP's best in the printing market, and the third quarter tends to be weakest.

But Hurd also stressed that the company still has more to do to improve its operating margins and cash flow. "We are still transforming," he said. "We are not close to being done."

Hurd emphasized that HP plans even further cost reductions over the next two fiscal years, particularly in the area of IT, real estate and corporate support functions. Those costs will decline more between now and 2009 than between fiscal years 2005 and 2006, he said.

HP shares were up 46 cents to close at $45.21 on Wednesday. After the results were announced, the stock rose to $45.49 in extended trading.