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HP reports profit growth, raises sales forecast

The computing giant posts revenue of $20.1 billion in its second quarter--a company record.

Hewlett-Packard's net income increased 34 percent to $884 million for its most recent quarter, boosted by strength in servers, printers and services.

For its fiscal second quarter, which ended April 30, the Palo Alto, Calif.-based computing giant had revenue of $20.1 billion--a company record. That's a 12 percent increase over the year-ago quarter and better than the average of $19.3 billion expected by analysts surveyed by Thomson First Call.

Using Generally Accepted Accounting Principles, HP reported earnings of 29 cents per share. Excluding several one-time items, the company had net income of 34 cents per share, matching First Call average estimates.

"Our business continues to fire on all cylinders," Chief Executive Carly Fiorina said during a conference call. "We're gaining ground, despite competitive rhetoric."

The company also increased its estimated revenue for the remaining half of the fiscal year from $39.7 billion to $40.7 billion.

HP's results include a $105 million settlement of a billing dispute with the government of Canada--money the company hopes to recover through legal actions against those HP believes responsible. Because some already has been paid, the settlement will result in a $70 million charge, HP said.

The biggest fraction of operating profits continues to come from HP's imaging and printing business, which grew $28 million to $953 million. Revenue increased 11 percent to $6.1 billion for sales of products such as printers and digital cameras, but growth was strong in particular for supplies such as toner for laser printers and ink for inkjets.

"I think what we are seeing is the cumulative impact of investing in categories where supplies are used even more strongly," Fiorina said. "It's clear color printers use more supplies than monochrome printers, and color is now going mainstream" among business buyers, she said.

HP's server and storage group reported a $62 million increase in operating profit to $120 million on revenue of $4 billion. Within the group, the ProLiant server line, based on Intel's Xeon and Advanced Micro Devices' Opteron, was strong, with revenue growth of 15 percent, HP said.

ProLiant servers were subject to fierce price pressure, though, and average selling prices decreased, HP said.

HP's top server competitor, IBM, is resurgent after struggling in the 1990s and still has a commanding lead. In the first quarter of 2004, Big Blue said its server revenue grew 19 percent.

In HP's high-end server line, the company is slowly moving customers from its own PA-RISC and Alpha processors to Intel's Itanium. The Itanium-based Integrity line accounted for 16 percent of revenues and 26 percent of unit shipments for high-end servers, Fiorina said.

Services operating margin increasing $32 million to $329 million on revenue of $3.5 billion. Much of the boost came from managed services--through which HP runs clients' computing infrastructure--where revenue increased 50 percent to about $650 million, spokesman Brian Humphries said.

HP's software group, however, remained unprofitable. Expenses came from the company's research costs and acquisitions of software companies such as TruLogica, Novadigm and Consera Software.

That unprofitability should ease, however. "We have plans in place to see substantial profit improvement next year," Chief Financial Officer Bob Wayman said of the software group.

The software companies put some flesh on the bones of HP's Adaptive Enterprise strategy, a variation of the utility computing trend sweeping high-technology companies. With the effort, HP hopes to lure customers with the promise of a computing infrastructure that's flexible and boasts operating costs matched to a company's business.

On May 1, HP unified services, software, and storage and servers into its new Technology Solutions Group under Ann Livermore's leadership. Collectively, that group had operating profits of $400 million on revenue of $7.7 billion.

Personal computer operating profits grew $22 million to $45 million on revenue that grew 17 percent to $6 billion, HP said. Average selling prices there increased for both laptops and desktops, a favorable circumstance not experienced by rival Dell, Fiorina said.

HP has begun embracing the Linux operating system for desktop computers, but the effort is very young, Fiorina said.

"We do see growing interest, in particular in the developing markets of the world. We have not yet seen real interest in the developed markets," Fiorina said. "I would call it interest, as opposed to demand we're willing to count on. We do have a number of pilot projects."