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HP exceeds estimates

While battered by price pressures and Asia's woes, the company surprises Wall Street by posting stronger earnings.

Hewlett-Packard, battered by PC pricing pressures and Asia's economic woes, today surprised Wall Street by posting third-quarter earnings that were stronger than expected.

But the company warned that the road ahead is still uphill, and analysts for the most part agreed.

The PC giant, which last month issued a warning that its quarter would be hurt by these two events, posted net income of $621 million, or 58 cents a diluted share for the quarter, compared with earnings of $617 million or 58 cents a diluted share a year ago.

Wall Street had expected the company to report earnings of 54 cents a share, according to First Call.

HP's revenues, meanwhile, rose 5 percent to $11 billion for the quarter, compared with $10.5 billion a year ago.

"This was a tough quarter, but we did many things that we believe will position us for better performance," chairman, president, and chief executive Lewis Platt said in a statement. "We made real strides on our expenses and we will take further actions to build on this short-term progress."

He noted, however, that HP remains cautious about Asia and that the region shows no signs of an immediate recovery. "There is some uncertainty about macroeconomic conditions in the United States and in Latin America," Platt added.

In Asia, revenue declined 13 percent and orders dropped by 19 percent in the quarter. Revenue in the United States increased 9 percent while orders grew 4 percent. European revenues rose 7 percent and orders climbed 6 percent.

In looking at HP's business segments, revenues in its computer business rose 6 percent in the quarter over year-ago figures, while orders increased 2 percent.

PC computer platform revenue, however, was flat over year-ago figures due to pricing pressure and a change in product mix to lower-priced products. Revenue declines were seen in its HP Vectra corporate market, especially in its Kayak PC Workstations. The company's Pavilion home PCs posted modest revenue growth, while its OmniBook notebooks performed well.

The company's test and measurement organization posted a 10 percent decline in revenues. But its information storage business revenue quadrupled, with software and services growing at a healthy pace, and its printer business posting moderate growth.

Analysts listening in on HP's earnings conference call this afternoon focused on whether HP is pulling away from or maintaining its earlier stance that revenue growth in the middle to high teens is still possible for the company once its short-term troubles clear up.

In addition, they looked for any signs that the company's PC business is leveling off--that is, if its average selling prices are remaining stable.

When the computer maker issued its earnings warning last month, it pointed to Asia's economic turmoil and industry competition as the main culprits for its sagging profits.

In an effort to remedy that situation, the company announced last month that it would temporarily cut the pay of 2,400 managers by 5 percent and close its U.S. offices for four days during the Christmas holidays.

"The thing that I heard that is causing us to rethink our outlook, is their perspective for revenue growth is markedly lower than we expected," said Phil Rueppel, an analyst with BT Alex Brown. "The culprits are all the things we've heard about: Asia, PCs, printers."

"They only had 1 percent order growth this quarter," Rueppel added. "That's the real indicator of demand, and unless that improves, no matter how much cost-cutting they do, it's tough to show good earnings."

Richard Chu, an analyst with Cowen & Company, noted that Hewlett-Packard has for the last several quarters set up expectations of a revenue growth rebound conditioned on its ability to move past its short-term problems.

"It will be interesting to see what direction or level of growth they are still encouraging people to think about," he said. "I want to gauge the sense of optimism or cautiousness they have for the next 12 months."

Rueppel pointed out that HP did show strong expense controls this quarter, something it typically is better at than most companies.

"Unless they can stimulate the top line, I think it will be a while before we see the stock recover."

HP stock closed nearly 5 percent higher today, at 55.25, ahead of the news.