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HP beats Street, but profit falls
HP's revenues and earnings ex-charges beat Wall Street expectations
November 17, 2005: 7:15 PM EST
By Amanda Cantrell, CNN/Money staff writer
Mark Hurd took over as HP's chief executive in April
Mark Hurd took over as HP's chief executive in April

NEW YORK (CNN/Money) - Wall Street's crush on Mark Hurd just keeps growing.

HP's (Research) shares surged in after-hours trading on strong sales of servers and PCs, which alleviated investors' fears that HP would suffer the sales setbacks that plagued rivals Dell and Lexmark during the quarter.

The Palo Alto-based computer maker posted fiscal fourth quarter revenues of $22.9 billion, slightly ahead of Wall Street expectations of $22.8 billion and a 7 percent increase over the previous year-ago quarter based on better than expected sales in its enterprise servers and storage division.

Excluding a hefty $1.1 billion charge related to restructuring costs and layoffs, the company posted earnings of $0.51 per share, well ahead of Wall Street analysts' expectations, according to estimates from Thomson FirstCall. But the charge caused the company's quarterly profit to fall 62 percent. Including the charge, earnings per share fell to $0.14.

"I was pleasantly surprised with the turnaround in the enterprise business, which I think surprised a lot of people on the upside," said Mona Eraiba, an analyst with Rosetta Group Research, adding that she was also pleased with PC sales. "Everybody was worried about Dell phenomenon, but HP executed. Also, the printer business looked very solid. That's the key thing - just solid execution, solid momentum, and they continue to take out costs."

After hours HP shares rose about 6 percent above its $29 closing price.

"I think it's another case of Hurd under-promising and over-delivering," said Michael Church, an analyst at Yardley, Penn.-based money management firm Church Capital Management, which owns shares of HP. "I think this is encouraging because last quarter they had some easy (year over year) comparisons, and I think this quarter was the true test."

Hurd's so good?

Church said he thinks investor confidence in HP is tied entirely to Hurd, who took over the company on April 1 this year. Since Hurd took the job, he has slashed costs, cut 14,500 jobs, separated the printer and PC businesses into two separate divisions and delivered a better-than-expected fiscal third quarter. HP announced Thursday during a conference call with analysts that it will cut an additional 800 jobs as part of its cost-cutting initiative.

"I think the market likes him right now," said Church.

Hurd said the company spent $1.6 billion during the quarter on share buybacks and dividends, and he noted that the company paid employees a sizable bonus during the quarter, though he declined to say how much.

Eraiba said the bonus is a good sign that Hurd is working hard to improve employee morale at HP, which took hits after the company's merger with Compaq, the attendant internal turmoil, the adjustment to a new CEO and the round of layoffs.

"Hurd's strategy was to couple the cutbacks with rewards, based on meeting the objectives and executing," she said. "It's encouraging that he is giving bonuses to make sure employees are happy."

The company also issued a forecast of $0.46 to $0.48 earnings per share for the current quarter, excluding three to four cents for a stock-based compensation expense. Including that expense, HP said it expects earnings for the current quarter of $0.42 to $0.44. Analysts had expected HP to forecast earnings per share of 44 cents; analysts said the Street's estimate did not factor in the stock-based compensation expense.

HP said it's expecting earnings per share of $1.88 to $1.95 for 2006, excluding roughly $0.13 of stock-based compensation expense. Including the expense, it expects 2006 earnings per share of between $1.75 and $1.82. Wall Street analysts expected earnings per share of $1.82.

PC numbers strong

HP appears to have dodged the consumer demand issues that plagued rivals Dell and Lexmark, which posted disappointing quarters.

Printing and imaging, HP's cash cow, posted quarterly revenue of $6.8 billion, a 4 percent increase from the year-ago quarter. That division will account for an estimated 63 percent of HP's operating profit in 2005, according to Sanford Bernstein technology analyst Toni Sacconaghi.

Revenues in the company's PC division, which accounts for about 31 percent of HP's total revenue, grew 9 percent year over year, to $7.1 billion. Shipments rose 13 percent year over year. HP posted a 14 percent increase in revenue to consumer clients, based largely on notebook revenue, which grew 23 percent year over year.

In its storage and servers division, HP posted $4.5 billion in revenues, a 10 percent increase from the year-ago quarter. That division accounts for about 20 percent of HP's revenue.

HP's stock has traded in a 52-week range of $19.89 to $29.51.

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Rosetta Group's Eraiba does not own shares of HP, and her firm has no banking ties to the company.  Top of page

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