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HP Profit Jumps on Laptops; CEO Urges Prudence

Hewlett-Packard, the world's largest personal computer maker, issued a better-than-expected quarterly profit and outlook Monday, driven by strong sales of notebook computers.

Hewlett-Packard
Hewlett-Packard

HP also announced an $8 billion additional share buyback program, though market reaction was muted by uncertainty over how much the U.S. credit crisis will hurt technology demand in coming months.

HP shares on Tuesday gained less than 1 percent in choppy and uncertain trade.

The results came after IBM and Cisco Systems warned of weakness in orders from U.S. financial institutions, which are mired in mortgage-related losses.

Chief Executive Mark Hurd told reporters on a conference call that HP saw a "fairly steady environment" in its fiscal fourth quarter, which ended Oct. 31, helped by lower costs for computer memory chips and other components.

"We do not have a huge exposure to the financial services industry," Hurd said. "We saw no change in spending in financial services in the quarter."

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But he said the component pricing environment could be moderately less favorable in the current quarter. "There's tightness in some categories, but in other categories, there's pretty ample supply," Hurd told analysts on a conference call.

Net income in the fourth quarter rose 28 percent to $2.16 billion, or 81 cents per share, from $1.7 billion, or 60 cents per share, a year earlier. Earnings before items of 86 cents per share beat the average Wall Street forecast of 82 cents, according to Reuters Estimates.

Revenue grew 15 percent to $28.3 billion, compared with the average analyst forecast of $27.4 billion. Sales were helped by a 49 percent jump in notebook computer revenue.

"Great numbers, great quarter," said Brent Bracelin, an analyst at Pacific Crest Securities. "This stock has been one of the best performing stocks in the past two years."

Asked about the muted share reaction, Bracelin said: "I can't explain the disconnect other than that people are very worried about spending on IT."

Weighing Component Costs

Component Costs

Palo Alto, Calif.-based HP last year overtook Dell as the largest maker of personal computers after three years of lagging behind its Round Rock, Texas-based rival. Hurd has focused on selling laptops and printers in stores and in markets outside the United States, areas where Dell lagged.

HP has also cut costs and expanded high-profit businesses such as software and technology services. Software revenue doubled to $698 million in the fourth quarter, after HP bought Mercury Interactive a year ago for about $4.9 billion.

Revenue in its personal systems group, which includes PCs for businesses and consumers, rose 30 percent to $10.1 billion in the fourth quarter.

"It looks like the cost cutting has helped. Software is growing. It once again points to the CEO who has been there two years continues to turn things in the right direction," said Richard Sichel, chief investment officer of Philadelphia Trust. "I think they will continue to surprise on the upside."

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HP, which has a market value of about $130 billion, expects to buy more software companies in addition to expanding its software business internally, Hurd told Reuters.

"We're very active in what's defined best as the management software space," he said in a phone interview, referring to systems, network, server and data storage management. "What we try to do is bring all these things together. You can see us in the software space continuing in this area."

HP forecast first-quarter earnings per share before items of 80 cents, above an average Wall Street forecast of 77 cents.

HP saw first-quarter revenue ranging from $27.4 billion to $27.5 billion, versus the average forecast of $27.04 billion.

For the full 2008 fiscal year, HP expects earnings per share of $3.32 to $3.37 before items and revenue of about $111.5 billion. Analysts, on average, expect full-year earnings of $3.26 per share and revenue of $109.8 billion.

HP's imaging and printing group, which includes printers and printer supplies, saw revenue growth of 4 percent to $7.6 billion. Revenue from server computers and data storage systems rose 10 percent, helped by strong sales of so-called blade servers designed to save space and energy in data centers.

HP shares have risen about 21 percent this year to trade at about 18 times estimated fiscal 2007 earnings, compared with Dell's multiple of 19 and IBM's 15.

Heed Hurd's Warning?

Hewlett-Packard, which took the title of world's biggest PC seller a year ago from slumping rival Dell, is warning investors that it does not expect its PC business to continue expanding as quickly as it has been.

"The numbers we've delivered are huge. It's not prudent to build a business model on that," CEO Hurd said in an interview Monday. "We're not building our models on the kind of growth we've seen in the past."

Sales of laptop and desktop computers have fueled much of the Palo Alto-based company's growth over the past year, jumping 26 percent to $33.5 billion and accounting for nearly a third of HP's $104.3 billion in revenue in 2007.

Still, Hurd said Monday that the company isn't forecasting the same kind of rapid growth for its PC business, though it expects to continue taking market share from other makers. The company has historically given similarly conservative financial guidance.

Wire services contributed to this story.

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