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HP's Profit Meets Firm's Guidance but Shares Slip

Reuters
Wednesday, 21 May 2008 | 12:27 PM ET

Hewlett-Packard posted a higher quarterly operating margin after cost cuts, and said strong growth abroad offset some weakness in the United States, but the shares were lower Wednesday as results couldn't shake off concerns about the company's integration with acquisition target Electronic Data Systems.

Hewlett Packard
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Hewlett Packard

The world's biggest computer maker also saw a record cash flow of $4.8 billion in its second quarter, leading its executives to estimate a 2008 total that would top an earlier forecast of $11 billion.

"We clearly expect to do a bit better than that. We are ahead of plan," Chief Financial Officer Cathie Lesjak said, noting that cash flow in HP's first two quarters had already topped $8 billion.

"Part of that is due to earnings, part of that is due to improvement in the working capital space," Lesjak said on a conference call with analysts.

Shares of HP were down more than 2 percent on the New York Stock Exchange Wednesday.

Last week, HP also announced it agreed to buy technology outsourcing company Electronic Data Systems for $12.6 billion, seeking to bolster its services business to better compete against market leader International Business Machines.

Operating margin, excluding special items, was 10 percent, up from 9 percent a year earlier and 9.9 percent in the first quarter, HP said, citing cost cuts as a reason for the rise.

"Our cost initiatives are ongoing and they are significant and we expect them to generate additional leverage in our operating model," Chief Executive Mark Hurd told the call.

HP confirmed preliminary earnings figures for its fiscal second quarter released last week that showed a net profit of $2.1 billion, or 80 cents per share, compared with $1.8 billion, or 65 cents per share, a year earlier.

Revenue rose to $28.3 billion, up 11 percent over that period.

International markets accounted for 70 percent of revenue, with that from Europe, the Middle East and Asia rising 16 percent on the year to $11.1 billion.

Revenue from Brazil, Russia, India and China grew 26 percent over a year earlier.

"Overall the results were good, but there were two areas of concern: the U.S. and servers. But for now and for the future it seems everything else is offsetting it," said Shaw Wu, an analyst with American Technology Research.

Shannon Cross of Cross Research said HP's $4.8 billion in cash flow was "phenomenal." "In this environment, to come through with very solid results with upside surprise and strong cash flow is what you want to see from a company. Things are tough."

HP also kept intact its earlier forecast for third-quarter earnings of 82 cents to 83 cents per share, excluding special items, on revenue of $27.3 billion to $27.4 billion.

Asked for his views on business in the United States, Hurd said: "The U.S. is a tale of many stories and 'spotty' is the best way to describe it. I wouldn't describe it as all good but I wouldn't describe it as all bad."

HP's personal computer business grew 16 percent from a year earlier, with unit shipments up 21 percent.

Notebook revenue grew 31 percent while desktop revenue was flat.

The company's imaging and printers segment grew 6 percent, while enterprise storage and servers revenue rose 4 percent and services grew 12 percent, HP said.

Jane Snorek, an analyst at First American Funds, said she was happy to see a pickup in its printers business, which she said still contributes 60 percent of HP profits.

"I think they are making some headway migrating up the printer market." HP shares, which closed 25 cents lower at $46.46, briefly rose 1 percent in extended trade after the report before falling 26 cents on the New York Stock Exchange.

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