H-P Stays on Track

The turnaround looks intact after a strong earnings report and outlook.
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Updated from 4:42 p.m. EST

Hewlett-Packard

(HPQ) - Get Report

moved forward with its turnaround, reporting better-than-expected financial results and an optimistic earnings outlook for the year ahead.

Shares of H-P moved 6% higher to $30.74 on Instinet in after-hours trading.

The company said sales for the fourth quarter, which ended Oct. 31, were $22.9 billion, up 7% year over year and above analysts' expectations of $22.78 billion.

H-P's profit fell to $416 million, or 14 cents a share, from $1.09 billion, or 37 cents a share, in the year-ago period, due to a 37-cent-a-share charge related to workforce restructuring and amortization.

However, excluding the various items, H-P's earnings for the quarter were 51 cents, well above Wall Street's estimate of 46 cents a share.

H-P had guided revenue for its fourth quarter between $22.4 billion and $22.8 billion, and pegged earnings between 44 and 47 cents a share.

"H-P delivered another strong quarterly performance, with balanced revenue growth, good cost discipline, improved margins in key businesses and strong cash flow," Mark Hurd, CEO and president, said in a statement. "We are pleased with our progress to date, but there is more work ahead of us."

The company said revenue in its Personal Systems unit grew 9% to $7.1 billion, with unit shipments up 13%. On a year-over-year basis, desktop revenue increased 1% and notebook revenue grew 23%. Revenue for commercial clients, which includes workstations, grew 8% over the prior-year period, while revenue in consumer clients grew 14%.

The results compared favorably with last week's earnings report by

Dell

(DELL) - Get Report

, which posted a year-over-year 2% decline in desktop revenue and "mobility" (notebook) revenue growth of 14%.

After immediately slipping in after-hours trading following H-P's announcement, shares of Dell were recently flat at to $29.87.

In a conference call with investors, Hurd attributed the PC unit's success to solid retail performance in the retail channel as well as the strength of H-P's international presence. "This hasn't been a one-quarter story," Hurd said of the PC division. "This has been a multi-quarter story and a multi-year story."

For the first quarter under way, H-P said it expects earnings before stock-based compensation expense of 46 cents to 48 cents a share, above the current First Call consensus estimate of 44 cents. The company forecast first-quarter sales $22.3 to $22.6 billion. The Street's consensus called for $22.6 billion. In addition to the seasonal sequential decline in revenue growth expected in the first quarter, Chief Financial Officer Bob Wayman said foreign currency issues would take an additional toll on the growth rate. For the full year, the impact of currency issues will result in revenue growth between 3% and 5% to a range of $89.5 billion to $91 billion.

For the full year, H-P expects earnings before the stock expense of $1.88 to $1.95. First Call was currently calling for the company to post full-year earnings of $1.82 a share on revenue of $91.12 billion.

The company expects overall demand in 2006 to be steady, said Hurd.

H-P shares have been on the rise this year, with investors showing confidence in the leadership of Hurd, who replaced Carly Fiorina in March. Since taking the helm, Hurd has aggressively focused on cutting costs across the company. In July, H-P announced it was reducing its headcount by 10%, or 14,500 employees. That number has now expanded to a total of 15,300 workers, Hurd said, as the company has moved forward with executing its restructuring plan.

Gross margins were 23.5% companywide, just up from 23.4% in the year-ago period. Margin improvements in the server and PC divisions were offset by declines in the imaging and services divisions. And H-P's first significant employee bonus payout in years also prevented margins from expanding.

The company's enterprise server and storage division showed one of the biggest margin improvements, with operating profit representing 9.1% of the division's $4.5 billion in revenue, up from 2.5% in the year-ago period. Hurd cited increasing revenue, pricing discipline and a refreshed product line. And the software division, which increased revenue 11% year-over-year, posted its first profit ever.

Unit shipments of consumer printers were up 6% year over year, while revenue for the segment declined 4%, suggesting that H-P may be lowering prices as it faces increasing competition from Dell and

Lexmark

(LXK)

. While operating margins in the imaging division slipped to 13.2% from 16.6% a year earlier, Hurd said the company was sticking with its 13% to 15% margin target for the printer division going forward.

H-P is trying to do two things at the same time, said Hurd: "to be very efficient in our cost structure

while at the same time try to grow in key markets."