SAN FRANCISCO - Hewlett-Packard ( HPQ) outpaced Wall Street's third-quarter earnings estimates Tuesday.Shares of H-P were recently up 2.8% to $44.93 in after-hours trading. Net income grew 14% to $2 billion, or 80 cents a share, from $1.8 billion, or 66 cents a share, in the year-ago period. Excluding special charges, EPS was 86 cents. Analysts were looking for 83 cents. Revenue at the Palo Alto, Calif., tech company rose 10% to $28 billion, or 4.7% in constant currency, from $25.4 billion for the same quarter of last year. Analysts polled by Thomson Reuters were expecting $27.4 billion. Operating margin, excluding special items, improved 80 basis points year over year to 9.8%. In the company's PC business, revenue rose 15% to $10.3 billion, driven by unit growth of 37% in notebooks for total unit growth of 20%. Printer group revenue grew 3.4% year over year to $7 billion, despite a drop in the number of printer units shipped. Executives cited increased adoption of H-P's digital and wireless printers and growing demand in certain categories of printing supplies. Uptake of H-P's Indigo digital graphics unit for commercial print companies yielded 31% year-over-year growth in page volume, which drives sales of ink. The company now has more flexibility to focus more exclusively on higher-margin products, Chairman and CEO Mark Hurd said on Tuesday's conference call. "Graphics is a strong story for us. We're interested in growing that because of the
Within the Technology Solutions Group, server revenue was up 5% year over year to $4.7 billion, with blade server revenue up 66%. Services rose 14% to $4.8 billion, while software jumped 29% to $781 million. In both services and software, growth was driven by strength in outsourcing. Compared to the same period of last year, revenue grew 4% in the Americas, 16% in Europe and the Middle East, and 14% in Asia-Pacific. Cash flow from operations was $3.4 billion, with free cash flow totaling $2.8 billion. Cash flow from operations year to date, at $11.3 billion, exceeds that generated during 2007, Hurd said. For the fourth quarter, H-P projected revenue of $30.2 billion to $30.3 billion and EPS, less items, from $1.01 to $1.03. Analysts were expecting revenue of $30.2 billion and earnings, less items, of $1 a share. The guidance doesn't reflect the impact of H-P's impending purchase of Electronic Data Systems ( EDS) The company has scheduled an analyst meeting Sept. 15 to discuss the impact of the acquisition on fourth quarter and 2009 earnings. H-P will finance the "vast majority" of the EDS purchase with newly issued debt, CFO Cathy Lesjak said. While the company has substantial cash on its balance sheet, much of it is offshore. The company paid $1.6 billion to repurchase 34 million shares during the quarter. Because revenue guidance is based on exchange rates in effect at the beginning of August, analysts questioned the outlook for fourth-quarter revenue given the dollar's recent strength.
If the dollar remains at current levels, it will put downward pressure on H-P's revenue, Lesjak said, although the company has hedged many of its assumptions. A strengthening dollar does not have an exclusively negative effect on revenue, particularly in the services segment, Lesjak said. When the dollar strengthens, services paid for outside the U.S. "actually get better because deferred revenue gets booked at the higher rate" while services are performed at the lower rate, Hurd said. On the hardware side, H-P competes with Dell ( DELL) and Lenovo. H-P's recent move to acquire EDS puts the company more squarely in competition with IBM ( IBM) and other services-oriented firms.