H-P Extends Honeymoon

The tech giant delivers another strong quarter, beating estimates on the top and bottom lines.
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Updated from Feb. 15

Hewlett-Packard's

(HPQ) - Get Report

earnings surged by more than 30% in its fiscal first quarter, as the company's ongoing focus on revamping internal operations buoyed the bottom line.

With profit margins in the PC, server and printer businesses all hitting targets H-P had set for fiscal 2007, the Palo Alto, Calif., company surpassed Wall Street's expectations by 4 cents.

Sales in the quarter ended Jan. 31 increased 6% year over year to $22.7 billion. The company had an operating profit of $1.5 billion, or 42 cents a share. That figure excludes $166 million in after-tax adjustments related to amortization of purchased intangibles and in-process R&D costs.

Excluding the charge, H-P earned 48 cents a share.

On that basis, analysts polled by Thomson First Call expected the company to earn 44 cents a share on revenue of $22.5 billion.

In early Thursday trading, investors boosted shares of H-P $1.84, or 5.8%, to $33.51.

In November, H-P projected that its first-quarter sales would range between $22.3 billion and $22.6 billion, with pro forma EPS between 46 cents and 48 cents.

In a conference call with analysts after the release of the results, CEO Mark Hurd said the company has made progress in its turnaround plan during the quarter, adding key hires to the management team and refining its sales model.

"We're pleased that our initiatives are on track and that the results are showing up in both the top line and bottom line," said Hurd.

For the quarter under way, H-P projected that sales would range between $22.4 billion and $22.6 billion, with EPS of 43 cents to 45 cents.

Analysts had projected that revenue would come in at $22.6 billion with EPS of 45 cents.

For the full year 2006, H-P projected revenue between $90 billion and $91 billion, with non-GAAP EPS of $1.90 to $1.95. Wall Street analysts had projected $1.83 EPS on revenue of $90.8 billion.

The company's PC business, which some investors have faulted for dragging down H-P's overall profitability, turned in a strong showing in the first quarter.

Sales in the PC division grew 8% year over year, to $7.4 billion, helped by strong demand for notebooks. Operating margins in the division jumped to 3.9% compared with 2.1% in the year-ago period.

Hurd said the PC group's margins were the highest they had been in many years. He cited the market shift toward mobility and consumer products as playing into the company's strengths. And he credited the company's relationships with retailers and distributors as critical in helping H-P succeed in emerging markets.

Hurd said PC unit shipments grew 68% in India, 62% in Brazil and 49% in Russia, though he didn't mention China, which many industry watchers believe to be one of the biggest growth opportunities going forward.

Overall, the company's sales were up 6% in Asia-Pacific area, 10% in the Americas and 1% in the Europe, Middle East and Africa region, year over year.

The enterprise storage and server division generated $4.2 billion in revenue, a 5% increase from the same time last year. The group's operating margins were 7.7%, compared with 1.7% in the first quarter of 2005.

Operating margins in printers, H-P's most profitable business, were down slightly from last year at 14.9% compared with 15.4% in the first quarter of 2004. The margins were up sequentially from the 13.2% level in the fourth quarter, however.

Hurd said the printer margins, at the high end of H-P's 13% to 15% target, were the result of internal cost-cutting efforts and "targeted pricing actions to drive market share gains in areas of high supplies consumption."

H-P boosted sales of printer supplies, a lucrative segment, by 11% year over year, while the company shipped 13 million printers during the quarter, up 12% year over year.

The company's services business saw a 2% decline in revenue, which the company said was the result of an adverse currency effect and the company's focus on making the business profitable.

"We've actually walked away from deals," said Hurd.

H-P is in the midst of a turnaround led by Hurd, who took over as CEO in March 2005. Investors have bid the company's stock up more than 44% since Hurd joined the company and undertook a series of moves such as reorganizing the company's internal divisions and slashing costs.

The company has announced that it is cutting more than 15,000 jobs, or 10% of its workforce, as part of the turnaround plan.

CFO Bob Wayman said H-P handed pink slips to an additional 1,800 workers during the first quarter, bringing the total layoffs to 6,500.

Shares of H-P closed Wednesday's regular session down 82 cents to $31.67.