Updated from 10:16 a.m. EST

Hewlett-Packard

(HPQ) - Get Report

shareslost ground Friday as Wall Street shruggedoff its upside sales guidance for the April quarterand better-than-expected PC sales. Instead, analysts and investorsgroused about the still-weak profit levels in H-P's corehardware lines of business.

In recent trading Friday, the stock was recently off 64 cents, or 2.7%, to $23.22.

There was little room for surprises heading intothe company's January quarter earnings report because italready preannounced its results.

In notable news from the company's postcloseconference call, H-P chairman and CEO Carly Fiorinareaffirmed her conservative prediction, first made inDecember, that companies will show only the mostmodest growth in information technology spending thisyear.

At Deutsche Bank, George Elling pointed out thatH-P's revenue outperformance -- some $250 million overhis estimate -- was due largely to stronger-than-expected sales in its computer arm.Also, he said he was encouraged by the improvedprofitability in the computer group and server andstorage division, which both recorded operatingprofits for the second consecutive quarter since themerger. The PC group managed to raise its operatingmargin from a hair-thin 0.4% in the prior quarter to1%, aided by strong mobile growth and higher sellingprices, while the enterprise line operating profitgrew from 2.6% to 2.8%, helped by

Intel

(INTC) - Get Report

-based serversand storage.

Elling raised his second-quarter revenue target to$19.4 billion from $18.9 billion, though he nudgeddown his above-consensus earnings-per-share number from 37 cents to36 cents.

He has a buy rating on the shares, arguing they offer asound value at about 16 times his fiscal year 2004estimate and 13.6 times his estimate for fiscal year 2005, basedon Thursday's close. Deutsche Bank has doneinvestment banking for H-P in the past year.

Offering a more skeptical take was Needham'sCharlie Wolf, who pointed out the improved computerand enterprise division margins were "still anemic."

H-P has "neither the cost nor expense structure toaggressively compete with

Dell

in personal computers and industry standard servers," Wolf wrote. "H-P's anemic margins onPCs and servers attest to this. Moreover, they areunlikely to reach materially higher levels over theforeseeable future." (He reiterated a hold rating on the shares; Needhamhasn't done banking for H-P.)

While PC growth was better than expected, growthin H-P's trusty printer line of only 5% was on theweak side, he said. "Once again ink carried the day,"noted Wolf, pointing out that H-P's printing and imagingarm accounted for over 70% of operating profit.

From that standpoint, he voiced some longer-termworries, namely that Dell could start to take a bite out ofH-P's printer sales by 2005. That might "eventuallytranslate into a reduction in its sales of high margin consumables -- the foundation of the HP story,"Wolf wrote.

One point of comparison:

Lexmark

(LXK)

, which manufactures printers for Dellbesides selling its own line, posted printer salesgrowth of 27% in the quarter ending in December,compared to 5% printer hardware growth at Dell, henoted.

At Merrill Lynch, analyst Steve Milunovich calledH-P's quarter slightly disappointing, given upsidesurprises at rivals Lexmark,

IBM

(IBM) - Get Report

and

Sun Microsystems

(SUNW) - Get Report

. Plus,the company saw a boost from a lower-than-expected taxrate, he noted. He has a neutral rating on the shares.Merrill has done banking for H-P.

Strong Quarter, Solid Guidance

As the company had already outlined on Feb. 11, January quarter revenue totaled $19.5 billion, up 9% over last year's levels. That was at the high end of H-P's November guidance for a range of $19.1 billion to $19.5 billion, and better than Wall Street's expectation for $19.4 billion.

H-P saw a major benefit from the weak dollar; adjusted for currency, first-quarter revenue grew only 1% over last year's levels.

The company posted net income of $936 million or 30 cents a share, up 25% from a year ago. Excluding charges, EPS was 35 cents, in line with expectations. The pro forma number reflects a $54 million adjustment to previously taken restructuring charges, $144 million in amortization of purchased intangible assets and $15 million for various acquisition-related items.

In the second fiscal quarter now under way, H-P expects sales of $19.2 billion to $19.6 billion, above the consensus estimate for $19.1 billion. Pro forma EPS should total 34 cents, in line with the current Wall Street outlook.

H-P also affirmed the current consensus EPS estimate for $1.43 in pro forma EPS for the full fiscal year 2004, which reflects year-on-year growth of 23%. That number reflects quarterly charges of about 4 cents a share for the amortization of purchased intangible assets and acquisition-related charges.

CEO Carly Fiorina said the January quarter was the second in a row that H-P saw growth in both desktop and notebook revenue, "almost twice as fast as our nearest competitor," with the company edging out

Dell

(DELL) - Get Report

to take the top spot worldwide in PCs in the calendar fourth quarter.

The company continues its goal "to begin stabilizing and in some cases improving

average selling prices" in PCs, Fiorina said. Prices for desktops rose 3% year over year but fell 9% for notebooks.

"We won't deny pricing pressure is intense" acknowledged Fiorina. But she added, "Dell, for example, has seemed to indicate we were doing aggressive pricing at the low end of the market. I think they must be talking about someone else."

From a macro standpoint, Fiorina endorsed again her December forecast that companies will likely increase their IT budgets by 1% to 2% this calendar year.

Responding to an analyst who pointed out that some tech companies have forecast more robust IT budget growth, perhaps on the order of 4% or 5%, Fiorina said: "If the economy continues to improve, is 4% possible? Yes. I honestly think 2% is probably more like it than 1% at this point. But we know customers have gotten more discriminating about how they spend their money, when they spend their money, with whom they spend their money, and how fast they spend their money. And I think that's going to continue for a while."

Commenting more specifically on the quarter, chief financial officer Bob Wayman said the computer, server and storage and finance arms "made very real improvements in business models and operating performance," noting that all three are businesses where the company has "been most focused on profit improvement in the past two years." He also said that despite weakness in H-P services, which saw gross margins slide 3 percentage points from the prior quarter, the company believes it can keep gaining share profitably.

He called H-P's printer results excellent.

Asked to comment on Dell's inroads into the printer market, following its announcement that it has shipped 2 million printers since launching a branded line last March, Fiorina pointed out that H-P currently ships "a million a week and growing."

"We continue to be very confident about our position in the printing business," she added.

By division, January quarter sales in H-P's server, storage and software arm grew 5% for an operating profit of $108 million (reflecting a $46 million loss in software). Sales in imaging and printing rose 6% for an operating profit of $968 million.

H-P's PC division stayed in the black with a $62 million profit, with revenue up 20%, aided by notebook revenue growth of 42%. And services revenue rose 6% for a profit of $258 million.

H-P said it reduced its staff in the enterprise division by about 500 people during the quarter, but offset those reductions with new hires in its services arm. The company ended the quarter with a flat payroll of about 142,000, Wayman said.