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H-P Hurtling With Hurd

New Hewlett-Packard CEO Mark Hurd treats investors to an upside surprise in the earnings report.

Updated from 5:03 p.m. EDT

Hewlett-Packard

(HPQ) - Get Report

shares jumped to a one-year high late Tuesday after new CEO Mark Hurd detailed second-quarter results that were better than expected. Investors looked past a third-quarter earnings target that was slightly weaker than hoped and focused on cost cuts and the promise of better things to come.

Shares rose 3.5% to $22.30 in late trading after closing the regular session up 2.5% to $21.55.

The company's results are the first for CEO Mark Hurd, who joined the company with a month to go in the quarter. Hurd declined to outline an extensive vision for the company, but investors clearly showed late Tuesday they liked how he was approaching the job. A key part of the company's results in the second quarter was a larger-than-anticipated amount of cost cuts.

"We are in a sprint to get the company in shape to go run a marathon," Hurd said during a conference call. "We are not in a race just to do things. We need to do things that create a sustainable structure for going forward."

For the quarter ended April 30, the company reported net income of $966 million, or 33 cents a share, on sales of $21.57 billion, compared with $884 million, or 29 cents a share, on sales of $20.1 billion during the same quarter last year.

The company's profit was helped by a reduced tax rate and the reversal of reserves on aged receivables, but those items were offset by more greater-than-expected costs from voluntary staff reductions and a charge related to sales taxes and use taxes from Compaq, prior to the merger. Currency impact knocked the company's sales growth rate to 7% from a reported 10%.

Excluding charges, H-P earned 37 cents a share, up from 34 cents a share during last year's second quarter.

Analysts had expected earnings excluding charges of 36 cents a share and sales of $21.3 billion, on average, according to Thomson First Call. At the quarter's start, H-P predicted earnings excluding charges between 35 cents and 37 cents a share and sales between $21.2 billion and $21.6 billion.

Gross margins for the quarter were 23.8% in the second quarter, up from 22.9% in the first quarter, and down from 24.5% in the same quarter last year.

For the third quarter, H-P expects earnings excluding charges between 29 cents and 31 cents a share and sales between $20.3 billion and $20.7 billion. Analysts had expected earnings of 32 cents a share and sales of $20.39 billion.

The company's third-quarter targets exclude an expected charge of $100 million, or 3 cents a share, for workforce reductions and an equivalent charge for amortization.

H-P's financial results and the subsequent comments from management show a new desire to be competitive. Although Hurd put off detailing a big-picture plan for the company, he did state that H-P's future success is an internal matter.

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The company has struggled since former CEO Carly Fiorina orchestrated the buyout of Compaq. Competition has become more fierce since, as H-P has found itself trapped between the broad offerings of

IBM

(IBM) - Get Report

and the hyperefficient

Dell Computer

(DELL) - Get Report

.

Hurd said he is measuring each business unit at H-P against the industry's best in order to make each unit better. "We're reviewing the organization structure and determining how we can simplify it and take out complexity," he said. "We'll take the necessary steps to drive a performance-oriented culture across our company."

By business unit, H-P's imaging and printing group grew sales 5% to $6.4 billion from last year's second quarter but its operating profit fell 15% to $814 million. H-P said it cut out $71 million in workforce costs, but that it was also hurt by pricing conditions and mix shifts within supplies.

The printing group provides the bulk of H-P's profit, but that cushion seems in danger now that it is

enmeshed in a price war. To that end, CFO Bob Wayman said H-P isn't looking to tank the industry through its pricing, but that it is simply trying to take advantage of the opportunities in front of it.

The personal systems group grew sales 6% to $6.4 billion and posted an operating profit of $147 million, up more than three-fold. Shipments rose 12%.

Sales of storage and servers rose 6% to $4.2 billion and the unit's operating profit was $184 million, up 55%. H-P said it eliminated $24 million in workforce costs during the second quarter from this group.

Services sales rose 14% to $4 billion while operating profit was $292 million, down 12%. H-P lopped off $74 million in workforce costs from this unit during the second quarter.

Software sales rose 23% to $277 million and the operating loss narrowed to $6 million from $52 million in the year-ago period.

Financial services revenue was $544 million, up 16%, and the group's operating profit was $58 million, up 66%.