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H-P Roars Past Estimates

The company beats revenue estimates by $1.4 billion on booming PC sales.

Updated from 4:19 p.m. EDT

SAN FRANCISCO --

Hewlett-Packard

(HPQ) - Get HP Inc. (HPQ) Report

increased its sales by 16% in its fiscal third quarter, sailing past Wall Street expectations.

The Palo Alto, Calif., tech giant said Thursday that revenue in the three months ended July 31 totaled $25.4 billion, $1.4 billion more than the average analyst expectation.

At this time a year ago, H-P had sales of $21.9 billion.

Favorable foreign-currency exchange rates helped H-P's top line, but booming sales of PCs provided the main engine of growth. According to H-P, notebook revenue grew 54% year over year, while desktop revenue increased 12%.

Industry standard server sales increased 16%.

"H-P's latest results demonstrate continued strength across each of our key businesses and geographies with our best revenue growth since 2000," CEO Mark Hurd said in a statement.

Shares of H-P were up 10 cents at $46.15 in extended trading Thursday.

The company made progress on the bottom line as well, thanks to what Hurd described as improvements in its business processes, better pricing discipline and declining component costs.

H-P reported a net income of $1.8 billion, or 66 cents a share, vs. $1.4 billion, or 48 cents a share, at this time a year ago. Excluding 5 cents in amortization of purchased intangibles, H-P said it earned 71 cents.

Analysts polled by Thomson Financial were looking for 65 cents a share, though it was not immediately clear whether that figure included the amortization charge.

H-P's operating margin was up year over year in every one of its business segments, save the financial services group. The PC group posed a 5.8% margin vs. 4% at this time last year. The servers and storage group improved its margin to 10.2% from 7.2%.

These margins were above the targets that H-P has set for next year.

As usual, Hurd told analysts during a postearnings conference call that H-P has plenty of room for improvement in capturing new business opportunities and in reducing the company's cost structure.

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He hinted that more workforce reductions are in the offing, although not on the scale of the layoffs that loped 10% of H-P's employee numbers a couple of years ago.

The CEO said that software was at the heart of H-P's future ambitions, as evidenced by last month's $1.6 billion acquisition of

Opsware

(OPSW)

.

According to Hurd, more than 50% of

the company's R&D spending now involves software.

The strong third-quarter results allowed H-P to push up its full-year financial outlook.

But the company's financial guidance for the current quarter appeared somewhat lackluster.

H-P said sales in the fiscal fourth quarter will range between $27 billion and $27.2 billion.

Although the range is higher than the average analyst expectation of $26.4 billion, H-P's guidance assumes a slower sequential growth rate than forecast by the Street.

H-P CFO Cathie Lesjak acknowledged that the guidance's 6% to 7% sequential growth rate was below the 10% to 12% growth that H-P typically sees at this time of year.

She said H-P did not believe it prudent to continue to expect its PC business to continue to grow three times faster than the overall market.

Lesjak also said that the third quarter's favorable component pricing was not sustainable, with computer memory prices already on the rise.

H-P said EPS will range between 75 cents and 76 cents, including 5 cents related to the amortization of purchased intangible assets. Consensus is for 78 cents, though it was not immediately clear whether that estimate included the amortization charge.

Hurd acknowledged that supplies of flat-panel displays used in notebook PCs are getting tighter, but he stressed that despite media reports of broad-based computer component shortages, H-P believed it had adequate supply to meet its financial guidance.

And while recent market volatility and credit jitters have raised concerns about a slowdown in consumer spending, Hurd said H-P does not see any immediate problems.

"I don't have any data that would indicate to me any material change in demand in any segment and any market," Hurd said.