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H-P Shares Rise on Hurd Honeymoon

Investors are willing to forgive some disappointing guidance.

Updated from 9:47 a.m. EDT

Shares of



set a new 52-week high Wednesday as investors celebrated a strong second quarter and gave new CEO Mark Hurd a walk on soggy guidance.

Shares closed the regular session Wednesday at $22.55, up a buck, or 4.64%, after trading as high as $21.81.

The company's results are the first for 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.

Wall Street offered differing interpretations of the restructuring, with CSFT lowering its 2005 earnings estimate by 6 cents to $1.46 a share, while Morgan Stanley raised its estimate by a penny to $1.53 a share. UBS added 2 cents to its 2005 EPS forecast and raised the price target to $25.

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.

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



and the hyperefficient

Dell Computer



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.

H-P's printing group, which provides the bulk of H-P's profit, 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 threefold. 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%.