Updated from 4:42 p.m. EST

Carly Fiorina and

Hewlett-Packard

(HPQ) - Get Report

took a step toward silencing their many critics Wednesday, delivering solid upside surprises on both revenue and earnings in the company's fiscal fourth quarter.

In after-hours trading, the stock zoomed $1.74, or 10.3%, to $18.59. Earlier in the day, H-P gained 30 cents to close at $16.55.

H-P reported revenue of $18 billion, a hefty amount above Wall Street's expectations of $17.3 billion and 9% above the previous quarter.

Net income was $390 million, or 13 cents a share, using standard accounting. H-P said it saw significant operating profit improvement across the board, in its enterprise systems, personal systems, and printing business.

Last year, the combined companies (before the merger with Compaq) posted a $518 million loss for the same quarter.

Pro forma earnings per share of 24 cents beat the consensus expectation by 2 cents and jumped from 14 cents last quarter. The company said pro forma EPS reflects a $331 million adjustment on an after-tax basis, or 11 cents on a diluted per share basis. The pretax pro forma adjustment includes a $150 million restructuring charge, $151 million of amortization of goodwill and purchased intangible assets, and $155 million for other merger-related items.

At SoundView Technology, analyst Mark Specker said H-P's latest results reflect a solid quarter, despite earlier concern that weak PC demand would hurt its business. "The takeaway is positive," he said. "You have to recognize they're not guiding up numbers; they're indicating some concern for the holiday season. But certainly the results are a nice positive data point, particularly on the internal

merger-related activity going on."

H-P's gross margin (under generally accepted accounting principles) grew from 24.9% to 26.5%. The company attributed margin growth to renegotiation of procurement contracts and integration of the two companies' supply chains.

"We delivered an improvement in gross margins at the same time as targeted price reductions to make our products more competitive," noted Fiorina. Reductions in cost structure "enabled us to be more price competitive and raise margins at the same time."

A quick business breakout: On a sequential basis, HP's printing business saw revenue rise 18%; enterprise posted an 8% gain, PCs grew 6%; and services rose 4%.

The PC division's operating loss was cut more than 50% from the prior quarter, to $87 million. Enterprise lost $152 million, but that was a $270 milion improvement over last quarter.

Europe hosted the strongest performance, with overall revenue up 10% sequentially, measured in constant currency. Revenue in the U.S. grew 9%, both sequentially and year over year.

On the merger integration front, H-P is running well ahead of schedule. In June, the company said it would cut a half-billion dollars in costs by the end of its fiscal year. But it managed to cut $651 million instead, contributing 16 cents per share to pro forma earnings in the second half of fiscal year 2002, which ended in October. About half the savings came from workforce reductions, with the rest from procurement savings, the cutting of redundant marketing, and closure of facilities.

Layoffs also were greater than originally outlined. In June, H-P had forecast it would let go 10,000 people by the end of October. But it had a greater net reduction of 12,500 employees, or 8% of its staff.

H-P affirmed consensus estimates for the quarter under way, the first fiscal quarter of 2003. Wall Street expects $18.3 billion in revenue and earnings of 27 cents a share. Based on its current results, that means it expects revenue to grow only 1.6%, but profits should grow by an impressive 23%.

Also in the first quarter, the company expects a sequential increase of $90 million in pension and retiree medical costs. A new advertising campaign will cost an additional $60 million.

Fiorina said she hadn't seen any uptick in technology demand, though global markets seem to be stabilizing. "There are no clear signs of sustained improvement, and we are not counting on a strong holiday buying season," she said.

"We expect the Christmas selling season will be very much like back-to-school. There will be some seasonal uptick but certainly not as robust a season as we would have expected." The company will have a better sense of the demand picture in the wake of the Thanksgiving weekend, which traditionally kicks off the season, she said.

Meanwhile, management suggested it will continue taking "targeted pricing action" in PCs and printers, keeping the heat on competition. "We are not going to announce ahead of time where we plan to take action," said Fiorina, adding that reductions in the company's cost structure "allow us to do so while meeting our profitability targets."

The enterprise and PC units are still expected to become profitable sometime in 2003, with the computer division likely moving into the black first, Fiorina said. She declined to give a more specific timeline, but said it was fair to assume both lines would see continuing sequential improvement in operating margins.

Asked whether the exit of former president Michael Capellas to

WorldCom

could hurt H-P, Fiorina said the departure was something the company had been prepared for, emphasizing that it already had a strong management bench. "Frankly, his leaving is not an issue for this company, either in the short term or long term," she said.

H-P is expected to give more detailed guidance at an analyst meeting scheduled for Dec. 3 and 4.