Scandal Scraps Weigh on H-P

A formal SEC probe offsets a solid quarter.
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Updated from 9:53 a.m. EST

For the big PC makers, earnings season is turning intoscandal season.

Hewlett-Packard

(HPQ) - Get Report

followed up a solid fiscal fourth-quarterfinancial report Thursday with the news that the

Securities and Exchange Commission

has launched aformal investigation into the company and its infamous efforts to find out who was leaking information to thepress.

The company added that the Federal CommunicationsCommission has also requested records and informationfrom H-P about the affair.

H-P's shares, which have proven impervious to the leakcontroversy during the past couple of months, slid1.8%, or 72 cents, to $39.41 in midday trading Friday.

A day earlier, the other big PC maker,

Dell

(DELL) - Get Report

, revealedthat it too was now the subject of a formal SEC probe -- in this case concerning certain past accountingpractices such as revenue recognition. Dell cancelledits quarterly results at the eleventh-hour citing thecomplexities of the ongoing investigation.

The SEC has been in informal contact with both Delland H-P until now. By initiating a formalinvestigation, the commission's division ofenforcement has the ability to use subpoenas.

H-P's announcement about the SEC probe marred what hadbeen another impressive quarter of financial resultsin which the Palo Alto, Calif., tech company onceagain surpassed Wall Street expectations.

CEO Mark Hurd said late Thursday the company's discipline in controlling costs and its share gains in key markets resulted in the most balanced profitability across H-P's various businesses in many years.

H-P has "substantially" completed a restructuring plan that called for laying off about 15,000 workers, or 10% of the company's workforce, executives said. The company has about 1,000 pink slips left to distribute in the current quarter.

Hurd said H-P was not done improving its cost structure, despite the success he said H-P has had in hitting short-term milestones.

"We certainly aren't taking any victory lap here," Hurd told analysts in a post earnings conference call.

The company said sales in the three months ended Oct. 31 totaled $24.6 billion, compared with $22.9 billion at this time last year.

Analysts polled by Thomson Financial were expecting $24.1 billion in sales.

H-P earned $1.69 billion in net income, or 60 cents a share, vs. $416 million, or 14 cents a share a year earlier, when the company had $1.1 billion in restructuring costs.

Excluding $208 million in restructuring charges in its 2006 fourth quarter, H-P said it earned 68 cents a share.

Analysts were looking for 64 cents a share.

Storage was a weak spot for the company, with Hurd saying he was disappointed with the business' 1% revenue growth.

But the company saw healthy growth in printers, PCs and servers.

Sales in H-P's enterprise storage and server business were up 4%, at $4.7 billion. Industry standard server revenue grew 9% while sales of blade servers increased 38%.

H-P said it took market share in notebooks, desktops, Windows and Linux servers and blade servers in its recently completed quarter.

Notebook PC sales were up 24% year over, while desktop PC revenue was flat. Operating margins in the PC division was 4.3%, compared to 2.8% in the year-ago period.

According to industry research firm Gartner, H-P displaced Dell to become the world's largest PC maker in the calendar third quarter of the year.

Dell, which was also due to deliver its quarterly earnings Thursday,

delayed the report at the last minute, citing an ongoing government probe into its books.

H-P had its own share of controversy during the quarter, with its chairwoman and its top lawyer exiting the company in the wake of a controversial boardroom press leak investigation that has resulted in felony charges.

With Hurd apparently not involved, investors have ignored the scandal. H-P executives weren't faced with a single question about the matter by analysts during the post-earnings conference call Thursday.

"The fourth quarter results showed that the company is firing on all cylinders. All of its major product lines in all geographies grew their revenues as well as profit margins," said Bob Djurdjevic, an analyst with Annex Research.

He noted that H-P's $91.7 billion in revenue for the fiscal 2006 year vault it ahead of

IBM

(IBM) - Get Report

, making it the world's largest information technology company.

H-P said it expects sales in the current quarter to range between $24.1 billion and $24.3 billion, with EPS between 55 cents and 57 cents, or 60 cents and 62 cents excluding amortization charges for purchased intangible assets.

The average analyst expectation calls for H-P go earn 60 cents a share on $23.8 billion in sales in its fiscal first quarter.

The company projected seasonal demand for PCs, despite some reports of a sharp falloff in PC motherboard shipments.

In contrast to some industry executives who have spoken of an uptick in PC demand when

Microsoft

(MSFT) - Get Report

releases it new Vista operating system, Hurd was more cautious, saying it was still unclear what the impact would be.

"We'll see what happens as the holiday season occurs -- and frankly, what happens after the holiday," Hurd said.