HP defends PC profit as Feb revenues rise 3%

Hewlett-Packard, attempting to put to rest investor questions about its recent performance, on Thursday defended the...

Hewlett-Packard, attempting to put to rest investor questions about its recent performance, on Thursday defended the profitability of its personal computer unit and said company revenues for February were running ahead of Wall Street expectations.

HP, which is in the process of integrating its $18.7bn purchase of Compaq Computer, said revenues for the combined company in February, the first month of the current quarter, were up 3% from a year earlier.

Analysts, on average, expect HP's sales to fall about 2.5% in the April-ended quarter, according to Thomson First Call. HP had earlier only said that the first month of the quarter, which began 1 February, was on track to meet its plans.

Shares of HP, which lost about 9% at one point on Thursday to touch a five-month low, recovered in late- and after-hours trade to almost erase their losses for the day.

The number one personal computer and printer maker made its comments in an unusual statement it said it issued in response to "market confusion" over a filing with securities regulators a day earlier and over the performance of its PC business.

In a filing on Wednesday, HP lowered its first quarter cash flow from operations by 18% to $647m from $791m reported earlier because of an accounting error.

In Thursday's statement, chief financial officer Bob Wayman stressed that the revision had left HP's cash position "strong and unchanged", but said the company would review the way it prepares initial financial statements.

"The important takeaway for investors from both our earnings call and yesterday's filing is that our gross cash position of $13.2bn is strong and unchanged," he said.

Wayman also said the $33m profit reported by the personal computer division in the fiscal first quarter ended 31 January was an improvement from a combined loss of $68m in the previous quarter and a loss of $52m a year earlier.

'Real profitability'

Some analysts have said HP reassigned some costs that should have applied to the division, allowing the PC unit to return to profitability in the January quarter after a spate of losses. One of the changes was to move some expenses from operating segments into a larger pool, for example.

"Under any measure, it [the PC group] would have been comfortably profitable," HP's chief marketing officer Michael Winkler told Reuters in an interview. "We probably should have (presented) the segments before and after."

"In retrospect, we could have done a better job articulating the changes," Winkler said.

Last year chief executive Carly Fiorina had made such profitability a benchmark for the success of the Compaq merger by saying the combined companies could cut costs and improve profitability in the division.

Investec analyst Eric Ross, who expects HP to post flat revenues in the current quarter, said the company was on track to top Wall Street sales forecasts if it maintains the momentum it reported for February.

But corporate spending on technology is unlikely to recover until the uncertainty over war with Iraq is resolved, a factor that could still weigh on sales later in the quarter, he said.

HP investors would also benefit from a more detailed accounting of the operating costs and margins of its PC division, even if it treats the segment as a way to essentially subsidize the sale of more profitable servers and storage products to corporations, he said.

"That just reduces our transparency when we look at it," said Ross, who rates HP a "hold" and rival Dell Computer Corp a "buy".

Shares of HP touched $15.45 in after-hours trade, up from an intraday low of $14.18, but down from Wednesday's close of $15.57. Dell shares closed up 88 cents, or 3.38%, at 26.89 on Nasdaq.

HP stock has lost about 17% since 25 February when the company reported quarterly results that missed its quarterly revenue target.

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