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HP Earnings Skip Past Forecasts

HP (HPQ) earnings
HP (NYSE: HPQ) on Wednesday easily beat the Street when it reported a first-quarter profit of $3.5 billion, or $1.10 a share, on sales of $31.2 billion.

The $31.2 billion in sales represents an 8 percent improvement from the year-ago quarter when it earned 93 cents a share on sales of $28.8 billion.

A survey of analysts by Thomson Reuters pegged the Palo Alto, Calif.-based company for a profit of $1.06 a share on sale of $30 billion.

HP shares closed up $0.71 to $50.15 ahead of the earnings report before moving up $0.94, or 2 percent, to $50.38 in after-hours trading.

"I believe HP has the best and broadest portfolio in the industry," CEO Mark Hurd said during a conference call with analysts Wednesday afternoon. "We address a $1.3 trillion IT market. I'm proud of what we've already achieved, but I believe HP's best days are still ahead."

Hurd added that HP will continue to hire more workers to keep up with what characterized as an "accelerating market momentum" while also managing the company's cost structure and invest in channel partners.

This momentum led Hurd and HP to boost its expectations for the remainder of 2010 as the company hopes to expand its share of the $1.3 trillion in annual sales derived from the IT industry.

HP told investors to expect second-quarter sales between $29.4 billion to $29.7 billion, slightly above its prior forecast of $29 billion.

For the year, it now projects sales in the range of $121.5 billion to $122.5 billion, up from its earlier guidance of between $118 billion to $119 billion.

Profits for 2010 will check in between $4.37 a share and $4.44, up from earlier estimates of between $4.25 a share to $4.35 a share.

HP strength in servers, storage and notebooks

By segment, HP enjoyed robust growth across almost all units.

Its enterprise storage and servers business checked in with sales of $4.4 billion, up 11 percent from the year-ago quarter. Blade server revenue was up 24 percent alone, and operating profit for the unit was $552 million, up from $406 million during the first quarter of 2009.

Its PC unit posted a 26 percent increase in unit shipments and held on to the top spot in worldwide PC market share. The unit reported sales of $10.6 billion, up 20 percent from the year-ago quarter and an operating profit of $530 million.

Notebook sales shot up 25 percent in the quarter while desktop units surged 16 percent.

Services revenue, however, slid 1 percent to $8.7 billion while software sales remained flat at $878 million.

Even HP's much-maligned imaging and printing group had cause for celebration, recording a 4 percent improvement in sales to $6.2 billion. Printer unit shipments rose 16 percent in the quarter and the division's operating profit checked in at $1.1 billion.

The upside surprise was exactly what most analysts covering HP had been expecting from the closely watched tech bellwether.

"We believe that H-P has multiple sources of revenue upside," BMO Capital analyst Keith Bachman said in a research note issued earlier this month. "We believe that enterprise, services, and even the printer division have upside potential versus our estimates."

HP, which is going at it hammer and tongs with Dell in the corporate PC space, sits in a very favorable position as the overall economy shows signs of modest recovery, according to JPMorgan analyst Mark Moskowitz.

"We think that HP stands to be the bigger beneficiary of any refresh cycle in corporate PCs later this year or early 2011," Moskowitz wrote in a research note. "This prospect, alongside the positive impact of a server refresh, should help HP outperform its PC and server peers."

According to technology market researcher Gartner, global IT spending is expected to rise 4.6 percent in 2010 after declining 4.6 percent last year.

HP's cash flow from operations surged up 114 percent to $2.4 billion in the first quarter, giving the company even more ammunition heading into what's projected to be a very busy and competitive merger and acquisition market throughout 2010.

Last quarter, HP managed to top analyst estimates when it earned $2.93 billion on sales of $30.95 billion.

Including one-time items and charges, HP pocketed $2.3 billion, or 96 cents a share, up from a profit of $1.9 billion, or $0.75 a share, in the first quarter of 2009.

HP shares rallied up to a 52-week high of $52.95 in January after falling to a low of $25.39 in March.

Twenty-seven of the 32 analysts covering the stock maintain either a "buy" or "strong buy" recommendation.

Larry Barrett is a senior editor at InternetNews.com, the news service of Internet.com, the network for technology professionals.