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Thu, May 22, 2008 - Page 10 News List

HP posts solid Q2, but EDS a concern

CHALLENGES The tech giant saw second-quarter profit rise 16 percent, but investors are worried that the EDS deal and a US slowdown could be a drag on its performance


Hewlett-Packard Co (HP) cashed in on rising international demand again in its second quarter, but that performance may not be enough to ease worries about the company's exposure to the ailing US economy as it prepares to digest the second-largest acquisition in its 69-year history.

The financial results released on Tuesday came as no surprise because HP provided a snapshot of its latest quarterly numbers and outlook last week when the Palo Alto-based company jolted investors with the news about its plans to buy technology services provider Electronic Data Systems Corp (EDS) for US$13.2 billion.

The deal has raised concerns that Plano, Texas-based EDS will compound the headaches that HP may be facing if US demand for its personal computers, printers and other products and services remains flat or slumps as consumers struggle to cover high gasoline and food costs while businesses also clamp down on spending.

Among other challenges, HP will likely have to make substantial layoffs from a combined work force of 210,000 employees, while trying to blend two different corporate cultures after the EDS deal closes late this year.

HP is counting on EDS to boost the demand for its services and computers among major companies and government agencies, while improving its competitive position against IBM Corp, the leading seller of technology services.

Echoing remarks from a week ago, Hurd assured reporters on Tuesday that the acquisition will pay off.

“Make no mistake about it: We will get the cost right and we will create value for shareholders,” Hurd said during a conference call.

In a separate call with analysts, Hurd acknowledged the difficulty facing HP in the US, where the company’s second-quarter sales were unchanged from a year ago.

HP's Q2 performance

• Sales up 11 percent year on year to US$28.3 billion.

• Profits up 16 percent year on year to US$2.06 billion, or US$0.80 per share.

• Operating margin rose to 10 percent from 9 percent a year ago.

“The best thing that I can tell you about the US is that it’s a very spotty market and we try to maintain caution around it,” Hurd said.

Like several other large technology companies, HP’s international diversity is helping to offset the debilitating effects of a weak US economy. Markets outside the US accounted for 70 percent of HP’s revenue in the second quarter.

The strong international demand, fueled in part by the weak US dollar, propelled an 11 percent increase in HP’s second-quarter revenue, which totaled US$28.3 billion. If currencies had remained stable, HP said its revenue would have been up by 5 percent.

HP fared particularly well in the rapidly growing economies of China, India, Russia and Brazil, where its sales climbed 26 percent from last year.

“For us, it’s a world of opportunity out there,” Hurd said in an interview.

The company also was helped by strong worldwide sales of notebook computers, which climbed 31 percent from last year. Sales of desktop computers remained flat, a trend that Hurd attributed to rising consumer demand for more portable devices that can access the Internet over wireless networks.

In its second quarter, which ended last month, HP earned US$2.06 billion, or US$0.80 per share. That represented a 16 percent increase from a profit of US$1.76 billion, or US$0.65 per share, at the same time last year.

Excluding acquisition costs, HP said its operating profit margin rose to 10 percent in the second quarter, up from 9 percent a year ago.

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