updated 8/20/2008 9:24:47 AM ET 2008-08-20T13:24:47

Hewlett-Packard Co. weathered economic turbulence remarkably well in the fiscal third quarter but the technology bellwether faces another big challenge — stiffer personal-computer competition — that threatens to slow its steady growth.

The Palo Alto-based company said Tuesday that its profit for the May-July quarter jumped 14 percent, beating Wall Street's expectations on strong laptop sales and a robust international presence.

HP said it earned $2.03 billion, or 80 cents per share, in the latest period, up from $1.78 billion, or 66 cents per share, a year earlier.

Excluding one-time charges, HP's profit was 86 cents per share, three cents higher than the average estimate of analysts polled by Thomson Reuters.

The results, reported after the market closed Tuesday, signaled that HP is still holding its ground as the world's No. 1 seller of personal computers even with stronger competition from Dell Inc. and Apple Inc. and aggressive price cuts.

However, HP's profits were hurt by higher prices for some of its parts and a shift toward cheaper PCs, trends that are affecting other PC manufacturers but that HP offset somewhat with better sales of technology services and software. HP's gross profit margin — its profit on each dollar of revenue once manufacturing costs are stripped out — was 24.2 percent of revenues, down slightly from the year-ago period.

The pressures within the PC industry raise questions about HP's ability to keep growing as quickly as it has been.

One of the key drivers of HP's growth has been its sizzling personal computer business, which makes up about a third of HP's overall sales and has consistently experienced double-digit sales growth over the past two years.

That rise has coincided with HP reclaiming the title of world's biggest PC maker from Round Rock, Texas-based Dell, a victory fueled partly by growing consumer interest in laptops and HP's strong retail presence, areas where Dell was weak but is now improving. Apple is also increasing its market share, helped by the success of iTunes and the iPhone and the Macintosh's appeal among designers and students.

HP Chief Executive Officer Mark Hurd said on a conference call with analysts Tuesday that he's happy with HP's ability to increase its PC sales despite "extremely tough" comparisons over last year, but he has consistently stressed that it will be hard for HP to keep topping itself in that area.

Still, HP's sales of laptop computers rose 26 percent during the latest period to $5.35 billion.

The company's optimism about its prospects despite a tough economic environment in the U.S. and parts of Europe helped lift the stock.

HP shares rose $1.26, or 2.9 percent, to $44.95 in after-hours trading after the results were reported. The stock had fallen 91 cents, or 2 percent, to $43.69 during the regular trading session.

Investors have become accustomed to HP offering conservative guidance and topping those forecasts by a few pennies per share, so HP's strong results for the latest period and a fourth-quarter outlook that was slightly better than analysts expected weren't much of a surprise.

HP also is still benefiting from weakness in the dollar. HP sales in other currencies translate into more dollars as the U.S. currency falls.

Sales were $28.0 billion, a 10 percent increase over last year and higher than the $27.4 billion analysts were expecting.

That revenue rise would have been just 5 percent, however, when adjusted for currency fluctuations.

Some investors have expressed fears that HP's growth might taper off as it digests its $13.9 billion acquisition of Electronic Data Systems Corp. The deal deepens HP's battle with IBM Corp. for the dollars that corporate customers spend to get guidance on setting up their computer networks.

Also a point of concern for some analysts was sales growth of just 3 percent in HP's printer and ink division, which provides more than a third of HP's total profits. Printer sales fell, but HP boosted the sale of supplies — which includes the expensive and profitable ink — by 11 percent.

In the current fiscal fourth quarter, HP said it expects a profit between $1.01 and $1.03 per share, ahead of the $1 that analysts had been forecasting. HP also forecast revenue between $30.2 billion and $30.3 billion in the fourth quarter. Analysts had been expecting $30.2 billion.

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