updated 2/20/2004 11:41:09 AM ET 2004-02-20T16:41:09

Hewlett-Packard Co.'s quarterly earnings jumped 30 percent to meet Wall Street expectations Thursday, but analysts remained cautious about the company's ability to outperform technology giants such as Dell Inc. and IBM Corp.

For the three months ended Jan. 31, H-P reported a profit of $936 million, or 31 cents per share, compared with $721 million, or 24 cents per share, in the same period last year.

Excluding special items, Palo Alto, Calif.-based H-P earned $1.08 billion, or 35 cents per share. That compared with $877 million, or 29 cents per share, a year earlier. The results matched the estimate of analysts surveyed by Thomson First Call.

First-quarter 2004 revenue was $19.51 billion, up 9.2 percent from $17.88 billion in the first quarter of 2003.

Carly Fiorina, H-P's chairman and chief executive, characterized the first quarter as "solid" but acknowledged "pricing pressure" from IBM and others in the burgeoning information technology consulting market. She said corporate customers remained hesitant about spending on information technology.

"We said we expected a steady recovery in IT spending, not an explosive one," Fiorina said in a conference call. "Everything we've seen since then reaffirms our view of the IT market."

Since its May 2002 merger with Compaq Computer Corp., H-P has focused on reducing costs and boosting performance of business units, ranging from consulting services to server sales.

First-quarter profits were more evenly spread among five divisions than any previous quarter since the company's merger. Merger-related costs were $15 million in the first quarter, down from $86 million in the same period a year ago.

H-P sold $5.91 billion in printers, ink cartridges, paper and related products in the first quarter of 2004, up 5.6 percent from the same period of last year. Depreciation of the U.S. dollar against foreign currencies made H-P products more affordable for shoppers in Asia and Europe.

Although revenue growth in personal computers outstripped that of Dell, Wall Street veterans sounded notes of caution about H-P's earnings report — particularly after pleasant surprises from other technology bellwethers in recent weeks. Half the 23 analysts polled by Thomson First Call rated H-P stock a "hold."

"Although the results are as expected, we think investors may be disappointed given recent revenue and earnings upside surprises from IBM, EMC, and Sun," Merrill Lynch's Steve Milunovich wrote in a research note this week.

IBM surprised analysts last month with an upbeat outlook for 2004 and fourth-quarter earnings that more than doubled from the year-ago period. In the last three months of 2003, IBM earned $2.7 billion, or $1.55 per share, on revenue of $25.9 billion.

Other researchers are concerned about whether the highly diversified H-P can survive assaults on several fronts.

In the relatively low-margin hardware market, H-P battles against Austin, Texas-based Dell, one of the world's most efficient retailers and a company that has proven adept at undercutting rivals' prices.

On the more lucrative consulting and services front, H-P faces a big challenge from Armonk, N.Y.-based IBM, whose services division accounts for almost half of corporate revenue. IBM customers signed services contracts worth $17.3 billion in the fourth quarter of 2003, up from $15 billion in the third.

"They're squeezed," said Martin Reynolds, vice president of research firm Gartner Inc. "Dell makes it very, very difficult for H-P to make big profits in hardware, forcing H-P to change their business model. On the other hand, IBM is very, very strong in global services. It's not clear whether H-P can deliver on its promises just yet."

H-P pared research and development costs in the first quarter, spending $875 million, down 3.6 percent from the same quarter a year ago.

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