3rd-Quarter Profit at HP Lags Wall St. Expectations

Hewlett-Packard Co. said Monday that its fiscal third-quarter earnings fell below expectations as price cuts in computers and printers and delays in products ate into its profit.

The world’s No. 2 computer maker said it earned $617 million, or 58 cents a share, during the three months ended July 31, compared with $425 million, or 40 cents, in the year-earlier period. The average Wall Street estimate was 68 cents a share.

While that reflected a 45% gain, profit would have risen only 11% if HP hadn’t taken a $135-million charge in last year’s third quarter to get rid of its unprofitable disk drive business.

Revenue rose 15%, to $10.47 billion from $9.11 billion.

Hewlett-Packard has trailed estimates in five of the last six quarters as it slashes prices to fend off rivals in its traditional printer, desktop computer and workstation businesses. At the same time, HP is investing in online commerce--including its $1.29-billion purchase of Verifone Inc. in June--a market where profits have been elusive.

“They’re still getting surprised that some of their businesses are changing so quickly,” said James Poyner, an analyst at Oppenheimer & Co. “It’s a little too early to say what electronic commerce will add.”

Shares of Palo Alto-based HP fell $2.25 to close at $63.81 on the New York Stock Exchange. The quarterly results lagged even the lowest analyst estimate of 63 cents. Just nine days ago, HP stock closed at a record $70.50.

Hewlett-Packard makes computers ranging from laptops to personal computers to business machines. In recent years, it has aggressively targeted the highly competitive PC market; during the quarter it was one of several big PC companies to make significant price reductions.

Those cuts, markdowns on printers and delays in shipping medical testing equipment as HP introduced new products made it more expensive for the company to do business, said Chief Financial Officer Bob Wayman.

“The increase in cost of sales didn’t surprise us, but the magnitude of it was more than expected,” he said. Cost of sales rose 14% during the quarter.

Putting more lasting pressure on Hewlett-Packard’s profit is the increased importance of PCs and printers to its business. HP became the world’s No. 3 PC maker in the April-June quarter, according to market researchers Dataquest Inc. and International Data Corp.

Those products, while brisk sellers, are less profitable than servers, workstations and specialized scientific equipment. The industry price war over low-cost basic PCs, and substantial cuts in fancier models, hasn’t helped the company.

“They’re battling for market share . . . and they’re willing to be very aggressive about it,” said Robert G. Herwick, president of Herwick Capital Management in San Francisco. “But the battle for market share is putting pressure on margins.”

While HP decided to sacrifice some profit for market share, industry observers were somewhat unnerved to see profit margins slip from 34.8% in the second quarter to 32.6% in the just-ended quarter, he said.

“There was the sense that maybe things had gone a little farther than [HP] intended,” Herwick said.

On a brighter note, the company’s orders rose a robust 19% during the quarter, led by 25% growth in the United States.

Wayman said HP, now that it has succeeded in stimulating demand, will focus on getting costs and expenses back into balance.

For the first nine months of the year, the company said, profit rose 19% to $2.31 billion, or $2.20 a share, from $1.94 billion, or $1.84.