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PCs, servers at a loss

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HP's CEO Carly Fiorina took on a somber tone in describing the company's disappointing third quarter, saying 5 percent revenue growth was acceptable but not good enough.

HP brought in $17.35 billion in revenue for the period ended July 31. This compares to $16.54 billion posted in the same quarter a year ago. The company reported a $297 million profit for the quarter versus a $2.03 billion loss in last year's Q3.

"The third quarter is always tough, but we still should have done better," said Carly Fiorina, HP chairman and chief executive officer, during a conference call."Nevertheless, we are confident in our strategy and the actions we're taking. We expect to deliver a strong fourth quarter with every one of our businesses profitable."

HP had a rough quarter in the PC business despite a 16 percent rise in shipments. The Personal Systems unit posted $4.97 billion in revenue - a 5 percent rise year-on-year. The group, however, reported a loss of $56 million in the quarter. This was an improvement over a $140 million loss in last year's Q3 but a drop from the $21 million profit posted in Q2.

HP was hurt when memory prices did not fall as expected. The company had to honor PC prices it provided earlier to the channel, which took an impact on gross margins. HP says it has now altered prices for the upcoming back-to-school season. This is one area where Dell often claims its direct model is a large advantage over HP, as Dell can alter PC costs at will.

"Our challenge in the Personal Systems business continues to be desktops, particularly in the U.S., where reduced volumes due to seasonality, and in some cases, our own overly aggressive pricing actions negatively impacted gross margins," Fiorina said. "We've already taken corrective pricing actions, and will return this business to profitability in Q4."

HP's Enterprise Systems business continued to lose money, while bringing in revenue of $3.71 billion. This business lost $70 million in the quarter versus a loss of $252 million in the same quarter a year ago. HP vowed the group will be profitable in Q4.

HP's high-end Superdome Unix servers had a strong quarter with revenue rising 64 percent year-on-year. Mid-range and low-end Unix server sales, however, were weak.

HP laid off another couple thousand workers from the enterprise group, saying it expects low-end and midrange Unix servers sales to remain slow. Analysts questioned whether or not the layoffs were needed to have the upcoming Q4 fall in the black. Fiorina denied such speculation, saying the hardware business would be profitable in Q4 with or without the reductions.

HP is also continuing to move more of its support services off-shore, highlighting expansions in China, Poland, Costa Rica and The Philippines.

As always, the Imaging and Printing group performed well. Revenue grew 10 percent year-on-year to $5.24 billion.

HP's Services organization posted a 5 percent year-on-year revenue rise to $3.08 billion. While customer support grew 8 percent, the prized consulting and integration services fell 15 percent year-on-year.

"This decline is in-line with what is happening in the market overall," Fiorina said.

HP performed best in Europe during the quarter. The company grew revenue by 9 percent in the region to $6.4 billion. Americas revenue went up 1 percent to $8.2 billion, and Asia-Pac jumped 8 percent to $2.0 billion.

HP is expecting revenue of between $18.8 billion and $19.1 billion for its fourth quarter.

Shares of HP were flat during the day's trading and closed at $22.11. The company's stock, however, is dropping with speed in the after-hours markets. It is down more than 10 percent, at the time of this report. ®

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