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HP shares tumble on weak Q3

Hardware execs shown the door

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Shares of HP took a nose dive this morning after the company reported disappointing third quarter results and announced it would shake up its server and storage management positions due to poor performance.

HP reported a modest 9 percent revenue rise in the third quarter to $18.9bn with a profit of $657m. This overall gain, however, did little to assuage investors who zeroed in on a five per cent revenue decline in HP's server and storage division. Shares of HP were down more than 16 per cent, at the time of this report, to $16.28 - well below HP's 52-week low of $19.10.

"Although we are satisfied with our performance in Personal Systems, Imaging and Printing, Software and Services, these solid results were overshadowed by unacceptable execution in Enterprise Servers and Storage," said HP's CEO, Carly Fiorina. "We therefore are making immediate management changes. We are also accelerating our margin improvement plans in this business. With these changes, we expect our server and storage business to return to profitability in the fourth quarter."

HP's results came as a bit of surprise to investors who had not expected the Q3 figures to arrive for another week. HP pushed up the announcement to Thursday morning, as opposed to its traditional after-market release next week, as it needed to communicate "material changes" to shareholders. HP plans to announce its executive changes later today.

The company said that poor execution by the enterprise group cost it $400m in revenue and $275m in operating profit. Tough pricing was blamed as one reason for these losses along with poor sales of storage systems. Overall, the server and storage group reported $3.4bn in revenue.

HP appeared to be punished by old Compaq server customers. Sales of NonStop servers tumbled 25 percent and Alpha server revenue dropped 32 per cent. HP has been phasing out much of the old Compaq line and looking for customers to move onto its Itanium server systems. The Itanium server revenue, however, does not seem to be offsetting the Compaq losses.

Word of HP's poor quarter comes just ahead of an earnings report from rival Dell, which rarely disappoints investors.

HP's printing and imaging business brought in $5.6bn - an eight per cent year-on-year revenue increase. Services revenue grew 12 per cent to $3.5bn, and software revenue had an usually high jump of 17 per cent to $223m. But the software unit reported an overall loss of $45m due to the numerous acquisitions HP has made in the past year.

HP's much maligned PC division reported a 19 per cent rise in revenue to $5.9bn. These gains, however, did little to boost the bottom line with the group reporting a profit of just $25m. Still, this is better than the loss of $56m reported in the same quarter a year ago.

HP is looking for Q4 revenue to come in between $21.0bn and $21.5bn. ®

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