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Autonomy Disappoints a Year After HP's Big Software Bet

Stocks in this article: HPQ IBM DELL

NEW YORK ( TheStreet) -- What a difference a year makes?

Hewlett-Packard's (HPQ) mixed third quarter earnings mark the one-year anniversary of a plan laid out by the company's former CEO Leo Apotheker to cut and run from declining computer sales and push into software and IT services. The PC giant's effort was marked by a mega acquisition of British data analytics specialist Autonomy.

On the one-year anniversary of HP's radical strategy change, Autonomy's earnings underperformance gives HP little reason to celebrate.

In third quarter earnings, HP's software unit -- the division where Autonomy resides -- reported flat sequential growth and profits of $973 million and $175 million, respectively, as operating margins remained below 20% (where they had been in the first quarter before beginning a decline). The results signal slow progress by new HP chief executive Meg Whitman as she tries to impart her strategic vision to HP, which remains the world's largest PC maker after cancelling Apotheker's breakup plan.

Topeka Capital markets analyst Brian White had expected the unit to see sales increase 2% from the second quarter, while its services unit was expected to grow just 1%, in line with Wall Street expectations. In third quarter earnings, software sales of nearly $1 billion and services sales of $8.8 billion -- a 3% year-over-year decline -- both missed estimates.

The results signal that as performance at HP's networking, printers and PCs units remain resilient in contrast to peers like Dell (DELL), which reported "death of the PC"-type earnings on Tuesday, a new strategic vision for Palo Alto-based HP is yet to fully emerge.

Overall revenue of $29.7 billion slightly missed analyst estimates, while HP's $1 in earnings per share beat an updated Aug. 8 guidance of between 94 cents and 97 cents in EPS.

With HP now having spent its "last" mega-deal dollars on Autonomy, the acquisition is yet to propel the company into IBM (IBM) and Accenture (ACN)-like territory of data and software services, as it tries to strategically reposition in the tech world.

Autonomy -- HP's third largest acquisition ever at $11.7 billion -- remains a key but uncertain piece of CEO Whitman's restructuring efforts. The unit is also a reflection of whether Whitman's decisiveness can help HP recover from a string of CEO failures and an erosion of its competitive footing.

Third quarter earnings were a defining test for Whitman after she restructured HP's software unit to bring Autonomy closer to the company's existing software and services operations.

After far weaker than expected results at Autonomy in the second quarter, HP overhauled management at the data analytics specialist in a big change of course for the company's software and services push. Whitman ousted celebrated Autonomy founder Mike Lynch and replaced him with Bill Veghte, HP's chief strategy officer, in a move to bolster the unit's performance. Whitman cited Autonomy's poor results as reason to remove Lynch and further integrate the software specialist within HP's global sales force, where the business could scale faster.

Yet the latest results signal are uninspiring. HP's earnings results signal that support is still needed, as revenue and profits continue to stay below expectations.

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