This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Hewlett Packard's Whitman May Write Off Transformation

Stocks in this article: HPQ DELL IBM ACN

Updated to reflect additional analyst commentary and closing share prices.

NEW YORK ( TheStreet) -- After Hewlett-Packard's (HPQ - Get Report) record $8.9 billion third quarter loss was colored by an $8 billion write-off of the company's 2008 acquisition of IT services giant EDS, losses may just be beginning as HP CEO Meg Whitman struggles to execute an IBM (IBM - Get Report)-like transition from PC manufacturing to software and IT services.

Notably, HP's mixed third quarter earnings marked the one-year anniversary of an effort unveiled by former CEO Leo Apotheker to cut and run from declining computer sales and push into software and IT services. The effort was marked by an $11 billion-plus acquisition of British software giant Autonomy.

In a series of decisive moves after Apotheker's ouster shortly following the deal, new CEO Meg Whitman stuck with HP's PC division and the company moved forward on its Autonomy acquisition.

Now, in spite of Whitman's decisiveness in outlining a strategy for HP, Autonomy's third quarter earnings underperformance, in addition to falling services based revenue, gives HP investors little reason to believe a turnaround is imminent as personal computer sales tumble.

In fact, after a massive non-cash third quarter writeoff of its $13 billion-plus acquisition of business services and hardware giant EDS -- a key to the company's IT services push -- Autonomy, the software and big data analytics leg of HP's transition strategy, may be the next writeoff.

HP management noted on the third quarter earnings call that they may write off more goodwill in the fourth quarter and highlighted that software was their main area of remaining goodwill after writing off over $9 billion in services in the latest results.

"After Autonomy's poor performance the last couple quarters, we suspect that goodwill associated with Autonomy will constitute part of the write-off," wrote Jefferies analyst Peter Misek, in a note to clients reacting to earnings. "We believe the negative headlines generated by this could weigh on the stock," he added.

Previously, Misek highlighted Autonomy as a key lever of HP's prospective earnings and stock rebound in coming quarters. CEO Whitman continues to highlight that her turnaround efforts will be focused on salvaging the strategy market by last August's $11 billion-plus Autonomy acquisition.

With HP now having spent its "last" mega-deal dollars on Autonomy, the acquisition will either complete a deal-dud trifecta or serve as proof of HP's successful move into IBM (IBM - Get Report) and Accenture (ACN - Get Report)-like territory of data and software services. With weak Autonomy results and HP beginning to speak about Autonomy in "writeoff" language, Whitman may soon join a long line of HP CEOs whose strategic turnaround efforts can't trump misguided "strategic" acquisitions.

The key question is whether HP's earnings weakness in the third quarter marks a baseline for Whitman in beginning to measure her execution as CEO, or whether the company's string of acquisitions have left the company with assets that aren't compatible.

Even with weak operating performance, HP earnings show it may yet have time to impart a turnaround, which Whitman said could take up to four years. The company reported $2.8 billion in operating cash flow for quarter and a non-GAAP profit of over $2.7 billion as it pared debt.

Some recent acquisitions may also help HP, even if Autonomy underperforms. "Prior to Autonomy, HP Software attributed growth to its security portfolio, namely ArcSight and Fortify, and TBR believes security remains a major revenue opportunity for the business," wrote Technology Business Research analyst Jillian Mirandi, in a Wednesday research note. "HP Software has opportunities to grow in the quickly expanding cloud and security markets," she added.

1 of 3

Check Out Our Best Services for Investors

Action Alerts PLUS

Jim Cramer and Stephanie Link reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

Jim Cramer's protégé, David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
Try it NOW
Try it NOW
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

Jim Cramer's protégé, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!

Markets

DOW 17,301.32 -115.53 -0.66%
S&P 500 2,011.38 -9.87 -0.49%
NASDAQ 4,682.3750 -1.0320 -0.02%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs