Hewlett Packard's Whitman May Write Off Transformation

Updated to reflect additional analyst commentary and closing share prices.

NEW YORK (TheStreet) -- After Hewlett-Packard's (HPQ) 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)-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) and Accenture (ACN)-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.

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