The EDS mega-deal and a 2001 merger with Compaq helped to usher out previous HP CEOs Mark Hurd and Carly Fiorina, causing billions in writedowns and leaving HP vulnerable to rapid commoditization in PCs, printers, laptops and IT hardware.
In third quarter earnings, HP's software unit -- the division where Autonomy resides -- reported flat sequential revenue 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 Whitman as she tries to impart her strategic vision on HP, which remains the world's largest PC maker.
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 third quarter earnings, software sales of nearly $1 billion and services sales of $8.8 billion -- a 3% year-over-year decline -- both missed Wall Street estimates.
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. Shares closed down over 8% on Thursday hitting new 52-week lows."Autonomy still requires a great deal of attention and we've been aggressively working on that business," Whitman said in the company's third quarter earnings call. Whitman is taking aggressive action to try and salvage the company's software unit and its services unit, where EDS resides. HP overhauled management at Autonomy after the data analytics specialist posted far weaker than expected results in the second quarter -- marking a big change of course in 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. When HP first took control of Autonomy last fall, it planned to run the company independently, keeping Lynch, who founded the firm in 1996, at the helm. However, after poor results, Whitman decided to remove Lynch and further integrate the software specialist within HP's global sales force, where the business could scale faster. Whitman's closer alignment of Autonomy with core HP, and an overall restructuring and simplification of HP mirrors the decade-ago turnaround of IBM that took shape through a strategy to quickly integrate acquisitions. Still, the drastic management change for Autonomy, a maker of software analytics that search unstructured data like emails, phone calls and social media, was a first troubling sign as to whether HP will get a bang for its buck on the deal. Third quarter earnings signal that support is still needed. In particular, earnings did little to reverse a trend of falling profit margins and a growth slowdown at HP's software and services units, an integral piece of any transformation. HP's software license growth fell to 2% in the third quarter from 7% in the second quarter and from 12% in the first, while the unit's operating margins rose to 18% after dropping to 17.7% in the second quarter (margins were 20% in the first quarter).