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HP Turnaround Hits Autonomy Wall

Autonomy -- HP's third largest acquisition ever at $11.1 billion - was seen as a key but uncertain piece of CEO Whitman's restructuring efforts. Second and third quarter results, showed a serious slowdown in Autonomy's earnings, which stunted growth expectations of HP's wider software businesses.

In the third quarter, Whitman restructured HP's software unit to bring Autonomy closer to HP's existing operations and ousted celebrated Autonomy founder Mike Lynch 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. It's to be see if revelations of an alleged accounting fraud change HP's story.

When HP first took control of Autonomy it planned to run the company independently, keeping Lynch, who founded the firm in 1996, at the helm. The drastic second quarter management change for Autonomy, a maker of software analytics that search unstructured data like emails, phone calls and social media, was a troubling sign for investors worried about whether HP will get a bang for its buck on the acquisition.

Under new unit head Veghte, HP expected to tie Autonomy to the company's existing services, server storage, networking businesses and its sales force, in an "organizational structure to support a $1 billion company," according to May comments from Whitman.

Fourth quarter earnings did show a reversal in a trend of trend of falling profit margins and a growth slowdown at HP's software and services units, integral to any transformation.

HP's software revenue growth grew 14% year-over-year, driven by 48% growth in its services business. The unit's operating margins rose to 27.2% in the quarter, after falling below 20% for much of 2012.

In August, UBS analyst Steven Milunovich said HP has so far assembled a mediocre set of assets that's unlikely to pull business from entrenched enterprise players IBM and EMC (EMC).

"HP lacks the pure enterprise focus of IBM and EMC yet will have trouble competing for consumers without strong tablet and phone businesses like Apple and Samsung," wrote Milunovich.

"We question whether HP is 'better together' and that it might be 'smart to be apart,' specifically spinning off printers and PCs," he added.

In a decisive call, Whitman retained HP's PC unit -- contrary to an audacious plan by former CEO Leo Apotheker -- and cast high expectations on the benefits of Autonomy.

HP chairman Ray Lane said in September that Autonomy's software and analytics revenue could grow from present levels of $1 billion to $5 billion or even $10 billion. "Hopefully, we'll see a bigger software portfolio and we'll see more value-added services at HP, but we have $120 billion of hardware business that we care dearly about," said Lane in September.

Since then, HP has enacted other turnaround efforts under Whitman, including a merger of its PC and printers divisions in a move to cut costs.

For more on tech sector M&A and turnaround efforts, see why a BMC Software (BMC) deal is caught between a cloud boom and tech gloom.

Interested in more on HP? See TheStreet Ratings' report card for this stock.

Check out our new tech blog, Tech Trends.

-- Written by Antoine Gara in New York

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