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Investors headed for the door after computer maker and Dow-30 component Hewlett-Packard (HPQ - Free Hewlett-Packard Stock Report) announced another steep loss in the October quarter, reflecting a big writedown of its Autonomy software business and competitive pricing in a number of its product groups. The stock retreated more than 10% in early Tuesday morning trading falling to a new yearly low on the process.

The company reported a $3.49-a-share loss for the October period on a 7% sales decline, compared to our estimate of earnings of $0.71 and share net of $0.12 in the year-earlier quarter. For all of fiscal 2012 (which ended on October 31, 2012), H-P lost $6.41 a share on a 5% drop in sales, compared with our estimate of a loss of $2.25, and earnings of $3.32 in fiscal 2011. The full-year loss also included July-period charges related to H-P's services business and restructuring program to streamline the company. Without the writedowns and other so-called unusual items, October-quarter and fiscal 2012 share net would have come in at $1.16 and $4.05, respectively.

Recall that the company, under its former CEO Leo Apotheker, acquired Autonomy in the fall of 2011 in a rather expensive deal. H-P, according to company releases, recently uncovered serious accounting improprieties, disclosure failures, and misrepresentations at Autonomy that occurred prior to the acquisition. Most of the October-period noncash impairment charge related to this situation. H-P has contacted the SEC enforcement division and the U.K.'s serious fraud office, requesting that both agencies open criminal investigations concerning this matter. It hopes to ultimately recover some of the loss. A smaller portion of the writedown resulted from the recent trading value of H-P stock.

Meanwhile, although there were some bright spots in the quarter, H-P turned in a generally disappointing operating performance in the October period. In the important printing group, sales slipped 5% year to year, but operating margins expanded five basis points, reflecting a 98% increase in high-margined ink advantage hardware shipments, which benefited from further geographic rollout of the program. The company has a slew of new products set to ramp up in fiscal 2013. While it plans to maintain its focus on the high end of the printer market, it is also working to bring out competitively priced offerings for the low end of the market, no doubt in recognition of soft economic activity worldwide.

The personal systems group's sales fell 14% in the October period, and margins contracted two basis points, reflecting weak demand and heightened competition, including from very popular tablet computers. H-P rolled out products featuring the Windows 8 operating system and tablet computers of its own in the period that may support better sales in fiscal 2013, and it is managing inventory and costs tightly. But it expects market conditions in the personal systems business to remain challenging in the new fiscal year.

In the Enterprise products group (servers, storage systems, and networking) sales fell 9% dragged down by weakness in industry standard servers and business critical systems, and margins contracted 4.5 basis points, as H-P took steps to improve its channel execution. 

Although services sales fell 6%, margins expanded more than expected due to better cost management and improvement in underperforming accounts. The company is experiencing growth in its enterprise services business, which addresses hot markets like cloud computing and analytics. However, services sales are expected to decline in the opening quarter of fiscal 2013, which will also depress margins in the period.

The software business bucked the trend. Software sales advanced 14%, and margins only contracted slightly. Autonomy is still a work in progress, with operational improvements needed to enable H-P to take full advantage of significant market opportunities.

Looking ahead, H-P expects fiscal 2013 to be a fix and rebuild year for the company, as changes to its organizational structure take hold. It now expects to earn only $0.34-$0.37 a share in the January quarter (excluding $0.34 of nonoperating expenses), down from our previous estimate of $0.68 a share, and $2.10-$2.30 a share for the full fiscal year, down from our original estimate of $2.80 and in line with our late-August revised earnings call. We are currently looking for fiscal 2013 earnings of $1.95 a share, since the company faces significant economic and competitive headwinds in the year ahead, and results would have to ramp up sharply to achieve its $2.10-a-share bottom-line target. 

By fiscal 2014, it looks for the benefit of new products and services introduced in fiscal 2013 to kick in. H-P expects to have another year of expense management under its belt, its enterprise services business to start growing again, and anticipates paying down more debt by then. The company looks for growth to accelerate in fiscal 2015.

Despite the company's turnaround plans, we think H-P's recovery will be a protracted process, and advise most investors to stay on the sidelines. Finances are in decent shape, but in light of the pressures on operating profits and 49% long-term debt-to-capital ratio, we have lowered the company's Financial Strength rating, from A to B++.

About The Company:Hewlett-Packard provides computing and imaging solutions and services to consumers and businesses. The company operates in six segments: Imaging & Printing (20% of 2011 revenues), Personal Systems, (30%), Enterprise Storage & Servers (17%), Services, (27%), Financing (3%), and Software, (3%). Research and development costs amounted to 2.6% of 2011 revenues.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.