The filing shows that CEO Meg Whitman earned more than $15.3 million during 2012, even though her base salary was only $1. The majority of her pay came in the form of share and options grants worth more than $13 million, almost none of which are yet vested. She also earned a $1.7 million bonus under HP’s PfR or “Pay for Results” bonus plan.

Under that plan, bonuses are awarded based on performance metrics including revenue, free-cash flow and achievement of management by objective (MBO) goals. There was also $220,000 in miscellaneous income, most of which had to do with her use of HP’s aircraft.

CFO Cathie Lesjak earned $6.7 million, which included her base salary of $825,011 per year plus $978,000 worth of stock options that vested during the year, plus $519,000 under the PfR bonus plan. She received another $4.8 million in combined share grants and options. The combined package is smaller than the $10 million she earned in salary, bonuses and options awards in 2010.

Enterprise business head Dave Donatelli earned the same base salary as Lesjak, but also received $1.15 million worth of stock options that vested during the year, plus another $519,000 under the PfR bonus plan and nearly $6 million worth of share grants and options.

John Hinshaw, the EVP who joined HP from Boeing in 2011, earned a combined $8.2 million in 2012, including $5.1 million in share grants and options. He has recently been tasked with cutting $3.5 billion out of HP’s annual operating budget by the end of 2014.

Todd Bradley, head of the Printing and Personal Systems Group, earned $7.4 million including $2.7 million in share grants and options. His base salary was $850,000 and he earned a PfR bonus of $587,000.

The filing also shows what two exiting execs were paid on their way out the door. Former head of the printing unit Vyomesh “VJ” Joshi, pushed out in a significant shakeup in March, collected $1.6 million in severance. He is also receiving about $3.3 million in four equal cash installment payments that end in October of 2013. He left HP owning 1.4 million shares worth, more than $22 million as of Friday’s closing price.

Another former executive collecting severance pay is John Visentin. He is the former head of Enterprise services, named by former CEO Léo Apotheker. He was fired after HP took an $8 billion charge to write down the value of EDS. That unit, acquired under former CEO Mark Hurd for $13.9 billion in 2008, has been a bit of an albatross around HP’s neck of late. Last year the unit was implicated in an embarrassing foul-up with an Australian bank that required Whitman to fly to Australia.

Visentin was paid a combined $8.3 million, including a base salary of $800,000 and a $2 million bonus connected to his promotion to Executive Vice President. HP also reimbursed him $127,311 for the deposit he made on a house he sought to buy in California, but on which he never closed. He lost out on $3.8 million in combined share grants and options, which were canceled and did not vest when he left. He departed HP owning a little more than 20,000 shares, worth about $330,000.

There are other interesting tidbits in the filing. For one thing, there’s a new policy proposal being put to shareholders that allows any person or group of up to 20 people who own at least 3 percent of HP shares and who has owned them for at least three years to nominate a slate of directors of as much as 20 percent of the board.

The proposal, which requires a vote of two-thirds of all shareholders, is a victory for activist investors over proxy access. Previously, HP shareholders could only vote on the slate of directors nominated by the company. Now if enough shareholders are unhappy, they can nominate their own group of new directors.

It has been a long-simmering controversy in corporate governance circles. Proponents have argued proxy access improves returns to shareholders by forcing boards to be more responsive to them, lest they lose their seats. Without proxy access, investors who want to shake up a board’s membership have been forced to wage expensive public campaigns to sway the votes of shareholders and have had to pay for distributing their own ballots.

As of now, there are only three investors who own enough to meet the 3 percent standard, and they’re all institutional shareholders: Investment firm Dodge and Cox owns 6 percent of HP’s outstanding shares, State Street Corp. owns 5.4 percent and investment firm Blackrock owns 5.2 percent.

HP’s fourth-largest investor, who owns 1.8 percent, already has a seat on the board. Ralph Whitworth, the activist investor with a history of agitating for breaking up the companies he invests in, joined HP’s board in November of 2011. And all indications are that he’s supportive of Whitman and her plans to turn HP around over the next few years. Besides, any board shakeups he may wish to carry out will have to wait for awhile: He doesn’t yet own 3 percent.

Much of those losses can be attributed to a combined $17 billion in write-downs taken during the second half of the year. The biggest was the $8.8 billion write-down announced on Nov. 20, of which $5.7 billion was attributed to Autonomy, the British software firm HP acquired for north of $11 billion in 2011. Another $8 billion was the result of an impairment charge related to EDS, the IT services concern HP acquired in 2008 for $14 billion.

If 2012 was the year that HP sought to package up all the toxic accounting and financial disclosures it could find, then 2013 either will or won’t be the year where it starts down the path toward recovery and turnaround. While HP is technically shut down now for the holidays, people I’ve talked to there in recent days tell me that the internal message being broadcast to employees at all levels is consistent: This year, everyone has to deliver.

Investors frustrated by the decline in value in HP’s shares in 2012 — at $13.68, as of Friday’s close, the shares are down nearly 49 percent this year — have largely come to terms with the notion that HP had to suffer through a horrible year in order to begin the arduous process of rebuilding its business and balance sheet, though the company and its CEO, Meg Whitman, have essentially exhausted their indulgences.

At a meeting of financial analysts in October, Whitman portrayed 2013 as a “fix and rebuild” year, and so the fixing and rebuilding will, a year from now, have to be apparent. The problem with that is that in the very same speech, Whitman projected profit declines in 2013.

The difficulty is clear in nearly every single line of HP’s business. While each line of business remains profitable — take out the combined $20.3 billion in impairment and restructuring charges on HP’s financial statements, and you see a $7.7 billion operating profit — sales in practically all of them declined by a range of 2 percent (services) to 10 percent (PCs). That’s unlikely to change in the face of an uncertain global economy. HP makes about 65 percent of its sales outside the U.S., and has historically had the widest exposure to Europe of all the major tech companies.

So, if 2013 goes according to Whitman’s recovery plan, what does it look like? For one thing, expect a boost in research-and-development spending. Whitman has made it clear that she thinks that R&D spending as a percentage of sales has been trimmed further in recent years than it should have been. In 2004, R&D spending at HP amounted 4.5 percent of sales. By fiscal 2010, it was 2.3 percent. In 2012, it was 2.8 percent. CFO Cathie Lesjak has said spending will be boosted in 2013, along with increased spending on internal IT infrastructure.

Also, expect more restructuring. The bulk of the 29,000 jobs cut at HP will take place during 2013, which will incur about $1.5 billion worth of restructuring charges.

All in all, it’s going to make 2013 a tough year for HP, though if it has any good luck at all, it will be less difficult and drama-filled than 2012. Analysts expect HP’s sales in its 2013 fiscal year (ending in October) to decline again to just north of $112 billion and, on average, they expect per-share profits on a non-GAAP basis to be $3.31.

By October it should be clear if the repair work undertaken is having any effect. Costs will be decreased. Most of the restructuring will be complete and, with luck, the global economic picture will have improved, if only slightly. If HP’s official guidance for fiscal 2014 doesn’t begin to look optimistic, that’s when talk of an endgame — really only speculative now — will begin in earnest.

So far, Whitman’s argument has been that HP is stronger as a combined unit than it could ever be if split into two or more pieces. If results and guidance aren’t looking up by late 2013, shareholders will start looking for alternatives, and a breakup will be at the top of their list.

One person who might lead that discussion is director Ralph Whitworth. An activist investor with a history of pushing companies into breakup strategies, Whitworth’s Relational Investors LLC owns about 34.5 million HP shares. That investment is about $318 million under water as of Friday’s closing price. Late in 2013, a two-year agreement he has with HP not to seek a breakup or sale of any significant assets will expire. If his patience with HP’s management and strategy wavers at all, expect the breakup conversation to get serious quickly, and to dominate media coverage about it into 2014.

Autonomy founder Mike Lynch is still not backing down in his ongoing battle with Hewlett-Packard.

“Simply put, these allegations are false, and in the absence of further detail we cannot understand what HP believes to be the basis for them,” he said in a statement, as well as aiming at $5 billion in writedowns the company has taken related to the controversial deal. “We continue to reject these allegations in the strongest possible terms.”

Lynch’s latest volley was prompted by a regulatory filing HP made earlier today, noting that the U.S. Department of Justice was indeed investigating its acquisition of British software company, for which it is trying to write down about $5 billion in expenses due to alleged “serious accounting improprieties.”

HP had taken the case to U.S. federal authorities in the first place, but now it’s official.

This caused Lynch, who has been vociferously battling the Silicon Valley tech giant over the allegations and rejecting HP’s claims of fraud in the $12 billion acquisition, to respond again.

In his statement, he presented a laundry list of arguments about how HP is trying to fool investors by pointing the finger at him.

Here’s his whole thing, so you can read for yourself:

It is extremely disappointing that HP has again failed to provide a detailed calculation of its $5 billion write-down of Autonomy, or publish any explanation of the serious allegations it has made against the former management team, in its annual report filing today.

Furthermore, it is now less clear how much of the $5 billion write-down is in fact being attributed to the alleged accounting issues, and how much to other changes in business performance and earnings projections. This appears to be a material change in HP’s allegations.

Simply put, these allegations are false, and in the absence of further detail we cannot understand what HP believes to be the basis for them.

We also do not understand why HP is raising these issues now given that Autonomy reported into the HP Finance team from the day the acquisition completed in October 2011, there was an extensive due diligence process and Autonomy was audited as a public company for many years.

We would particularly make the following points:

* HP’s CFO Cathie Lesjak and her team, plus a number of outside advisors, had access to all Autonomy accounts and documents from October 2011 onwards, and raised no issues.

* Beginning in November 2011, HP and KPMG reviewed Autonomy’s closing balance sheet in detail, and Ernst & Young reviewed Deloitte’s audit work papers.

* Beginning in October 2011, HP studied in detail Autonomy’s tax structure and transfer pricing as well as its revenue recognition practices (led by Paul Curtis, HP’s worldwide head of revenue recognition).

* An independent, third-party valuation of Autonomy’s assets was carried out in January 2012.

* Quarterly business reviews were held with Autonomy management, Meg Whitman and Cathie Lesjak to discuss Autonomy’s financial performance.

* HP has continued to sell and account for hardware alongside Autonomy software in the same way that Autonomy did for the year since the acquisition completed.

* Regarding differences between IFRS and US GAAP accounting standards, which appear to have a role in some of the allegations HP has made, Autonomy’s accounting policies were made clear in Autonomy’s 2010 annual report.

We also note the statement in HP’s annual report that it received confirmation from the US Department of Justice on 21 November 2012 (the day after HP’s first public statement), that the Department had opened an investigation. We can confirm that we have as yet had no contact from any regulatory authority. We will co-operate with any investigation and look forward to the opportunity to explain our position.

We continue to reject these allegations in the strongest possible terms. Autonomy’s financial accounts were properly maintained in accordance with applicable regulations, fully audited by Deloitte, and available to HP during the due diligence process.

We remain deeply concerned about how this process has been conducted, and believe it is in everyone’s interest for it to be resolved as soon as possible.

RELATED POSTS:

• More From Mike Lynch: HP’s Autonomy Accusations Are Getting Weaker
• Mike Lynch Punches Back at Today’s HP Filing: Whither $5B Writedown?
• HP Confirms DOJ Is Investigating Alleged Fraud in Autonomy Deal
• Yes, There Are Layoffs Pending at HP’s Autonomy Unit in the U.K.
• Former HP CEO Shifts Blame for Autonomy Deal to Chairman
• Dell Passed on Autonomy Before HP Bought It
• Why Mike Lynch Is Playing PR Hardball With HP
• Autonomy Founder Lynch Asks Board to Explain HP Allegations
• Autonomy Founder Lynch Blames Accounting Standards in HP Flap
• The Red Flags That Were Obvious — To Some — In the HP-Autonomy Deal
• Oracle’s Ellison Vindicated in Autonomy PR Flap by HP’s $8.8 Billion Writedown
• Autonomy Founder Mike Lynch Rejects HP Charges, Alleges Mismanagement
• What Exactly Happened at Autonomy?
• HP Explains Its $8.8 Billion “Oops”
• HP Beats Street Amid Sales Declines, Takes $8.8 Billion Charge
• HP Names Microsoft Exec Robert Youngjohns to Run Autonomy
• Search Under Way at HP for Autonomy’s Next Chief
• Autonomy’s Mike Lynch Talks About Being HP’s Speedy Tiger Cub (Video)
• Britain’s First Software Billionaire Now Reports to HP CEO Meg Whitman
• Oracle Launches Exalytics Machine, Probably Ending Spat With Autonomy
• Autonomy: When All Else Fails, Blame the Bankers
• Mike Lynch to Oracle: Oh, You Mean Those Slides
• Oracle: You Have a Very Bad Memory, Mr. Lynch
• HP Reportedly Close to $10 Billion Buyout of Autonomy, PC Unit Spinoff
• Will Oracle and Microsoft Bid on Autonomy?

Moody’s said that while HP will remain the leader in several market segments for the time being, its “credit profile will remain weaker than previously expected over the intermediate term.”

HP’s debt load, and the expenses it incurs to borrow, have become an ongoing concern; over the summer, credit default swaps on its bonds — essentially the insurance that debt investors buy to protect against the possibility of a default — were “blowing out,” as the term of art goes.

The end result of downgrades like this is that when HP next goes to the debt markets to borrow money to finance some aspect of its operations, it will probably have to incur higher costs to do it.

It was the second downgrade on HP’s credit rating by Moody’s this year. The last one was in January. Previously, both Fitch and Standard and Poors cut their ratings on HP late last year. Fitch has had a negative outlook on HP since then.

One thing HP doesn’t have is downgrade triggers on any of its debt. Sometimes companies have triggers written into their debt agreements that have the effect of accelerating the maturity dates by which the debt has to be repaid. But, as HP conceded in its most recent 10Q filing with the U.S. Securities and Exchange Commission, the downgrades already incurred have increased the cost of borrowing and overall reduced its capacity to borrow.

HP does have pretty ample cash reserves, and Moody’s even says as much in its announcement: $11.3 billion in cash and equivalents as of the end of the most recent quarter, and it said it expects that level to remain north of $8 billion for the forseeable future. Add to that an expected $4 billion in free cash flow in 2013, and it makes it unlikely that HP will need to borrow anytime soon.

Another bit of good news for 2013 is that HP has about $5.5 billion in debt maturities due, starting with a $1.5 billion payment in March and additional payments due in May, August and September. But there’s another $8 billion and change due in the following two years. Some will be repaid, some refinanced.

Whatever the outcome, today’s downgrade is a step in the wrong direction from what CFO Cathie Lesjak talked about at HP’s analyst’s meeting in San Francisco last month. At the time, she said getting HP back to what she called a “Mid Single-A” credit rating is “a top priority for us.” The only way to do that, she said, was to reduce the net debt load of the operating company — the portion of the debt not held by the finance division that is there to help customers buy HP gear — to “roughly zero.” That will take time.

Here’s the full announcement, courtesy of Moody’s:

Rating Action: Moody’s lowers Hewlett-Packard’s senior unsecured rating to Baa1, outlook negative
Global Credit Research – 28 Nov 2012
Approximately $25 billion of debt securities affected

New York, November 28, 2012 — Moody’s Investors Service lowered the long term credit ratings of Hewlett-Packard (HP), including the senior unsecured rating to Baa1 from A3. The Prime-2 short term rating is affirmed. This concludes a review initiated October 4, 2012. The outlook is negative.

RATINGS RATIONALE

The new rating reflect our expectations that “although HP will maintain strong to leading positions in a number of product areas, the company’s credit profile will remain weaker than previously expected over the intermediate term,” said Moody’s senior vice president, Richard Lane.

The negative rating outlook reflects our concerns about HP’s ability to contend with the significant competitive, secular and execution challenges facing the company. A “broad portion of HP’s portfolio, including PC’s, some enterprise servers, printers, and services, representing over 75% of revenue, will face slow to no growth prospects over the coming years,” said Lane. The ability to restore growth and profitability has sufficient uncertainty that we believe event risk in the form of more shareholder friendly actions or portfolio repositioning could develop, which would pressure the company’s credit ratings.

Key drivers to the projected credit profile include “company-specific execution challenges in services and software, secular shifts in PCs and printing, competitive pressures throughout its broad portfolio, as well as a cautious demand environment,” said Lane. As a result, we expect HP’s revenue will decline 5% next year while operating margins approximate 7% as compared to a nearly 9.8% historical average prior to 2012 (using Moody’s standard adjustments). We also anticipate free cash flow (post dividends) of approximately $4 billion next year, down from our prior expectations of $6 billion to $7 billion, driven by restructuring related cash outflows and overall weaker operating performance.

We believe HP will remain committed to reducing gross debt over the intermediate term after having reduced debt by $2.2 billion in 2012. We anticipate HP will repay at least half of its debt maturities over the next few years. In fiscal 2013, debt maturities total $5.5 billion with $1.5 billion due in March, $1.75 billion in May and $1.1 billion in each of August and September. HP has $4.9 billion and $3.2 billion of debt maturities in 2014 and 2015. Assuming HP repays approximately half of its debt maturities and refinances the rest, we project HP’s adjusted debt to EBITDA, estimated at 2.0x at October 2012, will approximate 1.9x at the end of 2013 and potentially 1.6x by 2015.

Ratings lowered include:

senior unsecured rating to Baa1 from A3

subordinated rating to (P)Baa2 from (P)Baa1

preferred rating to (P)Baa3 from (P)Baa2

Rating outlook negative

We expect HP’s acquisition activity will be minimal over the next few years as management focuses more on internal research and development over acquisitions, where HP has demonstrated a poor track record. While the less acquisitive posture reduces event risk, this approach also raises the potential that HP could lose some competitive ground against peers who have more flexibility to get to market faster with products and technology offerings via acquisition.

HP maintains a solid liquidity profile. At the end of October 2012, HP had $11.3 billion of cash and equivalents and we expect HP will maintain cash balances in excess of $8 billion. While a significant portion of this cash is held offshore, the company has tax efficient access to material amounts of this cash. We project about $4 billion of free cash flow in 2013, with the first half being weaker than the second half due to some seasonality and heavier restructuring cash outflows (primarily headcount).

The company maintains solid alternate liquidity to support outstanding commercial paper ($574 million at July 2012) in the form of a $4.5 billion bank facility maturing February 2015 and a $3.0 billion bank facility maturing March 2017. Both have one financial covenant under which HP has ample room, and no need to represent as to no material adverse change.

HP’s ratings are unlikely to be raised over the next year. The rating could be stabilized over the 12 to 18 months if the company demonstrates consistent execution and progress in restoring sustainable profitability throughout its portfolio. Longer term, the ratings could be raised if the company: (1) demonstrates steady organic revenue growth; (2) is likely to sustain EBIT margins above 9%; and (3) adheres to its conservative financial practices which include maintaining significant liquidity and a modestly leveraged balance sheet such that adjusted debt to EBITDA were below 1.5x on a sustained basis.

HP’s ratings could be lowered if the company (1) maintains adjusted debt to EBITDA above 2.0x; (2) EBIT margins fall below 6% for an extended period of time; or (3) deviates from our expectations of conservative financial practices.

For further information, please see www.moodys.com.

Hewlett-Packard, headquartered in Palo Alto, California, with $120 billion in revenue for the twelve months ended October 2012, is the world’s largest technology firm by revenue that designs, manufactures, and services computing and imaging systems and provides information technology and consulting services.

The principal methodology used in rating Hewlett Packard was the Global Technology Hardware Industry Methodology published in September 2010. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

The Global Scale Credit Ratings on this press release that are issued by one of Moody’s affiliates outside the EU are endorsed by Moody’s Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody’s office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Information sources used to prepare the rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, and confidential and proprietary Moody’s Investors Service information.

Moody’s considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody’s adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody’s considers to be reliable including, when appropriate, independent third-party sources. However, Moody’s is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO’s major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody’s Corporation; however, Moody’s has not independently verified this matter.

Please see Moody’s Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody’s ratings were fully digitized and accurate data may not be available. Consequently, Moody’s provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.

First, HP’s total $8.8 billion write-down isn’t all Autonomy-related. Of that total amount, about $5 billion relates specifically to Autonomy. Moments ago, on a conference call with reporters, HP CFO Cathie Lesjak said that the rest stems from the drop in HP’s share price.

The core allegation is that people at Autonomy took certain accounting actions while still running Autonomy as a publicly held company in the U.K., which had the end effect of making Autonomy seem more valuable than it was. As CEO Meg Whitman put it on a conference call a few minutes ago: “There appears to have been a wilfull effort on the part of certain former Autonomy employees to inflate the underlying financials of the company in order to mislead investors and potential buyers.”

It’s important to note that Autonomy’s founder and former CEO Mike Lynch has just issued a statement, essentially denying HP’s claims. I heard portions of the statement read on CNBC. In a statement being reported by Reuters, he has “flatly rejected” HP’s allegations. Also: “HP’s due diligence review was intensive, overseen on behalf of HP by KPMG, Barclays and Perella Weinberg. HP’s senior management has also been closely involved with running Autonomy for the past year.”

So what is alleged to have happened? For one thing, Autonomy, as HP tells it, was selling some hardware at a loss. During a period of about eight quarters prior to HP’s acquisition, Autonomy sold some hardware products that had a very low margin or on which it may have even taken a loss. It then allegedly turned around and booked those hardware sales as high-margin software sales. At least some portion of the cost on these products, Whitman said, was booked as a marketing expense, not as cost of goods sold.

There’s a second piece of the puzzle, where HP says that Autonomy was selling software to value-added resellers — the middlemen in so many technology transactions — in which there are ultimately no end users. That, too, inflated apparent revenue.

Third, there were some long-term hosting deals — essentially, Autonomy hosting applications for its customers on a subscription basis — that were converted to short-term licensing deals. Future revenue for software subscriptions — that should have been deferred or recorded as coming in the future but not yet booked — were stripped out and booked all at once.

John Schultz, HP’s general counsel, said there appeared to be what he called “a conscious effort by some former Autonomy employees to portray it as a pure software company.” The low-margin or loss-making hardware sales in particular, he said on the conference call, amounted to as much as 10 percent to 15 percent of Autonomy’s revenue during the eight-quarter period in question.

It had the effect, Schultz said, of not only closing the gap between actual financial growth and the consensus expectation of analysts — meeting the consensus is always a concern at a publicly held company — but also inflated the “growth metrics” of the company. “From an accounting perspective, there were improprieties, but also there were severe disclosure failures,” he said.

Lesjak said the problems are not only with the fact that revenue was inflated by itself, but the kinds of revenue. “These hardware sales were frequently reported as licenses. The VAR sales were reported as licenses, and they weren’t, in some sense, real sales, because there was no end user.”

The result, Lesjak said, was that Autonomy was able to boost its gross margins, a key measurement of profitability. Where Autonomy had been reporting gross margins in the neighborhood of 40 percent to 45 percent, Lesjak said a more realistic gross margin at Autonomy going forward is in the 28 percent to 30 percent range.

So what is HP going to do about it? First, it has reported the matter to the enforcement division of the U.S. Securities and Exchange Commission, and to the Serious Fraud Office in the U.K. Once those authorities have their say, HP will likely sue someone. Whitman conceded that it will likely take years before it’s all done. It’s going to get ugly before it’s over.

The Wall Street Journal just got a statement from former HP CEO Léo Apotheker, who did the Autonomy deal during his 11-month tenure as CEO. In a word, he says he’s “stunned.” He will also make himself available to help HP get to the bottom of it all.

Whitman was just on CNBC for several minutes, going through the particulars and reiterating much of what she said on the conference call with reporters. Here’s the video:

RELATED POSTS:

• More From Mike Lynch: HP’s Autonomy Accusations Are Getting Weaker
• Mike Lynch Punches Back at Today’s HP Filing: Whither $5B Writedown?
• HP Confirms DOJ Is Investigating Alleged Fraud in Autonomy Deal
• Yes, There Are Layoffs Pending at HP’s Autonomy Unit in the U.K.
• Former HP CEO Shifts Blame for Autonomy Deal to Chairman
• Dell Passed on Autonomy Before HP Bought It
• Why Mike Lynch Is Playing PR Hardball With HP
• Autonomy Founder Lynch Asks Board to Explain HP Allegations
• Autonomy Founder Lynch Blames Accounting Standards in HP Flap
• The Red Flags That Were Obvious — To Some — In the HP-Autonomy Deal
• Oracle’s Ellison Vindicated in Autonomy PR Flap by HP’s $8.8 Billion Writedown
• Autonomy Founder Mike Lynch Rejects HP Charges, Alleges Mismanagement
• What Exactly Happened at Autonomy?
• HP Explains Its $8.8 Billion “Oops”
• HP Beats Street Amid Sales Declines, Takes $8.8 Billion Charge
• HP Names Microsoft Exec Robert Youngjohns to Run Autonomy
• Search Under Way at HP for Autonomy’s Next Chief
• Autonomy’s Mike Lynch Talks About Being HP’s Speedy Tiger Cub (Video)
• Britain’s First Software Billionaire Now Reports to HP CEO Meg Whitman
• Oracle Launches Exalytics Machine, Probably Ending Spat With Autonomy
• Autonomy: When All Else Fails, Blame the Bankers
• Mike Lynch to Oracle: Oh, You Mean Those Slides
• Oracle: You Have a Very Bad Memory, Mr. Lynch
• HP Reportedly Close to $10 Billion Buyout of Autonomy, PC Unit Spinoff
• Will Oracle and Microsoft Bid on Autonomy?

Already the news is amazingly bad, and the shares are hitting lows not seen since 2002. If they go much lower, we’ll be looking at levels not seen since 1994.

5:13 am: Meg Whitman is speaking about Autonomy. She just said there’s a lot of work to do with Autonomy.

The majority of the accounting charge is related to improprieties, disclosure failures and impact from those failures. These improprieties were brought to light after an intensive investigation. The SEC criminal enforcement division has been contacted, and HP will seek “redress” from certain parties in the appropriate courts.

Now to guidance. 2013 will be a fix-and-rebuild year.

We expect the underlying macro headwinds to continue. Finally, the turnaround plan we laid out at the analysts meeting. New products and services will kick in. R&D will kick in, and another year of cost managements will result. We expect to grow as we reach FY15 and beyond.

Our 68 cents to 71 cents EPS non-GAAP in Q113.

8:17 am: And here’s Cathie Lesjak:

We continue to see macroeconomic challenges in all our regions.

Lesjak is speaking. I paused there to read a statement from HP on the Autonomy charge. I’m going to grab some text from that.

8:20 am: “HP is extremely disappointed to find that some former members of Autonomy’s management team used accounting improprieties, misrepresentations and disclosure failures to inflate the underlying financial metrics of the company, prior to Autonomy’s acquisition by HP. These efforts appear to have been a willful effort to mislead investors and potential buyers, and severely impacted HP management’s ability to fairly value Autonomy at the time of the deal. We remain 100 percent committed to Autonomy and its industry-leading technology.”

Now Lesjak is speaking about this. Of the $8.8 billion write-down, more than $5 billion comes from Autonomy, and it is linked somehow to the trading of HP stock. Expect more revelations on this soon, I guess.

8:23 am: Another couple paragraphs from the explanation on the Autonomy write-down: “As a result of that investigation, HP now believes that Autonomy was substantially overvalued at the time of its acquisition due to the misstatement of Autonomy’s financial performance, including its revenue, core growth rate and gross margins, and the misrepresentation of its business mix.

“This appears to have been a willful effort on behalf of certain former Autonomy employees to inflate the underlying financial metrics of the company in order to mislead investors and potential buyers. These misrepresentations and lack of disclosure severely impacted HP management’s ability to fairly value Autonomy at the time of the deal.”

What it comes down to is this: Someone in Autonomy management sought to make that company look like it was more valuable than it actually was.

Now back to Lesjak’s remarks: She’s speaking about the enterprise, servers, storage and networking. Business Critical Servers weak again. Persistent revenue declines as a result of the Itanium litigation. Mission critical x86 sales were up 25 percent.

8:28 am: Here’s the GM news. GM, remember, decided to insource the majority of its IT operations. A lot of HP services employees moved to GM. A side benefit was a huge software deal, the largest-ever HP software deployment.

8:36 am: Q&A is underway. Whitman just answered a question about Autonomy, and said that “basically, the two people who should have been responsible for the problems are gone.”

Question from Sanford Bernstein: If I look at your guidance, you’re guiding for a 40 percent drop in EPS. Historically, you’ve only been down more than 10 percent once. I’m wondering, given that your savings should be ramping from restructuring. But it’s really hard to get the math. Why the dramatic erosion in profitability in Q1?

Whitman: The way I look at 2013, we have weaker than normal seasonality in the first half. In terms of new products, many of those are being introduced now, and you’ll see them start to hit in Q3 and Q4 of 2013. We’ve looked into this very carefully. We have some headwinds coming at us, some of which are out of our control.

Lesjak is speaking. We had a very significant software deal from GM that is not going to repeat. We have to reset our incentive compensation plans.

Question about 8,000 people leaving in Q4, and why there’s not more savings showing up in the EPS.

Lesjak: Yes, we got the headcount reductions we expected. Still expecting 29,000, and by end of fiscal 2013 we’ll be down 26,000. When we execute reductions outside the U.S., they take a lot longer to complete, so the savings are back-end-loaded. Also, there’s a lot of new investments in the front of 2013 that start to pay off in the end of 2013.

Question from Morgan Stanley: A question about the trends in the PC and printing market.

Whitman: The good news about the PC business is that 80 percent is variable-cost. We’re conscious of the pressure on the PC business, we’re optimistic about our new products and Windows 8, but we have to manage the business as a whole to deliver the operating profits that we expect.

Lesjak: We have some additional levers with which to manage our cost. In printing and PCs, it’s about managing your costs day in and day out.

8:47 am: Q: What drove the 25 percent decline in enterprise profits? Why wouldn’t your enterprise assumptions for 2013 be at risk?

They came from low top-line growth, and an aggressive pricing environment, especially in Europe. Itanium hurt us and our Hyperscale business, and our margins there are materially different than the industry standard. We’re really investing in the large and growing and profitable market segment, and over time, that will offset Itanium. Also Hyperscale and Moonshot are disruptive products. Over the long term, we do expect these dynamics to bring margins back up.

Whitman: One of the main things we have to focus on is the mainstream server business. We have to better manage the supply chain and reconfigure some of the products. Dave Donatelli and his team will execute against that in the first half of 2013.

Lesjak: This is one of the key areas where we are putting R&D. This is not necessarily going to be a linear year.

8:50 am: Question about guidance. With Q1 guidance down, why aren’t you lowering your guidance for the full year? (70 cents implies a full-year EPS of $2.80, which is a lot lower than the guidance of $3.40 to $3.60.)

Lesjak: It’s basically that there’s a lot of confidence in the second half of 2013. New PCs and printers, new OfficeJet. That’s a product that doesn’t ship until February.

Whitman: When we gave guidance for Q1, we knew this would be a question. We went through it thoroughly, customer by customer, and we understand what your concern is, but we feel good about the guidance for the year.

Question about savings and cash flow.

Lesjak: What is important to take away from the Q4 results: When we focus, we achieve results. We’re not updating our guidance cash flow for FY13.

Whitman: With regard to cost savings. They focus in two areas, labor and non-labor. Making changes to your labor force in Western Europe is a big challenge, it can take as much as 12 months to 18 months to get it done.

8:59 am: Final question. Back on Autonomy. Can you provide steps and timing on remedies?

Whitman: Our internal investigation is ongoing. We have turned over the investigation to the SEC in the U.S., and the Serious Fraud Office in the U.K. That process is under way. It will take some time. It will take a long way to work through, but we will seek redress for our shareholders.

Q: And you will wait until the criminal investigation is over with, and then you seek a civil case?

Whitman: Basically, yes. (She previously said she expects a multiyear process.)

And that’s the end of the call.

RELATED POSTS:

• More From Mike Lynch: HP’s Autonomy Accusations Are Getting Weaker
• Mike Lynch Punches Back at Today’s HP Filing: Whither $5B Writedown?
• HP Confirms DOJ Is Investigating Alleged Fraud in Autonomy Deal
• Yes, There Are Layoffs Pending at HP’s Autonomy Unit in the U.K.
• Former HP CEO Shifts Blame for Autonomy Deal to Chairman
• Dell Passed on Autonomy Before HP Bought It
• Why Mike Lynch Is Playing PR Hardball With HP
• Autonomy Founder Lynch Asks Board to Explain HP Allegations
• Autonomy Founder Lynch Blames Accounting Standards in HP Flap
• The Red Flags That Were Obvious — To Some — In the HP-Autonomy Deal
• Oracle’s Ellison Vindicated in Autonomy PR Flap by HP’s $8.8 Billion Writedown
• Autonomy Founder Mike Lynch Rejects HP Charges, Alleges Mismanagement
• What Exactly Happened at Autonomy?
• HP Explains Its $8.8 Billion “Oops”
• HP Beats Street Amid Sales Declines, Takes $8.8 Billion Charge
• HP Names Microsoft Exec Robert Youngjohns to Run Autonomy
• Search Under Way at HP for Autonomy’s Next Chief
• Autonomy’s Mike Lynch Talks About Being HP’s Speedy Tiger Cub (Video)
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• Will Oracle and Microsoft Bid on Autonomy?

HP shares are setting new 52-week and 10-year lows after CFO Cathie Lesjak issued new guidance for fiscal 2013, saying the company now expects to earn between $3.40 and $3.60 on a non-GAAP basis, significantly lower than the $4.18 analysts had been expecting.

In afternoon trading, HP’s shares were down about 11 percent, in the neighborhood of $15.25.

Lesjak said HP continues to expect a difficult environment in Europe and a weak consumer market, and that every HP business segment except for software is bracing for a year-on-year decline in sales. She said she expects a 2 percent headwind from currency effects as the U.S. dollar remains strong against the euro. Operating margins are also expected to decline year on year, but the amount was not specified.

In remarks before Lesjak’s, CEO Meg Whitman painted a picture of a turnaround that at best wouldn’t be complete before 2016, with 2013 another year for declines in sales and profit.

Whitman said she sees 2014 as the year when the first signs of a turnaround would be apparent. “I believe that 2014 will be the year you see real recovery and expansion at HP,” she said. “You should see every business unit recover and grow. Our investments in R&D and IT will begin to kick in. And we will have demonstrated an ability to manage costs in line with revenue.” Also, more debt will have been paid down by then, she said.

HP indicated that much of the drag on its performance was in its Enterprise Services unit, the company formerly known as EDS. That unit is expected to see its sales drop by 11 percent to 13 percent, with operating margins expected to be flat to down 3 percent.

In another presentation, Mike Nefkens, the acting head of Global Services, and J.J. Chabon, senior VP and COO of the services unit, blamed the problems on “poor execution.” Operating margins in the services unit declined from north of 10 percent in 2010 to about 3 percent as of this year. They said that poor contracting practices led to pricing concessions to customers that turned out unfavorable to HP. Worse, HP Services saw revenue declines amounting to about 5 percent in relation to four major accounts, while an additional 2 percent was the result of currency effects.

It looks more or less like another example of HP taking its bitter medicine as it seeks to get things going in the right direction. You certainly can’t say that Whitman and Lesjak sugar-coated any aspect of the situation HP finds itself in. “HP did a good job self-diagnosing its many challenges and talking about optimizing near-term business, but they need to do more highlighting growth areas, analyst Patrick Moorhead, head of Moor Insights & Strategy told me. “HP must describe how it intends to win in a PC-plus, public cloud future before it will be seen as a growth company.”

As shareholders, employees and customers know all too well, there are many things that need fixing, and the fact that the share price has recently been trading no higher than where it was in 2002 is about as strong an indication of that as you can get.

Whitman has several items on the agenda about which analysts will be expecting to hear: Rationalizing her decision to keep the PC business, entering the mobile device business again after bailing out of the webOS hardware business, fixing the IT services unit on which the company took an enormous write-down recently, and growing the software business are but a few.

But the big item will be financial guidance for the coming year. The proceedings are about to begin.

Earlier:
8:16 am: The program is getting under way with introductions.

It will be Cathie Lesjak who gives the much-anticipated financial guidance, and she will speak after Meg.

Right now, Rob Binns is giving an introduction and reading the safe-harbor statement. Riveting.

And here’s Meg.

Whitman: Our goal today is to be pretty straightforward. We want you to understand the journey that we’re on to turn around one of the world’s great technology franchises.

Whitman: When I became CEO, it was a turbulent time for HP. Since then, I’ve seen the company’s strengths.

Customers and partners want HP to win. One important strength is global reach. We can reach any corner of the globe. One of the things I heard we were short of on HP is innovation. My conclusion is not that we don’t have enough ideas and innovation. It’s that we don’t work hard enough to get those ideas into the marketplace.

Whitman: In the last decade, HP has made a remarkable transformation from a printing company to a diversified IT company.

Whitman: The good news is that we are No. 1 or 2 in each of the major markets, and we can leverage that position in areas like supply chain and distribution.

Whitman: HP has a well-known and trusted brand. We also have a talented, committed and, I would say, resilient workforce. We will do anything for customers. They are at the heart of the company and have been for 75 years.

In 2002, HP was a printing company with 95 percent of profits coming from printing. Carly Fiorina and Mark Hurd assembled a powerful set of businesses.

From 2010, HP has seen a multi-quarter decline in revenue and margins.

Whitman: My belief is that the single biggest challenge at HP is the changes in the CEOs. There have been multiple inconsistent plans and executional miscues limiting the speed of recovery.

8:27 am: EDS has had four different leaders in only a few years. All of this is fixable, and it is going to take some time. In basic execution, HP has challenges. We don’t have the sharp competitive focus we’re going to use. HP also has too many areas of focus, whether it’s products or geographies.

8:28 am: Whitman: Expect the number of printer SKUs to be cut by 50 percent next year. Todd Bradley, the EVP who runs PCs and printers, was surprised to learn that HP makes 2,100 different printers.

Whitman: Marketing hasn’t been centralized; different units have been spending money inconsistently.

Now she’s talking about compensation. I’ve learned, at HP, you don’t get what you expect, you get what you inspect.

Whitman: It has been over seven years since we’ve had a new lineup of multifunction printers, but we have a much smaller share than we should in this market.

We are not as competitive as we need to be in how we go to market.

Whitman: We haven’t been using a compelling CRM system. We decided to move to Salesforce.com, which we think will yield real tangible results. (I’ll bet this was the “biggest deal ever” rumor that has been murmured about concerning Salesforce for awhile.)

Also good news for Workday — HP is a customer.

Whitman: HP faces dynamic market trends that we must confront. Mobility, software as a service, the cloud, hyperscaling.

Whitman: We also face very aggressive competitors. We have to demonstrate a will to win. We face some real macroeconomic headwinds. SMB and enterprise demand in Europe is very weak. Consumers are spending less, and there’s no question that China is slowing down.

Whitman: I will characterize fiscal year 2012 as diagnosing the problem and laying foundations for the turnaround. In 2012, the priority was to stabilize the company.

8:34 am: We have more work to do, but I think we have made good progress.

Whitman: Peeling the onion has taken some time. I’ve made several organizational and leadership changes that will help HP navigate the trends better.

Whitman: We now have crisp, agreed-upon strategies across the business units.

Whitman: We’ve also renewed HP’s focus on products and services.

Meg is about to run down the next four fiscal years. We’ve just completed Year One. 2013 will be a fix-and-rebuild year, and we’ll be doing it in a worse macroeconomic environment.

Whitman: We made significant changes to the salesforce to improve selling but reduce costs. When you disrupt the salesforce configuration, it takes time to settle in. Expect a broad-based profit decline in 2013. (Ouch.)

The good news in 2013 is that the bulk of the profit decline will be in enterprise services.

Whitman: I believe that 2014 will be the year you see real recovery and expansion at HP. You should see every business unit recover and grow. Our investments in R&D and IT will begin to kick in. And we will have demonstrated an ability to manage costs in line with revenue. More debt will be paid down.

Whitman: 2015 will accelerate. We should see a vastly reduced number of SKUs and platforms, and this should reduce costs.

Whitman: Compensation will be aligned to business outcomes and metrics. By 2016, we should have achieved market leadership in many areas. Financial metric should be growing about as fast as GDP, and profit should be growing faster than revenue.

8:40 am: Whitman: I now see, up close and personal, the challenges we face. There are no silver bullets. We will solve our problems through consistent leadership.

Whitman: Now she’s going to run down what role each business unit is going to play, going forward.

Whitman: The core of the company is infrastructure and hardware. They represent 70 percent of revenue, and it’s something we do better than anyone else, and it’s the DNA of the company. We need to stand up and be proud of it. People say it will be a commodity business. I say, not if we can help it.

8:44 am: Three big themes going forward: Cloud, Security, Information.

Whitman: Now she’s diving into the enterprise services business. She expects a decline in services revenue, with slowly improving margins.

Whitman: Now to PCs and printing: $65 billion, which would make it a Fortune 50 in its own right. PPS will be a low-growth business. She’s praising Todd Bradley, who took PCs from a money-losing business to being the biggest PC maker in the world.

Whitman: The enterprise group is a moderate growth business with the potential for faster growth over time. This business has an excellent set of assets.

Whitman: 2013 will be the year that Technology Services gets integrated into the Enterprise group.

Whitman: Now she’s describing the software unit.

8:50 am: Whitman: For services, you’ll see we have an entirely different operating model for 2013. The revenue has been disconnected from the people who own them. For 2013, we are restoring revenue and profit responsibility to the managers of our top 200 accounts.

Whitman: For PPS, we’re closing the product gaps that have hurt PCs and printers. We’re innovating and betting big on the ink business.

Whitman: In enterprise, it’s all about innovation and the journey to the cloud. For software, it’s about getting all the consumption models brought about by the shift to the cloud.

Whitman: Today, the architectural advances in enterprise hardware make it hard to justify the premiums in products from the likes of EMC and Cisco.

Whitman: 3Par and StorOnce are big offerings in data storage.

Whitman: Now she’s talking about the current buzzwords in networking: Software-defined networking. She said HP has the most comprehensive offering in the SDN marketplace. (I didn’t know that.)

Whitman is running down several products that she says are showing promise in the marketplace.

Storage, networking, multifunction printers, ArcSight, Autonomy, Vertica.

Just looked at HP shares: They’re down more than 5 percent while Meg has been speaking. Now at $16.18, down 95 cents.

Whitman is pretty close to wrapping up, which means that CFO Cathie Lesjak will be up with the guidance momentarily.

Whitman: I believe, with every single bone in my body, if we do this right, we can set HP up to be an unrivaled leader for the next 75 years.

9:02 am: And here’s Cathie Lesjak.

Lesjak: Fiscal 2013 is going to be another challenging year for HP.

Lesjak: We have seen deteriorating market conditions and execution that is not up to our standards.

Lesjak: In the first quarter, we saw a dip in cash flow, quarter on quarter. We have begun to address these with leadership changes, but there’s a lot more work to do. We’ve had discipline in the capital allocation progress.

Lesjak: Technology services will become part of ESSN in fiscal 2013. We are doing this to more appropriately align how we manage them.

Lesjak: We have generated $4 billion in free cash flow. At an operating company level, our net debt has improved by $2.5 billion this year. We increased dividend by 10 percent, and bought back $1.3 billion worth of shares.

Lesjak: I know capital allocation is top of mind for all of you, so I want to walk you through how we invest your money.

Lesjak: Every business unit has differing levels of variable costs. PSG has sort of a sliding cost structure, but still manages to maintain its operating margins.

Lesjak: In May of this year, we adopted a multiyear restructuring plan. We are increasing R&D costs in FY 2013.

Lesjak: We expect $1.5 billion in restructuring in FY 2013. We expect 26,000 people to leave the company as part of the restructuring. Expect $2.7 billion more in restructuring costs.

Lesjak: Must of the operational savings will be needed to offset the economic headwinds.

9:09 am: Lesjak: Our main priority is to deploy the appropriate mix of capital to the most productive uses.

Lesjak: Getting back to a mid-single-A credit rating is a top priority.

Lesjak: We need to reduce our net debt position on the operating company to near-zero.

Meanwhile, HP shares are down 6 percent. Looks like it has touched a new 52-week low of $15.93 today.

9:13 am: Lesjak: Now looking at the progress in rebuilding the balance sheet. Our net debt position is below where a mid-single-A company should be. It will be a couple years before we are where we need to be.

9:15 am: Here comes the outlook.

Lesjak: We expect continued weakness in the macroeconomic environment. We expect year-on-year revenue declines in all segments except software.

Lesjak: FY 2013 outlook: Non-GAAP EPS $3.40-$3.60.

There goes the $4 that analysts had been looking for.

This is based on an assumption that Enterprise Services Business Revenue will decline 11 percent to 13 percent across the company. With operating margins of zero to 3 percent. That’s pretty huge.

And now HP shares are nearing a 7 percent drop.

Lesjak: We continue to expect continued weakness in Business Critical Systems.

Lesjak just ran through a slide showing where HP expects different business units to contribute to the declines. Enterprise Services will see declines of 29 cents to 35 cents a share, the Enterprise Group will see declines of five cents to 12 cents. Software will contribute one cent to three cents per share in growth. PSG, the PC group, will be flat to slightly down by one cent. IPG, a.k.a. Printers, will grow by five cents to eight cents.

Lesjak: Let’s look beyond fiscal 2013. We expect to be a GDP growth company with key segments that grow faster than that. That, combined with growth in software, will grow our top line.

9:27 am: And Lesjak is done speaking. I’m going to close out the liveblog here.

The big looming question is whether HP can legitimately turn itself around. Having already set plans to reduce its headcount by 29,000, its restructuring is still getting under way.

There are many betting that Whitman may be in over her head. In a research note issued to clients today, ISI’s Brian Marshall considered — and then rejected — the bearish case against HP. Short interest in HP — a key indicator of market sentiment that a stock’s price is going to fall — has increased substantially in the last year: About 3.7 percent of HP shares were short, as of Sept. 14, up from less than 1.5 percent a year ago. And the short bets have paid off: HP shares closed Tuesday at $16.71, a level they haven’t seen since about 2002.

Marshall summarizes the bearish case thusly: HP is a broken company, and will experience annual revenue declines of about 5 percent forever. With the enterprise value amounting to about 8 times free cash flow, the company is not generatng enough free cash flow to be an attractive investment. Add to that about $20 billion in net debt, and you get a company that has little flexibility to make big acquisitions or invest in new initiatives. Conclusion: HP’s hopes for delivering $4 a share in annual per-share earnings just aren’t tenable.

But Marshall is not a bear himself. In his view, HP should saw itself in half — one part that generates cash, and one that requires cash investments in order to grow. The “growth group,” as Marshall sees it, would combine the Enterprise Servers, Storage and Networking business unit and HP’s IT Services group. The “cash group” is the new Printing and Personal Systems Group, which amounts to about 51 percent of overall sales. Marshall argues that HP Executive Vice President Todd Bradley, who runs the PC and printer group, will be an effective steward of that unit’s contribution to HP’s overall cash flow, allowing the excess to be reinvested in the “growth group,” and to rebuild the balance sheet.

“While we expect HP to continue to post revenue declines of about 5 percent year-on-year for the next 18 months before the company becomes a GDP-like grower, we believe annual earnings power can be maintained at about $4 per share during this transformation period,” Marshall writes.

How will HP maintain its earnings while revenues slide? Reducing headcount further — Marshall sees another 15,000 jobs on top of the 29,000 already announced — plus further reductions in the overall share count. Add to that a further tightening of operating expenses, and HP, he argues, can maintain profits at or near $4 a share through 2017.

One expression of that strategy — and a controversial one at that — was the nearly $12 billion acquisition of the British software firm Autonomy, announced 13 months ago. HP ultimately didn’t spin off its PC business, but its acquisition of Autonomy stuck. Now it is firmly part of HP’s software business.

As CEO Meg Whitman struggles to turn HP around, software is still a key part of her plans. While Whitman has made no secret of her opinion that Autonomy needs attention, there are some solid bits of HP’s software business — like Vertica and ArcSight — that are showing significant promise, if only they could grow.

Finding a way to get them growing is the job of George Kadifa. In June, HP named him as executive vice president, head of the company’s software business and a member of its executive council. Kadifa knows a bit about the software business. He spent seven years as a senior vice president at Oracle, and then ran his own company, Corio, for six years, until it was acquired by IBM for $182 million in 2005. From there, he went to investment firm Silver Lake, where, as partner, he pushed portfolio companies to improve their operations.

Kadifa sat down with AllThingsD last week at the software unit’s new headquarters in Sunnyvale, Calif., for his first interview since joining HP. We talked about how he plans to fix its weaknesses, improve its strengths and make software a more sizable piece of HP’s overall business.

AllThingsD: George, you joined HP to head up its software business unit in June. You’ve reached the 100-day mark, so give us your assessment of where you see things now and where they’re going.

Kadifa: A lot of good things are happening. We’re at about $4 billion in revenue, so if you look at HP Software as its own business, we’re about the fifth- or sixth-largest software business in the world. We have a great customer base; having worked at IBM and Oracle and now HP, customers really like us, versus previous experience. And we have a lot of products. A lot of them we acquired rather than built in-house.

Among the recent acquisitions, Vertica is one where the consensus seems to be that it was a pretty good deal. Where do you see Vertica going in particular, and what sets it apart?

One is the technology, which we think is second to none. When you think about it, the idea of taking data in columns and then arranging it in a row fashion, it seems like sort of a trivial difference. But it’s really unbelievable what it gives you in terms of capabilities. Say you’re storing a thousand names, you’ve got first names and last names. Let’s say five of those guys are named Arik. Normally you’d store five Ariks in a column. But here, instead of listing the name five times, you make a note above it with a five, so you know the name occurs five times. Now when you search through that list it’s so much more efficient, it’s two or three orders of magnitude faster, which means it’s 100 to 1,000 times faster than classic relationional technology. It has turned out to be a real diamond for us.

Yet it’s a small diamond. Yes, it’s growing, but how do you get it to grow fast enough that it becomes a more meaningful part of HP?

It’s a fair question. What we started with was a business with revenue in the low millions. It wasn’t in the $100 million range in revenue. It was really a project with some customers. We took it, and now it’s in the middle-double-digit millions. I can see us getting to $100 million with Vertica in a very short period of time. And there’s no reason it can’t be a billion-dollar business.

Let’s wrestle with the situation at Autonomy a little. You just named Robert Youngjohns to run it. Unlike Vertica, the consensus here is that Autonomy was an expensive deal that hasn’t come close to meeting expectations yet. What do you see happening there?

We just had a two-day planning meeting with everyone from Autonomy, where we went through the current status and looked at where we’re heading. The key for us right now is to get fiscal year 2013 on track, and that starts Nov. 1, so we’re working on that right now. Basically, when you look at Autonomy, the core unit is the IDOL Engine, which is the unique capability of meaning-based computing. We’re going to double down on that. In our labs in Cambridge, England, we have 40 or 50 mathematicians writing algorithms. And we’re going to build a team here in the U.S. to productize it and create a platform around it, because it has that potential. Frankly, the way Autonomy was managed previously, they put a lot more emphasis into enabling applications, which was fine, but our belief is that there’s a broad agenda, which is creating a platform around meaning-based computing. So we will maintain those apps, but at the same time we’ll open up the capabilities to a broader set of players outside HP.

It sounds like what Autonomy was doing was growing by acquisitions and then creating a more vertical stack of applications prior to HP’s ownership, rather than taking a broader, more horizontal approach. It sounds to me like HP wants to make Autonomy more horizontal. Is the potential there?

You’re correct. And, yes, the potential is there. I asked Autonomy that very question about why they went vertical instead of horizontal, and the answer that I got was that it came down to a difference of culture between the U.S. and Europe. In Europe, they tend to make things complex in order to create more value. For example, they saw the IDOL engine as too complex to just give it to people. Instead they thought they should acquire vendors and then create value by enabling applications. Here we take something that’s complex and we ask how we might simplify it in order to give it more scale for a bigger market. So, some of that difference was cultural, and some of it was that I think they fell in love with these acquisitions. … We think Autonomy’s technology has broader implications. And to reach that potential, we have to open it up as much as possible. And we’re also working with other organizations inside HP — PCs, printers, servers — to basically produce additional synergies.

Are the teams ready and primed? Meg Whitman, your CEO, and CFO Cathie Lesjak have made no secret that, so far, they have seen Autonomy’s ability to respond to deals that had been teed up by HP as lacking. Is the structure in place to address that problem?

It’s not in place yet, but the situation has settled down somewhat. The processes are working. The reason is that initially we kind of left Autonomy alone, and then we tossed a bunch of deals at Autonomy. The initial plan was to keep it intact, have the HP salesforce bring in deals, and everyone would be happy. One problem is that there were too many deals, and second is that the deals weren’t well-qualified. So what we did next was put in place a management process around sales cycles at Autonomy.

There’s been a lot of turnover there. Obviously, the former CEO, Mike Lynch, left, but so did a lot of the people who worked with him. Does that hurt the institutional memory at all?

No. Basically we lost the top half-dozen people. And you always expect that with an acquisition, especially with people who have grown up as entrepreneurs and will always be entrepreneurs. The remaining people running the products lines are still around, and so is the salesforce. The development guys in Cambridge and Chicago are still there.

Michael Dell has basically said he intends to keep growing his company by acquisition. Your boss, Meg, has said that we can expect no major acquisitions for the forseeable future — at least until the balance sheet is in better shape. If there were going to be acquisitions, even small ones, I would imagine they’d more likely be in software. Is that a fair statement?

I don’t want to say anything on Meg’s behalf. From a software point of view, if there are tuck-in acquisitions that can help us develop our technology, I’ll go and request to do it. The cash we generate from software would cover us. So that’s the thinking right now. We need to learn as a business how to grow organically because that’s where all the value is. At Silver Lake we did analysis on companies that grew by acquisition: Oracle, SAP, Microsoft, IBM, EMC and others. You find that their revenues grow and their profits grow. But what doesn’t grow, and what actually shrank from 2006 to 2011, is their multiples. Their valuations multiples shrank. What the market is saying is that just making acquisitions doesn’t add any value unless they create organic growth. That is how we look at it here. We’ve done a ton of acquisitions, so the task now is to create more organic growth because that is what the market will value.

While HP had more or less teed up the expectations for the nearly $10 billion in one-time charges that led in turn to the largest single-quarter loss in its history, it was the outlook and description of a long, arduous and painful turnaround process that is giving investors fits.

Meanwhile, analysts have piled on with a batch of downgrades: Kulbinder Garcha at Credit Suisse cut his price target to $25 from $30 a share, which, when compared to the estimate of other equities research outfits, looks downright sunny.

Brent Bracelin at Pacific Crest Securities slashed his estimate of HP’s fiscal 2013 revenue by more than $2 billion, and said he sees a possibility for the shares to hit $16, which would be lower than the $16.50 price it hit in 2004. “HP could remain challenged on multiple fronts as it attempts to transform an increasingly challenged business model and exposure profile,” he wrote.

Chris Whitmore of Deutsche Bank Securities, already an HP bear with a “sell” rating, lowered his price target even further, to $15 a share. Whitmore, in a note to clients today, was having none of the reassuring message coming from HP CEO Meg Whitman and CFO Cathie Lesjak on yesterday’s conference call. “Barring a significant change in strategic direction, we anticipate protracted declines in HP’s three major businesses to continue, making sustained growth in cash flow and EPS challenging,” he wrote. “That said, management is likely to reinvest headcount reduction and related cost savings to improve HP’s competitive position over the long haul. However, these investments will take time and it is unclear when these investments will translate into better product positioning. We estimate 24-plus months.”

As of 11 am ET, HP shares are trading at $17.94, down $1.26, or more than 6.5 percent.

That’s the message coming from CEO Meg Whitman on the occasion of its third quarter earnings report, which just crossed the wires about an hour ago. Expect more explanations about the state of the turnaround from Whitman and CFO Cathie Lesjak on the conference call with analysts which is set to get under way any minute.

2:03 pm: We’re live and waiting for the peppy hold music to come to an end.

And the call is starting with a word from the operator.

Starting with the preliminaries. Forward looking statements, blah blah blah….

CEO Meg Whitman is speaking. “We have made progress on our turnaround.”

Whitman: We have a lot of challenges, some are macroeconomic, some are about the business and frankly some of these are about HP’s execution.

Whitman: While revenue declined, the trajectory of the decline improved.

Whitman: When you look at our performance during the quarter, there were things we did well and things we could have done better. Storage, networking, printing did well.

Whitman: Good news from 3Par. Networking sales up 10 percent when normalized for a divestiture. (What did HP divest in this area again?)

Whitman: On a less positive note, the mainstream server business declined. Hyperscaling is looking good for the future. She’s also talking about some ink and paper changes in some countries. Also a technology that allows phones to connect to HP printers via Cloudprint.

Whitman: HP has 750 unique cloud systems customers. Also a version of the cloud for airlines. Also we released our first public cloud services.

Whitman: We continue to leverage the IP of our acquisitions: Autonomy, Vertica and others.

Whitman: Now customer wins: Russian Railways engaged HP Software. The U.S. Air Force selected HP to provide PCs and servers. Nascar is a new customer.

Consolidated Graphics, a big printing services provider, bought 10 Indigo printers. These are big printers.

Whitman: There’s nowhere we are not where we need to be. Enterprise Services: She’s going over the personnel changes running Services. “ES is in a multi-year turnaround. Progress will not be linear. We will turn ES around, but it will take some time.”

PCs. The reality is, we’re locked in serious competitive battles, and we intend to win. (She’s looking at you, Lenovo!)

Whitman: Autonomy still needs a lot of attention. HP has instituted a global dashboard to monitor engagements. We crossed a big milestone for Autonomy Vault. I missed the number but I think she said 10,000 customers. Sorry if I got that one wrong.

Whitman: The integration of PSG and IPC (PCs and printers) is under way. We streamlined Enterprise Group sales and management.

Whitman: 11,500 employees will leave the company in fiscal 2012, which is above the 9,000 expected.

Now she’s talking about headwinds.

Whitman: I’ve talked before about the tectonic plates that are moving the industry. HP needs to shift its portfolio, and will require some trade-offs and time.

Whitman: Macro headwinds will continue and keep revenue under pressure. The near-term outlook will be challenged.

Execution: We’ve made some changes that will be a distraction in the short term, but good in the long term.

Whitman is wrapping up her prepared remarks. $2.1 billion in free cash flow and reduction of net debt by $1.5 billion.

2:18 pm: And now CFO Cathie Lesjak is speaking.

Lesjak is running through the numbers, most of which were already in the press release.

Lesjak: PSG Revenue of $8.6 billion, down 10 percent. Total units shipped down 10 percent year on year. Soft in Asia and Americas. Consumer down 12 percent and commercial down 9 percent.

Lesjak: In printers, demand environment remains a headwind. We need to reduce channel inventory through close inspection …

Lesjak: Total printer unit shipments down 17 percent year on year.

Services: We are recording a non-cash pre-tax charge of $8 billion for the impairment of goodwill related to EDS. We do not expect this to incur any future cash expenditures.

Lesjak: We saw strong sequential growth in contract signings for strategic customers.

2:24 pm: ESSN: $5.1 billion in revenue, down 4 percent. 3Par grew 60 percent. There’s a bright spot.

BCS still in trouble. Non-stop server revenue grew double digits, but that didn’t help BCS revenue to grow.

Lesjak: We signed 46 new logos in the quarter.

Lesjak: We have a lot of work to do to improve Autonomy performance.

Lesjak: Capital allocation. We remain committed to rebuilding the balance sheet. Total growth $9.9 billion. Increased the dividend by 10 percent. We have been working to improve our cash conversion cycle, but at 27 days it’s still one day higher than before.

Lesjak: We are in the early stages of our turnaround and restructuring. In services, our diligence around account profitability is impacting our ability to sign new accounts. Some benefits will offset some of the headwinds. Demand continues to be an issue in PSG and IPG. The pricing environment in the hardware business remains competitive. Environment is more challenging than we thought even as recently as two months ago. Currency headwind is up 3 percent year on year.

Lesjak: EPS outlook $4.05 to $4.07 non-GAAP. GAAP will be a loss north of $2.

Lesjak: We expect to provide outlook at the analyst meeting on Oct. 3.

Q&A begins.

First question comes from Barclays: Printing. With channel inventory high, the Street was looking for 13.7 percent operating margin, and it was higher at 15.8 percent. What will the earnings hit be in the future when you pull back inventory?

Lesjak: We continue to face headwinds of lower volumes, and the year-on-year increase in margins was impacted by three things. Last year there was impact from the tsunami. We also had improved hardware margins because of a higher mix of higher-profit printers, and a higher mix of laser to inkjet.

Lesjak: The yen will remain strong year on year. That’s not going to help HP in the current FX.

Lesjak: The printer sellout in July left us with more inventory that we expected.

Question from Goldman Sachs: Given comments you made about being aggressive in PCs, who should we think about ASPs and gross margins in PSG?

Lesjak: The opex for PSG was 4.7 percent, which is down year over year, but it’s in the range we’ve been targeting for some time.

Lesjak: Commodity parts prices were unfavorable, LCD and DRAM prices are going up slightly. We do expect the demand environment to remain challenging.

Whitman is speaking: We are under attack by very strong competitive pressures. We’re responding with product lineup, thin and light notebooks, Windows 8 tablet for the enterprise, tablets combined with laptops for consumers. And also streamlining. Putting PSG and IPG [together] has helped control costs and things like freight and logistics. We’re going to defend our No. 1 position in the marketplace. (Hear that, Lenovo?!?)

Question from Toni Sacconaghi: Missed the first part of it. Given launch of Win 8 at the very end of FY12, how do you expect inventory of PCs to change?

Lesjak: Channel inventory at IPG is down on a dollar basis. Sell-through drove weeks of inventory higher than we think acceptable.

Toni is now trying to drill down on printer supplies inventory.

Lesjak: We are not expecting anything cataclysmic in Q4. We will continue to work on bringing down channel inventory.

Question from Morgan Stanley: Can you comment on linearity in other business? Can you comment on signs of stability that Cisco saw?

Lesjak: We don’t have a significant linearity difference. The entire quarter was fairly weak.

2:41 pm: Question from BMO: Revenue trends in IPG and PC division, but talk about HP in total relative to normal seasonal expectations.

Lesjak: Several key considerations in Q4 guidance are related to revenue. The macro is softer than expected in Q3 and we don’t expect it to get better in Q4. We expect to see well below normal seasonality. Challenges persist in legal situation with Oracle and getting software licenses up.

The realignment of the sales force, while creating problems in the short term, will pay back longer term.

Lesjak: We are maniacally focused on cost reduction. We’re going to get the benefits from the charges we’ve taken.

2:44 pm: Question from Stifel Nicolaus about servers: You talked about broad weakness. What are you seeing competitively in light of the product transitions to eighth-gen servers?

Whitman: We have some business model innovation that is required to compete in that business. Right now the hyperscale business is dilutive to ISS margins. We are still seeing weaknesses in mainstream ISS (ISS = industry standard servers). It’s an important business for HP and we have some action items to address problems in that business.

Question from Raymond James: Should we think about the $8 billion writedown based on past problems or future deterioration?

Lesjak: There’s a number of different factors, the trading value of HP shares are a factor. It doesn’t result in any future cash expenditures.

Whitman: I think I’ve said from the beginning, this was a business in need of a turnaround, I decided to make a leadership change. This is what we need to do to get the business on a better track. The account basis of accountabiilty got diffused across the organization. The person in charge needs to be in charge.

Whitman: I feel better about that business now than I have at any time in the last 12 months.

Q: I see a three-cent benefit to EPS.

Lesjak: Some of the benefit will counteract the headwinds, but that is the guidance.

Question about 2013 and the pace of reinvestment. Will that require EPS to decline?

Whitman: We’ll give guidance in early October. But here’s the situation as I see it. First we are facing macro economic trends. Western Europe and China for one. There are challenges for PCs and printers, and price pressures across the board. The competitor (Lenovo) is not losing money. Also, we have some execution challenges. There are still some very serious execution issues in this business.

Whitman: We set up a very crisp strategy in printers, we are the acknowledged market segment and we have some weakened competitors and we need to go after them.

When we look at 2013 we’re going to tumble all the pluses and minuses. There are going to be puts and takes.

Question from Wells Fargo: Talk about whether you can really focus on the long term while you’re working so hard on the near term.

Whitman: We have to focus on the short and the long term. If we don’t fix long-term problems we won’t have money to invest in longer-term problems. Our product portfolio is vast. My deeply held belief is that focus is going to be important. Behind the curtain there are smaller initiatives where we could get bigger bangs for the buck. I feel like we’re much farther along than we were nine months ago.

Whitman: We have lots of little initiatives within the company, some of which we may shut down. They’re not big dollar programs.

Lesjak: This is more focused attention. We need to focus more, not less.

Question from Credit Suisse about free cash flow, which looks to be $5 billion this year. If this is the rate of cash you can generate, it may take two more years from where we are now to give more cash back.

Lesjak: We generated $2.1 billion this quarter. At the same time, we reduced shares outstanding by 17 million shares and increased the dividend. We are making progress.

2:57 pm: Question from Shannon Cross (always interesting). What are you seeing in China?

Whitman: Let me elevate to BRIC: Russia and India were good, Brazil was mid to mixed, China was not so good. We are rebuilding the business in China with a new team there. We are also rebuilding our channel in China. This is also where we’re rebulding our channel with the enterprise business. But we are seeing a slowdown in China. At the same time, we can still improve our execution in China. There’s a regime change coming there, and we’ll see what the stimulus and public sector spending will look like.

And we’re done with the call.

Yesterday, HP fired the head of its Enterprise Services unit, John Visentin, though the decision to let him go came before last week’s embarrassing service disruption that hit Commonwealth Bank, Australia’s largest bank, caused by a software upgrade gone awry.

Australian tech blog Delimiter published details of the problems said to have hit the bank. An operating system patch intended only for desktop PCs was pushed to server machines as well, causing service disruptions to many branches.

Commonwealth Bank has long been a client of EDS, the IT services firm that HP acquired in 2008. Sources confirm that Whitman, already in Australia on other business, went to meet with the bank’s CIO, Michael Harte, in the wake of the troubles in hopes of salvaging the relationship. Meanwhile, Oracle and IBM are eagerly seeking to make sure that HP doesn’t win its business back.

The disruption is about as ill-timed as could be. The bank has a six-year contract with EDS — and thus with HP — dating to 2006 that is up for renewal right about now. Its status is unclear.

Visentin, a former IBM general manager named last year to run HP Enterprise Services by former CEO Léo Apotheker, was let go yesterday because of ongoing problems at HP’s ES unit. And while the problems at Commonwealth Bank came after Whitman’s decision to replace him, sources say it’s an example of the sorts of problems that have plagued the troubled Enterprise Services group in recent months.

The unit has also had difficulty meeting its numbers. Though it’s hard to figure out exactly what’s going on because HP doesn’t break out ES results specifically, there are clues in the filings and public comments. The unit sits under the umbrella of the Services segment that reported about $36 billion in revenue last year. It combines two smaller units, the Application and Business Services group, and the Infrastructure Technology Outsourcing group, known internally at HP by their three-letter acronyms “ABS” and “ITO.”

For the first six months of this year, the overall Services segment reported $17.5 billion in sales, about flat from the year-ago period, though its earnings as a percentage of HP’s overall revenue has dropped from nearly 16 percent last year to about 11 percent this year. The worst performer of the bunch has been ITO, which last quarter saw its revenue drop 3 percent to $3.7 billion. CFO Cathie Lesjak attributed the drop to “being more selective” with the deals HP chooses to pursue.

Mike Nefkens, the senior vice president and general manager for ES in Europe, was named to run the unit on an interim basis, while Jean-Jacques “JJ” Charhon, the unit’s CFO, was promoted to its COO. Nefkens isn’t assumed to be Visentin’s replacement, and sources tell me that HP will be looking both inside and outside the company for the services unit’s next boss.

I said it yesterday and I’ll say it again today: Expect a lot more questions about, and a lot more attention on, HP’s services business in the weeks ahead.

But it also boosted what it expects to lay out in restructuring charges. Remember that HP is going through the process of laying off 27,000 people over three years, about 9,000 of whom are expected to go this year. It now says it expects to incur between $1.5 billion and $1.7 billion in restructuring charges in fiscal 2012. The main reason is that HP employees are responding to the voluntary retirement program at a higher rate than expected.

There’s also going to be an $8 billion impairment charge to its services business, the IT services unit, essentially for the company formerly known as EDS, which HP acquired in 2008 for about $14 billion under former CEO Mark Hurd. CEO Meg Whitman has been complaining about troubles in this unit for awhile now, saying mostly that it’s going to have to focus on fewer, more profitable deals than on a large number of lower-margin ones. Expect a lot of attention on this business in the coming year, as Whitman’s turnaround program gets underway in earnest.

Overall, it looks like Whitman and her team, including longtime CFO Cathie Lesjak, are using this quarter — which was expected to be a tough one, given all the mishegas that has come from HP’s competitors — to take a lot of bitter financial medicine all at once. Shareholders seem to like it. HP shares are rallying by more than 3 percent, after about five minutes of trading in New York, to $19.53. This comes after a 5 percent rally during the pre-market session, when HP shares briefly traded for more than $20 a share.

There were also some executive moves, most of them in Enterprise Services, hence my reference to the mixed bag. Here they are:

• John Visentin, who had been appointed to run Enterprise Services under former CEO Léo Apotheker, is leaving. Visentin was an IBM veteran whom Big Blue had sued after he jumped to HP. He also replaced that unit’s longtime head Ann Livermore, who was herself often mentioned as a candidate for CEO. Livermore was pushed out of that job last June, but was offered a seat on the board of directors.

• Mike Nefkens, currently head of Enterprise Services for Europe, will replace Visentin.
• Jean-Jacques Charhon, CFO in the Enterprise Services business, has been promoted to that unit’s COO.

  I’ll have more as I go through it. The release is below:

  PALO ALTO, CA–(Marketwire -08/08/12)- HP (HPQ) today announced that it has appointed Mike Nefkens, currently senior vice president and general manager of HP Enterprise Services (ES) — EMEA, to lead HP ES on an acting basis. John Visentin, who previously ran HP ES, will be leaving the company to pursue other interests.

  HP also announced today that Jean-Jacques (JJ) Charhon, senior vice president and chief financial officer of HP ES, was appointed chief operating officer for HP ES. Charhon will focus on increasing customer satisfaction and improving service delivery efficiency, which will help drive profitable growth.

  Nefkens will be responsible for driving growth and innovation for HP’s applications, business processing and outsourcing services. Nefkens has led successful customer IT transformations for some of HP’s largest services accounts. Prior to joining Electronic Data Systems (EDS), he spent 10 years with Holland Chemical International NV, where he held several executive positions in Mexico, Nicaragua, Venezuela and the western United States. Nefkens will report to Meg Whitman, president and chief executive officer, HP.

  Charhon joined HP in 2010 as vice president of Finance for the Personal Systems Group. He brings a decade of services experience in the technology sector from both General Electric (GE) and HP. At GE, he held a number of global leadership roles. In his new position, Charhon will report to Nefkens.

  These appointments are designed to drive profitable growth, service innovation and client satisfaction for the Services business.

  Q3 FY12 non-GAAP outlook
  HP is increasing its previously provided third quarter fiscal 2012 non-GAAP earnings per share (EPS) outlook to approximately $1.00 per share, up from a previous range of $0.94 to $0.97.

  Third quarter fiscal 2012 non-GAAP diluted EPS estimates exclude after-tax costs related primarily to the amortization and impairment of purchased intangible assets, goodwill impairment charges, restructuring charges and acquisition-related charges.

  Q3FY12 GAAP outlook
  Services goodwill impairment charge
  HP expects to record a non-cash pre-tax charge for the impairment of goodwill within its Services segment of approximately $8 billion in the third quarter of its fiscal 2012.

  The impairment review stems from the recent trading values of HP’s stock, coupled with market conditions and business trends within the Services segment. Under accounting rules, when indicators of potential impairment are identified, companies are required to conduct a review of the carrying amounts of goodwill and other long-lived assets to determine if an impairment exists.

  HP does not expect this estimated goodwill impairment charge to result in any future cash expenditures or otherwise affect the ongoing business or financial performance of its Services segment.

  Restructuring program
  HP also updated the amount of the pre-tax charge it expects to record in the third quarter of fiscal 2012 in relation to its restructuring program announced on May 23, 2012. The change is primarily driven by a higher than anticipated acceptance rate under its early retirement program and faster than expected implementation of the workforce reduction program. Accordingly, HP now expects to record a pre-tax charge of approximately $1.5 billion to $1.7 billion, an increase from its previous estimate of approximately $1 billion, in its third quarter of fiscal 2012 that will be included in its GAAP financial results.

  GAAP outlook
  Given the expected impairment charge associated with the Services segment and the expected increased charge associated with the restructuring program, HP now expects third quarter fiscal 2012 GAAP EPS to be in the range of ($4.31) to ($4.49) including the GAAP tax impact on the impairment.

  HP did not provide an updated outlook for the full year fiscal 2012.

  ]]> http://allthingsd.com/20120808/hp-boosts-its-q3-guidance-and-its-expected-restructuring-charge/feed/ 0 http://allthingsd.com/20120524/the-aircraft-carrier-hewlett-packard-begins-its-turn-video/ http://allthingsd.com/20120524/the-aircraft-carrier-hewlett-packard-begins-its-turn-video/#comments Thu, 24 May 2012 15:55:21 +0000 Arik Hesseldahl http://allthingsd.com/?p=211972 Shares of Hewlett-Packard are heading up this morning on the heels of yesterday’s chock-full report, which included earnings that beat expectations and details of a restructuring plan that will see the company slash about 27,000 jobs over two years.

  HP shares rose nearly 5 percent to $22.10, up $1.02 as of 11:15 am ET. Investors appear to be showing new confidence in HP and how CEO Meg Whitman is running the show. All the announcements that HP made yesterday bear repeating, because it was a busy afternoon:

• The company says it plans to eliminate 27,000 jobs — about 8 percent of its work force — over two years, as part of a restructuring plan it says will help save between $3 billion and $3.5 billion in annual operating costs. The savings will be reinvested in growth areas of the IT business like cloud computing and services, and in a renewed focus on research and development. About 9,000 — or roughly a third — of the cuts will occur this year. Another batch — AllThingsD has been told the number is about 5,000 — will occur by way of voluntary retirement packages offered in the U.S.
• HP reported quarterly earnings that beat the street’s expectations. While profits fell year on year by more than 30 percent, non-GAAP per-share earnings at 98 cents beat the 91-cent consensus handily. Sales also came in ahead of expectations at $30.7 billion and beat the consensus by $800 million — though that, too, was a decline of 3 percent. It was the third quarter in a row that HP has recorded year-on-year sales declines.
• Mike Lynch, head of Autonomy, the British company for which HP paid nearly $12 billion last year, is leaving the company. Whitman talked about “disappointing results” at that unit, and complained in an appearance on CNBC this morning that Autonomy’s team was unable to close deals that HP had brought to the unit. Lynch, you’ll recall, is Autonomy’s founder, and was present at a pair of disputed meetings with senior executives of Oracle, at which the company may or may not have been shopping itself. Or just talking about databases in a lively fashion.
• Here’s an interesting detail: HP is evaluating the carrying value of the Compaq brand name. Remember, of course, that HP acquired the PC maker Compaq way back in 2002. That deal ultimately made HP the PC-making powerhouse that it is today, but also had a lot to do with the downfall of Carly Fiorina, the company’s CEO from 1999 until 2005. The plan is to use the Compaq brand in a “more targeted” manner, CFO Cathie Lesjak said, and so HP will take a $1.2 billion impairment charge to write down the value of the name. One wonders if the letter Q might eventually come out of the ticker symbol “HPQ” on the New York Stock Exchange, and that it might revert back to the old “HP” “HWP” from before the 2002 acquisition.

 
Update: A few readers have written to point out I was wrong about HP’s old ticker symbol. It wasn’t HP but HWP. Silly me. Even so, if the Compaq name is headed for some lesser level of importance in HP’s future, then perhaps the Q in the ticker symbol, which was added as a nod to Compaq’s old symbol CPQ, to give the impression that the combination was more a merger of equals, should go. Given the choice between them, I would vote for HP. I should stress that I have zero indications that this is even under consideration, and is really just me ruminating.

Analysts had a mixed view. Chris Whitmore of Deutsche Bank Securities has been one of the more skeptical voices on HP’s turnaround prospects. “New sheriff, old game plan,” was the headline on his note to clients today. “We remain cautious on HP’s weak fundamentals, challenging macro conditions and deteriorating cash flow,” he wrote. Despite the beat on earnings, free cash flow — at $1.4 billion in the quarter — declined by half, pointing to what Whitmore calls “very poor earnings quality.” He rates HP as a “sell,” with a $20 price target.

Brent Bracelin of Pacific Crest Securities wrote that he remains unconvinced that an unexpected strength in HP’s PC unit is sustainable. “Apple and Samsung now account for 39 percent of market share across PCs, tablets and smartphones, and have a volume advantage relative to HP’s 6 percent share,” he wrote in a note to clients this morning. He rates the shares “market perform,” or neutral, and worries that HP’s biggest problem is that about half its sales are still tied to PCs and printers.

Whitman took to CNBC this morning to talk about HP’s situation. She portrayed the turnaround under way as about “10 to 15 percent” complete. That means there’s still a lot of work to do ahead. “We’ve laid a lot of pipe and done a lot of groundwork,” Whitman told the network’s anchors in a 13-minute appearance. I’ve embedded it below:

]]> http://allthingsd.com/20120524/the-aircraft-carrier-hewlett-packard-begins-its-turn-video/feed/ 0 http://allthingsd.com/20120523/hps-whitman-we-are-in-the-early-stages-of-what-we-hope-to-achieve-here/ http://allthingsd.com/20120523/hps-whitman-we-are-in-the-early-stages-of-what-we-hope-to-achieve-here/#comments Wed, 23 May 2012 20:53:35 +0000 Arik Hesseldahl http://allthingsd.com/?p=211743 So the news is out. HP will cut about 27,000 jobs over the next two years or so.

I’m joining HP’s conference call a little late — there was a lot of news to get through in the press releases and regulatory filings. As I’m typing, CFO Cathie Lesjak is running through the financial results. But the all-important Q&A with analysts is still ahead.

1:54 pm: Lesjak is talking about the results in the personal systems group. Consumer revenues declined 4 percent, while commercial sales of PCs increased 3 percent.

Services delivered 11.4 percent of sales, which was down. IT outsourcing revenue was down 3 percent as “we are being more selective in the deals we pursue.”

Technology Services revenue was flat. Imaging and printing revenue was down 10 percent and supplies revenue was down 12 percent.

Business Critical systems are down 23 percent year over year. Business continues to be impacted by continued revenue decline. That’s the Itanium lawsuit with Oracle hurting HP again.

Software revenue grew 22 percent to $907 million. Still too small to have a significant impact.

2:00 pm: Lead generation we are seeing across HP for Autonomy, but the company seems to be having a harder time closing deals on time.

Now on to the balance sheet: Our focus is to rebuild the balance sheet this year. We returned $350 million to shareholders via share repurchases. We also paid $251 million in dividend. $2.5 billion in operating cash flow and free cash flow of $1.5 billion. Total cash was $8.7 billion.

Lesjak is still speaking. She’s now getting into details on the restructuring. 9,000 employees will exit the company this year.

That amounts to about one third of the cuts to come this year.

We will be investing in technology and business processes. We expect to invest savings from headcount and non-headcount actions in a lot of things like cloud, software and services.

Non-GAAP fiscal EPS to be $4.05 to $4.10.

2:05 pm: Expect cash impact to be about $400 million in fiscal. Hm. This is interesting. HP is writing-down the value of the Compaq trade name it acquired in 2002. Does this mean the end of Compaq as a brand?

Here’s the Q&A. First from Katy Huberty of Morgan Stanley: Regarding free cash flow, the second quarter numbers were strong. Where do you expect free cash flow to end this year?

Lesjak: We haven’t been guiding cash flow. The way to think about it long term is that it trends in line with non-GAAP earnings. In Fiscal 2012 we expect $400 million and through 2014 we expect it to be $2.7 billion.

Huberty: Do you have a view yet if share gains in PCs were “sell out” or “sell in” after hard drive shortages?

Meg Whitman: We saw a good sell out in channel inventory. We feel pretty good in demand. We’ve struck the balance between design and the workhorse design that companies and governments need.

Bill Shope of Goldman Sachs: Can we return to mid-teens margins in IPG?

Whitman: We expect about 2 billion pages that will move from analog to digital. People at home are printing fewer photos, but we feel good about printing in the enterprise. As an industry leader we need to step up and act like one. We need to get pricing correct on ink and printers, and get the right product at the right time. In the enterprise we missed a cycle on multifunction color printers. And we have to look at business models in emerging markets. If you price the printer a little higher and the ink a little lower, you can sell a lot more printers and print a lot more pages. I think we’ve got the past four years really clear now.

Lesjak: On supplies decline. The vast majority of the decline was due to channel inventories this quarter. We expect that to modulate going into Q3. The caveat is that demand continued to be fairly weak. We’d like to take the inventories down a little in Q3.

Shope: Question on margins.

Lesjak: Go back to what drove the margins. One was supplies mix. This was caused by channel inventory corrections, but also softer demand and lower margins. Finally something we are not calling for a change, its the strength of the yen in our Laserjet business.

Whitman: Joining forces of IPG and PC business is going very well. PSG had a broader footprint in emerging markets. We’re going to leverage that. These were different divisions that didn’t coordinate as well as they could have.

2:13 pm: Toni Sacconaghi from Sanford Bernstein: I know you stated several times that you expect savings to be reinvested. If we take that literally and say 40 percent will drop to the bottom line, is that the right framework we should be thinking about? Is that the envisions balance given that you used the adjective majority?

Whitman: We have a well defined amount we’re going to get from headcount reductions. But there are other things: We are not to the point where we can make a decision about how much of that we can reinvest. We want to take a disciplined approach and evaluate return on invested capital. For example, we may get a lot of these savings. We’re only going to reinvest on those opportunities that make sense for HP long term. We’ll give more guidance on this at the end of Quarters Three and Four.

Toni: Your guidance. Even if you strip out the initial 5-10 cents from the guidance, it still implies a 30 percent Q3 to Q4 EPS growth, which is unprecedented. He’s basically trying to calibrate EPS expectations given the cuts.

Lesjak: The math we’ve done is that Q4 is in line with normal seasonality. We’re feeling like this is consistent with normal seasonality.

Toni: What are the offsetting forces?

Whitman: Overall we feel cautiously optimistic coming out of Q2. But we haven’t turned the corner. We are in the early stages of what we hope to achieve in the next few years.

We are in the early stages of a turnaround. They’re not linear. There may be a setback. And then we’re going through a lot of changes here. IPG and PSG are joined. There’s a lot of moving parts, but I don’t want to get out over my skis in terms of what we can deliver.

Lesjak is now talking about currencies. At the end of the day the currency we’re looking at right now is a headwind.

2:19 pm: Shannon Cross from Cross Research: Provide more color on how you are thinking of restructuring. Cuts across the board? Will there be any divestitures? More investments in back-office systems?

Whitman: Our restructuring is about three things. Align cost structure with the portfolio, (missed one thing), and then streamline operating model. Basically say, what do we want to focus on, how many people do we need to deliver. We came up with a bottoms-up approach to the cost savings we can achieve.

Then we have to make investments in the business. That includes back office tools and processes. We combined sales under John Hinshaw. We’ve put tools in. Once we do that you’ll see this company be a lot easier place to work.

Cross is asking about Autonomy. As we reported earlier: Mike Lynch is out.

Whitman: Autonomy delivered disappointing results. It’s not the product and its not competition. This is classic entrepreneurial company scaling issues. When you see a company scale like that it’s a whole different ball game. We need a new organizational structure to support a $1 billion+ company. This is something I’ve done before, having scaled eBay from $4 million to $8 billion, I’ve seen this movie before. I feel good about the product. I feel good about big data and analytics and it will hit all our business units.

2:23 pm: Brian Marshall of ISI: He’s asking about savings from cuts and how they will be reinvested. His question is breaking up a little in my audio.

Whitman: We’re looking toward organic innovation. We don’t see any major acquisitions on the horizon. There may be some tuck-in deals. The heritage of HP is a fantastic engineering culture.

We are going to increase the Research and Development budget considerably. We’re going to invest in product quality. We have good quality, but I think we can do better. And we’ve got some investment in internal systems.

Lesjak: We expect to save on an annualized run rate of $3 billion. It is from that pool of savings that we’ll be looking for reinvestment. That vast majority will be reinvested back into the business in places where we can grow.

2:27 pm: Question from Keith Bachman of BMO: First on services. You’ve ID’d that you want to take a number of people yet at the same time, there are areas in services especially where you need to nurture. How do you see headcount there?

Lesjak: What we’re doing is having a transition. It’s going from heavily weighted in slower growth to faster growing higher margin services. Cloud. Security, information management and analytics, and application modernization. As we do that, it has headcount implications. We’ve modeled that out a few years. I think it’s also important that this is a mix. But it’s not just about mix, including lean methodologies, so we get a better rate basis on contracts.

Bachmann: Net, you need to add people in services. Is the headcount up or down?

Whitman: I believe we will have a smaller more profitable services business.

2:32 pm: Next question from Ben Reitzes of Barclays. Asking Meg about China. You said things are turning around there. Also, a point about demand for PCs.

Whitman: I don’t want to get out over my skis concerning China. But it is doing better. We have a new head of APJ. We feel better about the distribution system there. We are seeing positive signs of a stabilization and turnaround. We announced our new line in China for a reason. I feel good about it, but it’s early days. But as you know, it has been a tough road for HP in China.

Lesjak: In industry standard servers in China, we are doing well. We are doing well there in networking.

Whitman: We have a fledgling but growing services business in China.

Now on to end-user demand for PCs. There is demand and there is a refresh coming from Windows 8. We still worry about Europe. My personal prediction is that Europe will get softer before it gets better.

2:35 pm: Whitman is wrapping up now. We have not turned the corner, but we have made real progress. We are excited about continuing to execute over the next quarter and years.

And that’s the end of the conference call. I’ll be back with some additional comments and color in a few minutes at the top of this post.

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