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HP Needs to Find Itself

Tickers in this article: DELL EBAY IBM HPQ

NEW YORK ( TheStreet) -- As predicted, HP(HPQ) felt the effects of a tough macro economy when it reported its latest quarterly results on Wednesday. The Dow component, however, still needs to get its own house in order.

Problematic PCs

Weighed down by declining PC and printer sales, HP missed analysts' top-line estimate. While there was no great surprise here following rival Dell's(DELL) underwhelming second-quarter numbers this week, the results have once again thrust a spotlight on HP's PC business.

Last year HP's controversial former CEO Leo Apotheker mulled a possible spinoff of the company's PC business; although his replacement, Meg Whitman, ultimately nixed the plan.

Nonetheless, there are still calls for her to rethink HP's PC strategy, particularly after the division's listless third-quarter performance.

"In our view, HP should focus on the cloud and part ways with its PC business that we expect will be increasingly dominated by Asian competitors," explained Topeka Capital Markets analyst Brian White, in a note released on Wednesday.

A PC spinoff would certainly be a bold move for HP, but it would not be the first tech heavyweight to take such drastic action. Rival IBM(IBM) , for example, sold its PC business to Lenovo back in 2004, laying the foundation for a headlong push into more lucrative areas such as data analytics and cloud computing.

Whitman, though, can point to the fact that the company's Personal Systems Group (PSG) accounts for almost a third of total revenue and, within enterprises, serves as a vital 'foot in the door', to sell additional technology.

Nonetheless, more weak quarters from PSG will only increase the pressure on Whitman to carve off the vast PC business.

Software, Cloud, Security

Software was one of the highlights of HP's quarter, with revenue rising 18% to reach $973 million, albeit thanks to a favorable year-over-year comparison. Moving forward, though, the tech giant's software numbers could look very different.

"The majority of growth was inorganically boosted by the acquisition of Autonomy in late 2011 ," explained TBR analyst Jillian Mirandi, in a note."As the acquisition comes full circle next quarter, HP Software will no longer have the luxury of such positive year-to-year growth."

The analyst also warned that HP's fiscal third quarter could be its last quarter of double-digit software growth.

HP, which has been derided in the past for its "limited" software portfolio, has been highly vocal about its desire to boost this part of its business.

Speaking during HP's third-quarter conference call, however, the company's CFO Cathie Lesjak acknowledged that macro challenges on both sides of the Atlantic and sales issues negatively impacted software license revenue, which grew just 2%.

"We have a lot of work to do over the next several quarters to improve Autonomy performance, and we will be focused on improving pipeline conversions and execution across the entire software business," she added.