HP Revenue Falls 7 Percent as Company Takes $8.8 Billion Write-Down

PC news and Windows 8 barely registered a blip on the radar during HP’s Q4 earnings call Tuesday with CEO Meg Whitman’s revelation that the company is taking an $8.8 billion charge related to the purchase of software company Autonomy, which HP says engaged in activities to “inflate the underlying financial metrics of the company” prior its sale to HP. Of the $8.8 billion noncash write-down, more than $5 billion is related to “accounting improprieties, disclosure failures and misrepresentations,” according to HP Chief Financial Officer Catherine Lesjak.

In a statement released Tuesday, HP alleged “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.” The “misrepresentations and lack of disclosure severely impacted HP management’s ability to fairly value Autonomy at the time of the deal,” HP said.

Regarding what steps HP is taking to hold those responsible for lack of oversight at HP, Whitman said the executives who led the deal, former CEO Leo Apotheker and Chief Strategy and Technology Officer Shane Robison, have both left the company. Whitman acknowledged that most of the board, including herself, were “here” and voted for the deal, “and we feel terribly about that.” She added that HP relied on audited financials by Deloitte, “not brand X accounting firm but Deloitte,” whose work was reviewed by KPMG as part of HP’s “very extensive due diligence process.” Neither financial auditing firm “saw what we now see after someone came forward to point us in the right direction,” Whitman said.

One outcome of the situation is that those in the company responsible for due diligence and mergers and acquisitions at HP now report to the chief financial officer, a standard reporting structure in most companies, Whitman said. At HP those functions had reported to a strategy unit, she said.

In the Tuesday statement, HP said it launched its internal investigation into the issue after a senior member of Autonomy’s leadership team came forward following the departure of Autonomy founder Mike Lynch, alleging that there had been a series of questionable accounting and business practices at Autonomy prior to the acquisition by HP. The unnamed individual “provided numerous details about which HP previously had no knowledge or visibility,” HP said. HP subsequently ran its own internal investigation, concluding 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,” HP said.

HP has turned over the investigation to the SEC in the U.S. and to the Serious Fraud Office in the U.K., a process that Whitman said “will take some time.” She suggested it would be a “multi-year journey through the courts in both countries."

For Q4, HP revenue fell 7 percent to $30 billion, from Q4 2011, the company said. The U.S. market fared “relatively better than most,” Lesjak said, in comparison with other countries in the Americas region, where overall revenue was down 6 percent to $13.5 billion. Revenue for Europe, Middle East and Africa was down 8 percent to $10.7 billion due to “unrelenting pressure in Western Europe,” while revenue in Asia Pacific dropped 4 percent to $5.7 billion, she said.

The Personal Systems Group faced “weak demand and a challenging competitive environment,” Whitman said, “with very aggressive pricing impacting our profitability.” HP held on to its No. 1 position in global PC sales and recovered market share in Asia where it is No. 2, she said. Personal Systems reported $8.7 billion in revenue in Q4, down 14 percent year over year, Lesjak said. Unit shipments slacked off 12 percent from the prior year in both notebooks and desktops “as we saw weakness in both consumer and commercial sectors,” Lesjak said.

In printing, net revenue of $6.1 billion was down 5 percent from Q4 2011, Lesjak said, adding that the company has realized share gains in high-value ink hardware and multifunction printers. The company is also seeing “positive momentum” from its Ink Advantage program that balances higher cost hardware with lower cost ink, she said. Whitman noted there’s a “very distinct segmentation between high-end hardware and low-end hardware.” Purchasers of high-end hardware typically buy enough ink to offset the revenue loss of hardware, she said. At the low end, she said, “you put our hardware unit into the marketplace at a loss, and the customer never buys enough ink to overcome that hardware loss."

Total printer unit shipment volume was down 20 percent year over year, driven by declines on the consumer side as HP maintains focus on higher-value units, Lesjak said. Consumer printer revenue dropped 14 percent from Q4 2011, with hardware unit shipments plunging 22 percent, she said. HP shares closed 12 percent lower Tuesday at $11.71.