Hewlett-Packard Company (NYSE:HPQ) continues to regret its $11.7 billion acquisition of Autonomy, a British software maker, last year. HP purchased the British firm to boost its presence in enterprise software market and compete with the likes of IBM Corp. But on Tuesday, Hewlett-Packard Co. announced that it has to take an $8.8 billion accounting charge related to Autonomy.
Hewlett-Packard Company (NYSE:HPQ) said that it discovered “serious accounting improprieties” and “outright misrepresentations” at Autonomy. It started looking into these issues after a senior Autonomy executive came forward. HP then launched an investigation into Autonomy by hiring a third-party firm. Analysts have been criticizing HP for overpaying in the Autonomy deal.
The Silicon Valley tech giant has reported the findings to Securities and Exchange Commission in the U.S. and Serious Fraud Office in the United Kingdom. It is the second writedown by Hewlett-Packard Company (NYSE:HPQ) this year. Earlier in August, the company had to write off $8 billion related to $13.25 billion purchase of Electronic Data Systems in 2008.
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Hewlett-Packard Company (NYSE:HPQ) is in the midst of a multi-year restructuring plan. Last year, the company hired former chief of eBay, Meg Whitman, as its chief executive. Whitman has been rethinking HP’s product lineup and global marketing strategy.
The company’s quarterly revenues declined 6.7 percent to $29.96 billion in the fourth quarter from the same period a year ago. Hewlett-Packard Company (NYSE:HPQ) incurred $6.9 billion in losses, compared to a $200 million profit in the last year’s fourth quarter. Revenues from the PC business were down 14 percent, services segment declined 6 percent, printing business was down 5 percent, and sales at servers, enterprise, and networking segments declined 9 percent. The only positive sign came from the software business that grew 14 percent.
Analysts from Raymond James have downgraded HPQ shares to Market Perform from Outperform. This is a classic “throw in the towel” downgrade after this morning’s results that were overall in line with consensus but very different by segment. Moreover, the 1Q outlook is much worse than they expected and puts the full-year EPS outlook in question. Management’s F1Q13 (Jan) EPS guidance of $0.68 to $0.71 implies that 80% of FY13 EPS will occur after F1Q, which is much more back-end loaded than history suggests (75% to 78%).
They expected more stability in the near term than what these results suggest. Furthermore, they state that they can no longer rely on valuation support for a business that is deteriorating more quickly than we expected and where we have much lower confidence in the pace of the turnaround.
BAML analysts give reasons why the earnings were so poor, including:
(1) some of margin tailwinds in F4Q12 are non-repeating (e.g. currency hedging gains); (2) PC/enterprise hardware demand and margin environments remain challenging; (3) inkjet supplies inventory will need to decline even further (negatively mix impact); (4) ongoing account runoff in Services should drive higher than seasonal revenue/margin decline. Cost savings from restructuring (headcount reduction), supply chain/SKU optimization, business process reengineering, and real estate should provide some support to F2H13 EPS.
The company is working with the SEC and UK’s Serious Fraud Office for civil and criminal investigation and will try to recoup some of the loss.
Hewlett-Packard Company (NYSE:HPQ) shares declined 6.6 percent in the premarket trading after the announcement of the $8.8 billion writedown.