HP takes $8.8 billion charge on Autonomy accounting improprieties

Posts $6.9 billion loss for fourth quarter

Hewlett-Packard is taking an $8.8 billion charge as a result of what it called serious accounting improprieties that occurred at U.K. software company Autonomy before it acquired the firm in 2011.

Taking the charge into account, HP suffered a $6.9 billion loss in the fourth quarter. HP CEO Meg Whitman said on a conference call Tuesday that Autonomy misled HP about the state of its business before the acquisition. HP has notified authorities and will help criminal investigations, Whitman said.

HP bought Autonomy for its enterprise search engine technology, among other things.

The majority of the impairment charge resulting from the Autonomy acquisition was "linked to serious accounting improprieties, disclosure failures and outright misrepresentations at Autonomy Corporation plc that occurred prior to HP's acquisition of Autonomy," Whitman said on the conference call.

"These improprieties were discovered through an internal investigation after a senior member of the Autonomy leadership team came forward following the departure of (former Autonomy CEO Mike Lynch) on May 23rd," Whitman said.

"Based on this information HP initiated an intense internal investigation including a third-party forensic review of Autonomy's historical financial results. HP has contacted the SEC's enforcement division and the U.K. Serious Fraud Office. We have requested that both agencies open civil and criminal investigations into this matter," Whitman said, adding that "HP intends to seek redress against various parties in the appropriate civil courts."

For the fourth quarter, HP's net revenue dropped 7 percent to $30 billion as the company's PC market share declined and printer sales dropped. Analysts had expected the company to generate $30.43 billion in sales, according to a Thomson Reuters poll.

Several major HP business areas suffered a decline in the fourth quarter. Services revenue dropped 6 percent year over year. Enterprise servers, storage and networking revenue declined 9 percent year over year.

One bright spot was software revenue, which increased 14 percent year over year with a solid 27.2 percent operating margin. Networking revenue was up, by 7 percent.

HP specified the fourth-quarter $8.8 billion charge is for impairment of goodwill within its software segment, which includes the Autonomy analytics business. In acquisition accounting, goodwill is generally understood to represent the value of a respected business brand, good customer relations and other intangible assets. The impairment charge will not have an impact on cash flow, HP said.

The announcement of the charge comes as HP is trying to turn its business around after stumbling over a number of decisions including a move to develop, then abandon, a family of smartphones and tablets, and, under the short-lived regime of former CEO Leo Apotheker, a plan to sell its PC business. After Whitman took over, HP changed its mind and decided to keep the PC business.

HP has, however, experienced a loss in PC market share this year mainly to China-based rival Lenovo.

HP in October said that as part of its turnaround plan it would cut the number of PC models it sells by 25 percent, by 2015. In addition, HP said it will reduce the number of printing models in its lineup by 30 percent. In May, Whitman announced cost-control efforts that include cutting 27,000 jobs.

These cost controls have started to pay off, according to HP. HP has reduced its net debt by $3 billion, Whitman noted. In addition, margins in key business units in the fourth quarter look solid, HP officials noted. Even though printing revenue declined, the business had a 17.5 percent operating margin in the fourth quarter. The software business generated a 27.2 percent operating margin. Financial services delivered a 10.8 percent operating margin.

Meanwhile, HP scored some major customer wins recently. General Motors, for example, signed a five-year enterprise systems licensing deal that will result in the biggest deployment of HP technology globally.

Nevertheless, HP's forecast for the current quarter was lower than analyst estimates. HP said fiscal first-quarter profit, excluding some one-time items, will be $0.68 to $0.71 a share. Analysts on average had estimated profit of $0.85 a share, according to data from Thomson Reuters.

HP shares dropped in morning trading by 13.26 percent, or $1.76, to $11.54 -- about the level they were in 2002 in the wake of the dot-com bust.

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