HP takes $8.8B charge on Autonomy 'improprieties'

Last updated at 9:45 a.m. PT

Hewlett-Packard took a massive charge related to its purchase of Autonomy and indicated that it bought the company based on pumped-up and fraudulent accounting.

In its fourth-quarter earnings report, HP recorded a charge of $8.8 billion in its software unit. Then HP dropped this bomb:

The majority of this impairment charge is linked to serious accounting improprieties, disclosure failures and outright misrepresentations at Autonomy Corporation plc that occurred prior to HP's acquisition of Autonomy and the associated impact of those improprieties, failures and misrepresentations on the expected future financial performance of the Autonomy business over the long-term.

In other words, HP not only bought a clunker for $11.1 billion and decimated its balance sheet. HP bought Autonomy under false pretenses. Automony was using hardware sales to pump up its results. The problem is that Autonomy is a software company. 

The Autonomy acquisition was part of former CEO Leo Apotheker's plan to make HP more of a software-based company. However, Whitman stuck with the Autonomy purchase when she took over. 

HP CEO Meg Whitman explained the Automony investigation on an earnings conference call. 

These in improprieties were discovered through an internal investigation after a senior member of Autonomy's leadership team came forward following the departure of Mike Lynch on May 23rd. Based on this information, HP initiated an intense internal investigation into the allegations including a third party forensic review of Autonomy's historical financial results. HP has contacted the SEC's enforcement division and the UK's serious fraud office. We have requested both agencies open criminal and civil investigations into this matter. In addition, HP intends to seek regress against various parties in the appropriate civil courts to recoup what we can for our shareholders. I want to stress that we remain 100% committed to autonomy and its industry leading technology. We will continue to fully support our new and existing customers and we believe autonomy technology will play a significant role in our growth strategy over the long term.

Both Apotheker and the previous leadership at Autonomy were quick to react to HP's claims. In a statement to the Wall Street Journal, Apotheker said, "I'm both stunned and disappointed to learn of Autonomy's alleged accounting improprieties...The due diligence process was meticulous and thorough, and included two of the world's largest and most respected auditing firms working on behalf of HP."

Meanwhile, a spokeswoman for former Autonomy CEO Mike Lynch told Reuters, "The former management team of Autonomy was shocked to see this statement today, and flatly rejects these allegations, which are false."

The numbers for HP's fourth quarter
HP's fourth-quarter report was a mixed bag. HP reported a fourth-quarter loss of $6.9 billion, or $3.49 a share, on revenue of $30 billion, down 7 percent from a year ago. Non-GAAP earnings, which exclude the massive Autonomy writedown were $1.16 a share.

Wall Street was expecting earnings of $1.14 a share on revenue of $30.4 billion.

For fiscal 2012, HP reported a net loss of $12.7 billion, or $6.41 a share, on revenue of $120.4 billion.

As for the outlook, HP projected first-quarter non-GAAP earnings of 68 cents to 71 cents a share. Wall Street was looking for 85 cents a share. Fiscal 2013 non-GAAP earnings will be $3.40 to $3.60 a share. Wall Street was expecting $3.50 a share. 

Investors sent HP shares about 12 percent lower to a 10-year low. 

Whitman reiterated that HP is a multiyear turnaround project. On a conference call, Whitman said:

Fiscal 2012 was the first year in a multi-year journey to turn HP around. We know where we need to go. We have a plan to get there and we have already made significant progress towards our goal.

Indeed, HP's business units were under pressure across the board. Personal systems revenue fell 14 percent as PC sales slid. Printing revenue fell 5 percent; services fell 6 percent from a year ago; Enterprise servers, and storage and networking sales fell 9 percent from a year ago.

Analysts largely expected HP's PC business to be under pressure and the results paid out as expected. Notebook and desktop units were down 12 percent in the fourth quarter. 

On the enterprise side of the business, Whitman said HP saw pressure with its industry standard server business, but 3Par storage performed well. Whitman added:

Our server business saw double digit growth again in hyperscale, but this business is putting pressure on our overall ESSN margins. Our Gen 8 rollout continues to track positively although we saw pressures on our pricing and margins as we work to improve our channel execution.

By the numbers:

• HP's R&D spending was $3.4 billion for fiscal 2012, up from $3.25 billion in 2011.
• Inventory at the end of the quarter was $6.3 billion, and days of inventory at 25 days, down two days from a year ago.
• HP bought 7.6 million of its shares on the open market.
• HP ended the quarter with $11.8 billion in gross cash.

Editors' note, 9:45 a.m. PT: This story has been updated several times with additional information from the earnings report, the HP conference call, and responses from Leo Apotheker and the former management at Autonomy. CNET's Jonathan Skillings contributed to this report.

The story originally appeared at ZDNet's Between the Lines under the headline "HP: Autonomy had 'serious accounting improprieties."