Hewlett-Packard Profit Forecast; $8.8 Billion Charge

Nov. 20 (Bloomberg) — Hewlett-Packard Co. plunged to the
lowest price in a decade after it said the British software
company purchased last year falsified its finances,
resulting in an $8.8 billion charge to write down the value of the Autonomy Corp. business.

“HP is extremely disappointed to find that some former
members of Autonomy’s management team used accounting
improprieties, misrepresentations and disclosure failures to inflate the underlying financial metrics of the company, prior to Autonomy’s acquisition by HP,” Palo Alto, California-based Hewlett-Packard said today in a statement.

The charge is another blow for Hewlett-Packard, which is
already suffering from management turmoil and challenges in its personal-computer, printer and technology-services businesses. Former Chief Executive Officer Leo Apotheker, 59, agreed to buy Autonomy to diversify away from hardware and expand in software for corporations. Apotheker left in 2011 after less than a year on the job after repeated strategy shifts and forecast cuts.

“It seems very late in the day that HP would find
accounting irregularities,” said George O’Connor, an analyst at Panmure Gordon & Co. “It looks as though they’re trying to find a way to write off the deal.”

The shares of Hewlett-Packard fell 14 percent to $11.44 at
9:34 a.m. in New York, declining to the lowest price since 2002. Through yesterday, the stock had dropped 48 percent this year.

Deloitte Audit

More than $5 billion of the total charge is due to
accounting practices, which were disclosed by a senior executive at Autonomy after founder Mike Lynch, 47, departed, Hewlett- Packard said. The company said it has referred the matter to U.S. and U.K. securities regulators and will also pursue civil
litigation. Lynch didn’t immediately respond to a request for comment.

“The board relied on audited financials — audited by
Deloitte — not brand X accounting firm but Deloitte,” CEO Meg Whitman said today on a conference call with investors. “The CEO at the time and the head of strategy who led this deal are both gone — Leo Apotheker and Shane Robison.”

Jamie Harley, a spokesman for Deloitte, didn’t immediately
return a call seeking comment.

Apotheker agreed to buy Autonomy, the second-largest U.K.
software maker, for $10.3 billion to expand in cloud-computing and add software that searches a broad range of data, including e-mails, music, videos and posts on social networks such as
Facebook Inc.

Also today, Hewlett-Packard forecast fiscal first-quarter
profit that missed analysts’ estimates amid a continuing slump in personal computer sales.

Forecast Miss

Earnings excluding some items will be 68 cents to 71 cents
a share for the period, which ends in January, Hewlett-Packard said in a separate statement. Analysts on average had estimated profit of 85 cents a share, according to data compiled by
Bloomberg.

Whitman, 56, is paring product lines and cutting staff to
make the supplier of PCs, printers and data center gear more competitive. The company, once a hotbed of invention and the world’s biggest PC maker, has suffered from declining sales and has been late to develop mobile and cloud computing products.

“They have a lot of deep-rooted problems,” said Eric
Maronak, chief investment officer at Victory Capital Management Inc. in New York, which owns Hewlett-Packard shares. “A lot of it is self inflicted.”

The net loss in the fiscal fourth quarter was $6.85
billion, or $3.49 a share, compared with net income of $239
million, or 12 cents, a year earlier. Results included the
charge related to Autonomy.

Sales Miss

Profit excluding some items was $1.16 a share, topping
analysts’s average $1.14 estimate.

Fourth-quarter sales fell to $30 billion. Analysts had
projected revenue of $30.4 billion.

Hewlett-Packard, which gets more than a quarter of sales
from PCs, is suffering as consumers and business users
increasingly favor smartphones and tablets.

“The environment remains challenging for HP and other
technology companies in the space,” said Abhey Lamba, an
analyst at Mizuho Securities USA Inc. “HP is unlikely to post revenue growth for a couple of years due to market dynamics in the PC and printing businesses.”

PC Market

The total PC market will contract by 1.2 percent to 348.7
million units this year, according to IHS iSuppli. That’s the first annual decline since 2001, the market researcher said.

Whitman said at the company’s annual investor meeting last
month that a turnaround won’t happen anytime soon. At the time, she forecast earnings for the current fiscal year to $3.40 to $3.60 a share, lower than analysts had expected.

She is cutting 29,000 jobs by the end of fiscal 2014 to
save as much as $3.5 billion a year. Whitman is also
streamlining Hewlett-Packard’s unwieldy line of printers,
overhauling technology services to improve profit, and re-
entering the tablet computer market in January with the
company’s ElitePad. The company is also focusing on products that help run corporate data centers, which yield higher profits than PCs.

The earnings report came less than a week after Dell Inc.
reported fiscal third-quarter revenue fell 11 percent and PC sales dropped 19 percent, amid competition from Apple Inc.’s iPad and other tablet computers.

“HP is faced with many of the same secular and cyclical
headwinds as Dell,” albeit with a lower percentage of sales
from PCs, Jayson Noland, an analyst at Robert W. Baird & Co., wrote in a research report.

To contact the reporters on this story:
Aaron Ricadela in San Francisco at
aricadela@bloomberg.net ;
Amy Thomson in London at
athomson6@bloomberg.net

To contact the editor responsible for this story:
Tom Giles at
tgiles5@bloomberg.net

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