Arik Hesseldahl

Recent Posts by Arik Hesseldahl

HP Explains Its $8.8 Billion “Oops”

Just joining the HP conference call in progress.

Already the news is amazingly bad, and the shares are hitting lows not seen since 2002. If they go much lower, we’ll be looking at levels not seen since 1994.

5:13 am: Meg Whitman is speaking about Autonomy. She just said there’s a lot of work to do with Autonomy.

The majority of the accounting charge is related to improprieties, disclosure failures and impact from those failures. These improprieties were brought to light after an intensive investigation. The SEC criminal enforcement division has been contacted, and HP will seek “redress” from certain parties in the appropriate courts.

Now to guidance. 2013 will be a fix-and-rebuild year.

We expect the underlying macro headwinds to continue. Finally, the turnaround plan we laid out at the analysts meeting. New products and services will kick in. R&D will kick in, and another year of cost managements will result. We expect to grow as we reach FY15 and beyond.

Our 68 cents to 71 cents EPS non-GAAP in Q113.

8:17 am: And here’s Cathie Lesjak:

We continue to see macroeconomic challenges in all our regions.

Lesjak is speaking. I paused there to read a statement from HP on the Autonomy charge. I’m going to grab some text from that.

8:20 am: “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. These efforts appear to have been a willful effort to mislead investors and potential buyers, and severely impacted HP management’s ability to fairly value Autonomy at the time of the deal. We remain 100 percent committed to Autonomy and its industry-leading technology.”

Now Lesjak is speaking about this. Of the $8.8 billion write-down, more than $5 billion comes from Autonomy, and it is linked somehow to the trading of HP stock. Expect more revelations on this soon, I guess.

8:23 am: Another couple paragraphs from the explanation on the Autonomy write-down: “As a result of that investigation, HP now believes 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.

“This appears to have been 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. These misrepresentations and lack of disclosure severely impacted HP management’s ability to fairly value Autonomy at the time of the deal.”

What it comes down to is this: Someone in Autonomy management sought to make that company look like it was more valuable than it actually was.

Now back to Lesjak’s remarks: She’s speaking about the enterprise, servers, storage and networking. Business Critical Servers weak again. Persistent revenue declines as a result of the Itanium litigation. Mission critical x86 sales were up 25 percent.

8:28 am: Here’s the GM news. GM, remember, decided to insource the majority of its IT operations. A lot of HP services employees moved to GM. A side benefit was a huge software deal, the largest-ever HP software deployment.

8:36 am: Q&A is underway. Whitman just answered a question about Autonomy, and said that “basically, the two people who should have been responsible for the problems are gone.”

Question from Sanford Bernstein: If I look at your guidance, you’re guiding for a 40 percent drop in EPS. Historically, you’ve only been down more than 10 percent once. I’m wondering, given that your savings should be ramping from restructuring. But it’s really hard to get the math. Why the dramatic erosion in profitability in Q1?

Whitman: The way I look at 2013, we have weaker than normal seasonality in the first half. In terms of new products, many of those are being introduced now, and you’ll see them start to hit in Q3 and Q4 of 2013. We’ve looked into this very carefully. We have some headwinds coming at us, some of which are out of our control.

Lesjak is speaking. We had a very significant software deal from GM that is not going to repeat. We have to reset our incentive compensation plans.

Question about 8,000 people leaving in Q4, and why there’s not more savings showing up in the EPS.

Lesjak: Yes, we got the headcount reductions we expected. Still expecting 29,000, and by end of fiscal 2013 we’ll be down 26,000. When we execute reductions outside the U.S., they take a lot longer to complete, so the savings are back-end-loaded. Also, there’s a lot of new investments in the front of 2013 that start to pay off in the end of 2013.

Question from Morgan Stanley: A question about the trends in the PC and printing market.

Whitman: The good news about the PC business is that 80 percent is variable-cost. We’re conscious of the pressure on the PC business, we’re optimistic about our new products and Windows 8, but we have to manage the business as a whole to deliver the operating profits that we expect.

Lesjak: We have some additional levers with which to manage our cost. In printing and PCs, it’s about managing your costs day in and day out.

8:47 am: Q: What drove the 25 percent decline in enterprise profits? Why wouldn’t your enterprise assumptions for 2013 be at risk?

They came from low top-line growth, and an aggressive pricing environment, especially in Europe. Itanium hurt us and our Hyperscale business, and our margins there are materially different than the industry standard. We’re really investing in the large and growing and profitable market segment, and over time, that will offset Itanium. Also Hyperscale and Moonshot are disruptive products. Over the long term, we do expect these dynamics to bring margins back up.

Whitman: One of the main things we have to focus on is the mainstream server business. We have to better manage the supply chain and reconfigure some of the products. Dave Donatelli and his team will execute against that in the first half of 2013.

Lesjak: This is one of the key areas where we are putting R&D. This is not necessarily going to be a linear year.

8:50 am: Question about guidance. With Q1 guidance down, why aren’t you lowering your guidance for the full year? (70 cents implies a full-year EPS of $2.80, which is a lot lower than the guidance of $3.40 to $3.60.)

Lesjak: It’s basically that there’s a lot of confidence in the second half of 2013. New PCs and printers, new OfficeJet. That’s a product that doesn’t ship until February.

Whitman: When we gave guidance for Q1, we knew this would be a question. We went through it thoroughly, customer by customer, and we understand what your concern is, but we feel good about the guidance for the year.

Question about savings and cash flow.

Lesjak: What is important to take away from the Q4 results: When we focus, we achieve results. We’re not updating our guidance cash flow for FY13.

Whitman: With regard to cost savings. They focus in two areas, labor and non-labor. Making changes to your labor force in Western Europe is a big challenge, it can take as much as 12 months to 18 months to get it done.

8:59 am: Final question. Back on Autonomy. Can you provide steps and timing on remedies?

Whitman: Our internal investigation is ongoing. We have turned over the investigation to the SEC in the U.S., and the Serious Fraud Office in the U.K. That process is under way. It will take some time. It will take a long way to work through, but we will seek redress for our shareholders.

Q: And you will wait until the criminal investigation is over with, and then you seek a civil case?

Whitman: Basically, yes. (She previously said she expects a multiyear process.)

And that’s the end of the call.


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