Updating HP To $16 After Weak Results And Autonomy Fraud Allegations
Hewlett-Packard (NYSE:HPQ) reported lower than expected Q4 revenue of $30 billion and alleged that Autonomy had misled HP with accounting fraud prior to its $9.7 billion acquisition. The company reported a net loss of $6.9 billion mainly due to a $8.8 billion impairment charge related to the Autonomy acquisition.
HP revealed that “serious accounting improprieties” were discovered after a whistle-blower from Autonomy’s top management stepped forward after the departure of Autonomy’s founder, Mike Lynch. According to HP, the fraud led to the company overpaying by as much as $5 billion, after the company “willfully” boosted its figures during the acquisition. This is the second write-down in as many quarters, as the company reported a $8 billion write down due to EDS in August this year.
We had revised our earlier HP model based on its restructuring plans here and this valuation was contingent on the software, services and printer business performance. We have changed our estimates based on the current Q4 filings as well. The company may experience lower revenues related to software and services due to the alleged fraud by Autonomy, which may have misrepresented the size of its business and consequentially the potential growth opportunity for HP and we will keep a close watch on this division in 2013.
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HP Delivers On Earnings Even As Revenues Suffer
The company reported a non-GAAP EPS of $4.05 which was within the guidance provided while the GAAP EPS was a negative $6.41. The Q4 net revenue was down 7% y-o-y at $30 billion and the full year revenue was $120.4 billion, down 5% y-o-y. The personal systems group, which includes the desktops and laptops business was down 14% y-o-y with revenues of $35 billion. The printing business was marginally down y-o-y with $25 billion in revenues. The services business was down slightly with revenues of $35 billion and the enterprise servers, storage and networking business was down nearly 10% y-o-y to $20 billion.
EDS, Autonomy Will Weigh On Software And Services Business
As the company went through restructuring efforts, the guidance provided by HP stated that revenues were expected to decline across all divisions except the software division. If the allegations by HP turn out to be true, the software business may suffer as the potential earnings from the Autonomy acquisition would have been inflated and the actual earnings potential may be much lower.
EDS, which was acquired to boost the services division suffered a downturn and was the primary reason for the restructuring effort involving 27,000 employees. We have updated our estimate to account for the write-downs and will further update our model pending the investigation into the fraud allegations.
Outlook for 2013
The company expects to increase R&D expenses and IT spending to make its products competitive and simplify business processes and sales and marketing expenses is expected to reduce in the future as it rolls out CRM across the organization by implementing Salesforce.com’s products and services. For the Q1 2013, it estimates non-GAAP diluted EPS to be in the range of $0.68 to $0.71 and GAAP diluted EPS to be in the range of $0.34 to $0.37.
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