The U.S.S. ZOMG! It's a Slow Motion Train Wreck! I Can't Look Away! announced an extended stay in the port of HP on Tuesday as the company took a US$8.8 billion (with a b) writedown due to "accounting improprieties." The news yanked the rug from under yesterday's market rally and helped send tech stocks down, including shares of $AAPL.
Hanging out at HP
HP announced its October quarter results on Tuesday, turning in earnings and revenue that were mostly in line with expectations. The company reported $30 billion in revenue and $1.16 in earnings per share (EPS) before the writedown. Wall Street's consensus estimates were $30.5 billion in revenue and EPS of $1.15.
On the disappointing side, HP guided EPS for the January quarter well shy of consensus estimates. HP expects EPS of $0.68 - $0.71, while Wall Street was expecting $0.85.
Sterne Agee analyst Shaw Wu told his clients, "Though we find HPQ shares inexpensive, we maintain our Neutral rating as we are concerned there may be further downside surprises as we fear that the pressures its core businesses of PCs, printers, and services are facing may be secular and structural in nature."
HP's guidance would have been enough to spook the markets, but the company had another bombshell, announcing a $8.8 billion writedown.
That writedown was due to, "serious accounting improprieties, disclosure failures and outright misrepresentations at Autonomy Corp. 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."
You know, a billion here, a billion there...pretty soon it adds up to real money, and this writedown is sure to have repurcussions for the company. Mr. Wu said that the writedown, "may call into question the credibility of its board of directors."
Brian Marshall of ISI Group was even more direct, telling his clients, "To put it bluntly, this story has been an unmitigated train wreck. [HP has dropped] more shoes than Imelda Marcos."
To be sure, this was a mess created by departed CEO Leo Aopthekar, who was ousted after he bought Autonomy and made the brainiac decision to shed HP's multi-billion dollar PC business—before he had a buyer lined up—and transform HP into a software and services business.
Which is what happens when you hire a software and services accountant to run a product company.
In any event, current CEO Meg Whitman didn't create this particular mess, she inherited it, and so far none of those above-mentioned shoes have come from her closet. It remains to be seen if she can "fix" this company, but she's at least talking the right game.
During HP's conference call with analysts, Ms. Whitman said (according Seeking Alpha), "In terms of investments, we are very focused on product, product, product. Great companies return to greatness on the basis of product."
That tracks very closely with an important sentiment expressed by the late Steve Jobs. Because it's so awesome, we'll include it in full (via AllAboutSteveJobs):
And how are monopolies lost? Think about it. Some very good product people invent some very good products, and the company achieves a monopoly.
But after that, the product people aren't the ones that drive the company forward anymore. It's the marketing guys or the ones who expand the business into Latin America or whatever. Because what's the point of focusing on making the product even better when the only company you can take business from is yourself?
So a different group of people start to move up. And who usually ends up running the show? The sales guy. John Akers at IBM is the consummate example. Then one day, the monopoly expires for whatever reason.
But by then the best product people have left, or they're no longer listened to. And so the company goes through this tumultuous time, and it either survives or it doesn't. Look at Microsoft — who's running Microsoft? (interviewer: Steve Ballmer.) Right, the sales guy. Case closed. And that's what happened at Apple, as well.
Can she do it? It may depend on how big Mr. Apothekar's shoe closet is.
In the meanwhile, shares of HPQ closed sharply lower on Tuesday, ending the day at $11.71, down $1.59 (-11.95 percent) on more than six times normal volume, with 154.7 million shares trading hands. That's a ten year low.
The broader markets were mixed, with the DOW closing slightly lower, while the S&P 500 and the NASDAQ both ended the day with slight gains.
Shares of $AAPL closed lower, too, at $560.913, down $4.817 (-0.85 percent), on light volume of 22.9 million shares trading hands.
*In the interest of full disclosure, the author holds a tiny, almost insignificant share in AAPL stock that was not an influence in the creation of this article.