HP Accounting Improprieties Lead Tech Stocks Down

| Analysis

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.

The U.S.S. ZOMG! It's a Slow Motion Train Wreck! I Can't Look Away!

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.

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Paul Goodwin

HP’s history starting with the break off of Agilent is really sad. They truly were a great product company.


Okay, but what does HP’s failure have to do with Apple?
I say it has absolutely nothing to do with Apple, so why do these STUPID Anal-ists drop Apple’s stock?  This was HP’s business entirely and has nothing to do with Apple. I don’t see how or why Apple’s stock should be effected by this at all.


Whoa!  “HP Accounting Improprieties” in your headline doesn’t square with what actually happened.  Autonomy’s founder, Mike Lynch cooked the books, and HP is eating it.

This isn’t the NY Daily News, Bryan.

Bryan Chaffin

b9bot, most analysts are still quite bullish on AAPL. I’ve never understood the meme of the last couple of years that analysts are bagging on Apple. There are a couple of chuckleheads that don’t get Apple, have never gotten Apple, and are never likely to get Apple, but almost all of the analysts covering AAPL have Buy ratings on the stock.

As for what HP has to do with Apple, sector sentiment always has a greater or lesser effect on any given company in that sector. HP’s guidance for the current quarter (theirs ends in January) was much lower than expected, and that has a natural effect on the sector as a whole.

Plus, AAPL rose more than 7% yesterday. Some profit taking today is the natural way of things. As a talking head on CNBC put it, Apple down less than 1% on a day that tech stocks were down and the day after a 7% jump is pretty darned good.

iJack, the accounting improprieties belong to HP now and that term was a part of HP’s earnings report and conference call. HP is ultimately responsible for the issue (hence the writedown), and from a due diligence standpoint has been since the deal was done. You’re seeing blame in my title when it was crafted with ownership in mind.

Lee Dronick

Interesting hawsepipe and anchor on that frigate, well the painting scheme of it.

As to Hewlett-Packard is there anything criminal going on with this situation? I wonder if any of the players could go to jail.

Bryan Chaffin

Lee, it’s a German ship. if you click through to the original image, you’ll see the German navy emblem that I removed. I wanted to use a U.S. Navy ship for the sake of authenticity (I really wanted “U.S.S.” for the gag), but couldn’t find an image as suitable for the absurd name as that one.



Further to your question, which is reasonable, and in support of Bryan’s comment, yesterday on Bloomberg one senior analyst, who waxed bearish on all tech stocks, talked about the industry as a whole, and cited not only the HP/Autonomy debacle, but Apple missing analysts expectations of iPhone 5 sales (never mind that Apple sold out - a miss is miss is a miss) and the subsequent bearishness on Apple stock, and Intel and its uncertain future (not being part of tablets and all), etc, etc, all of which he summed up in that one word which all investors loathe - uncertainty. Despite Apple’s sterling performance and outperforming the industry, analysts are, dare we say it again, ‘uncertain’ about how well the whole industry, and Apple within it, will perform in the months ahead.

In short, what this senior analyst was saying was that analysts and investors in general do not distinguish one tech industry or company from another and view all ‘tech’ as all one, big and unhappy Borg collective, assimilating anything but new customers.

Uncertainty is like an infection, with pandemic potential. Once caught, uncertainty (which is spread by bears) can rapidly disseminate throughout the investor community such that even the most hardy analyst contracts it, and cannot help but cough up FUD, which spreads yet more uncertainty. The herd then panics and flight is inevitable.

Unfortunately, the antidote to uncertainty, hard data, and its adjuvant, reason, are not disseminated with equal efficacy as this contagion, and can take awhile to assuage the pandemic and bring the herd to heel.

In any case, I was pleased to hear Brian White the other day take these bears to task, and to see the stock price climb, a trend that has continued today.

Lee, Bryan: irrespective of the flag under which she sails, that is a nice frigate.

Lee Dronick

Oh yeah Bryan, I researched that ship, it is the FGS Bremmen. I was just intrigued by how they painted the hawsepipe and anchor, it really stands out. I spent 6 years serving on a similar warship, the USS Bradley FF1041 http://www.history.navy.mil/photos/images/h98000/h98502.jpg

Lee Dronick

Doh, Hessen, not Bremmen


”..if you click through to the original image, you’ll see the German navy emblem that I removed.”

Unfortunately, you didn’t remove the German flag on the bow, nor the “F221” that completely gives it away as the FGS “Hessen.”

Lee Dronick

Spot on Jack, fire for effect. I spotted the German flag on the jackstaff and then searched on German frigate 221. Looks to be a quite capable warship.

Wab, the six years I spent aboard the USS Bradley were the best times I spent at sea. Frigates are the MacBook Airs of warships, small yet dangerous.

Anyway riddle me this. Why would one company being in trouble cause stocks to drop for companies that are doing well?


“Frigates are the MacBook Airs of warships, small yet dangerous.

Though I was never in the navy, I can tell you this, these are not your grandfather’s frigates.  I was privileged to spend a lot of time – days, over a period of months – as the Captain’s guest aboard HMS Brilliant, during it’s initial shakedown phase.  Type 22 frigates are the size of WW II Destroyers, carry helicopters, and are nuclear-capable (Cruise missiles).  Engine room?  Only sort of.  A gleaming pair of Rolls-Royce RB 211’s adapted for marine use, siting in a spotless glass box, surrounded by some of the coolest tech you have ever seen.  No pipes, no ladders, all clean and serene.  The Royal Navy do it well, as I am sure do the Germans.

I also enjoyed having a personal steward at my beck and call, wonderful food, and absolutely no prohibition on liquor.

One of the great memories of my life.



I had not thought of frigates before as the MBAs of warships, but that is spot on brilliant. The combine that ideal combination speed and lean muscle menace that makes look fast and lethal even while docked.

As for your riddle about poor performance in one company sinking stocks in another that’s doing well, in ‘As Good As It Gets’, Jack Nicholson’s socially challenged, misanthropic character, when asked how he, as an author, wrote women so well quipped that he takes a man, then strips him of reason and accountability. I can think of no better explanation of the spooked investor, who extrapolates, uncritically, the performance of one company riddled with systemic problems that underly its poor performance indicators, onto another company structured fundamentally differently whose indicators are green across the board, barring one or two anomalies.

I am convinced that uncertainty is a rare form of zoonotic disease that is transmitted from bears to humans, whose only risk factor is that they own stock. It is highly contagious, and in its most advanced stages, results in mental paralysis - an inability to process data or think critically - and impaired judgment, or in layman’s terms, temporary insanity. Stripped of reason and overcome by fear, these poor bastards leap wildly in extremis with a tendency to flock in the same direction as the buggered herd. This is my hypothesis, but I think it deserves further study.

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