Hewlett Packard In Addition To Autonomy: Notes From My Santangels Presentation
A few weeks agone I presented at the Santangels conference inwards New York. The conference was held nether Chatham House rules.
My topic: how to mistaken your accounts from the perspective of the fraudster (and thus how every bit an investor to tell if a fellowship is faking its accounts).
At the terminate I suggested that fifty-fifty if you lot were correct together with the fellowship was a fraud you lot could soundless curt the stock together with lose coin - somebody with deep pockets mightiness purchase the fraud. The instance I gave was Autonomy which was purchased yesteryear Hewlett Packard.
Yesterday Hewlett Packard admitted that Autonomy was a grotesque fraud. They wrote off nearly of the purchase price.
Chatham House rules don't much affair inwards the human face upward of a major scandal (and Autonomy is a major scandal). So this forenoon (Australian time) my e-mail was amount of press bespeak for on-the-record comment. I commented to both Deal Book (New York Times) together with Reuters.
Jeff Matthews commentary
I tested my draft Santangels presentation on Jeff Matthews - together with then he had my views on Autonomy. He broke quiet on his blog.
Jeff is critical of Meg Whitman's comments that they "relied on the audited accounts". He observes that I relied on the same audited accounts.
That is fair comment: I could tell the accounts were non kosher from an business office inwards Sydney. I was non solitary - Jim Chanos came to a similar conclusion. So did many people inwards the United Kingdom of Great Britain together with Northern Ireland including the writers of FT Alphaville who convey been sceptical of Autonomy for years.
In other words my insight was non unique: many other people (including to a greater extent than than ane weblog reader) shared similar insight. I claim no exceptional genius.
And I was non alone correct either. I knew Autonomy was problematic. I underestimated the problems: Autonomy appears worse than the worst instance I modelled.
Looking at Autonomy's accounts
For the tape hither is how you lot could tell - exactly yesteryear looking at audited accounts - that Autonomy was non quite kosher.
Here is the P&L from the 2010 accounts:
And hither is the remainder sheet:
There are lots of things to regime annotation - but I volition restrain myself to the uncomplicated (which I pose inwards the Santangels presentation).
Sales were $870 million.
Receiveables were $330 ane chiliad m - which is 4 together with a one-half months of receiveables.
Deferred revenue is $177 ane chiliad m - exactly over one-half of receiveables.
This is really perverse for a software company. Software companies sell materials that is barely tangible - they sell it upward front end together with for cash. They convey really few receiveables.
They create soundless convey an obligation to service that software for a long fourth dimension later they sell it - together with then the unearned income is relatively large (usually a multiple of receiveables).
Autonomy was booking every bit income lots of cash it had non received (which is why the receiveables were large) together with non booking whatever obligation to furnish time to come services for that income.
This is prima-facie suspect (and you lot could tell only yesteryear looking at the remainder sheet). All it required was basic applied accounting.
Comments on Hewlett Packard's management
The administration (and for that affair the board) of Hewlett Packard convey various responsibilities. Most importantly they are responsible for technology scientific discipline - together with the technological issues are broad. They are besides responsible for accounting together with fiscal management.
I convey only no sentiment on who stuffed upward on the technical issues. Hewlett Packard asserts in that place are soundless about (small but) valuable businesses at Autonomy. Maybe the tech is non all bad.
But I am happy to bespeak the finger on accounting. The accounts were self-evidently suspect. Working that out is primarily the project of a finance together with accounting portion at Hewlett Packard - together with that portion was led yesteryear together with continues to last led yesteryear Catherine Lesjack. Catherine Lesjack is ultimately responsible for the fiscal parts of HPs due diligence on Autonomy together with she failed.
This actually is non rocket science. Lesjack is non upward to the job. She should resign.
John
PS: There has been much criticism of Meg Whitman inwards the blogosphere, twitter together with alongside my readers. I create non intend that is fair. Autonomy was a bargain done yesteryear Leo Apotheker (the previous CEO) together with the current CFO Catherine Lesjack - it is them who deport principal responsibility.
J
My topic: how to mistaken your accounts from the perspective of the fraudster (and thus how every bit an investor to tell if a fellowship is faking its accounts).
At the terminate I suggested that fifty-fifty if you lot were correct together with the fellowship was a fraud you lot could soundless curt the stock together with lose coin - somebody with deep pockets mightiness purchase the fraud. The instance I gave was Autonomy which was purchased yesteryear Hewlett Packard.
Yesterday Hewlett Packard admitted that Autonomy was a grotesque fraud. They wrote off nearly of the purchase price.
Chatham House rules don't much affair inwards the human face upward of a major scandal (and Autonomy is a major scandal). So this forenoon (Australian time) my e-mail was amount of press bespeak for on-the-record comment. I commented to both Deal Book (New York Times) together with Reuters.
Jeff Matthews commentary
I tested my draft Santangels presentation on Jeff Matthews - together with then he had my views on Autonomy. He broke quiet on his blog.
Jeff is critical of Meg Whitman's comments that they "relied on the audited accounts". He observes that I relied on the same audited accounts.
That is fair comment: I could tell the accounts were non kosher from an business office inwards Sydney. I was non solitary - Jim Chanos came to a similar conclusion. So did many people inwards the United Kingdom of Great Britain together with Northern Ireland including the writers of FT Alphaville who convey been sceptical of Autonomy for years.
In other words my insight was non unique: many other people (including to a greater extent than than ane weblog reader) shared similar insight. I claim no exceptional genius.
And I was non alone correct either. I knew Autonomy was problematic. I underestimated the problems: Autonomy appears worse than the worst instance I modelled.
Looking at Autonomy's accounts
For the tape hither is how you lot could tell - exactly yesteryear looking at audited accounts - that Autonomy was non quite kosher.
Here is the P&L from the 2010 accounts:
And hither is the remainder sheet:
There are lots of things to regime annotation - but I volition restrain myself to the uncomplicated (which I pose inwards the Santangels presentation).
Sales were $870 million.
Receiveables were $330 ane chiliad m - which is 4 together with a one-half months of receiveables.
Deferred revenue is $177 ane chiliad m - exactly over one-half of receiveables.
This is really perverse for a software company. Software companies sell materials that is barely tangible - they sell it upward front end together with for cash. They convey really few receiveables.
They create soundless convey an obligation to service that software for a long fourth dimension later they sell it - together with then the unearned income is relatively large (usually a multiple of receiveables).
Autonomy was booking every bit income lots of cash it had non received (which is why the receiveables were large) together with non booking whatever obligation to furnish time to come services for that income.
This is prima-facie suspect (and you lot could tell only yesteryear looking at the remainder sheet). All it required was basic applied accounting.
Comments on Hewlett Packard's management
The administration (and for that affair the board) of Hewlett Packard convey various responsibilities. Most importantly they are responsible for technology scientific discipline - together with the technological issues are broad. They are besides responsible for accounting together with fiscal management.
I convey only no sentiment on who stuffed upward on the technical issues. Hewlett Packard asserts in that place are soundless about (small but) valuable businesses at Autonomy. Maybe the tech is non all bad.
But I am happy to bespeak the finger on accounting. The accounts were self-evidently suspect. Working that out is primarily the project of a finance together with accounting portion at Hewlett Packard - together with that portion was led yesteryear together with continues to last led yesteryear Catherine Lesjack. Catherine Lesjack is ultimately responsible for the fiscal parts of HPs due diligence on Autonomy together with she failed.
This actually is non rocket science. Lesjack is non upward to the job. She should resign.
John
PS: There has been much criticism of Meg Whitman inwards the blogosphere, twitter together with alongside my readers. I create non intend that is fair. Autonomy was a bargain done yesteryear Leo Apotheker (the previous CEO) together with the current CFO Catherine Lesjack - it is them who deport principal responsibility.
J
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