The Documents HP didn’t show

HP today published an email from former Autonomy CFO Sushovan Hussain to former CEO Mike Lynch, from 10 December 2010, which it claims is evidence of a “CFO in panic” about the performance of the business. It contends this situation caused Mr Lynch to decide to sell the whole company to HP.

This email is taken wildly out of context, reflecting the CFO’s frustrations about the forecasting by parts of the sales force, and how that tracked against internal forecasts. HP has purposefully not shown other emails in the series, showing that Autonomy was on track to meet its expected revenues for the quarter, and indeed did so.

Analyst expectations for Q4 2010 were for revenue of $241 million. The following email shows that the forecast for Q4 on 13 December, despite the concerns in the U.S. identified on 10 December, was still $252 million:

HP Autonomy email

The final result for the quarter came in at $244.5 million, reflecting the fact that some of the revenue had not come in as indicated in the mail of 10 December, but still ahead of market expectations. Below is a copy of the final financial statement that was released to the market:

HP Autonomy Financial Statement

HP is taking an isolated incident to try to paint a picture of a company that was in some way in trouble. The email it has posted actually shows that Autonomy was trying hard to beat market expectations by a significant distance, and the frustrated overreaction of a stressed executive to the management of its internal sales forecasts. It has overlooked the fact that Autonomy delivered on market expectations, and the revenue was converted into cash.

Further, HP is suggesting that this situation led Mike Lynch to take the “radical action” of selling the whole company to HP. This is insanity. Not least because HP had already approached Autonomy about buying it!

This approach by HP is shameful and purposefully misleading. The full facts show that everything was handled properly, nothing was hidden and Autonomy was a strong business performing well. It is HP’s allegation of a “multi billion dollar fraud” that is imaginary.

 

Statement in response to announcement of FRC investigation

We note the announcement by the UK’s Financial Reporting Council (FRC) that it has begun an investigation of the financial reporting of Autonomy for the period from 1 January 2009 to 30 June 2011. As a member of the FTSE 100 the accounts of Autonomy have previously been reviewed by the FRC, including during the period in question, and no actions or changes were recommended or required.

We welcome this investigation. Autonomy received unqualified audit reports throughout its life as a public company. This includes the period in question, during which Autonomy was audited by Deloitte. We are fully confident in the financial reporting of the company and look forward to the opportunity to demonstrate this to the FRC.

Response to HP 2012 annual report filing

“It is extremely disappointing that HP has again failed to provide a detailed calculation of its $5 billion write down of Autonomy, or publish any explanation of the serious allegations it has made against the former management team, in its annual report filing today.

Furthermore, it is now less clear how much of the $5 billion write down is in fact being attributed to the alleged accounting issues, and how much to other changes in business performance and earnings projections. This appears to be a material change in HP’s allegations.

Simply put, these allegations are false, and in the absence of further detail we cannot understand what HP believes to be the basis for them.

We also do not understand why HP is raising these issues now given that Autonomy reported into the HP Finance team from the day the acquisition completed in October 2011, there was an extensive due diligence process and Autonomy was audited as a public company for many years.

We would particularly make the following points:

* HP’s CFO Cathie Lesjak and her team, plus a number of outside advisors, had access to all Autonomy accounts and documents from October 2011 onwards, and raised no issues.

* Beginning in November 2011, HP and KPMG reviewed Autonomy’s closing balance sheet in detail, and Ernst & Young reviewed Deloitte’s audit work papers.

* Beginning in October 2011, HP studied in detail Autonomy’s tax structure and transfer pricing as well as its revenue recognition practices (led by Paul Curtis, HP’s worldwide head of revenue recognition).

* An independent third party valuation of Autonomy’s assets was carried out in January 2012.

* Quarterly business reviews were held with Autonomy management, Meg Whitman and Cathie Lesjak to discuss Autonomy’s financial performance.

* HP has continued to sell and account for hardware alongside Autonomy software in the same way that Autonomy did for the year since the acquisition completed.

* Regarding differences between IFRS and US GAAP accounting standards, which appear to have a role in some of the allegations HP has made, Autonomy’s accounting policies were made clear in Autonomy’s 2010 annual report.

We also note the statement in HP’s annual report that it received confirmation from the US Department of Justice on 21 November 2012 (the day after HP’s first public statement), that the Department had opened an investigation. We can confirm that we have as yet had no contact from any regulatory authority. We will co-operate with any investigation and look forward to the opportunity to explain our position.

We continue to reject these allegations in the strongest possible terms. Autonomy’s financial accounts were properly maintained in accordance with applicable regulations, fully audited by Deloitte, and available to HP during the due diligence process.

We remain deeply concerned about how this process has been conducted, and believe it is in everyone’s interests for it to be resolved as soon as as possible.”

Mike Lynch