Exclusive: Autonomy Missed Revenue by 90% – The Big, Bad Data – Crime of the Century

HP has confirmed to me that their $8.8 billion write-down related to Autonomy has a big time accounting scandal tied to it and Autonomy CEO Mike Lynch.     According to a source, the Autonomy accounting scandal caused Autonomy to miss their first quarter numbers by 90% after HP paid $11 billion.

What happened?  When was it discovered?

This morning Mike Lynch was called out by HP and Meg Whitman as commiting fraud in his accounting practices.

Note:  I was bullish on Autonomy as having strong synergy with HP but not for $11 billion.   I still see some solid growth for HP which I’ll explain why below.

Here’s the story – Revenue Recognition Issue: “Book It” and “Record It” 

Autonomy basically overstated their product revenues by including the service revenue as product sales at the time of the sale.  This can have an impact of overstating the “real revenue” number in the filing period and creating a short fall in future periods.   Many companies try this move, but in this case, HP was handcuffed by UK law.

Accounting standards recognize product revenue at the time of the sale (when it was delivered). However, the standards recognize service revenue when it’s serviced, not when it’s sold.  For a simple example, let’s say Autonomy sold a  $120 -12 month service contract in January.  They  booked the sales in January for $120 and then recognized the sale as “real revenue” at $10 a month for 12 months (total $120).  What Autonomy did was hide from HP the future service revenue and put it as product revenue at the time of the sale.  In other words, Autonomy recognized all that “future” service revenue as product revenue when the “booked it” instead of over the 12 months it “serviced it,” as accounting standards dictate.

This is a fundamental lack of understanding between “bookings” and “revenue.”  Mike Lynch can deny all he wants, but stupidity isn’t a defense for the crime.  This can be viewed as a deliberate act to deceive HP in overstating the value and foreclosing future service revenue, which HP might have calculated as “synergy” to the deal.

Results of the accounting were staggering.  According to our sources and confirmed by Meg in the video below, by the second quarter of the deal integration Autonomy missed their revenue plan by about 90 percent.  Yes, 90 percent.  In the 3rd quarter they missed their plan by 70 percent.   Things just went downhill from there.

Here is Meg Whitman’s interview today on CNBC:

My Angle

Two big issues jump out at me:

  1. UK law sucks both on accounting forensics and the fact that there is a break up fee. This will prevent many companies from doing business with companies based in the UK – bad form UK government.
  2. This is the crime of the century because HP was counting on that service revenue for the “synergy” impact.  That never materialized because they booked it already.  The “well” HP thought was full of water is really “dry”.

Good for HP to run this down and for Meg to stand strong while HP takes their medicine.  I wrote my advice on this merger on my blog last year.
See my full analysis below: