Friday, April 11, 2014

Article: A Bit Of Rot Beneath Hewlett Packard's Shiny Surface

Seeking Alpha posted another article on HP today, giving some valuable insight to investors as it relates to the recent corruption allegations.

The highlights of the article are:
Recently, HPQ announced a settlement of $108 million for charges brought by the SEC on bribery of foreign governments to obtain contracts for their computer products.

The company’s general counsel assured prosecutors that the wrongdoing was performed by a small group of people, who are no longer with the company. 

Investors should monitor HPQ more carefully following this corruption; however, given HPQ’s strong fundamentals, should wait to take profits unless further misdeeds are revealed.

Here is the rest of the article:

HP Settles Problem
Hewlett Packard (HPQ) has been one of the top names in computer technology for decades. The company's ability to supply quality products at popular prices has made it a favorite in the United States and around the world.

Recently, the company announced the settlement of $108 million for charges brought by the U.S. Department and Securities and Exchange Commission on bribery of foreign governments to obtain contracts for their computer products.

Department of Justice/SEC Claims
Unfortunately, it was not just one claim of bribing a foreign government for business contracts that got HP into difficulty. It appears to have been a systemic strategy of doing business in a number of countries around the world.

In Russia, HP was found to have paid over $2 million to a governmental official to allow them to continue their multi-million dollar contract with a federal prosecutor's office. Much the same thing was done in Poland, where HP handed out $600,000 in a combination of money and gifts to help them win a contract with their national security office.

The Settlement Deal
The company fully cooperated with the DOJ and SEC during the investigation. In return for the $108 million, the Department of Justice agreed to put off prosecution of the company's Polish unit on the charges. They also signed a non-prosecution agreement against the company's Mexico division.
However, it became clear during the investigation that HP had put aside a slush fund for bribe money, as well as shell companies to lauder funds. Anonymous e-mail accounts and prepaid phones were used to make contact with officials to arrange the deals.

HP Attempts To Move Forward
Clearly, HP did not come out of the process smelling like a rose. Whatever poor decisions had been made in their eagerness to secure these contracts, the company is taking specific steps to resolve the matter and put it behind them.

The company's general counsel John Schultz assured prosecutors that the wrongdoing was performed by a small group of people, who are no longer with the company. Despite these assurances, investors are wondering what other information may crop up to shear off profits and undermine the company's reputation.

Should Investors Move On As Well?
HPQ stock has been strong thus far in Q1 2014 (see chart below), receiving two significant rating upgrades from Deutsche Bank and Barclays in the past two months.

(Yahoo! Finance)

While this recent news is certainly troubling, investors should hope Mr. Schultz's statement concerning a localized, now removed, group of wrongdoers is true, and that corrupt practices have not spread throughout the company.

While shareholders should thus be more critical of HPQ, we recommend waiting to take profits unless further misdeeds are revealed.

Wednesday, April 9, 2014

Article: HP to acknowledge "corrupt" activities in Poland

Article sources:

Hewlett-Packard (HPQ) is set to acknowledge today that it has engaged in "corrupt activities in Poland," the country's interior minister has said.

Poland interior minister, Barlomiej Sienkiewicz said, "I confirm that it's goin to happen today. It's a breakthrough moment in Poland when a great international company acknowledges its corrupt activities in Poland".

The interior minister also stated that Poland's Central Anti-Corruption Bureau has cooperated with the FBI and SEC on the issue, but did not state whether HP would be prosecuted.


UPDATE:  Source:

Polish prosecutors alleged on Wednesday that a local executive with U.S. firm Hewlett-Packard Co. paid bribes worth over $500,000 in exchange for help winning contracts to supply computer equipment to the Polish police headquarters.

Thursday, April 3, 2014

Seeking Alpha Article - Hewlett-Packard's Turnaround: The Devil's Advocate

Seeking Alpha posted an article this morning titled "Hewlett-Packard's Turnaround: The Devil's Advocate", explaining why Meg Whitman's projected turnaround is "still some way off".

This is the same sentiment we saw in the Yahoo finance article on HP a few weeks ago.

The article takes note of some issues I've discussed already, namely that HP revenues are down in all market segments and any future market share stands a good chance of being eaten up by other major players (Lenovo, Cisco) due to poor executive leadership.

HP's advancement relies heavily on having innovative leaders at the helm who can see and create the opportunities for the company to compete for market share and lead in a market segment - Whitman isn't it.

Some clips from the article:

"The turnaround is still some way off

While HP is still generating a healthy cash flow, there is concern over its revenue streams and shrinking margins in PC and other hardware sales, as confirmed in the negative growth in the Personal Systems, Enterprise Group and Enterprise Services business segments. This is unlikely to change in the near future due to decreasing margins and increasing competition.

Worldwide revenues for hardware sales are decreasing, as can be seen in the following table, which shows how all server vendors are affected. Computer hardware margins are razor-thin and expected to decrease further as the IT hardware industry becomes more and more commoditized. Furthermore, Lenovo entering the server market poses a threat to HP's server sales. If Lenovo's performance with PCs is repeated in the server arena, HP's revenue is in danger of falling further."

"HP's share price is being propped high by stock buybacks and by high expectations for its 3D printing venture, but it does not hide the obvious long-term adverse impact of one particular item in the income statement, the unimpressive revenue figures.In my opinion, a PE of around 11 is entirely justified, but I fear there is more to go on the downward trend before the expected turnaround. This is a company that is shrinking, not expanding, and has to do more shrinking for some time to come."

Meg Whitman: Another Flip Flop Exposed

On April 1st, Vocativ released an article focusing on Meg Whitman. The article is called "Meg Whitman: The Other Tech CEO That Wanted to Ban Gay Marriage".

Another example of "quintessential Meg." Whether it's business goals or social issues, Meg Whitman is consistent in one regard: She makes statements that will further her goal on any given day, but changes course when it suits her. She supports banning gay marriage when she wants to get the conservative Republican vote but back tracks when she is running a company in Silicon Valley.

Tuesday, March 25, 2014

Article on Yahoo! Finance: Whitman stabilized HP but real growth still looks far off

I saw an article this afternoon posted on Yahoo! Finance titled "Whitman stabilized HP but real growth still looks far off".

Yaho Finance Article

The article touches on some key points, namely that even with the recent 3D printing foray announcement, there is nothing in her history which has instilled trust that it will actually come to pass.

In fact, there has not been one major announcement projecting growth that has happened. 

The author states, "In 2012, she was talking up amazing tablets that would storm the corporate market. And early in 2013, a new server technology dubbed Project Moonshot was all the rage. Neither has led to much revenue for HP yet, however".  

The article also discusses the botched Autonomy acquisition still casting a shadow.

It wraps up with a point I've stressed in this blog, being "Wall Street has already rewarded Whitman for Saving HP from oblivion. Now the question is whether she can move it forward".  

The answer is simply, no. She does not have the experience or the vision necessary to propel HP forward into a place of being able to compete, much less create and propel forward. 

Friday, March 21, 2014

HP's Board: Disregard for Shareholders

On Autonomy - "Yeah, I think the synergies are great, and I think it makes a lot of sense. It will make a lot of sense to customers if HP engages them in a dialogue of managing unstructured data." - AllThingsD Interview
Let's talk about the HP Board - and in particular, Ray Lane.

In 2013, 41% of shareholders voted against Lane's re-election as Chairman, yet he remained on the Board of Directors.

Ray Lane directly oversaw the Autonomy acquisition, a well-documented disaster. He stepped down as chairman when shareholders voiced their appropriate concerns.

Mr. Lane was involved in a lengthy, and finally settled $100M tax dispute with the IRS.

How is it possible that it is in HP's best interest to maintain him as a Board member? And another bit of food for thought: What does his role in Meg Whitman's run for Governor have to do with it?

The Autonomy acquisition was not accretive for shareholders and continues to create significant legal challenges for the company and its executives in its wake. This is costing HP time and money that should be spent on innovation and developing a winning plan for improving market share and shareholder trust.

For shareholders, employees, customers, suppliers, and the future of HP - something must be done about improving the caliber and presentation of HP's Board. Remove the personal politics and focus on the company's success.

Thursday, March 20, 2014

Balancing Autonomy and Responsibility

Yesterday's public letter from Mike Lynch, Autonomy founder sparked a lot of conversation around foul play, transparency, and responsibility to shareholders, simultaneously igniting the aging topic of whether Autonomy was a smart buy (however unsuccessful it has been for HP).

Lynch claims that HP's senior executives were aware of all aspects of Autonomy prior to acquisition, and has launched a smear campaign against Lynch and Autonomy in order to cover up their failure to perform their due diligence.

The questions asked of Meg Whitman and the Board are bullet pointed below:

On the basis of recent reports, there are a number of material questions HP needs to answer:

  • HP has repeatedly declined to show the Autonomy management team the allegations or evidence against them, on the grounds that the issue is “with the regulators”. Yet it has engaged in selective disclosure of these documents and emails to the media. How does HP justify that?
  • HP claimed Autonomy’s auditors had “missed” certain items and been misled. All the evidence in the public domain shows Autonomy was fully open and transparent with its auditors (Financial Times, 17th February 2014). If HP has any alternative evidence, why does it not reveal it?
  • HP claims to have been in the dark until a “whistleblower” stepped forward. Articles in the Financial Times have established that the most senior managers of HP fully understood Autonomy’s accounting methods from when they took over the company in October 2011. Does HP deny that senior managers had prior knowledge?
  • Does HP deny that it knew how Autonomy recognised hardware sales and that these sales were reported in full by its auditors, and that HP continued the same sales of Dell hardware after it took over Autonomy?
  • Does HP deny that it was aware of how Autonomy recognised reseller transactions? And that it sought to use the differences between IFRS and US GAAP applicable to reseller sales to its own advantage after the acquisition?
  • HP’s independent advisers carried out several valuation reports of Autonomy after the acquisition, which explicitly included Autonomy’s hardware sales and confirmed the value of the company at c$11Bn? Does HP management deny this? Will they disclose these reports to shareholders?
  • Why did HP’s management fail to disclose these valuations at the time? Why do they not release them now?
  • Why won’t HP release its calculation for the write down?
  • HP says it “eventually learned that a portion of Autonomy’s revenue were related to hardware sales”. Yet documents show that HP knew about Autonomy’s hardware sales from October 2011. Does HP still maintain it knew nothing before June 2012?

Lynch brings up some excellent points, which undoubtedly will be hastily brushed under the carpet by Whitman and her PR machine, loudly distracting people with their "Five Year Turnaround" plan rhetoric.

As I have stated before, this comes down to a few possibilities, none of which are a positive sign of leadership for HP and the future of the company.

1. Autonomy was not fully vetted the way that it should have been before leading shareholders to believe that it was a solid buy for HP.
2. Autonomy was vetted but the Board and CEO at the time decided it was a favorable buy, despite its alleged shortcomings, and failed to disclose aforementioned shortcomings.
3. Autonomy was properly vetted and things looked good, but leadership failed to properly grow Autonomy into HP's offerings in a way that was economically viable.

Meg Whitman - Always Pointing Fingers
This was no small mistake.

Still, in typical Meg Whitman fashion, this acquisition's failure is solely Autonomy's fault.

She claims, among other things, that Autonomy used misleading accounting tricks.

You're HP! Even if this is true, it is on leaderships' shoulders to have tasked competent accountants to go over the details with a fine toothed comb.

But sure - it is easier than saying "I'm Sorry".

My question here is: Can HP survive moving forward with someone who fails to take responsibility for bad decisions? Meg Whitman is the face of HP -- and as such, should take responsibility for a bad buy, apologize to shareholders for HP's failure, and figure out a plan to move forward.

Wednesday, March 19, 2014

Every Key HP Business Segment is in Decline

Due to the failure to innovate and maintain relevancy in today's marketplace, Meg Whitman has allowed every HP business segment to suffer and fall out of favor in peoples' homes and stock portfolios.

Printers are down
Printers: HP Printers are losing market share and almost $1B of its profitability.  It is dependent on the artificially high price of the yen.

There is no shortage of complaints around HP printers, either. Between their failures in leadership and refusal to focus on customer service, the complaints abound, screaming caveat emptor to potential buyers and investors.
The HP Sucks Facebook Page is just one venue.

Servers: Lenovo will successfully attack HP's server business, just as they did the PC business. Lenovo is poised to take advantage of HP's lack of leadership and vision and make HP's server business obsolete.

Services: Services provides $1.5B in operating profit; margins were 10% in 2010 down to 3% in 2013. Services should be a strength of the company, but instead it is part of the slow drip bleeding the company to death.

Meg Whitman - What Happened?

PC's: A declining and losing share. Even if the PC category stabilizes, it is a small part of HP profits.

Overall, the estimated worldwide market share estimates are not impressive, especially when compared to previous numbers. New CEO's are supposed to drive their company to the top, yet Whitman and the current board have not managed to surpass the achievements made during Mark Hurd's control. In fact, they are barely hanging on.

Acquisitions: There have been $15B in acquisitions. This has translated into zero new revenues.

Acquisitions like that of Autonomy  got HP nothing in new software revenue. As a matter of fact, just today Autonomy's Mike Lynch openly accused Meg Whitman of intentionally misleading shareholders. 

HP bought back $20B of its stock at an average price of $34. Ouch.

My opinion? HP can't afford to make meaningful acquisitions that would be accretive to the business. We estimate that $3B is needed just to cover dividends and buybacks. With CapEx at 2.5 and taxes creeping over 20%, there isn't much left. Once below $100B, their profit will approach 8%.

If no change is in the wings for HP, it's simply not sustainable.

Meg Whitman's 5 Year HP Turnaround? Way Too Little, Way Too Late

The Empress Wears No Clothes!

HP is slowly but steadily going out of business.

In 2010, HP was a $120B business. Current management estimates that in 2016, it will be a $106B business.

That's down 11.6% to the tune of a $14B loss!

This disaster is not an "if", it's a "when".

Note the graph below (Source: Company Filings, Public Information)

9.30.10 - Leo Apotheker hired as CEO. Ray Lane hired as Chairman.
9.22.11 - Leo Apotheker fired as CEO, replaced by Meg Whitman. No official CEO search is conducted.
10.11 - HP cancels PC spin-off.
5.17.12 - HP announces plans to cut workforce by 30,000 employees.
11.20.12 - 4Q12 results released. $8.8B Autonomy goodwill and intangible asset impairment charge.
8.21.13 - Reports larger than anticipated slide in revenue. Announces that revenue growth in FY14 unlikely, backtracking on previous guidance for return to growth in FY14.

How is this projecting growth potential for HP? The short answer: it isn't.