Jaws are still wagging about Hewlett-Packard's bombshell news this week. The tech giant says it discovered fraudulent accounting at its Autonomy unit and, as a result, took a $8.8 billion writedown of the $11.1 billion it paid for the UK software company last year.
Mike Lynch, founder of Autonomy, vehemently denies it all.
What Lynch says:
- HP, he believes, is using this as a ruse to distract investors from its bigger problems: "People certainly realize I'm not going to be used as Hewlett-Packard's scapegoat when it's got itself in a mess."
- HP's numbers don't add up, Lynch says. It's questioning about $100 million in revenues, yet blaming $5 billion of the writeoff on fishy accounting. He's not the only one wondering about this.
- He wants HP to explain in detail how it came up with the $5 billion in writeoffs from alleged fraud.
- He not only denies all wrongdoing but says he has backup because Autonomy was audited quarterly and every invoice over 100,000 euros ($129,000) was approved by auditors.
He says some of the accusations are misleading because Autonomy was following International Financial Reporting Standards, as British companies do, not the GAAP standard used by HP, which means it recognizes revenue differently in certain situations from U.S. practices.
Here is a lightly edited transcript of our conversation with Lynch.
Business Insider: Has anyone at HP contacted you yet?
Mike Lynch: No. This has all been a complete ambush. The last time I spoke to HP about anything was in June [a month after he left the company]. The first I knew about this was the press release.
BI: Did you listen in on the HP conference call where they discussed these allegations with Wall Street analysts?
ML: No, I wasn't. I was told about the press release by a friend.
BI: Have you been approached yet by any authorities, like the SEC?
ML: No, I haven't.
BI: This situation sounds emotionally rough. How are you dealing with it?
ML: It's a complete shock. Hewlett-Packard used ambush tactics and pushed this into a media thing, where the first I knew about any of this was when the press release hit.
It's been a bit of a scramble. Of course they've made these general statements without any details. So you have to get your act together as an individual versus this big company, and all its resources, coming out like this. It's pretty much against the rules of natural justice or due process and you have to defend yourself. I was certainly shocked but people certainly realize I'm not going to be used as Hewlett-Packard's scapegoat when it's got itself in a mess.
BI: Let's talk about the specific accusations. HP is accusing Autonomy of massaging the numbers in several ways, such as improperly booking hardware sales as software to inflate margins. What's your response to that?
ML: That's complete inaccurate. We booked our hardware sales. They were booked at the correct margins. The idea that somehow we weren't taking that cost—even if you took HP's argument, which is inaccurate, but even if it was, it would make no difference to the bottom line or the top line.
The interesting other thing about this is that all of those deals went to our auditors who also agreed to the treatment. It's no great secret that Autonomy sells hardware.
BI: HP also accused Autonomy of improperly booking revenue with resellers. What's your response to that?
ML: Again, there's no problem with how we do that. It is different to how a U.S. company would do that. We did it under IFRS and there are very stringent rules about how we recognize revenues with resellers. They could be found in the annual report. And it's only if those criteria are met that we book revenue. Those criteria are actually tested by the auditors before they allow us to take revenue.
And unlike most European companies, we are audited every quarter and also the auditor gets to see every invoice. So the auditor gets to see every deal and they explicitly clear every deal over €100,000.
BI: Some critics have claimed that a quick look at Autonomy's profit-and-loss statement in 2010 showed that the company's books were off because receivables were higher than deferred revenue. For a software company, they say, the reverse should be true. How would you explain that?
ML: Software companies have changed in the last few years. They've gone from selling only licenses to doing cloud deals. When you have only license deals, the deferred-revenue trajectory was quite straightforward because every time you would sell a license deal, you would get maintenance and deferred revenue at about 15% and then that would recur.
When cloud came along, that changed. There were two different cases. One is where a company gets paid up front for a cloud operation, in which case you can have a lot of deferred revenue. Or another one where it gets paid in arrears in an ongoing basis, where you can have no deferred revenue.
Another example is something that most software companies don't do, but which Autonomy does, is where you get paid a royalty, in which case there's no deferred revenue. Because Autonomy has a different mix in how it does its revenues compared to managed-software companies, you would expect the revenue profile to be different. This is covered in many analysts notes over the years.
BI: Oracle claimed that you had tried to sell Autonomy to Oracle before striking the deal with HP and then denied it. Can you shed some light on that?
ML: That hasn't changed. I met with Oracle on what was a meeting with a customer and making sure they knew about Autonomy, giving them an update. I gave a presentation to them about Autonomy. When the HP deal was done, they "accidentally" pulled a presentation that had been given to them by a banker three months earlier, in a meeting I had nothing to do with, which does look like its a pitch of Autonomy, on behalf of that banker to Oracle. That story hasn't changed. I believe that Oracle did eventually confirm that the presentation was from an earlier meeting.
BI: There have been accusations leveled at HP, too, about how the arrived at the numbers. What are your thoughts on that?
ML: One of the big things that people are now questioning, which I think is very valid, they've got on the record that the amount of questionable revenue is running at about $100 million a year. What's interesting about that, is a lot what they are talking about is reclassification of revenue. So they are not saying that the revenue is not there. So for example, the hardware thing you've talked about, the revenue and profit are still exactly the same, even if what they were saying is true, which it isn't.
So, it's inconceivable how, from $100 million of revenue that just changes classification, you could possibly have a writedown as big as $5 billion.
Something else must be going on. People are starting to spot this. They've had to do a very big writedown and they tried to blame it on the accounting but obviously something else is going on.
That is a question that Hewlett-Packard has got to answer.
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