back to article Autonomy did count some hardware sales as marketing costs, ex-finance bod tells High Court

A witness who worked on the Autonomy finance team told London's High Court during the long-running Autonomy trial that the firm had indeed been accounting for some hardware sales as marketing expenses in its annual accounts. Elizabeth "Lisa" Harris, who listed her business address as the same Cambridge office block that houses …

  1. Halfmad Silver badge

    Costing HP a lot of money this.

    Apparently at least 35ml of Magenta each day per lawyer.

    1. Doctor Syntax Silver badge

      Re: Costing HP a lot of money this.

      "at least 35ml of Magenta"

      Do they have to buy that from HP Inc or can they get it from Xerox?

    2. overunder Silver badge

      Re: Costing HP a lot of money this.

      HP would tell you, you're forgetting the recycling costs.

    3. Sandtitz Silver badge
      Thumb Up

      Re: Costing HP a lot of money this.

      "Apparently at least 35ml of Magenta each day per lawyer"

      I'd prefer 35ml of CYANide per lawyer.

      (yes, some IT declined clients have actually ordered for 'cyanide' toners without any irony)

    4. Luiz Abdala Bronze badge
      Coffee/keyboard

      Re: Costing HP a lot of money this.

      Here is your upvote, while I go clean my keyboard from the coffee-black ink I just spit.

  2. jeffty

    It still doesn't sound like a smoking gun...

    ... accounting for hardware as marketing costs.

    I'm not from a sales or accounting background (so excuse my ignorance), but to me if the end customer is paying for a solution, and it's provided as an appliance (software + hardware), and your end goal is to get the end customer to pony up for a software subscription (subscription-model income), then I can see the logic in running the hardware as a loss-leader - you make the product cheap to adopt, but the recurring subscription costs eventually net you the profit over a longer term. I could understand the hardware being sold as "marketing costs", effectively it's a promotional deal on the longer-term revenue you're hoping to net and does carry a short-term cost to the business.

    HP had similar appliance product offerings at the time (Arcsight etc), would be interesting to know if they worked on a similar model as Arcsight appliances were software bundles on rebranded HP tin (usually Proliant servers). That's before you get to HP's SOHO printers where the printer is sold at a loss and they make their profit via proprietary consumables (ink cartridges)...

    Even if you assume HP didn't use their hardware as a loss-leader for similar products, this still smacks of a fundamental lack of understanding of Autonomy's revenue stream (or more likely, they just assumed it was categorized in the same fashion as their own sales and didn't bother to check).

    1. Mark 85 Silver badge

      Re: It still doesn't sound like a smoking gun...

      It's really not a smoking gun. It's a standard business practice. The "loss leader" is used by everyone from tech to grocers. In a way, HP pulls the same thing with low price printers but they recoup it on the ink.

    2. dnicholas

      Re: It still doesn't sound like a smoking gun...

      I'm going with "didn't bother to check". Not sure how promotional tin amounted to so much as to cause the huge drop in valuation though. It's mind boggling*

      *Haven't been following closely and $8.8bn buys a lot of tin

    3. a_yank_lurker Silver badge

      Re: It still doesn't sound like a smoking gun...

      The question of how to account the costs can be tricky. The real question is not what Autonomy precisely did but whether they had a defensible position for their practices. Selling items at cost in a large deal is not uncommon. Whether it is a marketing cost or should be accounted somewhere else keeps the bean counters busy. As a non-accountant I am aware of this practice so I would expect a competent accountant would know to ask some pertinent questions.

      1. Anonymous Coward
        Anonymous Coward

        Re: It still doesn't sound like a smoking gun...

        Indeed. I was Head of IT Finance for many years in a similar institution. I would suggest that it is not, at first glance good accounting, but it is something that I would first read tjhe contract very carefully, and possibly take advice on from the auditors. If they were happy, then so was I. It's why we pay them after all.

        But as others have said -it seems most likely to me that HP made some assumptions that they shouldn't have, and Autonomy didn't correct them.

      2. Mark 85 Silver badge

        Re: It still doesn't sound like a smoking gun...

        a-yank-lurker sayeth: "The question of how to account the costs can be tricky. "

        Exactly. Hollywood has been doing it for decades. So why not tech companies?

    4. James Anderson Silver badge

      Re: It still doesn't sound like a smoking gun...

      The point is the hardware sales were entered in the books as "costs" i.e. a loss making expense. According to the testimony it was HP's accountants who moved them to "sales" thus inflating revenue.

      So effectively HP are suing Autonomy for an interpretation of sales used by their own accountants.

    5. Anonymous Coward
      Anonymous Coward

      Re: It still doesn't sound like a smoking gun...

      If you bury the costs of hardware associated with sales (which would be significant) in the marketing budget and away from the direct cost of sale, aren't you artificially making the margins for those sales look a lot better ?

  3. Moosh
    Holmes

    "When I questioned this he explained that HP thought that the distinction between hardware and software sales was not material and, according to Mr Duckworth, it was all 'product' from HP's perspective. This idea did not emanate from Autonomy and it was not hidden from HP."

    That would be a pretty big nail in HP's coffin if it were true, surely? Their entire complaint is that Autonomy propped up their figures with hardware sales, but then pre/post buyout were aware hardware and software was being lumped together but didn't care?

  4. katrinab Silver badge
    Paris Hilton

    What's the problem?

    They threw in some cheap hardware in order to encourage people to sign up for their software

    They didn't book that hardware to sales, they booked it to marketing. It is after all promotional activity undertaken with the intention of increasing sales.

    So, how can it be evidence of them overstating sales?

    1. EveryTime

      Re: What's the problem?

      If you have a $1M combined deal and value the hardware at $0 (as a marketing cost), delivery cost at $10K, and the software at $990K, you can claim your gross margin is 99%. That would be fraudulently misleading.

      1. Steve K Silver badge

        Re: What's the problem?

        Not fraudulent as no one (and least of all their accountants) looking to buy a company would go purely on Gross Margin.

        If you did this on every transaction then someone would be questioning your Accounting Policies, but they would already be looking at Net Income, Gross to Net margin and Marketing Expense ratios.

        For loss leaders then you would expect something like this, but not across all hardware transactions. HP as noted above will have done similar deal sweeteners for key or strategic accounts.

  5. SIP My Drink
    Mushroom

    Hmmmmm

    Straws... Clutch...? At Something...?

    Hmmmmmmmmmmmmmmmmmmmm.... I see HP really trying everything. But I mean - How is Lynch and crew going to cough up 5 Billion?

  6. Zippy´s Sausage Factory
    Paris Hilton

    Just a quick thought, but what if Autonomy wins this and then Deloitte takes umbrage at whatever HP ends up saying in the media and sues HP for libel?

    Paris because I'm already confused about this case and I've just managed to make myself even more confused. I think I need to go for a lie down.

    1. JimboSmith Silver badge

      I am not a lawyer but.....I believe that what's said in court you can't sue for defamation over. Hence why when somebody has decided to rant about someone else in court the Judge often tells them to shut up in legalese.

      1. Franco Silver badge

        You are correct, and it has already happened in this trial, Meg Whitman called Lynch a "frauster who committed fraud" during her evidence and promptly got a verbal beat down from the Judge.

        https://www.theregister.co.uk/2019/06/06/judge_slaps_down_whitman_autonomy_trial/

    2. BebopWeBop Silver badge

      In other news, popcorn futures went through the roof.

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