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 …
... 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).
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.
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.
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.
"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?
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?
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.
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.
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