Autonomy: A Pretty Good Position
August 16, 2008
Analyst reports are often difficult to figure out. Take for example the write up by the London investment outfit Cazenove. The company issued report about Autonomy’s financial performance for the period ending June 30, 2008. I received a copy of this report from a Web log reader. My experience is that these are documents anyone can get if you have a big enough account with an investment bank or your financial manager is an individual with some clout. The wacky email address that sent me this July 23, 2008 Cazenove report “Autonomy” could be a signal to others in the enterprise search sector. I worked through the detailed analysis. You should read it as well.
On the whole,the document was stuffed full of useful data about Autonomy’s financial performance, which was quite good. Autonomy is on track to be close to or generate more than $300 million in revenue this year. Compared to most vendors of search and content processing, Autonomy is doing a good job. I compared their sales success to tuna fisherman who return to port with no fish. Autonomy’s vessel returns to port with its hold stuffed to the brim. Autonomy is at www.autonomy.com.
For me an interesting point in the Cazenove write up was this observation:
Autonomy management consistently mentioned the strength of its cash collection but we believe there is an issue related to cash conversion (i.e operating cash flow as a percentage of EBITDA). DSO’s (using trade receivables) decreased from 96 days to 91 and yet cash conversion did not improve. Autonomy provided some insight into the difference between commercial and government customers. For commercial accounts the DSO’s are around 30-40 days (and represents 75% of the revenue), which implies that for government customers DSO’s are c. 240 days (or c. 8 months).
As I stated, I have a tough time reading the tea leaves in this analyst’s report. Three thoughts went through my mind:
- The days sales outstanding was one of the factors that I had noticed in the 2007 Fast Search & Transfer financials. The growing days sales outstanding can contribute to a cash shortage. Money is not coming in but money keeps going out. A hitch in the git along can trigger a challenge at any company, even well managed ones.
- Autonomy has a number of lines of business. Some of these are search like the Web site or library search deals the company has landed and described in news releases. Other lines of business use Autonomy technology but are not “pure search”; for example, fraud detection or video management. Autonomy is growing larger and may be evolving into a more generalized software company. This means marketing and sales costs may be subject to greater pressure. Autonomy has done a good job managing costs, but if the controls slip, a cost surge could occur.
- Autonomy has been able to land a number of big deals. The company’s Web site does a great job of identifying these “big tuna” wins. The question I have is, “For a big deal, does the customer like a government agency or a big company pay up front?” In my experience, big companies pay some and then hang on to the bulk of the money until the system is up, certified, and operational. As a result, a big deal in a news release may not translate into an immediate cash injection. Autonomy appears to be able to get the cash or most of it before the system is up and running. This is a management capability that some Autonomy’s competitors cannot achieve.
Autonomy is definitely one of the high profile brands in search and content processing. I track more than 50 vendors of search, text processing, and content analytics. Only Google is in the same revenue sphere as Autonomy. The other vendors are far smaller, and if Autonomy can continue to grow, it may challenge Google and enterprise application vendors like Microsoft more sharply.
A happy quack to the Autonomy financial wizards.
Stephen Arnold, August 16, 2008
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[…] ScottGu Analyst reports are often difficult to figure out. Take for example the write up by the London investment outfit Cazenove. The company issued report about Autonomy’s financial performance for the period ending June 30, 2008. I received a copy of this report from a Web log reader. … […]