Autonomy Creative Accounting?

We heard an interesting speculation recently from a chum at a well-known investment bank, that Autonomy is cooking its books. We'd welcome further input.

First, a couple of relevant bits of background information:

  • Autonomy's core business is its Idol enterprise search product. The search market in general has been somewhat stagnant for several years.
  • Autonomy's biggest competitor was FAST. FAST cooked its books and had major product issues. FAST was acquired by Microsoft. Autonomy's other big competitor is the Google Search Appliance.
  • Autonomy's acquisitions in the archiving field--Zantaz and EAS--have suffered substantial vicissitudes. We don't know the details, but acquired staff have often been very disillusioned, and more recently we've talked to major EAS clients who are very dissatisfied and are considering moving elsewhere.

The speculation is as follows:

  • Autonomy is buying businesses to increase its revenues.
  • It's often reclassifying deferred income as current income. For example, if a sale is for three years of business, it's taking the three years of revenue in the current year rather than spreading it over three years.
  • Hence, in order to maintain attractive revenues and profitability, Autonomy is obliged to keep doing deals.
  • Further, cooking the books in this way explains why the company has had a cash conversion ratio of some 75%.

Generally, the investment bank feels that Autonomy's published financial information needs to be far more transparent.

Similar concerns are expressed by Dave Kellogg, CEO of an Autonomy competitor, in his Kellblog.

Can anyone provide further information? It seems things are seriously amiss at Autonomy. If you want to contribute without your identity being revealed, contact me at david.ferris@ferris.com, or (415) 367-3436.

... David Ferris, with thanks to the investment banker and software analyst Curt Monash

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