Autonomy, the software company which tends to polarise opinion in the City, has pleased investors today with its full year figures.
The company - which specialises in search software - reported record full year revenues of $740m, up 47%, and pretax profits up 55% to $323m, in line with expectations. Chief executive Dr Mike Lynch was also upbeat about the prospects:
At the very end of the fourth quarter of 2009 we began to see some indicators of an initial improvement in the macro environment, which gives us confidence in the outlook for 21010.
We continue to see the strongest growth in the new models of the software industry such as OEM and cloud computing. Whilst it may still take a little time for people to understand how these models differ from traditional software businesses, we believe the momentum in these areas is accelerating.
The news has lifted the company's shares by 40p to £16.09 and there were a number of positive notes from analysts. Credit Suisse, for example, said:
We remain outperform rated with a target price of £20, representing 27% upside.
Fourth quarter cash conversion came in at 58%, about in-line with the average conversion in the fourth quarters of 2008 and 2007 of 64%. Bears will focus on the fact that this metric is less than 100%, however we believe the fourth quarter's result should be seen as reasonable.
Autonomy's R&D capitalization in the quarter was approximately 2% of revenues, in-line with historical levels and well below the third quarter's abnormally high 6% of revenue. This makes for a cleaner quarter than the third quarter and should ease concerns that the company would continue to capitalize R&D at a high rate.
DSOs (days sales outstanding) of 88 days are back in-line with historical levels: in the third quarter, Autonomy reported DSOs of 97 days as a large bank paid an invoice just after the quarter ended, likely to manage its balance sheet. Bears had seen this as a negative, so the return to typical DSOs likely assuages fears that the company is overextending itself to sign deals.
George O'Connor at Panmure Gordon commented:
The outlook statement is more positive than we expected – with Autonomy seeing an improvement in the environment at the end of the period – this may lead to some upgrades this morning as analysts look to Autonomy's spring scenario. We retain our forecasts for now, but as we roll forward 2010 estimates our target price increases to 1920p (from 1817p).
But on the other side of the coin, Paul Morland at Astaire Securities kept his sell rating on the business:
These results were very close to our forecasts in all respects. The creditor reversal meant that cash conversion in the fourth quarter was poor, but this was not a surprise and the only concerning thing is that the creditor increase wasn't mentioned by the company in its third quarter presentation. We believe the more worrying element of working capital is trade debtors. These look too high to us, even after their reduction by a large bad debt provision.
Furthermore, we can't understand how Autonomy managed to collect $216m of cash in the fourth quarter. Our thesis, as explained in previous notes, is that revenue is being recognised earlier than it should be. This is flattering growth rates and boosting margins whilst depleting deferred income (no evidence of this in these results) and hurting cash conversion. Also, customers are not paying on time and this has up until now been reflected in rising DSOs. Our failure to understand how cash collections have suddenly improved leads us to conclude that perhaps Autonomy has sold some of its debts to a third party.
