Autonomy grows profits but cash doubts remain

Autonomy, the intelligent software maker that divides analysts as to its real financial strength, reported above-consensus profits and revenues today.

Autonomy’s shares closed up 7.5 per cent at 1,621p after it said it saw a sustained recovery in its first quarter of 2011 as demand for its software continued to rise.

Revenues and profits both increased 13 per cent compared with the same period in 2010, to $220m (£134m) and $95m respectively. These beat market forecasts, which were for $216m and $90m.

"We continue to see a gentle sustained recovery and believe current market estimates will turn out to be conservative," chief executive Mike Lynch said in a statement.

Sales of Autonomy's core IDOL software grew by 17 per cent in the quarter, up from the 12 per cent seen in the fourth quarter of 2010, helped by large deals totalling more than $90m announced since mid-February.

Autonomy is now worth $6bn thanks to the success of IDOL, which helps organisations search unstructured data such as email or phone calls and has until now had no market peer.

Goldman Sachs analysts said the double-digit product revenue growth should begin to alleviate market concerns about Autonomy's ability to grow.

"Given the strong start to the year and correspondingly strong commit/backlog metrics, consensus expectations continue to look very conservative to us," Goldman Sach's analysts said in a note.

But Autonomy generates strongly bearish responses from other financial analysts, with Peel Hunt and JPMorgan Cazenove both highly critical of its financial performance.

Peel Hunt analyst Paul Morland, who rates the stock a sell, criticised its cash generation.

“A spike in debtors, beyond what should normally be expected, left them at very high levels at end 2010,” he said, noting that it had 93 days’ sales outstanding at the end of the year and forecasted it would stay high.

“Add to this the unwinding of a $35m increase in creditors in Q4 and cash is almost certain to disappoint.”

He was correct: Autonomy reported DSOs rising to 102 days in the first quarter – equating to $20m of late payment, though it said $25m of payments were received at the start of the second quarter.