I have a simple view on tech companies. Who buys their products and/or services, and how much do they pay? technology is driven by innovation, so the profit margins will be pretty good, at least until somebody else figures out how to match or surpass your product and then you become a commodity supplier and then disappear. Remember Sperry Univac, Amdahl, Ashton Tate or Loitus? Neither do I.
But Autonomy always seemed to be valued way above what I would expect for a one trick pony (fancy searching) with a few related but low value acquisitions (archiving, document retrieval), and to be frank, although I heard a lot about Autonomy businesses, I don't remember hearing many people telling me how much they were paying for Autonomy products and services, and to justify a $10 billion price tag, even with a supposed 55% annual revenue growth, you need a lot of sales.
Which is what makes the following blog post from a year ago by Alan Pelz-Sharpe, a man from whom we may be hearing a lot more, about his misgivings about the acquisition of Autonomy by HP, and statements by the former (although current at the time) boss of HP, Leo Apotheker:
Leo Apotheker wildly stated that Autonomy had "a" and Autonomy claims that over 400 software companies are building applications using Autonomy IDOL. Well first off I am not sure what this strong cloud based solution set consists of...is it the archiving solution from Zantaz that Autonomy acquired? Surely not as that would contribute a tiny fraction toward this valuation. As for the 400 software companies building applications on IDOL, in effect embedding (OEM) IDOL, we just can't find them. What we can find is a lots of people using basic document filtering widgets (KeyView) and some using the old Verity K2 search engine, but hundreds of software firms using IDOL? They are nowhere to be seen, at least by me, and I watch pretty closely.
Plus we have some pretty dodgy accounting with, according to HP, intra-group licenses reported as sales and loss-making hardware sales booked as software sales to massage sales growth figures, or to use HP's words:
"... HP now believes that Autonomy was substantially overvalued at the time of its acquisition due to the misstatement of Autonomy’s financial performance, including its revenue, core growth rate and gross margins, and the misrepresentation of its business mix.
Although HP’s investigation is ongoing, examples of the accounting improprieties and misrepresentations include:
- The mischaracterization of revenue from negative-margin, low-end hardware sales with little or no associated software content as “IDOL product,” and the improper inclusion of such revenue as “license revenue” for purposes of the organic and IDOL growth calculations.
- This negative-margin, low-end hardware is estimated to have comprised 10-15% of Autonomy’s revenue.
- The use of licensing transactions with value-added resellers to inappropriately accelerate revenue recognition, or worse, create revenue where no end-user customer existed at the time of sale.
This appears to have been a willful effort on behalf of certain former Autonomy employees to inflate the underlying financial metrics of the company in order to mislead investors and potential buyers."