Now here’s something to send the blood pressure of Autonomy’s Mike Lynch soaring.
It’s a clinical – and very critical – analysis of Tuesday’s third quarter results from Canaccord Adams analysts Bob Liao and Kevin Ashton.
Having digested the numbers, the Canaccord duo are now firmly in the bear camp (they have turned sellers) and are voicing concerns about cash conversion at Autonomy, rising capital expenditure and, crucially, the relationship between receivables and revenue.
To be sure, many of these issues have been addressed by other analysts but no one (as far as we know) has pulled it all together.
Here’s are some excerpts:
CASH CONVERSION FLATTERED BY PAYABLES
Cash conversion was reported to be 131% (CFFO/EBITDA). However, the figure was boosted by a $43.8 million inflow from extending payables. The payables increase was due to one-off marketing expenditure (~$15-20 million) not being paid for and cash management (~$18.8-23.8 million). We consider the deferral of the large payment for marketing expenditure to be exceptional and it should reverse to become a drain on cash in Q4. Meanwhile, the management of payables is unlikely to recur to support future cash conversion figures. Excluding the cash inflow from payables, cash conversion would have been 73%.
DECLINING DEFERRED REVENUE RELEASE
Deferred revenue release was $58 million in Q3, falling for the first time in at least 11 quarters. Assuming maintenance revenue from Interwoven was about $28 million, deferred revenue release from the original business was only $30 million, below the $31 million in Q4/08 before the acquisition of Interwoven. This appears to indicate that deferred revenue release of the original business has not grown this year. Lack of growth in maintenance would be concerning and could potentially indicate a stagnant customer base.
RECEIVABLES REMAIN HIGH
Despite the acquisition of Interwoven, which had DSO [days sales outstanding] of 60-70 days, Autonomy’s DSO remains high. Indeed, DSO rose to 97 days from 84 in Q3/08. Autonomy explained that DSO had increased temporarily as a result of a significant deal that was signed late in the quarter for which it did not receive payment. Management indicated that DSO may return to more normal levels (89 days in Q2/09 and 84 days before the acquisition of Interwoven) but they appear to remain unaffected by the inclusion of Interwoven with its relatively low DSO. Autonomy explained that its payment policy has been adopted by Interwoven and public sector deals, which may have risen as a percentage of combined revenues, usually carry longer payment terms.
We expect to further explore Autonomy’s high DSO figures despite the acquisition of companies with low DSOs. Related to this, we note that Autonomy’s bad debt provision also remains high despite the acquisition of Interwoven. Before the acquisition of Interwoven, Autonomy had a bad and doubtful debt provision of 8% at the end of 2008. Interwoven had a provision that was equivalent to about 3.6% of sales but Autonomy still points to a figure that is “well under 10%”. We would expect to see a maximum figure of 7% for the year-end, ceteris paribus.
The full note can be found in the usual place.
And here’s Wednesday’s price action in Autonomy:
Somehow, we think Messrs Liao and Ashton won’t be attending the next Autonomy results meeting.
Update:
Evolution Securities have also published an interesting note on Autonomy on Wednesday. Here’s their conclusion.
At interims, management’s review of analyst models suggested 105c FY09E EPS, but the 3Q presentation appeared to suggest a possible outcome of 95c-100c based on a “first thaw” scenario where extra expenditure on supporting additional growth in 2010 and beyond is warranted. We interpret this as a near term downgrade. Another major acquisition is possible within six months, which would polarize market opinion and confuse the picture on FY10E estimates. With downside risk to consensus FY09E to 95c EPS, we remain sellers.
Related link:
Autonomy and the City – FT Alphaville