Autonomy relishes recovery prospects

Autonomy, the UK’s largest software company by market value, said it had seen a strong start to the year as companies resumed discretionary spending on IT projects.

“I see a definite recovery, although I suspect it is fragile,” said Mike Lynch, chief executive.

Sales in the first quarter rose 50 per cent to $194.2m (£126m), as the Cambridge-based company signed more deals above $1m – 19 compared with just 10 in the same quarter of last year. Autonomy’s $775m acquisition a year ago of Interwoven, the legal software specialist, also lifted sales.

The IT group is hoping the second quarter will be boosted by banks buying search technology following news that the SEC is suing Goldman Sachs for fraud.

Autonomy’s software allows companies to search through unstructured information such as e-mails, voice calls and word processing documents, and is already used by many banks to ensure that they comply with regulations.

In the past few weeks, however, there has been a sharp rise in demand for a “quick-fix” search product, a box that can instantly be plugged into a bank’s computer system to check through files.

Autonomy bought $10m of hardware for the box product in the first quarter, about three times normal levels. Pre-tax profits rose from $50m to $68.8m, while earnings per share rose from 15 cents to 21 cents.

A further sign of confidence is that Autonomy is looking to poach sales staff from its rival Oracle to sell its new product for searching structured databases.

Mr Lynch said discussions were continuing on a large acquisition in the second half of the year. Auto­nomy has a war chest of $910.9m, after it raised £500m in a convertible bond issue in February. Analysts believe the company could buy a business worth up to $2bn, possibly in the business intelligence or web content management area.

Shares in Autonomy, which have risen over 40 per cent in the past year, were up 1p at £17.82.

FT Comment

Autonomy is a “marmite” stock, which polarises investor opinion. On Wednesday, it was in trouble with the bulls for promising “jam tomorrow” – a disappointing second-quarter revenue guidance of $217m-$222m compared with a consensus of about $225m – but a promise of a stronger second half. Quibbling over the numbers is irrelevant, however, given that Autonomy is poised for a possibly game-changing acquisition. The bulls will applaud a deal for increasing size and reach; the bears will decry it for muddying the waters on underlying growth. At about 21 times earnings estimates for 2010, the shares are higher than the European Software Group at 18.5 times, but acquisitions historically cause them to rise and could do again.

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