The problem with staring at the horizon is that it becomes easy to trip. The UK software darling Autonomy has undoubted potential. It is the market leader in “unstructured search” – clever software that can grasp context and identify relationships across a variety of files, from e-mail and spreadsheets to audio and video. It can listen to call centre conversations, for example, and suggest actions to staff as they speak, cutting down on training needs. Duplication of effort can be avoided in large and disparate organisations. Productivity gains as yet undiscovered lie in wait for businesses who can better exploit information not gathered up into neat databases.

So the grand hope is that Autonomy’s technology will become embedded into the very infrastructure of business software. Most of the important developers have licensed the right to plug Autonomy tools into their own products. If they actually begin to do so, this will generate both a self-reinforcing network effect and a hefty stream of royalty payments.

Furthermore, a near pure software model means significant operational gearing. As sales grew from $65m to $343m between 2004 and 2007, operating margins (excluding amortisation) jumped from 8 per cent to 31 per cent. With continued top line expansion, 40 per cent seems possible. Yet the group makes 60 per cent of its sales in the US and new software licences remain discretionary purchases for IT departments. Analysts’ expectations for 2008 earnings have been static for the past two quarters, a break from a recent history of perpetual upgrades. Autonomy’s £2bn market capitalisation is supported by a valuation of 32 times forward earnings. That is below the average of 42 times held for the past three years, but more than double the rating of the rest of the UK software sector. The shares, which have recovered from autumn lows, are not priced for disappointment.

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