Five Ways in Which Autonomy is Alleged to Have Cooked The Books

Books - Manu M

The most serious of the allegations HP has made against unnamed members of Autonomy's management team.

'CHANNEL STUFFING'

A spokeswoman for Lynch has denied any suggestions that the tactic was used.

Channel stuffing involves offloading excessive amounts of product to resellers ahead of demand. Typically, the reseller is charged little or no money up front, and may not be obliged to pay unless they sell the product on. In accountancy terms, a line is crossed if those deals are booked as revenue before an end customer has actually bought the product.

Autonomy had hundreds of resellers, one of which was Tikit, which specialises in legal and accountancy software and has just been bought by BT. In December 2010, Tikit reported a surge in the amount of inventory on its books, up from £100,000 worth per half year to £4m.

Peel Hunt analyst Paul Morland says Tikit told him that it had done a big deal to acquire software at a discount.

Tikit declined to comment and there is no evidence that Autonomy booked the deal as revenue. A spokeswoman for Lynch insisted Autonomy never recognised revenue from resellers if there was a right of return, and that such a right was almost never granted.

US regulators have taken high-profile scalps in their efforts to stamp out channel stuffing. Drugs firm Bristol-Myers Squibb coughed up more than $800m in fines and legal settlements after admitting to pumping stocks of medicines onto wholesalers' books in order to inflate its own revenues. During the dotcom boom, the McAfee antivirus software company engaged in practices with a reseller called Ingram Micro which saw them eventually fined a combined $65m.

USING ACQUISITIONS AS A SMOKESCREEN

In Autonomy's last full year as an independent company, it claimed to be growing at 17%. This excluded the contribution of any acquisitions. But one financial analyst has claimed it was using its purchases to mask the fact that there was no growth at all.

Over six years, Autonomy bought at least eight sizeable businesses, culminating in May 2011 with the digital archiving arm of US group Iron Mountain. "Once they had bought the company they would close parts of the business down," says Daud Khan, who followed Autonomy while working at JP Morgan Cazenove, and is now at Berenberg Bank. "Closing down a business costs money but the restructuring charges were always very low. Through magic dust Autonomy managed to do it with very little cost and they did that again and again." He believed Autonomy was claiming the discontinued revenues from acquired companies as part of its own organic growth.

Lynch's spokeswoman says Autonomy's accountant, Deloitte, checked every acquisition. She said there were more than 30 analysts covering Autonomy's stock, and Khan's view was in the minority.

DESCRIBING HARDWARE SALES AS SOFTWARE SALES

HP said Autonomy sold hardware that was wrongly labelled in its accounts as software and sold hardware at "negative margin", in other words at a loss, and charged it as a marketing expense. The sale was then chalked up as licence revenue for growth calculations. HP said these sales accounted for up to 15% of Autonomy's total revenue, which was estimated at $1bn in 2011.

Lynch said it was "no secret" Autonomy sold hardware, and it accounted for around 8% of revenue. The company would sometimes supply desktop computers to clients as part of a package. In some cases, Lynch said, deals were struck at a slight loss, in exchange for the client agreeing to market Autonomy products. These losses were then charged as a marketing expense. Crucially, he claims those sales accounted for less than 2% of total revenues.

EXAGGERATING SEARCH REVENUES FROM OTHER SOFTWARE COMPANIES

Autonomy's client roster reads like a software hall of fame. Its website lists most of the biggest names, from Adobe to IBM and Oracle, and in its last financial results, it claimed more than 400 separate products were using its "core" technology.

Original equipment manufacturer (OEM) licences were one of Autonomy's growth engines, rising at 27% a year.

Autonomy's top product is a search engine called IDOL (Intelligent Data Operating Layer), but Autonomy has rebranded less expensive products as IDOL, such as the document filter produced by a company called Verity it bought in 2005.

A week after HP announced it was prepared to acquire Lynch's company at a 64% premium to its share price, Leslie Owens at Forrester Research published a piece entitled What is Autonomy, Without its Marketing?, in which she declared the development of IDOL was "stagnant", with no major release in five years.

Technology analyst Alan Pelz-Sharpe, who reported Autonomy to the Serious Fraud Office last year, claimed last August in his blog: "Where Autonomy is present in 3rd-party software, it is more typically the old (and very basic) Verity engine, not IDOL."

Autonomy would not be the first company to have overplayed the popularity of its products. Lynch's spokeswoman said there was no exaggeration of revenues from other software companies. The view of the analysts is simply that if sales of its flagship search software were not soaraway, Autonomy might not have been worth the premium HP paid.

FRONTLOADING REVENUES

Changing the payment model for storing large digital archives on behalf of customers is another way in which HP believes Autonomy boosted revenues. Autonomy was supposedly converting long-term "hosting" deals into short-term licensing deals.

Red flags were raised by analysts after Autonomy's 2007 acquisition of a US email archiving company called Zantaz, whose clients included nine of the world's top 10 law firms and JP Morgan and Deutsche Bank. Khan claims Autonomy renegotiated contracts so that instead of spreading payments over a three- or four-year contract, it would take a big lump sum upfront and smaller payments in subsequent years.

"There's nothing illegal with that but it generates growth that isn't real growth," says Khan. "If you value a business you have to ascertain whether it is growing."

Lynch's spokeswoman said this was not an accurate characterisation of the changes: Zantaz customers that had been pay-as-you-go committed to much larger deals once Autonomy took over, often including on-premises software.

Powered by Guardian.co.ukThis article was written by Juliette Garside, for The Observer on Sunday 25th November 2012 00.00 Europe/London

guardian.co.uk © Guardian News and Media Limited 2010

 

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