While alleged fraud at Autonomy may have been a surprise to Hewlett-Packard, its auditors, its bankers and its executives, it wasn't to short-seller Jim Chanos.
Chanos told me this morning that in early 2011, months before the HP-Autonomy deal, Autonomy was his biggest European short. Chanos' firm even wrote a report on it in July of that year.
Too bad HP didn't read it.
Among the red flags the report pointed out – the following lifted directly from the report:
- Autonomy claims about the size of its e-Discovery business are questionable, and represent 40 percent of total market share, in an industry with more capable and better capitalized competitors, like Microsoft , EMC , and IBM .
- Autonomy's claims of 20 percent growth in revenue are inconsistent with competitors' reported figures. Both FTI Consulting and EMC Documentun are reporting much slower growth.
- Autonomy's customers are much less enthusiastic about the company's products than Autonomy itself.
- Level of financial disclosure at Autonomy is very poor, and does not reveal standard performance metrics of maintenance revenues, acquisition details, etc.
- Deferred revenue growth consistently underperforms recognized revenue growth. An acquisition follows every quarter where deferred revenue / recognized revenue dip below 70 percent.
- Cash generation has consistently underperformed profitability measures, with large working capital draw downs and benefits from lower cash taxes.
- Autonomy margin profile is suspiciously high for its size and consistent with extremely large software companies like Microsoft and Oracle .
- Autonomy capitalizes R&D costs, 14 percent of total in 2008, boosting EBIT margins by 2 percent.
- The last three acquisitions have helped to create a significant cookie jar of earnings to support the margin profile.
The report even questioned whether Autonomy's chief operating officer at the time, a former junior mergers and acquisitions attorney, was qualified for his role.
My take: Yet another example of the shorts knowing before anybody else.
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