Hewlett-Packard is in the news at the moment over a reassessment of the value of UK-based Autonomy which it bought last year. Autonomy is a world leader in “meaning-based computing”, the analysis and use of all the unstructured information that floats around companies and the web these days, and accounts for up to 90% of corporate information.

There is a quick video explanation of the problem here on Business Insider, but a better numbers-based critique comes from Australian money manager and blogger John Hempton: he raised concerns about the company purely by looking at Autonomy’s Income Statement and Balance Sheet from 2010. His key issue is this:

  • a software company is typically paid quickly because it is dealing in intangibles; therefore it should have low receivables (debtors). If it has very high receivables (like Autonomy) there is a concern that it may be reporting future contracted work as a current sale, even though the work hasn’t been done yet.
  • a software company typically has an obligation to support its products and services in future, and therefore shows a large figure for unearned income – usually several times the size of its receivables.
  • but Autonomy had Sales of $870m and receivables of $330m (138 Days Sales Outstanding at year-end, meaning that if these numbers were correct customers were taking over 4 months to pay), and deferred revenue of $177m (approximately half the size of alleged receivables).

In Andromeda Training we believe that key financial issues are more easily identified visually than by number-crunching. For example, Autonomy’s 2010 financial statements look like this in our gameboard-format view:


Here the Days Sales Outstanding over 90 days (the stacks of Receivables at the top end of the “Trade & Other Receivables” track) stand out as being exceptional in this industry, without anyone having to calculate any numbers.

If $100m or $200m (a stack or two) has been mischaracterized as a sale, when in fact the work has not yet been performed, then Sales Revenue (top right) should be lower by a stack or two, and Net Income (bottom right) would be hugely reduced.

The finances would still need to be scrutinized in detail – Visual Finance only gives an immediate heads-up about areas of possible concern. But it gives that heads-up extremely efficiently and clearly.