Hewlett-Packard, Autonomy, and the Value of Visual Finance

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 2010 Income Statement and Balance Sheet.

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 the 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. Meanwhile, deferred revenue was only $177M (approximately half the size of alleged receivables).

At Andromeda Simulations International, 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.
• Net Income (bottom right) would be hugely reduced.

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

If you want to see how Visual Finance can help your team identify financial risks faster, contact us today.