Autonomy

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Top Contributors Anjan Gupta

Autonomy is a global leader in infrastructure software for the enterprise & UK’s second biggest software company. Through its core technology IDOL and divisions ZANTAZ, Cardiff, etalk, Ultraseek and Virage, Autonomy offers tailor-made solutions for a wide range of environments and information challenges.

Autonomy's customer base includes more than 16,000 global companies and organizations, including BAE Systems, Ford, Ericsson, Royal Sun Alliance, Sun Microsystems and public sector agencies including the U.S. Department of Defense, NASA and the U.S. Department of Energy. Strategic reseller and OEM partners include leading companies such as ATG, BEA, Business Objects, Brio, Citrix, Computer Associates, EDS, IBM Global Services, iManage, Novell, Novient, Vignette and Sybase. The company has offices worldwide.

The business fundamentals remain very strong as the licenses continue to grow well above double-digit growth (20%) organically. Total Revenue growth for FY2008 is expected to be around 44%. Moreover, operating margin is also likely to expand going forward due to the synergies from Zantaz. Autonomy has built a strong pipeline & this would definitely keep its pace going into the seasonally strong 4Q07. Recently Autonomy signed a Software License agreement with Oracle Corp and EMC, which again strengthen its pipeline. Autonomy has also bagged a $70 million deal from a major global bank in the area of compliance & regulatory solutions. This deal is expected to generate revenue for the company over the next few years.

Autonomy, being the market leader in the attractive Enterprise Search segment, has an edge over its competitors and will be the biggest beneficiary of the market expansion in Enterprise Search segment. Moreover, the ongoing customer focus around risk management driven by regulatory factors will also provide great impetus to Autonomy.

Risk to the Target Price of GBP 10.48 (as per Triangulation) includes – 1. Economic slowdown pulling down business IT spending. 2. Integration & execution risk relating to Zantaz acquisition.

As per my view, the current weakness in Autonomy shares provides an excellent long position opportunity for investors keen to gain exposure in one of Europe’s most attractive Software sub-segment, Enterprise Search. Although, the company has a premium valuation to the sector – trading at 28.3x 2008e P/E v/s 18x for the sector – it fully justifies the premium because of strong fundamentals. FY2008 revenue growth is expected to be 44% YoY backed by robust deal pipeline and license growth. Operating Margin is also expected to expand by around 2.5% to 33.75% due to synergies from Zantaz.