Autonomy Is No Longer Master of Its Destiny

Baldwin Louie — Mon, 26 Mar 2001 14:00:00 -0800

Mike Lynch - Britain's first software billionaire - made his fortune as the chief executive of the intelligent search and retrieval software firm Autonomy (AUTN). But he has given up trying to understand financial analysts and the press after the expulsion of his company from London's FTSE 100 index of leading shares earlier this month.

Last year he could do no wrong, but now Lynch and his advisers are getting the impression that they have been singled out as the latest fall guy for the U.K.'s volatile new economy.

Analysts have raised doubts about Autonomy's software, which can search, retrieve and index data from a host of sources, including so-called unstructured sources such as e-mail. And there are fears that rivals are edging into the group's core market - the supply of information search-and-retrieval products to large companies. The truth is that Autonomy is still proving its business model.

In recent memory, few British stocks have split opinion quite as dramatically as Autonomy. Of the 15 analysts that follow the stock, a third have recommended that their clients bail out while the rest rate the shares a raging buy. Since November's IPO it has dropped from a historic high of £41.50 to its current price of £11. Analysts' forecasts for 2001 range between £5 and £50 a share. The only thing both sides agree on is that the stock was due for its recent correction.

"The multiples are outrageous on Autonomy," says Thomas Kessler at WestLB Panmure. "If you look at companies that have traded on high multiples and how much they have come down even after reporting good numbers, it was a correction that needed to happen." All the same, Kessler is recommending the stock.

But Lynch believes he is the victim of a misunderstanding. "People in London do not know Internet software companies. There is one software company in the FTSE 100 now and that is Sage," he says. "As for the analysts - an understanding of how they work is something that I try not to confuse myself with any more."

Instead, Lynch is spending his time on building up the business. But the deals Autonomy has signed to date with original equipment manufacturers (OEMs) - software firms that will embed Autonomy into their products - are a gamble. Autonomy is grabbing these second-tier customers in order to force the major players to sign up. High-profile corporate customers, such as Lloyds TSB and Ericsson, are intended to prove the company's case and attract more OEM contracts.

Autonomy made its technology available for OEMs over a year ago, but because of the long lead times involved, revenues have only just started to appear from a handful of the more than 40 contracts signed to date.

But, according to some customers, Autonomy's technology is not quite as user-friendly as the company likes to think. The Standard Europe has spoken to several customers, many of whom said the software was hard to implement. The chief technology officer at a major British ISP which uses the technology in its portal explained that Autonomy was leading-edge technology and so involved a necessarily high degree of expertise.

A major complaint is that Autonomy's software functioned efficiently while it was processing information for companies with a few thousand staff, but it becomes unreliable for larger concerns.

But SageMaker, which uses Autonomy's core technology in its own software, says Autonomy has dealt with this problem. "Scalability is being catered for now by Autonomy's new architecture," says Malcolm Hafner, senior European vice president of SageMaker. "We have not come across a problem and scaling up to several hundred thousand internal users is now a capability."

More damaging than technological doubts is the threat of rivals moving into Autonomy's core market. Microsoft (MSFT)'s Cambridge-based research centre has gained a lot of publicity for a project code-named Tahoe. The final product, SharePoint Portal Server, is now out and looks a lot like Autonomy. But it only runs on Microsoft and is aimed mainly at small and medium businesses.

So is Autonomy's share price due for a further fall? So far, it has not dropped as far as its US peers. Broadvision and Vignette (VIGN), two e-business companies, have both fallen 93 per cent from their 52-week highs. Inktomi (INKT), another producer of search-engine software, has dropped 97 per cent to $6.12 from $241.50. Nomura analyst Keith Woolcock suggests that Autonomy's share price has become divorced from any rational assessment of the company's potential: "The nub of Autonomy is a ratings problem. Is it a great share or is it a great company?"

Autonomy's 400-year-old roots
An 18th century theologian and mathematician is playing an influential role in the new-technology companies of the 21st century. Both Autonomy and fellow software company Applied Psychology Research depend on the methodologies developed by Thomas Bayes, born in London in 1702. Bayes developed a mathematical way of expressing probability inference - the means of working out how probable an event in the future is, based on how frequently it has occurred in the past. His Essay Towards Solving A Problem In The Doctrine Of Chances, published in 1763, explained his findings. It has strongly influenced today's statisticians and IT visionaries.

Bayesian inference is helping computers to understand Web pages, documents and people in a way that enables them to respond in a much more relevant and automated way to the needs of users. Microsoft has no less than 25 Bayesian specialists on the payroll.

The Bayesian technique is a perfect tool for today's super-fast computers, which have to wade through masses of data for relevant information. Using Bayes's theorems, they can quickly work out a probable result from a welter of prior occurrences.

It all depends on your mood
How psychological profiling can help Web sites
Intuitive mood marketing over the Internet is upon us. It is being made possible by a UK company whose software combines psychological techniques with the Bayesian pattern-recognition technology made famous by Cambridge-based Autonomy.

Applied Psychology Research has developed a method to help users of online services to find what they want depending on their mood or behaviour patterns. For example, pre-registered visitors to a Web video retailer could be presented with movie choices such as happy or sad, romantic or violent, and funny or dramatic.

The company was founded in 1997 by Dan Brown, straight after he graduated with a doctorate in clinical psychology, and former philosopher John Turner, a lecturer in Multimedia Information Systems at London Guildhall University.

Brown, who ran a computer games software company from the age of 13 until he finished school, applied his experience of building interactive stress models to APR's projects.

The co-founders' first projects were not related to the Internet. They developed an emotionally based classification program for books, which is now being used by 50 libraries.

Borrowers make selections on sliding "fuzzy logic" scales between funny or serious, sex or no sex and 20 other categories. The software then uses these responses to work out the best book for the reader. APR's literary success was then followed with a CD-Rom for the Poetry Society.

Last year, the company launched Youmeus, Internet software that captures implicit and explicit feedback from users through the way they navigate Web sites and make choices or clearly state preferences. This "adaptive personalisation system" helps companies target customers with the products they need.

"Psychiatry works on the model of assessment and intervention, and then monitoring the efficacy of that intervention," says Brown, now chief executive of APR. "Our software does the same for the needs of end consumers. The system can provide a specific need and also deliver items that correspond to people's traits."

APR currently employs more than 50 staff and its software has been used by companies such as the Co-Op, Affinity Internet, Mytaxi.com and Blockbuster (BBI). "We think of Autonomy as our peers. Adding value through humanising technology is new and we are leading the way," adds Brown.

Last Monday, APR said it had secured second-round funding of $10 million from Barclays (BCS) Ventures, Intel Capital and the London Business School's Sussex Place Partners.

"With companies such as APR and Autonomy, the U.K. is far ahead of the U.S. in this field," says Barclays' Khilan Dodhia. "APR came to us as a profitable and successful company. Its software product is very well developed and the latest funding will help with sales and marketing as the company expands across Europe and then the U.S."

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Autonomy Is No Longer Master of Its Destiny