“ Analysis of 2007 Autonomy Corporation”
Autonomy Corporation is a software company which found in 1996. For the 2007 Autonomy Corporation, Mike Lynch (CEO) gave a high evaluation. Although the appreciation of Mike is right, some problems also existed which caused negative influence to the company. The objective of the essay is to prove the positive and negative condition of the company and give a prediction for the near future.
2. Overall evaluation of 2007 Autonomy Corporation
As the CEO Mike Lynch said, Autonomy Corporation got successful in 2007. It is true that top line revenues, operating profits, bottom line profit before tax and EPS are increased obviously than 2006. In addition, the operation is growth global. To be more specific, the business spread to Latin America, containing Brazil, Mexico and Colombia. Some Asia countries such as China, Singapore and Japan are also the aim market.
2.1 Main financial result
In fact, information from 2007 financial statements illustrated the positive condition of the company. To start with, revenue increased 37% from 2006. Moreover, profit from operations (adjusted) has rose 60% from 2006, achieved $108.8 while profit from operations (IFRS) has grow 60% from 2006 as well. In addition, Profit before tax (adjusted) has shot up 60% from 2006, reached $113.2 million while profit before tax (IFRS) has increased 62% from 2006. EPS (adjusted) also have ascended 47% from 2006, arrived at $0.38. Lastly, at the end of 2007, cash balance is $92.6 and there is no net debt.
2.2 Main financial review
Revenue in 2007 was $343.4 while it in 2006 was $250.7 million. The growth is mainly contributed to the organic growth and ZANTAZ acquisition which explain the positive trend of the whole strategy.
Gross profit has increased 33% from 2006 to 2007. The number in 2007 is $291.3 while it was $219.1 million in 2006. Although gross margins have descended in the middle of 2007 but because of the competition of ZANTAZ, it has increased finally.
Research and development express in 2007 was $62.3 million which has ascended 21% from 2006. The main reason of growth is the numbers of staff and relative expense were both increased.
Profit from operations was $88.6 million in 2007 and the data in 2006 was $55.5. It was increased by 60%. The increased explained that revenue has increased from 2006 to 2007 as well.
Profit before tax also went up. To be more exact, the number in 2007 was $91.4 which has grew 62% from 2006. Just like profit from operations, the increased number means increased revenue from 2006 to 2007.
Net profit has 59% increased from $39.1 million in 2006 to $62.3 million in 2007.
Goodwill has gone up from $415.8 million in 2006 to $820.1 million in 2007. Acquisitions of ZANTA is the main reason which cause the increased of goodwill.
Property, plant and equipment also up from $6.2 million in 2006 to $28.8 million in 2007. The data was grew 78.5% from 2006.
3. Compared main ratios between 2006 and 2007
Some main ratios showed the situation of Autonomy Corporation from 2006 to 2007. The increased and decreased of the rate reflect the operation situation of the compay.
ROCE (Rate of Capital Employee)= Net profit / Capital Employed
= 88649 / (67776+99813) = 8.32 % (2007)
= 55540 / ( 17837+571622) = 9.42 % (2006)
ROCE from 2006 to 2007 is decreased which explain the positive trend from 2006 to 2007. ROCE is a kind of independent variable which aims to comparing the earning and capital employed. ROCE is an accounting ratio which reflects the internal rate of return (Kwong et al, 1995). In addition, ROCE is a way to show the structure of the company capital operation. Owing to ROCE is relative to net profit and capital employed, if the ROCE is higher which explain that the rate of revenue back is high. The decreased ROCE is mainly caused by the equity increased (Dunagploy and Gray, 2005). In addition, profit from operation includes net foreign exchange lossess, research and development cost, staff cost and so on. ROCE means operating performance and capital resource which connected to the shareholder which aim to show the whole proficiency of product earning (Gallizo et al, 2003). The decreased ROCE showed the negative trend of Autonomy Corporation from2006 to 2007.
3.2 Profit margin
Profit margin= Net profit / Sales = 88649 / 343409 = 25.81 % (2007)
= 55540 / 250682 = 22.16% (2006)
The profit margin from 2006 to 2007 is increasing which reflect a positive trend. Profit margin is mainly used to compare the internal item of the company. In fact, Jordan et al (2009) prove that profit margin is calculated by using income and operation to sales which stand for the overall performance measure of the company. Besides, profit margin also reflect the company ability to command the cost and expenditure (Jordan et al ,2009). For Autonomy Corporation, profit margin in 2007 is 25.81% which means for every unit of sales, 25.81 cents produced by revenue for per dollar. The rest amount is 74.19 which contributed to the cost. The increased profit margin reflected entity and controlling cost are all in positive operation. Otherwise, the higher controlling cost caused current earnings grew. To sum up, the earning and cost condition is better for 2007.
3.3 Asset turnover
Asset turnover = Sales / Capital Employed = 343409 / ( 67776 + 99813) = 32.21% (2007) = 250682 / ( 17837+ 571622) = 42.53% (2006)
Asset turnover represent the assets which company used in producing sales revenue. From 2006 to 2007, the ratio of assets turnover is decreased 10.32%. Decreased assets turnover reflect the assets are not flexible than 2006, some of which became fix asset. Even through the sales are increased, the capital employed increased more than sales, so that the assets turnover fall. Decreased assets turnover means the negative change which prove the company is not so profitability. In addition, decreased assets turnover also showed the lower current profitability and net operating assets growth (Fairfield, 2001). For forecasting, position of the company may have deteriorate influence on the fixed assets. If managers want to know the specific weakness, it needs benchmarking to compared with the other companies in the same industry. (Malhotra, 2008)
Leverage = Debt / (Debt + Equity ) = 67776 / (67776 + 998313) = 6.38 % (2007) = 17837 / (17837 + 571622) = 3.03% (2006)
Leverage from 2006 to 2007 was rose which lead a negative trend for the developments in the future. Leverage also named gearing or levering which reflects debt in operating investment. In fact, the change of leverage is mainly due to the stock price rather than debt. The leverage effects the investment and also caused risk of company. The capital price can be decreased with debt when the leverage relative with finance. Besides, when the debt brought, the company should pay back the debt first and then cause the unbalance of the investment.(Ozdagli,2009) As a result, the operation situation is not healthy to develop. For leverage in financial statements, net debt reflects in the balance sheet and the market price evaluate effective of the equity. In order to make balance of the leverage equations, the price and value should be integrated. If the debt book value is identified with the primary value, the market risk can be descended. (Penman et al, 2007) On the other hand, if the leverage is well operated, the company performance is accord with the equity affect (Mahakud and Misra, 2009) .
3.5 Current ratio
Current ratio = Current assets / Current liabilities
= 224641 / 150315 = 1.49 (2007)
= 207370 / 95692 = 2.17 (2006)
Current ratio is a kind of rate which reflect whether the company can meet the short term mission (Fleming, 1986). Actually, the best current ratio of a company is equal or more than 2. As a result, the current ratio in 2007 is less suitable for the company than 2006. The current assets is mainly made up by cash, inventories and other assets recognized as payments. The current ratio of 2007 is lower than normal which caused by the liquidity problem. In fact, the current ratio can change quickly during a short time. (Fleming,1986) Actually, investors thought the higher current is better but from management view, the ratio should have an upper limit. If the current ratio is too high, it means the utilize of capital is not effective. Secondly, accountants may modify the current ratio before they provide their financial statements to bank or other investors. Thirdly, the current ratio at the end of accounting term may not represent the current situation of the whole year so that the suitable current ratio is around 2.
4.Evaluation and prediction of Autonomy Corporation
Although the top line revenue, operating profits, bottom line profit before tax and EPS are increased, the main ratios include ROCE, profit margin, asset turnover, leverage and current ratio are not optimistic. To be more precise, except for profit margin, the rest of four ratios reflect the negative influence in 2007 compared by 2006. As a result, it is truly that Mike Lynch said but it is not over optimistic because not all the ratio are better than 2006.
In fact, some risks also existed in the company. For example, firstly, expenditures increased but not accord with revenue increased which may cause bad result in market condition. Secondly, the average selling price is decreasing sharply which is not good for revenue and gross margin. Thirdly, some problems of potential acquisitions still existed. Fourth, it is difficult to forecast the revenue, operating results and cash flow Under the sales of manufactures by third parties condition. (Autonomy Corporation plc,2007)
For forecasting, it is believed that the trend may be continues in a few years and achieve the goal finally. New technology, new relationship with customers and expand the global market should be developed. In the future, this performance could be continued because it need time to carry out if Autonomy Corporation wants to change better. In summary, it is positive for Autonomy Corporation to develop and progress and achieve the goal in the future.
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