Huh? What Did You Say? Ask Soon-to-Be Available Autonomy Software

LONDON -- To Ask Jeeves (ASKJ Quote) a question, you have to go through the trouble of writing it down. No wonder, then, that Autonomy Corporation's (AUTN Quote) speech-recognition software is causing such a buzz.

Autonomy -- a provider of software that automates the normally labor-intensive task of organizing vast amounts of unstructured information on the Internet, in emails and documents -- announced at the end of last week that it expects to begin shipping its speech-recognition technology "within the next couple of quarters."

The technology was initially developed by a company called SoftSound, which Autonomy acquired in April. The software will enable recorded or real-time speech to be searched and analyzed for concepts in the same way that written data is. For example, the technology would allow companies to analyze phone calls to their call centers to find out whether a question being asked has been answered before.

Mike Lynch, the chief executive of Autonomy, believes there will be a lot of demand for this addition to the company's technology. "We've had a lot of approaches from Fortune 100 companies; there was a lot of pent-up demand here, and there'll be a strong takeup of it," Lynch told analysts and investors during a conference call at the time of the announcement.

Lynch is probably correct. Yet those investors looking to see a boost in revenue to match the print space that the announcement has generated are likely to be disappointed, at least in the medium term.

"It's not clear the impact on revenue this technology is going to have, not a significant amount in the next six to 12 months" says Darren Lauber, an analyst with WestLB Panmure who has a buy rating on the stock. In any case, "the speech-recognition part is embedded in the rest of the software, so it would be difficult to separate the revenue streams of the two." (WestLB has no investment banking relationship with the company.)

More important, Lauber believes, is the impact that the technology release will have on the market's perception of Autonomy. "This really shows that Autonomy is far ahead in terms of the technology out there," he says.

Indeed, a look at the list of Autonomy's original equipment manufacturer, or OEM, vendors shows the caliber of companies that have taken a shine to its technology, which, unlike that of Ask Jeeves and Inktomi (INKT Quote), is built around an algorithm, thus making it nonlanguage specific. Autonomy OEM vendors include Oracle, Hewlett Packard and Sun Microsystems.

However, it's debatable whether the company needs any further boost in the eyes of investors. Autonomy shares on Monday closed around 49, and with forecast earnings this year of 5 cents a share, the company is trading at a forward price-to-earnings ratio of 980 and an enterprise value (debt plus equity) -to-sales multiple of 64 times.

Although Autonomy's second-quarter revenue grew 174% to $14.6 million, the company is under enormous pressure to realize far more spectacular growth in the second half of this year as the OEM vendors begin to launch products that incorporate Autonomy's speech-recognition technology.

Yet Autonomy's deal with Oracle, the world's largest data vendor, shows just how unpredictable this revenue flow can be. Autonomy's business model is a licensing one, whereby third parties incorporate Autonomy's technology into its products and Autonomy receives a cut of the sales of those products. No sales, no revenue.

"The Oracle deal is frustrating," admits Lynch. "The launch of their enterprise portal is delayed, and because we are part of that portal, then we are delayed too."

However, having popular technology such as Autonomy's offers a solution to this. Autonomy also counts Sybase as an OEM partner, and Sybase is already rolling out its enterprise portal product OpenDoor. "In a sense we backed both horses," Lynch says.

Lumpy revenue growth aside, other risks to Autonomy's domination in the knowledge-management software area look improbable, at least for the moment.

"Their software may not work, it may prove difficult to integrate or something comes along that is better," says Nainish Bapna, an analyst at Nomura, which has no investment banking relationship with the company. Bapna has a buy rating on the stock.

"But I'm very keen on the company," Bapna says. "Everyone is talking about Autonomy's knowledge-management software."

Just Ask Jeeves.