RPT-UPDATE 2-Autonomy Q3 gross margin hit by new product rollout

(Repeats to remove extraneous text at the bottom of story)

* Q3 revenue $191.6 mln, vs $192.9 mln in Reuters poll

* Q3 EPS $0.20 vs forecast $0.21 in Reuters poll

* Says confident about full year

* Gross margins impacted by new product launches

* Shares down 7.2 percent

(Adds CEO comment, analyst reaction, shares)

By Paul Sandle

LONDON, Oct 20 (Reuters) - British IT company Autonomy Corp AUTN.L on Tuesday said the costs of meeting demand for its new database search product had hit its gross margin in the third quarter, sending its shares down 7.2 percent.

Autonomy, whose software searches e-mail, telephone calls and documents for companies and government departments, posted revenue of $191.6 million for the three months to the end of September and earnings per share (EPS) of $0.20, broadly in line with analysts' expectations.

However, the company's gross margin fell to 86 percent, from 92 percent, which it said was due to higher-than-expected launch costs for its database product and did not signal a trend.

"We did a big product launch and had a set of one-off costs for that," Chief Executive Mike Lynch said in an interview.

"If you took that out the operating margin (34 percent) would have been 43 percent, which for Q3 is a record."

Shares in the group, which have increased by 87 percent in the last 12 months and have outperformed the Dow Jones European technology index .SX8P by 13 percent, were 7.2 percent lower at 1,481 pence by 0924 GMT.

Panmure Gordon analyst George O'Connor said the results were at the bottom end of expectations.

"Today's a day for the bears," he said. "EPS was shy of our expectations, a casualty of the gross margin which at 86 percent was lower than we anticipated."

O'Connor, who rates the shares a "buy", reduced his full-year EPS forecast to $0.977 from $1.005 and target price to 1,790 pence from 1,868 pence.

Analysts at Numis said Autonomy showed an excellent top line performance, but contained plenty of surprises in the makeup of the bottom line.

They said that EPS included a $0.04 benefit from a low tax charge and a high research and development capitalisation, which when stripped out reduced EPS to $0.16, short of its $0.19 guidance.

SEARCHING FOR MEANING

Autonomy's new product, IDOL SPE, applies the company's patented search algorithms to databases, enabling companies to perform intelligent searches.

"It opens up a very big opportunity for us," Lynch said. "We got a bit swamped -- our quickstart programme went far faster than expected, we thought we'd spend 15 million (dollars) on launching this thing but we ended up spending 18 million." The group is also developing its technology in marketing applications for call centres and e-commerce retailers.

"Meaning-based marketing we think will be very strong in an upturn," he said. "Tesco (TSCO.L) is using it already, but demand will pick up as the economy recovers."

Lynch is not calling the recovery yet, despite positive earnings results from U.S tech companies and forecasts of a lift in IT spending in 2010. [ID:nN19371000]

"The current forecast says winter continues," he said. "If we thought spring was arriving then I would expect to see stronger growth than the current forecasts."

The company is expected to report full-year revenue of $741.1 million and EPS of $1.00, according to Thomson Reuters I/B/E/S. (Editing by Kate Holton and Karen Foster)