Despite posting disappointing performance in new license revenues, business intelligence software vendor Cognos Inc. yesterday reported solid top-line growth on a small decline in net earnings, in its second fiscal quarter.
Revenue for the quarter ended August 31 was $229.9 million, compared with $212 million for the same period last fiscal year. License revenue, however, came in at $78 million, compared with $78.6 million in the corresponding period last year.
Carrying the quarter for Cognos were product support and services revenues, which reached $103.2 million and $48.6 million, respectively, compared with $93 million and $41.3 million in the like period last year.
Net income on a GAAP basis was $23.8 million, or 26 cents per diluted share, which exceeded earlier guidance. That figure, however, was off $1.1 million from the $24.9 million -- or 27 cents per diluted share -- reported in the like period last fiscal year. Cognos's quarterly net income on a non-GAAP basis (excluding amortization of acquisition-related intangible assets and stock-based compensation expense) was $30 million, or 33 cents per diluted share, compared with $29.9 million, or 32 cents per diluted share, for the same period last fiscal year.
In a conference call with analysts, CEO Rob Ashe said he was pleased with the fiscal second quarter results, but expressed disappointment with the new license revenue generated in the period. He attributed the shortfall, in part, to disruptions caused by a recently concluded SEC investigation, which hurt earnings to the tune of $2 million.
Cognos recorded 10 orders of $1 million or more in value during the second fiscal quarter, compared with nine in the like period last year, but down from 13 in the first fiscal quarter. A Cognos spokesman told Managing Automation that several of these large deals were signed by manufacturing companies for performance scorecarding and supply chain visibility projects, although he declined to identify the companies.
He said that Cognos 8, the company's flagship business intelligence system, which has been on the market for the last year, "led the charts" in the period, but that the company's entire product set was well represented in sales to manufacturers during the quarter. During the period, Cognos also established "traction" with its recently announced Sales and Operations planning blue prints, which are aimed at helping manufacturers improve their management of capital assets.
To improve its asset utilization and operating margins, Cognos earlier this month laid off 210 employees -- or 6% of its workforce. The action was aimed at improving the company's organizational agility by creating more touch points with customers and prospects, Ashe said. Hardest hit by the layoffs, he said, were managers and personnel in non-revenue-generating or administrative positions.
The staff reduction, he noted, is expected to generate cost savings of approximately $28 million on an annualized basis, $13 million of which will be realized in the second half of this fiscal year, he noted.
At the same time, Ashe noted that Cognos continues to invest in its sales and professional services organizations. For instance, the company added 23 employees to its sales organization in the second quarter, bringing its headcount to 366. Cognos expects to hire an additional 20 to 25 sales representatives before the end of the fiscal year, Ashe said.
With the SEC review and workforce realignment behind it, Cognos enters the traditionally stronger second half of the fiscal year with a healthy pipeline against which Ashe said the company expects to deliver better performance. He cited several industry trends that buoy his confidence: a push by large and mid-size companies to consolidate and standardize business intelligence tools across their enterprises; a move by companies to embrace service-oriented architectures; and recent surveys showing that business intelligence and enterprise performance management are among the top corporate investment priorities.
Ashe pointed to additional reasons to be optimistic about the company's performance in the second half of the fiscal year. These include the recent delivery of the first maintenance release for Cognos 8, which is expected to provide much-needed upgrade momentum; the debut of Cognos Go, which enables users to find BI content via leading search engines; new workforce management analysis software, which Ashe said has garnered strong market reception; the impending delivery of a remote access module for Cognos 8; and the business funnel generated by new partner IBM.
Cognos expects that revenue in the third quarter of fiscal year 2007, ending November 30, will be in the range of $237 million to $245 million, which would be a respectable increase from the $212 million posted in the comparable period last year, and would deliver GAAP earnings ranging between 10 and 14 cents per diluted share. For the year ending Feb. 28, 2007, the company expects revenues to be in the range of $950 million to $970 million, with GAAP earnings of between $1.08 and $1.15 per diluted share.
AMR Research analyst John Hagerty, for one, likes what he is hearing from Cognos. In a research note published before the Q2 results were released, he wrote that Cognos has "refined its game plan to take advantage of what it sees as market opportunities rather than threats." He noted that Cognos has "subtly shifted its stand on separate BI and corporate performance management (CPM) lines to a unified performance management agenda," a move which should resonate with organizations seeking to rationalize their investments in technologies that create increased visibility into and predictability around operational performance.
He also pointed to AMR projections that 2006 spending on BI and performance management tools would reach $23 billion -- a historic high for the category.
"If I had to summarize my opinion of Cognos in one word, it would be 'solid,'" Hagerty wrote, noting that he senses that the company's workforce realignment and strategic overhaul will help support revenue growth and improve profit margins even as enterprise software vendors Microsoft, Oracle, and SAP get more serious about the space.