Making good on an earlier promise to jumpstart sluggish financial performance, Cognos Inc. yesterday reported robust fiscal third-quarter top-line results that topped previous projections and were driven in part by solid growth in new licenses.
The business intelligence and performance management software vendor recorded revenue for the third quarter ended November 30 of $247.8 million, an increase of 17% from what was a disappointing comparable period last year. License revenue soared 24% to $94 million, propelled by strong adoption of Cognos 8, the company's flagship business intelligence suite, Cognos CEO Rob Ashe told analysts on a conference call last night.
Top-line results exceeded guidance provided by Cognos last period, when the company indicated that third-quarter revenues would come in between $237 million and $245 million. At that time, Ashe said the company was entering the traditionally stronger second half of the fiscal year with a healthy pipeline against which it expected to deliver better performance. And Cognos delivered.
Net income was another story. On a GAAP basis, the company netted $16.5 million, or 18 cents per diluted share, down from the $24 million, or 26 cents per diluted share, reported in the same period last year. Profits were dragged down, the company said, by severance charges related to a $26.9 million cost-cutting plan that Cognos disclosed in September.
The strong third quarter brought nine-month revenues to $694.7 million, up 11% from the like period last year, and net earnings to $54.8 million or 61 cents per diluted share. Cognos reported net earnings of $69.3 million or 74 cents per diluted share in the same period last year.
Overall, Ashe said he was pleased with the company's performance, citing tighter coordination and better execution across Cognos's far-flung operations as primary drivers. He said the third-quarter results were a reflection of continued strong demand from organizations that see business intelligence as a competitive differentiator and are seeking to standardize on a single software suite across functional areas.
Cognos's primary advantage vis-à-vis larger enterprise vendors like Oracle and SAP that are aggressively pursuing the performance management space is its ability to work more effectively with heterogeneous data types, Ashe said. He also cited the company's ability to deliver technological innovation more quickly and consistently as a result of its exclusive focus on business intelligence software as another competitive advantage.
As an example, he pointed to Cognos's out-of-the box support for generating reports from Salesforce.com's on-demand CRM suite. He told analysts to expect Cognos to announce its "first significant win" in this area this quarter.
An uptick in demand for Cognos 8, which accounted for $60 million in license revenue during the period, also contributed to the company's third-quarter success. "The recurring themes in wins for Cognos 8 were its 100% Web-based, modern service-oriented architecture; breadth of user coverage; and the extensibility of the platform to deliver new capabilities, such as Microsoft Office integration, search, and the recently announced Mobile edition -- Cognos Go! Mobile [which will be available in late February]," Ashe said.
Overall, the company signed 11 contracts valued at more than $1 million in the third quarter, compared with seven in the like period last year, according to Cognos's COO Les Rechan. Average deal size for contracts greater than $50,000 improved to $222,000 from $157,000 in last year's third period, he added.
Business was strong across all geographies, with North America contributing 56% of total revenues, Europe 35%, and Asia-Pacific 9%. Direct sales generated 73% of revenues; existing customers were responsible for 77% of total sales.
Although Cognos doesn't break out its financial results by vertical sector, Paul Hoy, the company's director of manufacturing industry solutions, told Managing Automation that manufacturing-related business mirrored the company's strong overall performance in the period. He noted that manufacturing's continued push for improved supply chain visibility as well as sales and operations planning flexibility fit well with Cognos's performance management thrust.
This is particularly true in the consumer goods sector, where Cognos is seeing "phenomenal traction," Hoy said, declining to identify specific engagements.
The company's blueprints for building trade promotion management and planning and budgeting applications -- which are offered free of charge-- are helping Cognos to expand the use of business intelligence within the manufacturing enterprise, Hoy noted. And since Cognos 8 blends a real-time dashboard with reporting and analytics, manufacturers are able to start with one feature set and later adopt the other -- all within a single architecture, he added.
After a tough transition to Cognos 8, Ashe said he is confident the company is poised to resume steady growth. He said continued feature, function, and quality improvements made to its BI suite are enabling Cognos to capitalize on the cross-industry movement toward performance management software standardization. And with only 20% of the company's installed base on Cognos 8, the product has a good deal of revenue upside, Ashe noted.
Management's decision to add more direct sales personnel while reducing headcount in non-customer-facing positions, and to concurrently rely heavily on key allies, such as an expanding partnership with IBM, is fueling his optimism. Noting the company's "healthy pipeline" entering the fourth quarter, Ashe said he remains confident in Cognos's strategic positioning. "The performance management theme resonates with the business buyer, as all customers look to deliver more value to the organization [in terms of] insight, understanding, and action," he said, adding that IT buyers see the technology as critical to supporting the growth objectives of their companies.
Cognos also upped its fourth-quarter guidance. The company expects revenue to be in the range of $270 million to $280 million, with GAAP diluted earnings per share in the range of 54 to 60 cents. That would bring fiscal 2007 revenue to between $965 million and $975 million, up from the $950 million to $970 million range projected earlier, with GAAP diluted earnings per share of between $1.14 and $1.20.
The company didn't provide fiscal 2008 guidance, but said it expects year-over-year revenues and net profits to increase 10% and 16% respectively.
Responding to an analyst's inquiry, Ashe said the company remains open to acquisitions, but he characterized these opportunities -- without identifying any potential targets -- as incremental to Cognos's overall business plan.
What likely prompted the question is the company's strong balance sheet -- which makes Cognos both a potential acquirer as well as a possible acquiree. Cognos closed out the fourth quarter with $599.3 million in cash, cash equivalents, and short-term investments, up roughly $116 million from the same time last year.
Ashe declined to say whether the company was open to being acquired -- a question that has surfaced many times in the recent past -- reiterating instead the customer-oriented virtues of remaining independent.