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Cognos Surviving In A Cutthroat Game

Posted: Oct 11, 2007 10:54 AM by Dean Lundell

Tickers in this Article: INFA, ORCL, SAP, MSFT, BOBJ, COGN

Business intelligence company Cognos (Nasdaq:COGN) reported solid, if unexciting, financial results for the second quarter ended August 31. So far, the company has managed to survive in an intensely competitive industry.

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Business intelligence is a little like the real intelligence game. Rivals can quickly become allies - allies can quickly become rivals, and rule No.1 is always watch your own back. In this cutthroat climate, Cognos has carved out a niche for itself. Let's look a little closer at the company and its results to see if this success can continue.

Cognos, based in Ottawa, Canada, is one of the industry leaders in business intelligence and performance measurement. The firm's products take disparate pieces of information from any number of sources and transform them into a cohesive product that managers can use to spot trends, correct deficiencies and correlate it all for a smoother, more efficient operation.

Solid Second Quarter
For its second quarter, the firm's revenue grew 10% versus the same period a year ago, to come in at $252.4 million, of which the license revenue portion grew by 12% to $87 million. Net income on a U.S.-GAAP basis also grew at 12% for the quarter to $26.5 million for 31 cents per share versus 26 cents earned in the same period a year ago. The earnings per share (EPS) of 31 cents per share beat previous consensus estimates for the stock by a single penny.

Management at Cognos has goals for revenue to come in at $270 million to $285 million for the third quarter and approximately $1.1 billion for the full year. The company's goal for EPS on a U.S.-GAAP basis is 36 cents to 44 cents for the third quarter and $1.66 to $1.76 for the entire year. Cognos also announced a stock repurchase program that allows for the repurchase of up to $200 million worth of common shares by this time next year. (To learn more about repurchases, see A Breakdown Of Stock Buybacks.)

The recent quarterly results at Cognos are pretty remarkable when one considers that the firm has to compete with the likes of Business Objects (Nasdaq:BOBJ) and giants such as Microsoft (Nasdaq:MSFT), SAP Corp. (NYSE:SAP) and Oracle (Nasdaq:ORCL).

Acquisition Frenzy
If the level of competition in this business isn't intense enough, competition of acquisitions is every bit as demanding. Some of the deals cemented in the first half of 2007 are impressive indeed. Among them were Oracle's purchase of Hyperion for a whopping $3.3 billion, Business Objects acquisition of Cartesis for $300 million and SAP's purchase of OutlookSoft for an undisclosed figure.

Not to be outdone on the acquisition front, Cognos has agreed to acquire Applix for $399 million. Applix provides analytic software that will make Cognos' products more powerful and allow them to compete more effectively with firms such as Oracle. There are also rumors that IBM could be interested in acquiring Cognos outright.

One of the challenges customers face is working their way through the huge amount of data that these products generate and trying to make sense of it. To address that problem, Cognos has formed an alliance with Informatica (Nasdaq:INFA), which provides a product that integrates all this data into a consistent and usable format. This alliance will allow Cognos to combine these two products into one and sell them on a global basis.

Bottom Line
While it is by no means operating in an easy environment, Cognos appears to be holding its own. I think investors would do well to keep their eyes on this stock, as it could have solid upside potential if it can prove that its recent earnings surprise wasn't just a one-time affair.

For related reading, check out The Advantages Of Investing In Aggresive Companies.

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By Dean Lundell

Dean Lundell is a former vice president at Merrill Lynch Capital Markets, a principal of a regional investment bank, an independent futures trader and licensed commodity trading advisor. He has written for McGraw-Hill, the Chicago Mercantile Exchange and several financial magazines. Prior to his career on Wall Street, he served with the 82nd Airborne Division in Vietnam.

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