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Stay Smart With Business Intelligence

Posted: Aug 07, 2007 13:35 PM by Dean Lundell

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

There is no substitute for good intelligence. Not the kind between your ears mind you (though that's handy too), but the kind of intelligence that includes information on what your competitors or adversaries are up to. Today, staying competitive means more than simply reacting to your rival; it means predicting, analyzing and negating any advantage, before that advantage becomes a problem.

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We're going to look at three companies who create software that helps businesses do just that. Business intelligence is moving from massaging data to predictive analytics. Perhaps you'd like to stay a step ahead with one of these firms.

Broad Base of Loyal Clients
SPSS Inc. (Nasdaq:SPSS) has been around for about 38 years and enjoys a loyal client base of approximately 250,000 customers globally, including other software companies, universities, banks, insurance companies, police departments and government agencies. Even NASA uses SPSS product to predict part failures in the space shuttle program.

Roughly half its business comes from licensing agreements. The other half stems from consulting and maintenance and training. SPSS is not the only firm in this business, but it is entrenched with a 13% market share. Also, 58% of its business comes from international customers.

Although SPSS is the smallest of the firms we're going to discussed, with a market capitalization of about $720 million, it has a strong balance sheet and is positioned to take advantage of opportunities as they come along. However, SPSS needs to do better from a profit-and-loss perspective. SPSS can generate a gross margin over 93%, but manages a net margin of about 10% and a return on book equity of about 14%. (To learn how to do the proper homework on a company before you invest, see our Financial Statement Analysis Tutorial.)

The next stage in this business will be predictive analytics where it will encounter some formidable competitors such as Business Objects SA Cognos Inc (discusses next)and Oracle (Nasdaq:ORCL). Perhaps its integration of various products into a single platform will make the difference.

Growth by Acquisition
Business Objects SA (Nasdaq:BOBJ) has achieved a $4.2-billion market capitalization and $1.3 billion in sales, fueled largely through acquisitions. Taking over Crystal Decisions gave the company its launch into the business intelligence segment. BOBJ has subsequently acquired ALG, Nsite and Cartesis. Despite BOBJ's less-than-stellar financial results, the company has announced a new buyback program. Its growth rate in earnings, while averaging 32 % over the last three years, came in at a negative 9.7% last quarter. For a company that can generate a gross margin of about 75%, it only manages a net margin of 5.2% and a return on equity of 3.7%. Perhaps the company is suffering some acquisition indigestion.

Business Objects does command a respectable 14% market share in the business-intelligence market and is phasing out its old product for its latest version. There is room to grow - only 40% of its 42,000 customers have switched to the company's new version. In addition, sensing that the "large market" is saturated, BOBJ has developed products for mid-sized and small companies that can be handled via server and internet. This initiative is working well.

All this success has not gone unnoticed by the major players. Microsoft (Nasdaq:MSFT), Oracle and SAP AG (NYSE:SAP) are geared up to not only compete but to commingle their offerings into standard product suites. Fortunately for BOBJ, the cost is high for a customer to switch providers.

Northern Exposure
Canadian-based Cognos, Inc. (Nasdaq:COGN) is a company of contrasts. With a market capitalization of $3.5 billion and sales of almost $1 billion, this is a company that can and must do better. Cognos has a competitive advantage in that its product is technologically superior, yet it's financials have been mediocre. (To learn more about smart companies, read Competitive Advantage Counts.)

Perhaps the problem is as simple as exchange rates. The Canadian dollar continues to climb in relation to the U.S. dollar. Two-thirds of Cognos' costs are in Canadian dollars, yet only 7% of its revenue comes from Canada. Hedging can only take you so far. COGN's measures of revenue and profitability are going the wrong direction; growth in operating income has averaged 14% for the past four years while net margins have been on the decline since fiscal 2005.The firm's earnings growth has been similar. The company gets a 12% net margin from a gross margin of 78%, but it does manage a 16.7% return on equity.

If Cognos expects to compete with the likes of Microsoft, Oracle, SAP, Business Objects and SPSS, a clean balance sheet and no long-term debt won't be enough.

Consolidation in the Offing?
The business-intelligence software market is like any other. It is only so big and there are only so many firms with product offerings. The smaller firms will have to remain technologically superior or they'll find themselves lost in the shuffle.

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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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