Ottawa-based Cognos grew its profits 4% in the quarter to $28.7m (or 31 cents per share), against revenue of $212m that was more or less in line with analyst estimates. License revenue for the quarter inched up 4% year over year to $78.6m.
Sales growth across all three of Cognos’ major geographic regions was led by Europe, up 22% in the quarter. The America’s region, which is Cognos’ strongest market accounting for 60% of revenue, also grew 15%.
However, the company’s sales growth was offset by a 22% increase in product and service costs and a 17% hike in operating expenses. Most of these costs were higher due to Cognos’ heavy investment in its Cognos 8 architecture, which it unveiled recently and puts Cognos at the front end of a major product cycle, plus its absorption of Swedish on financial consolidation software firm Frango AB last year.
Cognos CFO Tom Manley pointed to the impact of foreign currency exchange rates in relation to the Canadian dollar.
The Canadian dollar has risen and a third of our costs are in Canadian dollars, he said.
Cognos’ first SOA-based ReportNet enterprise reporting product, which was launched two years ago, continues to drive sales, pulling in $38m of license revenue in the quarter, up 15%.
Cognos’ main business performance management product, Cognos Planning, also grew 11% in the quarter. Cognos also said claims that its new Controller product (which is based on Frango) is starting to gain traction among customers and was part of several large deals it signed during the quarter.
The combined license revenue growth for both these products topped 50% in the quarter.
Sales of Cognos’ PowerPlay OLAP product however remain weak and dropped around 17% in the quarter. But this decline understandable since the product has effectively been re-written as a modern SOA application for the Cognos 8 architecture. Cognos expects Cognos 8 uptake to uplift PowerPlay sales.
Cognos also issued revenue guidance of $230m to $237m for its current (third) quarter earnings of 36 cents to 39 cents per share. While revenue falls within analyst expectations of $235.4m, earnings fall short of the 40 cents that analysts expected.
Manley said the discrepancy can be attributed directly to the rise of the Canadian dollar which has risen by 4 cents in the last month or so.
Cognos however still maintains it year-end forecast of $915m to $930m. and overall earnings of between $1.52 and $1.58 per share.
We’ll be making appropriate adjustments in our business model to make sure we meet that guidance and we’re going to be more prudent with our spending, Manley said.
Cognos issued a statement this week, curiously calling the results strong and pointing to quarterly earnings that exceeded market guidance and 9 contracts worth over $1m. Cognos also said it exited the quarter with a war chest of $500m.
With the recent launch of Cognos 8 BI we are poised to continue our strong growth into the second half of our fiscal year, said Mychelle Mollot, Cognos’ vice president of analyst relations and market strategy, in an email sent to analysts.
Cognos 8 is scheduled for general release on November 18.
While the results aren’t bad, they are disappointing given Cognos’ past track-record and high standards. The company has been a consistent bellwether for growth in the BI sector for the past several years. However the normally rock-solid Cognos stumbled earlier this year after it cut its guidance for its first quarter – the first time it has done so in 16 consecutive quarters – and sales slumped by around $56m from the previous quarter.
Of course Cognos 8 can be blamed for the slowdown in new license transactions as customers anticipate upgrading to the next generation architecture. Historically, Cognos’ license growth has slowed prior to the launch of its last two major product cycles.
But it has always bounced back in the past and the company is confident that Cognos 8 will provide a new springboard for growth. Existing customers that are up to date on their maintenance contracts will get a free ride to upgrade to Cognos 8. But expect Cognos to aggressively pursue cross-selling opportunities well into next year as well as it tries to migrate more of its older Series 7, PowerPlay and older Impromptu reporting customers and onto its shiny new SOA-based Cognos 8 architecture.
ReportNet remains a key license revenue generator and Cognos continues to witness more migrations every month from its legacy Impromptu and Impromptu Web Reports (IWR) base. The opportunity remains large. Cognos says that so far ReportNet has been deployed by just 2,500 customers out of its 23,000 customers worldwide.
Nevertheless investors punished Cognos on the markets. Cognos’ shares slipped by as much as 5% to $37 in Nasdaq after hours session following the announcement of the results.
