Scotia Capital expects big things from Cognos Q

Our ever brilliant friend, Scotia Capital Software and Services analyst Paul Steep, put out some upbeat stuff (particularly upbeat for Paul) this am on the upcoming Cognos (CSN:TSX) quarter. Read the entire note to hear about what Microsoft (MSFT:NASDAQ) is up to in the analytics space. Perhaps a couple of good quarters will finally bring on the friendly takeover at CSN (see post “Takeovers to come“, April 15-07).

Event

? Cognos will host its Q2 F2008 results conference call Thursday September 27 at 5:15pm (EST) dial-in 416-640-1907. We are looking for revenue of $251M and adjusted EPS of $0.39 (consensus of $251M and $0.38).

What It Means

? Our expectation is that Cognos will deliver strong Q2 results driven by a number of large million dollar plus deals and relatively easy year-over year comparables. On the conference call we will be focused on: the pace of C8 migrations, major R&D initiatives, and changes in the
enterprise spending environment.

? The launch of Microsoft PerformancePoint on September 19 is likely to raise competitive concerns across the BPM market. Our expectation is that PerformancePoint will impact Cognos and BOBJ primarily in competing for new mid-market customers by increasing pressure on pricing. We anticipate that the impact of PerformancePoint will be gradual over the next several years as Microsoft focuses efforts of increasing customer adoption.

Anticipating strong showing in Q2

? We anticipate that Cognos will deliver strong Q2 results when the firm reports on Thursday
September 27 driven by a number of large deals secured in the quarter (see Exhibit 1). In
addition, Cognos’ Q2/08 results are expected to benefit given the relatively easy year-over-year comparison versus Q2/07 when a number of large deals slipped at quarter end. This quarter will be the third quarter reported following a significant restructuring action announced on September 6, 2006 which resulted in a 6% decrease in the firm’s workforce. Over the past three quarters, Cognos has reported year-over-year operating margin improvement of approximately 3.0% to 4.5% from operational improvements. Our expectation is that the firm will see much of the operating margin improvement from the restructuring efforts offset this quarter due to the negative impact of a rising Canadian dollar compared with Q2/07.

Cognos 8 Upgrade cycle. Migrations and new sales of Cognos 8 continue to represent the key sales driver for the firm. Our discussions with partners indicate that a significant number of customers have yet to upgrade to C8 and given the effort required to migrate are carefully deliberating the benefits prior to undertaking a major upgrade. Over the past year, Cognos has reported continued progress in securing new sales of C8 (see Exhibit 2). C8 has now been in the market for over eight quarters and through several point releases as the firm has introduced incremental product introductions. The company has faced challenges in migrating large PowerPlay deployments to C8 given the architectural changes made in the latest release. In C8 version 8.3, the company indicated that it plans to launch Cognos 8 Transformer a tool designed to ease the migration process to C8 for existing Powerplay customers. Cognos 8 Transformer continues to be in beta testing with a number of customers and is expected to ship later in 2007. Our expectation is that the introduction of Transformer should help at the margin in terms of encouraging customer upgrades to C8 but is unlikely to be a panacea for major Powerplay deployments.

Expect changes to BPM landscape with Microsoft PerformancePoint

? Our view is that upcoming release of Microsoft PerformancePoint represents the latest incursion into the BI market by Microsoft. Microsoft is set to officially launch PerformancePoint Server 2007 (PPS) on September 19. The launch of PPS 2007 represents a significant introduction for Microsoft’s BI and BPM product set by enhancing the firm’s performance management offerings. PPS 2007 is designed to allow a firm to plan and analyze its key performance metrics and is based on technology from the ProClarity acquisition.

? We do not expect Microsoft PPS 2007 to have a material impact in the current or next fiscal
year on either Business Objects or Cognos. We anticipate that the launch of PPS 2007 represents a potential turning point in the BI/BPM markets as Microsoft delivers a product
targeted at the higher end of the mid-market with competitive pricing.

MRM