Cognos' Earnings Take A Hit

Delays in shipping Cognos 8 and fewer million-dollar deals during Q3 take a bite out of license revenue.
Business intelligence software vendor Cognos Inc. Wednesday reported slower sales and decreased earnings for its third quarter ended Nov. 30. Delays in shipping a major new release of its flagship software and organizational problems with closing large deals led to what Cognos executives admitted was a disappointing quarter.

Sales for the quarter were $212.3 million, up less than 1% from the same period one year earlier, while earnings dropped nearly 18% year-to-year to $28.3 million. License revenue dropped 18% to $75.5 million.

While Cognos formally announced Cognos 8, a new release of its business intelligence platform, in mid-September, last-minute development and production problems held up the software's availability until Nov. 18, says Neal Hill, Cognos senior VP of corporate development. That means the new software was only generating revenue from that date until the quarter ended Nov. 30.

Hill admitted that Cognos management did a poor job communicating with its customers and the Cognos sales force about just when the product would be available. Cognos said the product generated $14.4 million in license revenue during the short period of time it was shipping. "We think the customer demand is generally out there and the product acceptance is outstanding," Hill says.

Cognos also said it closed only seven contracts valued at more than $1 million during the quarter, compared to 15 such deals in the same quarter last year. "There were many large deals in the pipeline that we weren't able to turn into revenue," Hill acknowledged. Cognos experienced a similar shortfall in closing deals worth $1 million or more in its first quarter.

Business intelligence deals are growing as more companies standardize on one or two products and deploy business intelligence software on a company-wide basis. Hill says Cognos' sales forecasting systems haven't kept pace with those changes " such as incorporating more information from systems integration partners " and Cognos' sales processes have to adapt to the longer sales cycles that come with bigger contracts.

Hill was confident Cognos is making the changes it needs to correct the problems, such as hiring an SAP executive as Cognos' new VP of global professional services during the quarter. Hill said no layoffs or major restructurings are planned because of the poor quarter.

As recently as September when Cognos announced its second quarter results the company said it expected sales for the third quarter to fall in the range of $230 million to $237 million. But on Dec. 1 the company said revenue would only be in the range of $209 million to $212 million. At the time president and CEO Rob Ashe said forecasting and execution in closing large sales opportunities "were poor," and the transition to Cognos 8 "proved challenging."

For the current quarter Cognos expects revenue in the range of $230 million to $240 million. For fiscal 2006 ending Feb. 28, the company expects revenue to reach $854 million to $864 million.