Why Cognos loves Oracle

By Tom Taulli
April 4, 2007

When Oracle (Nasdaq: ORCL) acquired Hyperion Solutions a month ago, traders buzzed that the software sector’s next target might be Cognos (Nasdaq: COGN). Rumored suitors included Hewlett-Packard (NYSE: HPQ), SAP (NYSE: SAP), and IBM (NYSE: IBM). But that’s all pure speculation; Cognos might not need a buyout to keep its shares growing.

Cognos develops business intelligence (BI) software that helps companies better analyze databases and business applications. Its 23,000 customers include marquee names like Home Depot (NYSE: HD), Amazon.com (Nasdaq: AMZN), and Dow Chemical (NYSE: DOW).

Fiscal fourth-quarter revenues increased 12% to $284.5 million, while earnings per share spiked 55% to $0.67. Cognos’s sales team scored 25 contracts of $1 million or more, helping to push software license sales up 11% to $130 million. These revenues should lead to higher maintenance and service fees over the next few years.

The quarter’s only drag was Cognos’ drop in gross margins from 82.8% to 81.7% over the past year, drained by weakness in the company’s services business. To fix these flaws, Cognos is redeploying key employees, working to generate greater demand, and adding incentives for education and e-learning offerings.

Ironically, the Oracle-Hyperion deal might actually benefit Cognos. Hyperion customers are probably concerned that Oracle could rework Hyperion’s product line to fit better with its own databases and business applications. That could mean higher costs for Hyperion customers, should they eventually need to migrate to Oracle’s offerings, making Cognos’s rival products seem more appealing.

The Oracle deal also validates BI’s importance and establishes a valuation benchmark. Hyperion sold for 3.4 times sales, compared to the 3.1 times sales at which Cognos currently trades.

With ample momentum in license revenues, and growing opportunities to pick off more customers from Hyperion, Cognos’ management may not be interested in selling out right now — at least, not before it’s gained a bit more upside in its shares from Mr. Market.

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