— 24 percent license revenue growth drives Q3 revenue and earnings performance —
Ottawa, ON & Burlington, MA, December 20, 2006- Cognos Incorporated (Nasdaq: COGN; TSX: CSN) (all figures in U.S. dollars), the world leader in business intelligence (BI) and performance management solutions, today announced financial results for its third quarter of fiscal year 2007, ended November 30, 2006.
Revenue for the third quarter was $247.8 million, compared with $212.3 million for the same period last fiscal year, an increase of 17 percent. License revenue was $94.0 million, compared with $75.5 million in the third quarter of last fiscal year, an increase of 24 percent.
Net income in the quarter on a U.S. GAAP basis was $16.5 million or $0.18 per diluted share, compared with $24.0 million or $0.26 per diluted share for the same period last fiscal year. Net income in the quarter on a non-GAAP basis (excluding amortization of acquisition-related intangible assets, stock-based compensation expense and restructuring charges) was $43.1 million or $0.48 per diluted share, compared with $29.5 million or $0.32 per diluted share for the same period last fiscal year.
Revenue for the first nine months of fiscal year 2007, ended November 30, 2006, was $694.7 million, compared with $624.4 million for the same period last fiscal year, an increase of 11 percent. License revenue for the nine-month period was $245.7 million, compared with $225.3 million for the same period last fiscal year, an increase of 9 percent. Net income on a U.S. GAAP basis in the nine-month period was $54.8 million or $0.61 per diluted share, compared with $69.3 million or $0.74 per diluted share for the same period last fiscal year. Net income for the nine-month period on a non-GAAP basis (excluding amortization of acquisition-related intangible assets, stock-based compensation expense and restructuring charges) was $93.0 million or $1.03 per share, compared with $84.4 million or $0.91 per diluted share for the same period last fiscal year.
Third quarter non-GAAP results differ from results measured under U.S. GAAP as they exclude $1.7 million of amortization of acquisition-related intangible assets, $7.1 million of stock-based compensation expense and $26.9 million of restructuring charges, before taxes. Compared to the GAAP results, this is an increase of $0.30 per share, in the aggregate, after the effect of taxes. Non-GAAP results for the first nine months differ from results measured under U.S. GAAP as they exclude $5.1 million of amortization of acquisition-related intangible assets, $18.0 million of stock-based compensation expense and $26.9 million of restructuring charges, before taxes. Compared to the GAAP results, this is an increase of $0.42 per share, in the aggregate, after the effect of taxes. A reconciliation of U.S. GAAP to non-GAAP results is included at the end of this press release.
Cognos’ balance sheet remains strong. Third quarter operating cash flow was $23.5 million. As a result, the company exited the quarter with $599.3 million in cash, cash equivalents, and short-term investments. Days sales outstanding (DSOs) for accounts receivable were also strong at 61 days in the quarter.
“I am pleased with the performance of our team this quarter,” said Cognos president and chief executive officer, Rob Ashe. “In particular, 24 percent license revenue growth, significantly improved margins and earnings, and continued strong momentum for our product and solution set is a testament to the hard work and focus of the entire Cognos team.”
Recent Highlights:
Mr. Ashe continued, “We enter our fourth quarter with a continued commitment to customer success, a healthy pipeline, a strong solution set led by Cognos 8, and an expanding Performance Management market opportunity. I feel very good about our business and our opportunity moving forward.”
Business Outlook
The company’s outlook for the fourth quarter and full fiscal year 2007 assumes no significant changes in the economy, a U.S. GAAP tax rate of 22.5 percent and a Canadian dollar of $0.87 U.S. and a Euro of $1.32 U.S. for the remainder of the year.
Management offers the following outlook for the fourth quarter of fiscal year 2007 ending February 28, 2007:
Expected non-GAAP diluted earnings per share for the quarter ending February 28, 2007 exclude approximately $1.7 million of amortization of acquisition-related intangible assets and approximately $6.7 million of stock-based compensation expense, before taxes. This is an increase of approximately $0.07 per share, in the aggregate, after the effect of taxes.
Management offers the following outlook for the full fiscal year 2007 ending February 28, 2007:
Expected non-GAAP diluted earnings per share for fiscal year 2007 ending February 28, 2007, exclude approximately $6.8 million of amortization of acquisition-related intangible assets and approximately $24.7 million of stock-based compensation expense, and $26.9 million of restructuring charges, before taxes. This is an increase of approximately $0.50 per share, in the aggregate, after the effect of taxes.
The company’s current planning parameters for fiscal year 2008 include 10 percent revenue growth and operating margins of approximately 16 percent on a GAAP basis and approximately 20 percent on a non-GAAP basis.
Cognos management will host a conference call to present results for the third quarter of fiscal year 2007 and business outlook at 5:15 p.m. Eastern Time, today, December 20, 2006.
Listeners can access the conference call at 416-640-1907 or via Webcast at http://www.cognos.com/company/investor/events/fy07q3. Presentation slides for the call can be accessed at the Investor Relations area of the Cognos Web site approximately 15 minutes prior to the start of the call.
An archive of the Webcast can be accessed at
http://www.cognos.com/company/investor/events/fy07q3 following the conference call.
A replay of the conference call will be available from December 20 at 8:15 p.m. Eastern Time until January 3 at 11:59 p.m. Eastern Time. The replay can be accessed at 416-640-1917. The passcode for the replay is 21211370#.
Safe Harbor for Forward-Looking Statements
Certain statements made in this press release that are not based on historical information (including those in the section entitled “Business Outlook”) are forward-looking statements which are made pursuant to the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934 and Section 138.4(9) of the Ontario Securities Act. Such forward-looking statements relate to, among other things, the company’s expectations with respect to revenue and earnings per share (on both a GAAP and non-GAAP basis) for the fourth quarter of fiscal year 2007 and the full fiscal year 2007; planning parameters for fiscal year 2008 revenue and operating margins; the assumptions set out in the “Business Outlook” including those relating to the economy, U.S. GAAP tax rate, the exchange rate for the Canadian dollar and Euro in U.S. currency; the amount and impact of amortization of acquisition-related intangible assets, stock-based compensation and restructuring charges; the company’s pipeline, market opportunity and drivers of its market; and other matters. Certain assumptions were applied in making the forward-looking statements, such as the business outlook, and material assumptions are set out above in the section entitled “Business Outlook.”
In addition to our GAAP results, Cognos discloses adjusted revenues, operating margin percentage, net income and net income per diluted share, referred to respectively as “non-GAAP revenues”, “non-GAAP net income,” and “non-GAAP net income per diluted share.” These items, which are collectively referred to as “Non-GAAP Measures”, exclude the impact of stock-based compensation, the amortization of acquisition-related intangible assets, the restructuring charges related to our margin improvement plan, and the impact on revenue of the write-down of acquired deferred revenue to fair value, as required by GAAP upon the acquisition of Applix, Inc., (collectively “Excluded Items”) as these items are considered non-recurring. From time to time, subject to the review and approval of the audit committee of the Board of Directors, management may make other adjustments for revenues, expenses, gains and losses that it does not consider reflective of core operating performance in a particular period and may modify the Non-GAAP Measures by adjusting these revenues, expenses, gains and losses. Management makes these adjustments so that core operating performance reflects management’s business activities as well as changes within the software industry.
Management defines its core operating performance to be the revenues recorded in a particular period and the expenses incurred within that period which management has the capability of directly affecting in order to drive operating income. Management has excluded the effect of the deferred revenue adjustment to fair value upon the acquisition of Applix, Inc. as the adjustment will reduce the comparability of future periods performance when renewals occur, which will drive operating income. The Excluded Items are removed from our core operating performance because the decisions which gave rise to these revenues and expenses were not made to drive revenue in a particular period, but rather were made for our long-term benefit over multiple periods. While strategic decisions, such as the decisions to issue stock-based compensation, to acquire a company or to restructure the organization, are made to further our long-term strategic objectives and do impact our income statement under GAAP, these items affect multiple periods and management is not able to change or affect these items within any particular period. Therefore, management excludes these impacts in its planning, monitoring, evaluation and reporting of our underlying revenue-generating operations for a particular period.
Prior to the adoption of FAS 123R on March 1, 2006, the beginning of our fiscal year 2007, management’s practice was to exclude stock-based compensation internally to evaluate performance. With the adoption of FAS 123R, management concluded that the Non-GAAP Measures could provide relevant disclosure to investors as contemplated by Staff Accounting Bulletin 107. As of the beginning of our fiscal 2007, management also began excluding amortization of acquisition-related intangible assets when assessing appropriate adjustments for non-GAAP presentations. When we acquired Applix, Inc. in the third quarter of fiscal 2008 management began excluding the impact of charges relating to the write-down of deferred revenue when presenting our Non-GAAP Measures. While all of these items affect GAAP net income, management does not use them to assess the business’ operational performance for any particular period, and management’s short term compensation is not based on them because: each item affects multiple periods and is unrelated to business performance in a particular period; management is not able to change the items in any particular period; and the items do not contribute to the operational performance of the business for any particular period, or in the case of excluding the write-down of deferred revenue, the exclusion helps the user understand the future ongoing operational performance when the support is renewed.
In the case of stock-based compensation, as disclosed in our Annual Report on Form 10-K, Item 11, (which incorporates by reference the Corporation’s Proxy Statement, specifically the Compensation Discussion and Analysis) for the fiscal year ended February 28, 2007 (“2007 Form 10-K”), our compensation strategy is to use stock-based compensation as a key tool to align management “to make strategic decisions and to manage Cognos with a view to increasing shareholder value through an increase in Cognos’ share price over the medium and long-term.” Whether the grant of stock options or restricted share units are part of a Key Employee grant, are merit based or are granted based on meeting specific performance criteria in a measurement period, these grants vest over time and are aimed at long-term employee retention, rather than at motivating or rewarding operational performance for any particular period. Thus, stock-based compensation expense varies for reasons that are generally unrelated to operational performance in any particular period. We use annual cash bonus payouts for executives and other employees to motivate and reward annual operational performance in the areas of revenue and operating margin achievement.
Management views amortization of acquisition-related intangible assets, such as the amortization of an acquired company’s research and development efforts, customer lists and customer relationships, as items arising during the time that preceded the acquisition. It is a cost that is determined at the time of the acquisition. While it is continually viewed for impairment, amortization of the cost is a static expense, one that is typically not affected by operations during any particular period, and does not contribute to operational performance in any particular period.
The margin improvement plan reflected a fundamental realignment of our business, including significant personnel reductions within higher levels of management. The restructuring charges are excluded in our non-GAAP Measures because they are significantly different in magnitude and character from routine personnel adjustments that management makes when monitoring and conducting the Corporation’s core operations during any particular period. The restructuring decision and related expenses are not related to operating performance for any particular period, and are not subject to change by management in any particular period. Instead, the restructuring was intended to align our business model and expense structure to our position in the market we were experiencing, and expect to continue to experience, over the long term.
Management views the impact of the write-down of acquired deferred revenue to fair value, due to purchase accounting, as a non-recurring acquisition only adjustment, and it is not consistent with the method used by management to value the entity when it is acquired. This has the effect of increasing support revenue to the amounts that would have been recorded in the absence of the purchase accounting adjustments required by GAAP. Management’s view is that to exclude deferred revenue because of purchase accounting adversely impacts the ability to make comparisons between past and future reports of financial results, as the revenue reduction related to acquired deferred revenue will not recur when related annual software maintenance contracts are renewed in future periods. Management believes that the inclusion of the amount will render the financial statements easier for investors to understand.
Management also uses these Non-GAAP Measures to operate the business because the Excluded Items are not under the control of, and, accordingly, not used in evaluating the performance of, operations personnel within their respective areas of responsibility. In the case of stock-based compensation expense, the award of stock options is governed by the Human Resources and Compensation Committee of the Board of Directors. With respect to acquisition-related intangible assets, acquisition-related deferred support revenue write-down and charges associated with the margin improvement plan, these charges arise from acquisitions and a restructuring that are the result of strategic decisions which are not the responsibility of most levels of operational management. The restructuring charges, like our stock-based compensation charges, acquisition-related deferred support revenue write-down and amortization of acquisition-related intangible assets, are excluded in management’s internal evaluations of our operating results and are not considered for management compensation purposes.
Ultimately, the Excluded Items are incurred to further our long-term strategic objectives, rather than to achieve operational performance objectives for any particular period. As such, supplementing GAAP disclosure with non-GAAP disclosure using the Non-GAAP Measures provides management with an additional view of operational performance by adjusting revenues, expenses, gains and losses that are not directly related to performance in any particular period. Further, management considers this supplemental information to be beneficial to shareholders because it shows our operating performance without the impact of the Excluded Items that are largely unrelated to the performance of our underlying revenue-generating operations during the period in which they are recorded. Including such disclosure in our filings also provides investors with greater transparency on period-to-period performance and the manner in which management views, conducts and evaluates the business.
Because the Non-GAAP Measures are not calculated in accordance with GAAP, they are used by management as a supplement to, and not an alternative to, or superior to, financial measures calculated in accordance with GAAP. There are a number of limitations on the Non-GAAP Measures, including the following:
Because of these limitations, management recognizes that the Non-GAAP Measures should not be considered in isolation or as an alternative to our results as reported under GAAP. Management compensates for theses limitations by relying on the Non-GAAP Measures only as a supplement to our GAAP results.
Cognos, the world leader in business intelligence and performance management solutions, provides world-class enterprise planning and BI software and services to help companies plan, understand and manage financial and operational performance.
Cognos brings together technology, analytical applications, best practices, and a broad network of partners to give customers a complete performance system. The Cognos performance system is an open and adaptive solution that leverages an organization’s ERP, packaged applications, and database investments. It gives customers the ability to answer the questions -- How are we doing? Why are we on or off track? What should we do about it? – and enables them to understand and monitor current performance while planning future business strategies.
Cognos serves more than 23,000 customers in more than 135 countries, and its top 100 enterprise customers consistently outperform market indexes. Cognos performance management solutions and services are also available from more than 3,000 worldwide partners and resellers. For more information, visit the Cognos Web site at http://www.cognos.com.
(US$000s except share amounts)
(Unaudited)
RECONCILIATION of US GAAP to Non-GAAP
Diluted Earnings per Share for Business Outlook
(Unaudited)
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