Does Cognos Have Bad Karma? (COGN)

| About: Cognos Inc. (COGN)

Cognos Inc. (NASD:COGN) makes software that allows its customers to direct corporate processes by "enabling all of the key steps in the management cycle, —from planning and budgeting, to measuring and monitoring performance, to reporting and analysis". The company numbers Dow Chemical (NYSE:DOW), Mercedes AMG, Miller Brewing, The New York City Police Department, and Harrah's (NYSE:HET) among its well-known clients.

Business was pretty good for awhile. The company's revenue and operating income rose steadily in the three fiscal years ending February 2005, when the top line hit $825.5 million. Things slowed down a lot after that. The quarter ending February 28, 2005 had revenue of $256.3 million. Net income was $59.5 million. Then, it was downhill. Revenue for the May 2005 quarter was $200 million and for the next two quarters approximately $212 million each. Operating income for those two quarters fell to a little more than $32 million.

Revenue for the fiscal quarter ending February 28 got somewhat better, rising to $253.1 million. Although this was up from the two immediately previous quarters, the same period in the previous year had revenue of $256.3. Operating income fell from $59.5 million a year ago to $47.7 million. For the entire fiscal year, operating income fell from $158.7 million to $137.3 million.

However, guidance was good. The company expected the full 2007 fiscal year to have revenue of $940 to $960 million, up from $877.5 in fiscal 2006. The guidance for Q1 07 ending May 31, 2006 was for revenue in the $210 to $218 million range. The previous year, it was $200 million.

The company's business relationships and partnerships have also been picking up. In mid-April, Cognos announced that its Cognos Go! product would be integrated with Google (NASD:GOOG) OneBox for Enterprise and IBM (NYSE:IBM) Enterprise Search.

But, by mid-May, the clouds had gathered. Cognos announced on Monday May 15 that it would delay filing its 10-K because, according to the Associated Press: "The SEC staff is looking at how Cognos allocates revenue for post-contract customer support in contracts with multiple elements".

As investors, might expect, the SEC news sent the shares into a free fall on Tuesday and they ended the day down almost 13% at $30.13, and traded below $30 for part of the day. The stock's 52-week high is $42.

So far, there is nothing to really justify such a sharp drop. Valuing customer support in software contracts can be complex and it would seem that a restatement, if necessary, should be relatively modest. The company's balance sheet should not be affected.

If Cognos can make its new guidance and show that the anticipated sharp growth in its business is real, the issues depressing the stock should fall away. That would make the current shares unusually cheap.

COGN 1-yr chart:

Douglas A. McIntyre is the former Editor-in-Chief and Publisher of Financial World Magazine. He is also the former president of, which was the 10th most visited site in the world at the time, according to MediaMetrix. He has been chief executive of FutureSource LLC and On2 Technologies, Inc. and has served on the boards of and Edgar Online. He does not own securities in companies he writes about. He can be reached at