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Cognos Incorporated (COGN)

F4Q07 Earnings Call

March 29, 2007 5:15 pm ET

Executives:

Tom Manley – SVP, Finance and Administration and CFO

Les Rechan - COO

Rob Ashe - President and CEO

Analysts:

Steve Ashley - Robert Baird

Tom Roderick - Thomas Weisel Partners

Robert Schwartz - Jefferies & Co.

Keith Weiss - Morgan Stanley

Brian Wallace – First Albany Corp.

Steven Li – Raymond James

John Torrey – Montgomery & Co.

Scott Penner – TD Newcrest

Christopher Sailer – Goldman Sachs

Jason Maynard - Credit Suisse

Michael Abramsky - RBC Capital Markets

Adam Holt - JP Morgan

David Hilal – Friedman, Billings, Ramsey & Co.

Edward Maguire – Merrill Lynch

Vik Churamani - Lehman Brothers

Nathan Schneiderman – Roth Capital Partners

Laura Lederman – William Blair & Co.

Presentation:

Operator

Welcome to the Cognos fourth quarter and full year fiscal 2007 conference call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question and answer session. Instructions will be provided at that time for you to queue for questions. If anyone has any difficulties hearing the conference, please press *0 for operator assistance at any time.

As a reminder, we will end today’s call promptly at 6:15 PM. We ask that you each limit yourself to one question so that everyone has a chance to participate. If we have time left after completing the first round of questions, you may queue to ask an additional question.

I would like to remind everyone that this conference call is being recorded on Thursday, March 29th of 2007, and we’ll now turn the conference call over to Tom Manley. Please go ahead.

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Tom Manley

Thank you.

Welcome to our conference call to discuss the company’s fourth quarter and full fiscal 2007 financial results. Joining me today are Cognos’ Chief Operating Officer, Les Rechan, and President and CEO, Rob Ashe.

For those of you following with the PowerPoint slides from our website, you should now move to slide 2 please.

Before I proceed, I would like to caution you that our remarks will contain forward-looking statements relating to, among other things, future revenues and earnings on the US GAAP and non-GAAP basis, expected margins, the assumptions and expected investments underlying our business outlook, our execution plan for fiscal year 2008, including plans for our services offering, expected timelines to implement our plans, hiring and headcount, future opportunities and success, performance of Cognos 8, integration of future products, the timing and content of product enhancements and releases, and prominent themes and market drivers in the BI market.

These forward-looking statements are made pursuant to section 21E of the Securities Exchange Act of 1934, and some are considered to provide forward-looking information as defined by the Securities Act. They are neither promises nor guarantees, but are subject to risk factors that may cause actual results to differ materially from expected results, and any conclusions, forecasts, or projections is a forward-looking statement.

A discussion of those risks is contained in our filings with the Securities and Exchange Commission and Canadian Securities administrators, including our most recent annual report on form 10K and quarterly reports on form 10Q and in our earnings press release of today’s date, as well as other periodic reports filed with the SEC.

For the purposes of the Securities Act, certain material factors and assumptions were implied in drawing a conclusion or making a forecast or projection, as reflected in certain forward-looking statements, and additional information with respect to those material factors and assumptions is contained in the earnings press release of today’s date and provided during this call.

Investors should not place undue reliance on such statements, which are currently only as of the day they are made. We disclaim any obligation to update them.

This conference call will also discuss non-GAAP financial measures as defined by SEC regulation G, to provide greater transparency regarding Cognos’ operating performance.

In particular, we will provide non-GAAP earnings per share, which excludes stock-based compensation expense, amortization of acquisition-related and tangible assets, and restructuring charges.

Any non-GAAP financial measures discussed should not be considered an alternative to measures required by US GAAP, and are unlikely to be comparable to non-GAAP information provided by other issuers.

Any non-GAAP measures disclosed are reconciled to the most directly comparable GAAP financial measure in a table provided on the investor relations page on our website at www.cognos.com.

Slide 3, please. Cognos delivered record revenue and earnings performance in our fourth quarter. Total revenue was $284.5 million compared to $253.1 million in the fourth quarter of last year, an increase of 12%.

Net income on a US GAAP basis in the quarter was $60.9 million compared with $39.3 million for the same period last year, an increase of 55%.

Net income on a non-GAAP basis, excluding amortization of acquisition-related and tangible assets and stock-based compensation expense, was $66.9 million compared with $45.2 million last year, an increase of 48%.

Earnings per diluted share on a US GAAP basis for the quarter was $0.67 compared with $0.43 for the same period last fiscal year.

EPS on a non-GAAP basis was $0.74, compared with $0.49 in the fourth quarter last fiscal year.

These fourth quarter non-GAAP results exclude from our US GAAP results $1.8 million of amortization of acquisition related and tangible assets and $6.6 million of stock-based compensation expense, all before taxes. Compared to the GAAP result, this is an increase of $0.07 per share in the aggregate after the effect of taxes.

License revenue for the fourth quarter was $130.5 million, compared to $117.9 million last year, an increase of 11%. Support revenue was $111.3 million, compared to $97 million last year, up 15%. Professional services revenue was $42.8 million in the quarter, compared to $38.2 million a year ago, up 12%.

Slide 4, please. GAAP gross margin in the quarter was 81.7% as compared with 82.8% a year ago. Non-GAAP gross margin in the quarter was 81.8% as compared with 83% a year ago.

Within our gross margin, our GAAP services margin of 8.8% was disappointing. For the year, our GAAP services margin was 10.9%, and non-GAAP services margin was 14.2%.

As we move in to fiscal year 2008, we are targeting a GAAP and non-GAAP services margin in the high teens. Expect modest improvements in our services margin in Q1 to low double digits.

Les will provide more detail on our global efforts in this area of the business during his remarks.

GAAP operating margin was 23.8%, up 7.2 percentage points from a year ago, and non-GAAP operating margin in the quarter was 26.7%, up 7.1 percentage points from a year ago.

This performance reflects the achievement of our objective: to have a strong Q4 margin run rate to enable us to achieve our margin objectives for fiscal year 2008.

Slide 5, please. Day sales outstanding for accounts receivable for the quarter was 70 days based on ending balances compared with 77 days recorded one year ago. Cognos exited the quarter with $691.9 million in cash, cash equivalents, and short-term investments. That increase in the quarter of $92.6 million. This increase was driven by strong operating cash flow of $118.8 million. We also repurchased $50 million of stock under our share repurchase program.

Slide 6, please. Cognos financial results for the full fiscal year 2007 were as follows:

License revenue of $376.2 million and total revenue of $979.3 million were up 10% and 12% respectively. US GAAP operating margin for the year was 12.1%, compared with 13.5% last year. Non-GAAP operating margin was 18%, compared with 16.5% a year ago.

US-GAAP net income was $115.7 million and non-GAAP net income was $159.9 million, an increase of 7% and 23% respectively. US GAAP EPS was $1.28 per diluted share, and non-GAAP EPS was $1.77 per diluted share, compared with $1.17 and $1.40 respectively a year ago.

We had very strong operating cash flow of $231 million. Our net cash balance through the year increased by $140.9 million, and in the year we repurchased $125.1 million of stock under our share repurchase program.

Overall, we are very pleased with our revenue, earnings, and cash performance in fiscal year 2007.

Slide 7, please. With regards to our outlook for the first quarter and full fiscal year 2008, we have assumed an exchange rate of $1.32 US for the Euro and $0.86 US for the Canadian dollar. We’ve also assumed a GAAP tax rate of 22% and 23% on a non-GAAP basis.

With these assumptions built into our outlook for the first quarter, we expect revenue in the range of $230-240 million. We expect US GAAP earnings per share to be in the range of $0.19-$0.24 and non-GAAP earnings per share in the range of $0.28-0.33.

These non-GAAP earnings estimates for the quarter exclude approximately $2 million of amortization of acquisition related and tangible assets and approximately $8.4 million of stock-based compensation expense, both before taxes.

To add a little more color to our Q1 outlook, I do want to highlight that this range reflects net income growth over last year in the range of approximately 20-50%. The earnings outlook incorporates approximately $4 million of new investments we are making internally in new IT infrastructure within our support organization to allow us to better serve our customers, and a share services operation for our European administrative functions to improve operating efficiencies.

For the full year, we expect revenue to be in the range of $1.055 billion to $1.075 billion. We expect GAAP earnings per share to be in the range of $1.66 to $1.73 with a non-GAAP earnings per share for the year in the range of $1.98 to $2.05. These non-GAAP earnings estimates for the full year exclude approximately $8.2 million of amortization of acquisition related intangible assets and approximately $31.6 million of stock based compensation expense both before taxes. I’ll now turn it over to Les for his comments on the quarter.

Les Rechan

Thanks Tom. Slide 8, please. Let me begin by reviewing some of the key operational metrics from Q4.

Slide 9 please. We closed a record 25 contracts greater than $1 million in the quarter, compared with 18 in Q4 of last year. We had 285 contracts greater than $200,000 compared with 242 a year ago. Average license order size for orders greater than $50,000 was $198,000 compared with $192,000 last year. These results demonstrate very strong large deal executions from our teams around the world. They also demonstrate the strategic value our customers place on our solutions, and the growing number of customers who are committing to broader based enterprise performance managed partnerships with Cognos.

Slide 10 please. The distribution of license revenue for Q4 was 70% direct and 30% through our partner channel. New business accounted for 29% with 71% coming from our existing customer base.

Slide 11 please. Overall, I was pleased with the combined growth of 14% we saw in support and services, and the progress we are making to improve our capabilities to better serve Enterprise class customers. As Tom mentioned, we are not happy with our services margin performance in the quarter.

Three factors have influenced this performance. First, over the course of the year, to help drive our services pipeline and revenue growth, we increased our client management headcount. While we closed a record number of larger services engagements in the quarter, our billable utilization in the client management skill set did not meet our internal targets. Second, demand and sales in the education area did not meet our expectations in the quarter. Third, larger deal sizes extended our closing cycles resulting in delays to project start dates.

Going forward, we have developed a clear plan to address these issues. First, we will rebalance our client management headcount, placing some of these professionals in fully durable roles. Second, we will increase our focus on demand generation, and deploy special incentives for our education and computer based training offerings. Third, we will continue to increase our sales alignment selling both large services engagements as well as packaged service offerings. The entire global leadership team is aligned and executing the specific actions I’ve outlined starting in Q1.

Slide 12 please. In terms of our major geographies, 56% of our revenue came from the Americas, 36% from Europe, and 8% from Asia-Pacific. For the Americas, revenue growth was 9%, in Europe revenue growth was 16% in reported US dollars and 6% in local currency. In Asia-Pacific, revenue grew 18% in reported US dollars and 14% in local currency.

Slide 13 please. We ended the quarter with 374 quota-carrying sales reps up 23 from a year ago and 10 from Q3. We continue a steady pace of incremental hiring within our field organization this quarter, particularly with the further expansion of our sales rep force. Our intention is to continue to grow our sales rep headcount to greater than 400 in fiscal year 2008.

Slide 14 please. We delivered strong operating results which demonstrate our execution progress, against the commitments we made at our financial analyst conference in October, to deliver strong bottom line results and double digit revenue growth while transforming our business to better serve our customers and partners.

As we move into fiscal year 2008, our execution plan centers on three key operational themes: Continued strong growth across all major revenue channels and geographies, customer success driven by an enhanced focus on solutions, and a solid foundation of winning conditions for our people. In Q4, we made significant progress on all three of these fronts, positioning us well for success in fiscal year 2008.

Slide 15 please. As our fourth quarter results indicate, we saw strong growth performances across all of our major channels and geographies, including several standout performances worth a special note. A strong quarterly performance from Global Major Accounts Team, particularly in the Americas.

We have expanded this program from a 120 accounts to 170 globally for fiscal year 2008, our continued progress in driving pipeline growth and execution in every revenue generating unit in the company, our Eastern European team which delivered 40% growth including a major contract with one of the regions largest financial institutions, and in China, where we closed our largest ever contract in that country.

Slide 16 please. In Q4, we continued to advance our focus on customer success by delivering truly end-to-end solutions capability to our clients. We made important progress across some key aspects of our solution offering including performance blueprints and our partner Ecosystem. To strengthen momentum of our partner, Ecosystem continues to enhance our overall solution offering. In Q4, we initiated development of four new performance blueprints with some our key partners, and we have announced a total of 13 new industry blueprints in fiscal year 2007. We achieved excellent OEM license revenue growth, particularly in the Americas, and we closed an excellent Q4 with IBM exceeding our targets for the first year of our global strategic alliance with IBM.

Slide 17 please. We have continued to strengthen our team at the executive level with the recent hiring of Mel Zeledon. Mel is an industry veteran who comes to us from Hyperion, as well as Siebel and Oracle earlier in his career. I’m confident he’ll make a tremendous impact for Cognos, our partners, and our customers as leader of our Global Alliances organization.

We recently held our annual Global Sales and Solutions kick-off meeting in Orlando. This was one of our most successful kick-offs ever. Our field teams are excited about our global team alignment, our strategy and execution road map, and the solution sets we have to offer our customers. Plans are fully in the hands of our reps and feedback is very positive. We look forward to holding our most successful Cognos forum and partner summit in May.

Our team is energized about our progress, coming out of a strong finish for fiscal year 2007, and we are aligned and optimistic about our ability to achieve success for our customers and our partners in fiscal year 2008. I will now turn the call over to Rob.

Rob Ashe

Slide 18 please. Organic license revenue growth of 11%, 25 conracts greater than $1 million, another strong performance from Cognos saved $92 million of license revenue and very strong operating margins in cash performance.

These fourth quarter results clearly display the momentum we are seeing in the market for BI and performance management solutions, and they validate the important and strategic steps that we have taken over the last several years. Our goal is to be the leader in performance management solutions for the Enterprise.

Slide 19 please. In (inaudible) intelligence we saw an excellent quarter, led by the continued momentum of Cognos 8. Our core BI license revenue growth was 12% for both the fourth quarter and the full fiscal year as Cognos 8 delivered over $238 million of license revenue in its first full year. We saw a good mix of opportunities from new business, as well as existing customers seeking to adopt Cognos 8 for new applications and migration.

There are two key market factors driving our BI opportunity today. First, solution led performance management, the foundation of which is our BI solution, and second, enterprise standardization. Our opportunity to full capitalize on these trends continues to strengthen which each release of Cognos 8. The most recent release of Cognos 8, Version 8.2, shipped in February and is another significant step forward.

Slide 20 please. We also saw good performance in our performance management applications business. Specifically in the office of finance, we’ve achieved a more balanced performance across our portfolio, including an expanded adoption of Cognos Controller, particularly in North America. We also saw more partner activity in this area, driven by our close, consolidate, and report performance blueprint shortly developed and delivered with (inaudible).

Cognos Planning continues to be a very strategic solution for our customers and for Cognos, is driving application value well beyond finance and typically leveraging a dollar of BI for every dollar of planning revenue. I am confident that the evolution of our Cognos 8 platform to include the complete integration of planning and consolidation, on to the Cognos 8 platform, now in Beta combined with the elimination of Hyperion, and an independent provider for the office of finance will contribute to strong performance for these solutions in FY ’08.

Work force performance delivered another strong quarter, for the third consecutive quarter a leading global HR outsourcing company in this quarter, Hewit Associates, has a selected a Cognos Inc. work force performance to enhance their service offering. Work force performance is a great example of the opportunities available to Cognos and our customers standing from the architecture of Cognos Inc.

All in all we deliver strong Q4 performance across a product solution portfolio with particularly strong performance of BI, and I believe we are very well positioned as we head into FY 08.

Slide 21, please. Looking forward, there are 3 major markets seen as driving our strategy. First, BI and BI standardization are top priority. Second, performance management is moving to the mainstream market. And third, BI and performance management are becoming pervasive.

I’m going to briefly comment on each of these trends and how Cognos can capitalize on these opportunities. First, all recent surveys confirm that business intelligence is a top priority for CIOs and standardization is a foundational theme in this market. Our large deal performance in the quarter demonstrates a compelling value proposition or other solution for this opportunity. We will capitalize on this opportunity with a strong brand and significant innovation within Cognos Inc.

Second, the market for performance management solutions has clearly evolved into the mainstream. This market is center front solutions for the office of finance led by consultization and planning. Strong and integrative capabilities in this area provide strategic footholds for which to drive performance management throughout the organization. In addition, the most important asset and biggest contributor for performance within any organization is its people and Cognos Inc. work force performance delivers a world-class solution for that critical area of focus.

Third, BI and performance management are becoming pervasive across data sources, types of users, and devices. Three key additions to our portfolio will drive Cognos to be the leader of performance management solutions for the enterprise. Cognos Inc. will search, Cognos Inc. co-mobile and sell equip. For example, Cognos Inc co-mobile extends the Cognos Inc value proposition to mobile devices, and is receiving a very high level of interest. In addition, a recent acquisition of cell (inaudible) extends our performance management solution to real time operational data across a variety of delivery vehicles including software, the service and appliance offerings.

With every shift in the market, new opportunities emerge. The shift in BI and performance management has allowed us to capitalize on the key investments we’ve made in recent years. The recent shift in the competitive landscape through consolidation presents yet more opportunity. Key segments of the market will continue to pursue broad for the European mutual solutions for performance management and we intend to capitalize on this opportunity and be the clear leader in performance management solutions for the enterprise.

To conclude, our fourth quarter and full Fiscal year results reflects the strength of our execution. The performance of Cognos Inc. speaks for the strength of our market and our record earnings demonstrate the strength of our business. On this solid foundation, we remain very confident in our team, our solutions and our opportunity going forward.

Operator, I’ll now open it up for questions.

Question-and-Answer Session:

Operator

Thank you, one moment please. Ladies and gentlemen we will now conduct the question and answer session. In order to keep this call to one hour, we request that you please strictly limit yourself to one question. In you have a question, please press the star followed by the one on your touchtone phone. You will hear a three toned prompt acknowledging your request. Questions will be taken in the order they are pulled. If you would like to decline from the pulling process, please press star followed by the two. Please ensure you lift the handset you are using has speaker phone before pressing any keys.

One moment please for your first question. Your first question comes from Steve Ashley of Robert Baird. Please go ahead.

Steve Ashley - Robert Baird

Hi Tom, I’d just like to follow up and just ask about that $4 million expenditure you expect in the first quarter. Is that just a one time in nature expense that’s going to pull through the P&L? And maybe you could just give us some color on what exactly you’re doing and what benefit you expect. Thanks.

Tom Manley

Well certainly within our Q1 outlook, it does incorporate two major initiatives that we initiated in Q1. One is application replacement of our support system. This will help us better serve our customers ongoing. That investment will continue on through Q2, Q3, but is incorporated into our overall outlook for the year. Our shared services initiative in Europe is front end loading our Q1. There will be some more cost in Q2, but not to the same extent. So, it does represent what I would call front-end loaded expense in Q1 and it will taper off as we go through the rest of the year.

Steve Ashley – Robert Baird

Thank you

Operator

Your next question comes from Tom Roderick of Thomas Weisel Partners. Please go ahead.

Tom Roderick - Thomas Weisel Partners

Hi, good afternoon, guys. I just want to take a deeper look into the margin structure. You recently talked about parameters of trying to hit 20% for this year and kind of guiding to lessen that obviously in a seasonally down first quarter. Should we think about this Q1 as a function of perhaps some stronger seasonality in the business on the license line, or should we think of this as something structural growing on with the services margins and something that’s going to take awhile to correct?

Tom Manley

Well, the seasonality that we see in our revenue profile is consistent with what we’ve seen in prior years. I don’t think you’ll see a big change from that point of view and I think that when you look at your models, it will reflect that.

In terms of the margins, certainly we are targeting, our objective is to have 20% non-GAAP margins next year. In Q1 specifically, certainly at the upper range of the range of the outlook is a 3%, about a 3% improvement over a year ago, so I don’t really see it being out of line with what our overall objectives are for total year business model performance. Does that answer your question?

Tom Roderick - Thomas Weisel Partners

Yes, and just if you could address the service margins as well, what drove those down and what gives you confidence that you can get them back to the high teens?

Tom Manley

I think that last talk already there’s some of the operational challenges that we’ve been working with, and there is plan to improve margins next year. We do expect to have a modest improvement going into Q1 on services margins. We should be comfortably within low double digits in performance next year. We believe that realistically we’ll be in high double digits, high teens, I should say, for the total year, and I think that the actions that Les has outlined are really going to enable us to achieve that. I think more importantly, the actions we are taking are going to provide a better service capability for our customers in terms of their overall success. So, Les, I don’t know if you want to make any more comments related to the overall plan?

Les Rechan

No, I think you hit it. I would emphasize that we do have a clear plan, and that we’re comfortable growing our services business for the year and working toward these high double digit margins for the business. And we do have both top and bottom line initiatives to drive that performance.

Rob Ashe

Tom, just to wrap on that, there’s 2 comments that I’d make. First of all, if you look at our Q1 guidance in that range that represents earnings growth in the range of 25-50%. We feel quite good about that on a year to year basis. You can take into account the cost Thomas has mentioned. But with respect to those costs, we look at the guidance for the year and the guidance for the quarter and we think we have a balanced plan. We see significant opportunity in the market. We saw very, very strong second half growth in our BI business with Cognos Inc. The sum of our applications: We look at the market, we look out in the next 12 months, and we see. You heard from Les, we’re entering the year with 274 sales reps and plans to go to 400. We think it’s a balanced plan that represents the achievement of the goals that we outlined three months and six months ago to get the 20 point overall operating margin. But at the same time, to take advantage of what we think is a significant opportunity in the market. So from that perspective, we think it’s a balanced plan.

Tom Roderick - Thomas Weisel Partners

That’s great, thank you guys.

Operator

Your next question comes from Robert Shwartz of Jefferies & Company. Please go ahead sir.

Robert Schwartz - Jefferies & Co.

Thanks so much. Can you talk about your close rates in the quarter past, your assumptions about close rates next year, and maybe relate that to linearity of the quarter and what it looks like going into Q1?

Tom Manley

Yeah, I think that from a close rate perspective, obviously we are pleased with the large deal performance…25 deals, greater than a million dollars. We are executing with discipline as it relates to creating joint success plans with the customer and really looking to quality assure, if you will, the connection of our partnership with the customer as well as our own execution. We’ve also, as a core discipline in the company as I talked to you about in October, this focus on pipeline. I call it pipeline interlock, and pipeline growth across all functional areas in the company.

With revenue generating units really driving pipeline growth and going forward, we feel good about the progress we've made with our pipeline to drive this balance performance that Rob talked about, of double digit growth. So we're really pleased about the progress we made in the fourth quarter, we feel we've got a good attack plan, if you will, to drive double digit growth, and we feel we can do that by delivering great customer value as well in our execution on these broader based enterprise performance management partnerships.

Robert Schwartz – Jefferies & Co.

There's a follow on. Are you assuming a better or worse closed rate for next year than you had in Q4?

Tom Manley

I'm not going to give percentages around closed rates, but I would just tell you that our plan is to not get any worse. We are going to continue to execute, and if we execute well, all the activities that we've talked about here in terms of pipeline growth, success and solutions, the people capability that we have, would frankly lead to higher closed rates against pipelines that match the results that we're projecting here.

Tom Manley

Thank you.

Operator

Your next question comes from Keith Weiss of Morgan Stanley. Please go ahead

Keith Weiss - Morgan Stanley

Thank you guys. Next quarter I was wondering if you could talk a little bit about your expectations for Celequest for the year, both in terms of product roll outs as well as any potential color you could give us on if there's any assumption for revenue contribution or expense contribution in the numbers that you're giving us today.

Tom Manley

First of all there is assumption for both revenue and cost in these numbers, but we don't call them up separately. In the overall scheme of things they're not big enough. I will tell you that Celequest has received a lot of early interest in our channel, and keep in mind that we really only exposed our sales reps and account teams to it in March our sales kickoff as Les referred to earlier. So people are seeing very good synergy, we see good opportunity, we think that it will make a contribution to our business this year that will be helpful, but we're not disclosing what that might be at this stage.

Operator

Your next question comes from Mark Murphy of First Albany. Please go ahead

Brian Wallace – First Albany Corp.

Thank you, this is Brian Wallace from Mark Murphy. I was wondering if you could just describe for me the impact of the Oracle and Hyperion acquisition on items such as (inaudible) pipeline and how are opportunities going forward?

Tom Manley

As I mentioned in my prepared remarks, with every shift in the market, opportunity opens up. We view the market and our strategy is to be the leading provider of performance management solution to the enterprise.

There is a very significant part of that enterprise that wants to look at that performance capability from an independent or neutral perspective. They have all kinds of transaction systems, their data is in all kinds of different places, and many of them don't necessarily want to have alignment of their ERP system to their decision making system, for instance.

So we see the opportunity quite significant as now from an independent perspective at the enterprise level, if you look at where we compete versus where some of our other competitors play.

You know, one of our major competitors has just been consolidated away and we see it as an opportunity to gain market share in SAP accounts, in IBM account, and accounts that are probably heterogeneous.

We see this independent performance management system that sits on top of these infrastructure stacks as really being a huge opportunity for ourselves. From a market perspective we expect that it will open up opportunities. From a people perspective we've all just looked at Hyperion as a good place to hire people, and that will continue on, and maybe Les can speak specifically to some of the plans we have out in the field.

People like to work for a company that's focused on performance management, and that's what we do. Very focused on performance management, so we see it as a good opportunity to make sure we can gain some key resources.

Operator

Your next question comes from Steven Li of Raymond James. Please go ahead.

Steven Li – Raymond James

Hey guys. Tom, the $4 million investment, is that for Q1 or for the year?

Tom Manley

That's for Q1. We specifically highlighted the approximate expense related to these two projects because it does represent new spending in the quarter for us.

Steven Li – Raymond James

And what would that number be for the year?

Tom Manley

I don't have the total number but as I said earlier, we expect the peak to be in Q1 and it will taper off as we go through the next three quarters.

Steven Li – Raymond James

OK great. And you guys also highlighted Eastern Europe and China. Can we know the quarter covering sales rep in these two regions, last year and this year?

Tom Manley

No. We don't have that detail to disclose.

Steven Li – Raymond James

OK thanks, that's it for me.

Operator

Your next question comes from John Torrey of Montgomery & Co. Please go ahead

John Torrey – Montgomery & Co.

Good afternoon, nice quarter. With respect to the sales hiring targets you outlined for fiscal '08, can you update us on any sort of coverage level changes that that implies for the sales force or alternatively elaborate a little bit on what gaps you may be filling in geographically or in terms of coverage?

Tom Manley

First I want to point out esteem as it relates to '08, which is really one of continuity within our go to market model. We, as I mentioned, when you look at the segmentation, we call it global major accounts and enterprise accounts and SMB, small and medium business.

We have segmented this well in '07 and our coverage model against those customer sets will not change going forward. We will enhance our capabilities to serve each one of those segments as we grow with those customers sets and continue to stay connected.

So in terms of that, the teams coming out of the kickoff are very excited about the continuity, really connecting with those customers. As it relates to gaps that we're filling, if you look around the world we have some very good performances in various spots throughout the world. Australia, New Zealand did well, India did well, Hong Kong, China did well, in Europe you have northern, southern did well, the UK had a great year, in the Americas our channels operation Latin America, OEM, SMB, our Enterprise East organization, life sciences. So we've got a lot of successes in there and where we see opportunities we will add. We're going to go north of 400 here, we really feel that our recruiting engine is primed and we're looking to hire folks to help us better serve customers both in sales, presales, and in services in key capability areas that will make a difference for customers.

John Torrey – Montgomery & Co.

Very helpful, thanks.

Operator

Your next question comes from Scott Penner of TD Newcrest. Please go ahead.

Scott Penner – TD Newcrest

Thanks. Mainly I'd like to talk about the cash for a minute. Closing in on $700 million, clearly you're generating it faster than you're spending it, which is a nice problem to have. But when you look at the interest income that you're generating, it's no more than a few points and your own stock is about a 5% to earnings yield. What is the thought at the board level of providing some sort of dividend to your shareholders or, in concert with that, if you could update on some of your acquisition plans.

Tom Manley

Certainly from a cash perspective we're very happy with our cash performance this year. Certainly our operating cash flow was very very strong. As you're aware I guess it was back in Q3 we announced that we were doubling our stock buyback to $200 million and we have been consistently been buying that for two quarters now, about $15 million of shares a quarter. So we'll continue along a strong buyback program.

Meanwhile from an M&A perspective we continue to look at what opportunities there are from an M&A perspective. We certainly believe that we are in a growth market opportunity and we'll look at what the alternatives are to use that cash.

Rob Ashe

Yeah, I mean at a very simplistic level, where's the best place to put the cash, and we think reinvesting into the business at the returns that we can achieve on the path that we're on is a good thing to do, and M&A is not a thing that happens every quarter, it happens at particular times and we want to be ready for that and having a good cash balance just puts us in good position to be opportunistic. We think we can put the money to good use in the company.

Scott Penner – TD Newcrest

If I may please, Tom, just squeeze in. The form buy-in that you talked about again in Q1, is that a number that flows through the expense line or is that part capitalized, part expense?

Tom Manley

That's the expense impact of those two projects.

Operator

Your next question comes from Christopher Sailer of Goldman Sachs. Please go ahead.

Christopher Sailer – Goldman Sachs

Great, thanks guys very much. I guess my first question would be on the DSOs. Was the quarter less back end loaded and was that part of the reason it came down nicely year-over-year?

Tom Manley

No, I think last year we had an abnormal performance. We were much higher than we normally are.

I believe that I kind-of isolated five days related to the profile revenue of renewals on the support side. But 70 days is where we would normally be, and I think that represents very good cash collections for us.

Christopher Sailer – Goldman Sachs

Great. And then, in terms of some of Les' comments about the double-digit revenue growth. If I just look at the high end of the guidance revenue range, it's just slightly below 10%. So I'm wondering if the comments about double-digit growth, if you guys are just being a bit conservative in the guidance that you give out there. Or how should I reconcile...?

Rob Ashe

Well, we're a company that targets double-digit growth. I mean, that's why we're here. The expectations and guidance that we set based on the current plan or the current ability and the balance that we see in the market, we think it's good guidance. We're very comfortable with it. But make no mistake about it, this is a management team that's driving to double-digit growth.

Christopher Sailer – Goldman Sachs

Great. So the targets would be a bit higher than the guidance, is what your saying.

Rob Ashe

Well, I'm not going to call it that. But I will tell you that we're targeted for double-digit growth.

Christopher Sailer – Goldman Sachs

OK, great. Thanks, guys.

Operator

Your next question comes from Jason Maynard of Credit Suisse. Please go ahead.

Jason Maynard - Credit Suisse

Hi. I apologize if I missed this earlier, but can you maybe talk about expectations for Celequest in the forward guidance, and then just your thoughts about how that product line ramps in the coming year.

Tom Manley

Yeah, we did talk about Celequest earlier. I'll just repeat my comments quickly. We won't specifically call out guidance for Celequest, but we're quite optimistic that it can make a contribution to the business. It's only been exposed to our channel now for less than 30 days. We really only got exposed to it as we entered our new fiscal year and the kick-off.

So plans are being put in place. Customer reaction, market reaction, very good, very interesting technology, both in the ultimately-deliver capability, (inaudible) and appliance, but also kind-of the operational real-time capability with dashboard. Reception has been very good, so we're optimistic. Early in the year, it's going to take a little bit of time to gear it up, but we're quite optimistic.

The second part of your question, Jason, was around outlook?

Rob Ashe

I think outlook for Celequest.

Tom Manley

No, we don't give outlooks on that.

Jason Maynard - Credit Suisse

Alright, thank you.

Operator

Your next question comes from Michael Abramsky of RBC Capital Markets. Please go ahead.

Michael Abramsky - RBC Capital Markets

Thanks very much. The lower service margins: is that the majority of the reason for your lower EBIT marginal outlook? I know that you said that you're maintaining a 20% outlook, but my math sort-of takes, based on your midpoint, about 18.5%. And I'm just wondering if that's the case, whether that occurred because the majority of the reason is the expected lower service margins. Or is there something else there?

Tom Manley

I'm not sure what your model is. Certainly the high end of our guidance, we have 20% margins. As you go lower into the overall performance for the year, I would expect that those margins would fall somewhat short of 20%, so your models may be correct. But we're very focused on our overall objective, to hit double-digit growth, as Rob said, on the revenue line, and a 20% operating margin with that performance.

Michael Abramsky - RBC Capital Markets

OK, so, just following up on that, what gives you the confidence – because obviously, this is a pivotal factor for recovery or low growth and earnings – in delivering your guidance. Last quarter you were calling for quarter-over-quarter improvement, but weren't able to do that this quarter. I know you've got these initiatives in place, but what's the risk to that, the margin expectation?

Tom Manley

I think we've got a balanced view for services margin built into this forecast, if that's what you're asking me. We've built into this outlook what I would call low double-digit margin for services next quarter, and overall for the year, high teens. So that is built into the outlook, and we've adjusted accordingly for that.

Rob Ashe

The other thing I would say is that when you just look outside at the numbers, just the progress we've made on the capability side to serve customers. We are driving new offerings. So for example, this quarter we had a rapid score-carding offering. We put out there other key offerings that enhance the value proposition for the customer, which are not large-deal or large-engagement oriented. So you've got a combination of value plus volume.

We've got a very strong focus on sales productivity within the client management function. We really did perform well from a, call it, pipeline growth point of view in the large contract area. We've got a really strong focus on demand generation and sales, if you will, in the education area, which is higher margin. Everybody on this leadership team is focused on this issue. So I really believe that we've got a plan here, and the backdrop is that we really do want to create this capability for our customers, so that we can help make them successful and drive performance management as they differentiate in their enterprises.

Operator

And your next question comes from Adam Holt, JP Morgan.

Adam Holt - JP Morgan

Thanks for taking my question.

I understand you don't provide license service numbers but a product line. I would appreciate if you could provide additional colour on PowePlay Impromptu, and report net license deals as did they grow on a year on year basis?

How should we be thinking about growth in non Cognos 8 products going forward?

Tom Manley

Well we don't provide that guidance but they did decline. Cognos 8 accounted for $92 million of license revenue of our total $130 million. Huge number, huge increase over last year and so you see the decline in those other product lines that Cognos 8 takes over. It’s the lion's share of what we do in this business.

I would say that with PowerPlay, it is an area that we see room for improvement. We do think that we can provide an opportunity there for PowerPlay customers. We don't have any (inaudible) this stage but we do think that it is an asset in the company that we can see providing some growth as we look at the second half of this year.

Adam Holt - JP Morgan

Do you think that PowerPlay and Impromptu sales have bottomed in this quarter and we should expect growth going forward there?

Tom Manley

No, I think we have an opportunity to grow PowerPlay. Impromptu is now really what we would class as a legacy product and it will continue to decline.

Adam Holt - JP Morgan

Thank you

Operator

Your next question comes from David Hilal of Friedman, Billings, Ramsey & Co.

Please go ahead

David Hilal – Friedman, Billings, Ramsey & Co.

Thanks.

Rob, I wanted to talk about the trend towards standardization. I guess that one way to ask about that is when you get your large deals, how many of those customers were standardizing on Cognos and replacing some other BI offerings in house?

Rob Ashe

Well first of all, the vast majority are standardized.

The large deals have very significant standardization activities. Not just the $25 million deals we talked about but if you go to the next level down it is a consistent theme as we talk to people.

Now are they always replacing competitive products? No it is different styles of standardization. It is either a customer locking down us as their standard in moving forward.

It's a customer that might be consolidating and might be replacing, which doesn't always happen immediately but happens at some point down the road.

Typically in the standardization engagement, a customer will pick a standard. They will explore new applications to that standard and will replace existing non standard applications if it is economically feasible to do so.

There are some exceptions where we see with some of our competitors products where they are on older versions and they are not sure if they want to go through the whole upgrade path to what is currently the market. That is probably the majority replacements of our competitive replacements.

Tom Manley

One thing that I would add here, is that a lot of customers these days and our customer staff are picking a partner. That doesn't say that when you standardize you are going to put everything else off day one. It means that there maybe multiple swim lanes but eventually they come to this standard Cognos 8 platform which is the beauty of the platform.

You see even now the business process outsourcers standardizing on Congas 8 as the workforce performs capability.

The beauty is that you can attach things to it like office finance applications. These new things coming out and that is really where Cognos 8 provides a good partnership advantage for us. It is not an instantaneous switch but there is the ability to serve new applications as well as connect to existing applications in different types of deployment models. .

That is the beauty of this Cognos 8 as a picking a partner platform.

David Hilal – Friedman, Billings, Ramsey & Co.

OK thank you

Operator

Your next question comes from Ed Maguire of Merrill Lynch.

Please go ahead.

Edward Maguire – Merrill Lynch

Good afternoon.

I was wondering if you could quantify or at least qualify what you see as the level of penetration of Cognos 8 within your installed base?

How many of your customers have made a standardization decision from older products and how much opportunities you are left within your existing customers?

Rob Ashe

We see significant opportunity out there.

First of all in terms of what our customers are doing with Cognos 8. We still see that the majority of new applications that support migration including applications that capability of Cognos 8 can service for older generation of products.

So, it’s a very good activity, through the penetration rates. I would suggest that about a third of our customers, 25% to a third of our customers have touched it, but that the migration percentage is still below 10% kind of number in terms of migration.

Edward Maguire – Merrill Lynch

OK, and just as a follow up, how many of your customers are now really looking at ways to expand the user base to search and mobile, and how are you thinking about being able to monetize those additional ways to reach users?

Tom Manley

Well, I would characterize users at this stage as more of something that demonstrates our vision as opposed to being heavily monetized. I think it’s a very popular product, when the customers look at the product, see where we can take it, see the beauty of the service architecture and how we expanded the search. Mobile, on the other hand, which only just ship, and I’ve been a user throughout the beta, I can tell you I barely bring my PC with me when I travel anymore. I get my financial updates on my Blackberry. We think it’s going to be a very popular product, it’s going to be easy to monetize. Besides, it’s priced separately in a nice package. The promotion in Q1 is around it. It’s finding its way into every demo because again it’s a significant differentiator verses the competition. So I think we will see good monetization of the Go-Mobile opportunity.

Edward Maguire – Merrill Lynch

Thank you.

Operator

Your next question comes from Vik Churamani of Lehman Brothers. Please go ahead.

Vik Churamani - Lehman Brothers

Just a quick question, should we expect, on the services side, also double digit growth, or how would you reconcile that for FY 08?

Tom Manley

I’m not sure what the overall growth is, but I would expect a very modest sequential increase in services revenue in the quarter.

Vik Churamani - Lehman Brothers

How about for the full year?

Full year, we would expect double digit growth.

Vik Churamani - Lehman Brothers

Then, Tom, going back to your comments in Q3, when you put parameters and guidance of roughly double digit growth, it looks like you guys are maintaining that. And then, Rob, you talked about some benefit from the disruption, I guess consolidation of this opportunity. So is it safe to say that guidance doesn’t factor in any potential benefit from the consolidation that’s happened in the marketplace?

Tom Manley

Well, I wouldn’t go so far as to slice our guidance up and what’s in it and what’s not in it. Based on our view of capacity to market opportunity we think it’s reasonable guidance and the growth kind of reflects the goals that we’ve set. There are areas of opportunity that we’ll look to perform and try to do better than what we hope, but I can’t quantify that for you.

Rob Ashe

I’ll just say that we feel like there is, when you take a look at Q3, Q4, we feel like we are moving forward in the right way with the right momentum. You look at the 8.2 upgrade cycle, which is very positive as well, so we think there is momentum here, so we’re just kind of continuing to push. As we get further traction with our go-to-market model, our skill base, etc. We’re feeling that we can deliver to the objections that we’ve outlined for you.

Vik Churamani - Lehman Brothers

OK, just a last question for Tom. Tom, a pretty good performance in cash flow for Q4 and for the year. Perhaps you can give us your thoughts on going on to the next year and what kind of cash flow we should expect for fiscal ’08.

Tom Manley

In terms of operating cash flow?

Vik Churamani - Lehman Brothers

Yes

Tom Manley

I think that we should have a similar performance next year. We don’t typically give any kind of guidance on that. We should perform from a balance sheet perspective, very similar to what we have this year. And, I think that year models will produce models like that.

Vik Churamani - Lehman Brothers

Is it safe to say, I don’t want to put numbers here, but roughly in line with the net income and the operating income?

Tom Manley

Yes. I don’t have a number to give you, but certainly it will be generated primarily by our (inaudible) performance.

Vik Churamani - Lehman Brothers

Good, thank you.

Tom Manley

Thanks, Vik.

Operator

Your next question comes from Nathan Schneiderman of Roth Capital Partners. Please go ahead.

Nathan Schneiderman – Roth Capital Partners

Thanks very much, I wasn’t sure I’d get in here. I’m curious, are you comfortable, there’s been a lot of talk about double digits growth for ’08. Are you comfortable with us modeling double digit license growth in both Q1 and for the full fiscal year? Is that what you’re saying? And then also, you hit reference to the beta version of the product where the financial apps get on the same platform as the version 8 product and, was just curious on the expected GA date there?

Tom Manley

First of all, to your first question, no we haven’t called out specifically license and services guide and I’m not going to do that now.

If you’ll look at our guidance we’ve called, it’s the high end of the guidance, it calls for double-digit growth and I think if you model a reasonably consistent performance for our future service line, licensed service support, you know, model that back, I think you can get a reasonable representation of what we can do.

Nathan Schneiderman – Roth Capital Partners

OK, thank you.

Tom Manley

OK, operator, we’ll take one more question.

Operator

Your last question comes from Laura Lederman of William Blair. Please go ahead.

Laura Lederman – William Blair & Co.

Hi, thanks for squeezing me in. Just a few quick questions. A question I get on a broader level from investors is, any sense of just the environment weakening. Obviously, you’re benefiting from a product cycle, but any sense that just (inaudible) is weakened at all, even anecdotally, from what you can tell? And also, your close rates in the first half of last year were not nearly as good in the second half. Are you assuming more of a normal close rate versus Q1, Q2, Q3, Q4, or something in between, in the more difficult close rates of the last two years?

Tom Manley

Less, do you want to take the second question first?

Les Rechan

On close rates, what we assume is kind of, we do track that, and what we’re assuming is kind of based on our recent history and what we see in the market, you know, our ability to get the job done at a certain level of close rate. I’m really looking at today’s current market, the trending that we’ve seen over the last 6-9 months, as being the indicator for us.

So we’ve got two things going here, one that’s focused on driving more pipeline to work with, and second, discipline and how you do go about engaging the opportunity and working with the customer on the right plan, getting very well aligned with them, writing the right solution, the right magic system.

So if you do all that right, you should have solid close rates, and really that’s what we’re planning on forward.

Rob Ashe

Laura, on the environment, there’s all kinds of press about which way the economy is going. And I haven’t seen any evidence yet of that having an impact. But what I can tell you is, what seems to have had the most impact on us is the extent to which BI has become so strategic, and enterprises have called it out as an area for investment.

Whether you’re talking to someone who’s made a significant ERP investment and is now trying to modify that significant investment with performance management capability and on top of it, somewhat standardizing, whatever. Our level of interest in what we do has gone up, so on balance we see a pretty positive environment out there.

Laura Lederman – William Blair & Co.

One final question, we talked a lot on the call about Hyperion and the Oracle opportunity there, any thoughts or updates on competing with (inaudible), anything that you’ve seen there in terms of when rates increasing, changing, the standard way of benefiting you?

Rob Ashe

Well, I think if you do some key comparisons, I mean $25 million deals in our fourth quarter was I think significantly in excess of what they saw. 12% growth in BI license revenue…I can’t recall what their year number was but I know it’s quite a bit less than that.

As far as business objects, and what they’re doing, I think as it relates to the enterprise of the larger customers, BI standardization, and performance management, we really feel that we’ve got a great position, and the reason we’re so excited about Hyperion being rolled into Oracle is that the high end of the market, when it comes to performance management there’s really now only one choice, and so we really feel that we’re well positioned against our competitors.

Tom Manley

And I think the beauty of the Cognos 8 foundation for performance management partnership, the fact that that’s been built organically, fully SOA capable. There’s a lot of value in that for the customer in competing for those types of opportunities, so we feel very good about our ability to compete and win against the competitor that you just mentioned.

Laura Lederman – William Blair & Co.

Thank you very much.

Tom Manley

OK, operator, thank you very much. Thank you everyone for participating in the call. We feel great about our performance here in the fourth quarter. We think we head into this next year in good shape on the solutions front and on the people front. So thank you very much.

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Source: Cognos F4Q07 (Qtr End 2/28/07) Earnings Call Transcript
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