Scotia Capital Lowers Cognos Estimates on Canadian Dollar Move

One of our favorite guys, Scotia’s ranked Software & Services research analyst Paul Steep, came out yesterday on the topic of Cognos (COGN) and the rapidly increasing strength of the CDN$ relative to the Yankee buck. We’d suspected that research analysts would begin to make these moves (”Calling all software equity research analysts", June 2-07), and Scotia, along with Versant Partners research head Tom Liston, is one of the first firms to tackle the topic. Mr. Steep shaved his price one-year target by $1 to US$43, and his 2008E EPS by 10 cents to US$1.93. Here’s the summary of his note:

Lowering Estimates on FX Impact Ahead of Q1

Our expectation is that Cognos will deliver Q1/F08 results inline with our revised EPS estimate. Cognos’ Q1 results are expected to reflect a difficult year-over-year comparison given that the firm recorded a record 13 deals in excess of a million dollars in Q1/F07. We estimate that Q1 revenues should reflect ~4% gain related to sales in Europe. Our Q1 EPS estimate is lower by approximately $0.03 based on the impact of a declining US dollar and the greater proportion of the firm’s costs in Canada and Europe.

Potential for buyback remains. Our view is that the firm is likely to undertake modest share
repurchases to offset the ongoing dilution from option grants rather than pursue a more aggressive buyback program. During Q1, Cognos did not repurchase any shares under its normal course issuer bid and has not yet repurchased any stock under its 2006 program. The firm is authorized to repurchase the lesser of $200 million or 8 million shares up until October 9, 2007.

Decline in US$ expected to negatively impact F2008 EPS. Our view is that the firm is likely to revise F2008 EPS guidance downwards based on the recent depreciation of the U.S. dollar. Following Cognos’ most recent update to F2008 guidance, the U.S. dollar has depreciated 8.5% against the Canadian dollar and 2.2% against the Euro. The firm remains exposed to the impact of currency changes relative to the U.S. dollar based on having a greater proportion of their operations in Canada (~35% of costs) and Europe (~20% of costs).