Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  
TRANSCRIPT SPONSOR
Cornerstone OnDemand Logo

Cognos Incorporated (COGN)

F1Q08 Earnings Call

June 21, 2007 5:15 pm ET

Executives

Tom Manley –CFO

Les Rechan - COO

Rob Ashe - President and CEO

Analysts

Abhey Lamba - UBS Securities

Mark Murphy - First Albany

Keith Weiss - Morgan Stanley

Robert Schwartz - Jefferies and Company

Jason Maynard - Credit Suisse

Vik Churamani - Lehman Brothers

Steve Ashley - Robert W. Baird and Company

Scott Penner - TD Newcrest

Mike Abramsky - RBC Capital Markets

Nathan Schneiderman - Roth Capital Partners

Daniel Cummins - Banc of America

Tom Roderick - Thomas Weisel Partners

Frank Sparacino - First Analysis Securities

Presentation

Operator

Good evening, ladies and gentlemen. Welcome to the Cognos first quarter fiscal 2008 conference call. (Operator Instructions) We'll now turn the conference call over to Tom Manley. Please go ahead.

Tom Manley

Thank you. Welcome to our conference call to discuss the company's first quarter fiscal 2008 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, expected margins; the assumptions and expected investments underlying our business outlook; future revenues and earnings on a U.S. GAAP and non-GAAP basis; headcount expenses, including stock-based compensation expense and amortization of acquisition-related intangible assets; our pipeline and opportunities; our business and strategic focus, expected license revenue growth; expected steps to offset the strength of the Canadian dollar; the timing and content of product enhancements and releases; and, prominent themes in the BI market.

These forward-looking statements are made pursuant to Section 21-E of the Securities Exchange Act of 1934 and some are considered to provide forward-looking information as defined by the Ontario 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 conclusion, forecast or projection in the forward-looking statement. A discussion of those risks is contained in our filings with the Securities and Exchange Commission and the Canadian Securities Administrators, including our most recent annual report on Form 10-K and quarterly reports on Form 10-Q 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 Ontario Securities Act, certain material factors and assumptions were applied in drawing a conclusion or making a forecast or projection, as reflected in certain of the 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 current only as of the date they are made and we disclaim any obligation to update them.

On this conference call, we'll also discuss non-GAAP financial measures as defined by SEC Regulation G to provide greater transparency regarding Cognos operating performance. In particular, we'll provide non-GAAP earnings per share, we'll exclude stock based compensation expense and amortization of acquisition related intangible assets and non-GAAP margin. Any non-GAAP financial measures discussed should not be considered an alternative to measures regarded by U.S. 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 measures in a table provided on the Investor Relations page on our website at www.cognos.com.

Slide 3, please. Cognos delivered solid financial results in our first quarter. Total revenue of $236.7 million compared to $217 million in the first quarter of last year, an increase of 9%. Net income on a U.S. GAAP basis in the quarter was $22.4 million compared with $14.5 million in the same period last year, an increase of 54%. Net income on a non-GAAP basis, excluding amortization of acquisition-related intangible assets and stock-based compensation expense was $29.2 million compared with $19.8 million last year, an increase of 48%.

Earnings per diluted share on a U.S. GAAP basis for the quarter was $0.25 compared with $0.16 for the same period last fiscal year. EPS on a non-GAAP basis was $0.32 compared with $0.22 in the first quarter last fiscal year. We were pleased with this EPS performance, given that foreign exchange cost us $0.025 this quarter.

These first quarter non-GAAP results exclude from our U.S. GAAP results $1.8 million of amortization of acquisition-related intangible assets and $7.5 million of stock-based compensation expense, all before taxes. Compared to the GAAP results, this is an increase of $0.07 per share in the aggregate after the affect of taxes.

License revenue for the first quarter was $75.7 million compared to $73.7 million last year, up 3%. Support revenue was $113.4 million compared to $100.2 million last year, up 13%. Professional Services revenue was $47.5 million in the quarter compared to $43.1 million a year ago, up 10%.

Slide 4, please. GAAP gross margin in the quarter was 77.3% compared with 76.7% a year ago. Within our gross margin, our GAAP services margin was 14.6% compared with 13% for the same period last year and up from 8.8% last quarter. Les will provide additional color on our services margin improvement in his remarks.

GAAP operating margin was 8.7% and non-GAAP operating margin in the quarter was 12.6%, up 230 and 300 basis points respectively. We are very pleased with our operating margin performance in the first quarter, reflecting the impact of our cost measures last year and despite the impact of the increasing Canadian dollar.

Slide 5, please. Day sales outstanding for accounts receivable for the quarter were 63 days based on ending balances, compared with 58 days recorded one year ago. Cognos exited the quarter with $654 million in cash, cash equivalents and short-term investments, driven by operating cash flow of $29.9 million. We repurchased $48 million of stock under our share repurchase program during the quarter and purchased $25.8 million of stock under our restricted share unit program.

Slide 6, please. With regard to our outlook for the second quarter and full fiscal year 2008, we have assumed on exchange rate of $1.33 U.S. for the euro and $0.94 U.S. for the Canadian dollar. As you are aware, we had a significant change in currency since our last call with the euro and the Canadian dollar increasing in value by approximately 1% and 9% respectively. We are continuing to monitor currency fluctuations and are carefully managing operational expenses to minimize overall earnings impact in the second half of the fiscal year. We have also assumed a GAAP and non-GAAP tax rate of 22%.

With these assumptions built into our outlook for the second quarter, we expect revenue in the range of $245 million to $255 million. We expect U.S. GAAP earnings per share to be in the range of $0.25 to $0.30 and non-GAAP earnings per share in the range of $0.34 to $0.39. This EPS outlook reflects an unfavorable currency impact of $0.03 compared to when we provided our full year outlook on March 29. The non-GAAP earnings outlook for the quarter excludes approximately $1.8 million of amortization of acquisition-related intangible assets and approximately $9 million of stock-based compensation expense, both before taxes.

For the full year, we expect revenue to be in the range of $1.065 billion to $1.085 billion. We expect GAAP earnings per share to be in the range of $1.66 to $1.73 and non-GAAP earnings per share in the range of $1.98 to $2.05. This EPS outlook includes an unfavorable currency impact of $0.12 per share compared to when we first provided our full-year outlook on March 29. This non-GAAP earnings outlook for the full year excludes approximately $6.8 million of amortization of acquisition-related intangible assets and approximately $31.5 million of stock-based compensation expense, both before taxes.

I will now turn it over to Les for his comments on the quarter.

TRANSCRIPT SPONSOR

Cornerstone OnDemand Logo

Want to understand the future of human resources software?

Cornerstone OnDemand is the leading provider of SaaS solutions for integrated talent management, covering the human capital life cycle from hire to retire.

We offer over 30,000 online training titles and performance tools for compliance and analytics to help companies maximize workforce productivity and achieve organizational excellence.

Learn about talent management and our industry leading products for learning management, corporate social networking, onboarding, compensation, compliance, employee performance management and succession planning at CornerstoneOndemand.com.

To sponsor a Seeking Alpha transcript click here.

Les Rechan

Thanks, Tom. Slide 7, please. Let me begin by reviewing some of the key operational metrics from the quarter. Q1 is the toughest quarter of our year, particularly for license revenue. In this context, I'm pleased with our overall performance in the quarter and remain very optimistic about the opportunity ahead.

Slide 8, please. We closed seven contracts greater than $1 million in the quarter compared with 13 in Q1 of last year. We had 127 contracts greater than $200,000 compared with 118 a year ago. Average license order size for orders greater than $50,000 was $200,000 compared with $186,000 last year.

Slide 9, please. The distribution of license revenue for Q1 was 74% direct, and 26% through our partner channel. New business accounted for 28%, with 72% coming from our existing customer base.

Slide 10, please. In terms of our major geographies, 57% of our revenue came from the Americas, 35% from Europe, and 8% from Asia Pacific. For the Americas, revenue growth was 4%. In Europe, revenue growth was 15% in reported U.S. dollars and 7% in local currency. In Asia Pacific, revenue grew 25% in reported U.S. dollars and 18% in local currency.

Slide 11, please. We ended the quarter with 390 quota-carrying sales reps, up 47 from a year ago and 16 from the previous quarter. I'm pleased with our progress in this area. We have strong momentum coming out of our worldwide sales kickoff in March and we are on track to achieve our objective to have more than 400 quota-carrying sales reps this fiscal year.

Slide 12, please. In Q1 we continued to make progress against our key execution commitments of growth, customer success driven by solutions, and winning conditions for our people. I was particularly pleased with the progress we made this quarter with our focus on solutions and customer success. We achieved strong market momentum with several key partner solutions during the quarter, including Accenture's Enterprise Metrics Management solution, Deloitte's Cognos Planning Application Management service offering, and IBM's Crime Information Warehouse and Banking Risk Cockpit Solutions.

We also advanced our industry solutions portfolio with the launch of new public sector solutions developed with Bearing Point and Grant Thornton and we saw solid momentum within key vertical market, in particular, the U.S. public sector, financial services and retail. We witnessed a good example of this momentum with over 400 customers registering for our government forum held in Washington in early May.

Within our services business, as I mentioned on our last call, we said we would improve services margin with a three-point plan: to rebalance our client management skill sets, to increase our focus on demand generation and education solutions, and to strengthen our sales alignment. As our margin results demonstrate, we have made solid progress on these initiatives and we will continue this focus on capacity, capability and margin going forward.

Our progress in delivering solutions for customer and partner success was most evident at our recent Cognos forum and partner summit events. This was the most successful year ever for these events, with record attendance of over 500 at our partner summit and over 3,000 at Cognos Forum.

On a final note, I'm pleased to announce the appointment of Rick Gilbody as President of our Americas Field Operations. Rick is a seasoned Cognos executive with a deep understanding of our business. He's earned a strong commitment of the company during his seven-year tenure at Cognos and I'm confident he will do a tremendous job in this role.

In closing, our focus on customer success driven by solutions remains laser sharp, our team is solid, we're fully aligned, and our pipeline remains strong. As we move into Q2 and the remainder of the fiscal year, we will continue our focus on disciplined success plan execution in cooperation with our partners and our customers.

I'll now turn the call over to Rob.

Rob Ashe

Thanks, Les. Slide 13, please. I am pleased with our overall results here in this quarter, our seasonally toughest quarter. Some of the areas in which I'm particularly pleased include our overall revenue growth of 9%, earnings growth of 54% despite the recent strength of the Canadian dollar, significantly improved operating margin from a year ago up 300 basis points, the improved services margin that Les referred to of 15% this quarter, good overall deal volume, and a very strong sales rep headcount exiting the quarter of 390. While our Q1 license revenue performance was below the 10% growth we are targeting, I'm confident we remain on track for our objective of double-digit license growth for the full year.

The strength of the Canadian dollar did have a significant impact on our results, costing us $0.025 in the quarter. While that obviously impacts our earnings expectations going forward, we do intend to carefully manage our operational expenses to offset the Canadian dollar strength, as Tom said, and deliver on the guidance we set for full year earnings in FY '08.

Customer feedback at Cognos Forum validates three key pillars of opportunity for Cognos as we enter the second quarter and the remainder of fiscal year 2008.

First of all, the demand for enterprise class business intelligence remains very strong. We are entering the sweet spot of a very rich product cycle, led by our Cognos 8 BI platform. Version 8.2 is being well-received by customers and partners and adoption of the platform continues to grow. This version of the product includes significant enhancements for performance and capabilities of the product for upgrades, migrations, and performances within SAP environments.

Although our overall license revenue for the quarter showed modest growth, Cognos 8 license revenue, which represents 80% of the BI revenue was $48 million, up 10% from a year ago. It was however, offset by the decline of our legacy products. Our trailing 12-month growth in BI license revenue now stands at 9%.

Cognos 8 BI version 8.3 will be in beta shortly. As the foundation for all of our BI and performance management solutions, this next release of Cognos 8BI includes enhanced enterprise deployment and administration capabilities. It also includes more flexible information packaging for business users, such as advances in Cognos 8 Transformer, which will ease the building of power cubes and is something that our PowerPlay customers will really like and help them to move into the Cognos 8 environment.

Slide 15, please. The second point we heard clearly at Cognos Forum is that customers continue to embrace performance management to drive competitive advantage. This trend takes many forms, starting with a solid platform for business intelligence as a foundation, however most customers start with a solution in finance and then extend that out into the business with business intelligence. Here again we are in the midst of a very strong product cycle with our entire finance product line now fully integrated on the Cognos 8 platform.

Cognos 8 Controller version 8.2 shipped in Q1. In addition, Cognos 8 Planning version 8.2 finished its beta cycle in Q1 and will ship here in Q2. This high level of integration distinguishes us from the flurry of acquirers in this space that have followed our lead, but are well behind us in terms of an integrated solution in the market.

That integrated solution offers very important advantages to our customers, including but not limited to rapid expansion of a performance management solution beyond finance with business intelligence, lower cost of ownership for deploying the complete solution, better overall compliance with its single metadata and query foundation, and better visibility to a complete system for performance management.

In the words of Mark Smith from Ventana Research, Cognos now finds itself with a technology advantage over those competitors who are busy integrating acquired technologies and trying to find synergies for their customer offering.

In Q1 license revenue from solutions for finance grew in excess of 20%, led by very strong performance with Cognos Planning. Cognos Controller continues its progress with growing pipeline and adoption throughout the world, and we are seeing good momentum for this product in North America. We see very positive feedback on solutions for finance from the thousands of customers and prospects that participated in our Global Finance Forum events earlier this spring. Overall, we feel very good about our position in this market, and I feel particularly good about the product line-up for finance.

Our Workforce performance application has now been in the market for a year. In FY '07, our initial focus was on business process outsourcers and we were successful in gauging four of the world’s top BPOs. In FY '08, we have begun to move beyond those BPOs and into our direct sales channel where I see good pipeline development and good prospects.

A third message we heard from customers at our Forum was their strong desire to make BI performance management solutions pervasive across the enterprise. Slide 16, please. During the quarter we began our go-to-market program with Cognos 8 Go! Mobile. This solution delivers Mobile access to any Cognos 8 report on RIM BlackBerrys and clearly differentiates Cognos 8 in the value of our unique solo architecture in new business opportunities. We will extend our support for Go! Mobile to Symbian devices and the Windows CE platform later this year. Go! Mobile was a big hit at Cognos Forum and drove more than 300 downloads of the demo version of the product at that event alone.

Slide 17, please. Another solution to capture the imagination of Forum attendees was Cognos Now! This operational BI solution came to us through our recent acquisition of Celequest. It let decision makers proactively monitor response, up-to-the-minute operational metrics in real time or near real time with minimal IT intervention. Its appliance service delivery model gives us a compelling new offering to drive rapid penetration to mid-market organizations and new departments within the enterprise.

Slide 18, please. We'll also extend our offering for Microsoft Excel users in Q3, with Cognos 8BI Now! for Microsoft Excel. This product extends the Cognos 8 platform by allowing Excel users to stay in their Excel front end but take full advantage of the power of the Cognos 8 platform, enabling secure and controlled access to complex corporate data.

To conclude, demand for BI performance management remains healthy. The recent consolidation activity in the market has made the opportunity for Cognos, we believe, even bigger. Our strong, integrated product portfolio combined with our expanded sales capacity and sound business fundamentals position us well for future success and I remain very confident in our business here in FY '08 and beyond.

Operator, we'll now open up to questions.

Question-and-Answer Session

Operator

Your first question comes from Abhey Lamba - UBS Securities.

Abhey Lamba - UBS Securities

Hi, Les, or Rob, you guys mentioned that your license growth I think for the year is still double-digits. Given the 3% license growth this quarter and really tough compares in the third and fourth quarter, what gives you the confidence for double digit license growth for full year, and what type of sequential ramp-up should we expect over the next few quarters?

Rob Ashe

Okay. Well, I'll kick it off and maybe Les could add some color. The first thing that gives us confidence is the state of the market. I think the market is very healthy, both BI and Performance Management, so we feel good about the market what we're hearing from our customers.

Second thing I think is that our product lineup very strong. It's about the richest product lineup I've ever seen at Cognos in all of my career with Cognos 8.2 now in the market, 8.3 entering beta next month, Controller 8.2 shipping in April, Cognos 8.2 Planning shipping next quarter, Cognos Now!, Cognos Workforce Performance. A very, very strong product lineup.

I think Les and his team have done a great job on capacity with 390 reps exiting the quarter fully quota, that's 50 more reps than we had a year ago at this time. There are a whole number of reasons that I feel confident about it.

I will add before I hand it over to Les, that Q1 is our seasonally toughest quarter. We came off two great quarters in Q3 and Q4. So I wasn't that disappointed with results in the quarter; would have liked license revenue to be a bit higher, but I'm pretty confident in what we can do this year with revenue.

Les, do you want to add some color to that?

Les Rechan

Yes. First, the license revenue ramp in the second, third, and fourth quarters of this year is similar to that of our last three years, so we feel comfortable with that ramp. We do feel good about the pipeline that we have going forward and the coverage of that pipeline. We feel good about the mix of deals that we have. If you look at the mix this year, the number of deals in the first quarter between $500,000 and $1 million in the quarter were up 20% in Q1 over Q1 of last year. So generally we feel good about the mix of business, the pipeline, the teams are aligned, we're incented to make it happen, so we feel good about the full year.

Operator

Your next question comes from Mark Murphy - First Albany.

Mark Murphy - First Albany

Rob, as you referenced, there has been a considerable amount of recent consolidation in the financial apps market. Does that change your approach to the market in any way? Perhaps make Cognos more likely to acquire? Also, could you specifically comment on what you view as the capabilities of Cartesis versus Frango?

Rob Ashe

Well, the first question on consolidation, we have a very healthy balance sheet, we have an appetite to grow the business through some acquisition. That's always an option, whether it's in the financial application space or anywhere else in the business. I wouldn't point to that particular area as a necessary where we're going to acquire, we generally have an appetite to acquire and we will look to do that as this year progresses.

The biggest thing that we've got going for us right now is that we have made the first steps in this market years ago. We've made the steps to integrate BI with consolidation, with planning. Those steps are behind us. The full product now set up on a Cognos 8 environment and we've got a very significant advantage in the marketplace, in my view, to give customers what they are looking for which is this integrated solution based on a solid platform.

So we're going to continue just to drive that in the market and drive that differentiation, because I think that is quite compelling now against all of our major competitors, every single one of them that's done some kind of acquisition that involves quite a significant amount of overlap or multiple products for the same thing in those same companies.

I'm not going to talk too much about Cartesis versus our own product, I guess, only to say that we really pride ourselves on productive tools to deliver applications and solutions quickly for our customers. Specifically in the office of finance, you'll find that finance wants to be in a position to manage their own applications, they have very tight close deadlines, they're driving entries into those close processes late in the period. The last thing we want to do is the night before the report to the audit committee call IT to have to put some new capability in their application.

Cognos Controller is owned and operated by finance, it's built specifically with process capability around consolidation that has to be programmed into other tools like Cartesis. It involves a very modest amount of service offering compared to a product like Cartesis. We really feel that Cognos Controller is really a great product for the marketplace. That's why we bought it and we were so excited about its integration on Cognos 8.

Les Rechan

The other comment I would make is that we don't see Cartesis a lot outside of France and Europe from a footprint perspective. Like Rob mentioned, Controller is very easy to deploy, Cartesis is very services-intensive. I've been pleased by the OOF growth that had year to year is indicative of our ability to compete as the performance management expert in the business. We see ourselves winning those integrated performance management system engagements, so we think we can compete well.

Unlike some of our competitors who can afford to zig zag with different solutions, our customers can't afford to zig zag. We've been on this track for some time, we're sticking to that and the fact that Controller and planning are riding the Cognos 8 bus now delivers us a unique capability in the marketplace for pervasive performance management.

Mark Murphy - First Albany

Just as a quick follow-up. You have this substantial adverse currency impact, yet you are reaffirming your earnings guidance. Does that imply to us that there is some small change to the headcount plans, or are you making adjustments in other areas?

Tom Manley

Well, I mean, bear in mind that $0.03 of that $0.12 is behind us in Q1 so we're really looking at a $0.09 impact over the next three quarters. We have a very dynamic planning process in any event where we readjust priorities and our spending profiles based on what our needs are on a very frequent basis. So being able to offset that impact over the next nine months, we feel pretty comfortable that we can make the appropriate adjustments and we've built that into the plan.

Rob Ashe

Mark, I would just add that we very effectively executed on our plan last year to make sure that we could invest in resources facing the customer. The results that you see here, since the six months that we affected that action-- or maybe it was more than six months -- we're now up to 390 reps so we have a really solid focus on revenue-generating capability and continuing to invest in revenue-generating capability.

This currency effect, as Tom said, does mean we're going to manage carefully; we have no significant actions planned or anything like that. We're just going to manage our resources carefully and manage our priorities, making sure we continue to invest in the front end of the business, as we've been doing since last fall.

Operator

Your next question comes from Keith Weiss - Morgan Stanley.

Keith Weiss - Morgan Stanley

I just want to talk a little bit about the transaction numbers. I understand that 1Q is a seasonally weak quarter, but when you look at the year-over-year trends where you have seasonality in both quarters, deals over $1 million down nearly 50% year over year, mid single-digit growth in transactions over $50,000 and single-digit growth in transactions over $200,000.

Outside of seasonality, is there anything specific to this quarter that when looking at the year-over-year compares that it is just not up to that double-digit growth that we've been expecting?

Rob Ashe

I'll just comment that I've always said that large deals are going to ebb and flow a little bit up into the right kind of trend and that's the way we continue to feel. We were working against an exceptionally strong performance last year in Q1, so they are going to ebb and flow. You're going to see them up and down a little bit.

Les, do you want to comment on some of the deal volume?

Les Rechan

Yes. I think the seven-figure deals is a respectable performance for Q1, which is seasonally our most difficult. In the quarter, we had different ways of getting to the end goal that we wanted to get there, so I feel good about the fact we're able to bring some deals in, some deals slip but we had 25 deals greater than $1 million in the fourth quarter, we had a very strong third quarter, so when you look at the connection of those quarters, we feel pretty good about the business and the mix of deals going forward.

In terms of the deals in the $500,000 to $1 million category, that was up 20% Q1 to Q1. So I think that if you look at the pipeline focus we have, the coverage there, and I think as you look at the businesses around the world, there were some bright spots in there. We had some businesses like Northern Europe grew substantially, Central Europe grew very well. Our enterprise business in the Americas is doing very well. Asia grew very well, those emerging markets there, so we feel comfortable about the mix that we have, both geographically as well as in terms of deal size.

Rob Ashe

If I could just add to that, I think you see that in the consistency of the average selling price. We were just under $200,000 in Q1, which really shows the strength in that $500,000 to $1 million deal range. You look back over the last five quarters, we've been consistently 180 to 200 in average sales price and that's up substantially from the year before. So I think that the deals in that midrange are getting richer and more consistent.

Keith Weiss - Morgan Stanley

Then real quick on the direct/indirect mix, it definitely ticked down year-over-year from 30% to 26% and by my calculation, probably the indirect license contribution was probably down close to 10%, 11% year-over-year. Anything specific we should be worried about of that channel contribution, or are you expecting it to spring back?

Les Rechan

Oh, no. I'm not worried about that at all. The indirect business is OEMs, some of our VARs, resellers. Again, you're going to see different behavior in different quarters but, we had a lot of momentum in the indirect business. Cognos 8 is a very, very popular platform amongst OEMs, people who embed the product because of its architecture and its openness. So, no, on the contrary, again, you're going to see some ups and downs, but we feel really good about indirect. Our indirect team is doing very well. It's very, very strong year last year coming out of fiscal year '07. So no, nothing I would say in terms of any concern there at all.

Rob Ashe

The OEM business grew extremely well and I would point out our new leader of our global business partners organization Mel Zelnick, hosted our partner forum in Orlando which went very well. The partner community, we're very aligned with our partner community, we're doing a lot of things around the enablement of that community. So I think that going forward, especially with the solution sets that we have, the integrated solution to enable pervasive performance management, the partner community is frankly very excited.

I talked about a lot of different solution sets that we've announced with global SIs, with solution providers, so to be honest with you, I've never felt better about the partner relationships that we have and our ability to scale the business jointly together, the services, the strategy we have there with partners is very solid.

Operator

Your next question comes from Robert Schwartz - Jefferies and Co.

Robert Schwartz - Jefferies

I would like to focus on the Americas where you had 4% growth, which has been one of the lowest growth rates in a long time; certainly lower than the 10% that we're looking for. Maybe you can help us parse that and talk about what was strong and what was weak to lead to that number? I think I heard you say, Les, that enterprise looked strong, I heard some mention in the call of maybe some legacy products. I don't know how that factored in and whether there's a localized change in the deal size. Help us put it all together to get to 4%.

Les Rechan

We don't provide license by geography. The Americas did display good license revenue performance throughout last year. This year's Q1 was against a tough compare for them, so I'm not disappointed with the America's performance in Q1. I'm confident that we're on track with the Americas for the year.

But within the Americas, if you take a look at this business, I will tell you there are a number of different units that were really strong in the quarter. Federal, which we made some changes in the federal business in the first quarter, they were very positive, they had a very good quarter. The state and local business is growing well. The East went very well, North/Central went very well. The G&A business slowed down a bit in the quarter, but they had such a good fourth quarter and there's only a subset of our total accounts 170 worldwide, so that really, we run those accounts more on a multiyear basis, that's the way those particular accounts are.

The OEM business was very strong. Latin America and SMB slowed down a bit, but those organizations have performed very well for us. So all in all, in the Americas I think the solutions team there is well aligned. I have mentioned before we have a new leader in the services and the marketing side of the business.

The team's well aligned and I think really rallied to have quite a good year.

Operator

Your next question comes from Jason Maynard - Credit Suisse.

Jason Maynard - Credit Suisse

I just have a question about cash flow and cash collection in the quarter and maybe just get your commentary on what you experienced. Also just for the full year, how should we think about cash flow growth compared to fiscal 2007?

Tom Manley

Well, operating cash flow was $30 million. I think we had a strong performance of both earnings and balance sheet performance. DSOs were strong. So it was a fairly predictable performance on operating cash flow.

We certainly continued with our stock buyback this quarter. We bought back $48 million of stock in the quarter and we did buy back about $26 million of stock for our RSU program which we just had for our broader base of employees this past quarter.

Operating cash flow will perform in excess of $200 million this year, which I think is the models that are pretty well out there. We'll continue to buy back stock. We do have a $200 million program approved by the board of which we're about halfway through. I don't expect to have any material amount of stock on the RSU side to buy for the remainder of the year.

Jason Maynard - Credit Suisse

Last year Q1 '07 cash flow was $72 million and you had a positive impact of $40 million from changes in working capital. This year, obviously, $30 million's not a bad number, but it's lower than it was in Q1, so I'm just trying to understand?

Tom Manley

Well, Q1 last year was a bit of an anomaly, really a carryover from our fourth quarter. If you remember that fiscal year, we fell short of our expectations and we didn't have the same level of accruals on our balance sheet as a result. We didn't pay management bonuses in FY06, commission accruals were lower. So there's about $30 million to $40 million of cash that fell into Q1 last year, which was unique to that year mostly as a result of how we exited the balance sheet in the Q4. So this past quarter is a much more normal performance from a cash perspective. So don't try to read anything into that change from a year ago.

Jason Maynard - Credit Suisse

So if I think then about cash flow compared to '07, is it reasonable to assume that if you grow revenue top line by 10% or so, in getting some leverage, I should get at least a 10% growth in operating cash flow?

Tom Manley

Yes, you'll get a similar growth to our overall earnings growth, but you do have to make that adjustment for that $30 million to $40 million that fell over in Q1 a year ago. So you make that adjustment and then just run your numbers from there.

Operator

Your next question comes from Vik Churamani - Lehman Brothers.

Vik Churamani - Lehman Brothers

Tom, just a little clarification on the guidance on the FX side. But first of all, could you remind us, the streamlining that you guys were doing in Europe on the back office side, how much was that going to contribute in cost savings towards the second half?

Tom Manley

Well, that project is winding down in Q2, so in terms of that expense that we had in Q1, we have a little bit in Q2 to still experience. It will generate some productivity improvements in the second half of this year, but not a material amount. That shared services project, there are economic gains or productivity gains to be had as a result of that, but it significantly improves our overall back office functions and control environment within the European marketplace. But I don't have a specific number, but safe to say that it's very low, single-digit millions of dollars.

Vik Churamani - Lehman Brothers

The reason why I ask is because when you look at the $0.09 in FX, $0.03 you can make an assumption on the share count being a little bit lower and then $0.02 on the tax. So you're left with about $0.04 which is about $4 million. So I'm wondering where this flexibility is coming from in the next nine months to offset that? Are you guys going to be outsourcing more towards India or China? Just trying to get a better handle on this.

Tom Manley

Well, on $600 million or $700 million of spending, $4 million, or $6 million or even a $9 million adjustment is not really a significant change. We're going to just prioritize our spending through our rolling four quarter planning process to prioritize our activities. It's a normal business process we have. We have a great planning tool that helps us do that. So I'm confident that, without any specific details we're able to share with you today that we're able to make the specific adjustments.

Vik Churamani - Lehman Brothers

Okay, fair enough. Lastly for Les and Tom, on the indirect side of the business, is there any way you can perhaps prioritize for us what channel partner relationships are stronger versus a year ago and which ones are not? Is there any way to stack these up?

Les Rechan

Well, I would not want to single out any one of those, because we are really focused, if you look at our performance management frameworks by industry, we're working with various partners and I named multiple today in various industries. I would tell you that from a global system integrator perspective, we see very, very positive progress with IBM, with Accenture, with Bearing Point, with Deloitte, all of which were sponsors at our Forum. The solution partner channels are getting even stronger.

At the Forum, we announced we had a solution catalog that we just published with 100 solutions in that catalog, 60 new. We had multiple new blueprints last year, many jointly built with partners. So I think that we really have a disciplined execution plan with these partners now, and Mel leads that for me and we are just really focused on growing the business collectively here and the partners are, frankly, excited about the confidence that companies have in 8.2, what they heard at the Forum from a lot of these customers, as well as the true business opportunity that's out there; because this is a differentiating area for companies. Data-driven decision making is the number one area to have impact with IT.

Vik Churamani - Lehman Brothers

Are your partner deals getting bigger this year if you look at fiscal '07 and going to fiscal '08 versus the previous year's? Is there any way you can provide us any color on that? Lastly, how much was Celequest this quarter?

Rob Ashe

We don't break out Celequest, I would just tell you that we've got a very strong focus on it and the pipeline is growing there. That appliance form factor for operational BI is really a neat paradigm that we're really excited about it.

In terms of partner influence, that's only going to increase. If you take a look at our business model between partners and our services team, we really want the majority of the engagements to be primed by partners. We see a lot of influence coming from partners, so I think that's only going to increase.

Now, that doesn't necessarily show up in the direct versus indirect, because many times we will actually sell the license, but there will be partner involvement in that. So we're really focused on ramping the partners, getting their skill sets enabled around Cognos 8. I think that number is only going to go up.

Operator

Your next question comes from Steve Ashley - Robert W. Baird.

Steve Ashley - Robert W. Baird

I would like to talk about PowerPlay a little bit. I think on the last call you had mentioned that you would hope to see that product resume some growth. Rob, you made some comments about C8 transformer being baked into Cognos 8.3 that might help pull some of the PowerPlay people over onto the Cognos 8 platform. Can you give us a little more color on what the plans are around PowerPlay and how we might facilitate some of those migrations?

Rob Ashe

Sure, Steve. It's harder for me to give you really specific color, because some of this stuff is yet unannounced, obviously. At our Cognos Forum we did a few sessions for our customers on Cognos 8 Transformer, which, as you say, is designed to help us get those PowerPlay customers moving and getting comfortable working in a Cognos 8 environment. We have more work underway to make sure that it's easier for those customers to move into a Cognos 8 environment.

I think that those customers will be pleased with what they see and I do think that as time unfolds here, we'll have an opportunity to do a better job with PowerPlay (1) as customers continue to see our investment in that platform, continue to invest in existing products and (2) looking for what might come down the road for them to also purchase.

So, as I said, no specific thing to tell you as all this work is under development, not announced. But suffice it to say, it's an important customer base to us, we're committed to it, we plan on getting and contributing more.

Operator

Your next question comes from Scott Penner - TD Newcrest.

Scott Penner - TD Newcrest

I think you mentioned that Cognos 8 was a proportion of the license revenue. Could you just repeat that, and then talk about when you would expect the drag from the legacy business to subside? You did get the 10% license growth in Cognos 8.

Rob Ashe

Yes. It's about 80% of our BI license revenue and I think we're getting to the point where the legacy products are leveling out and are not going to have as big an impact on the Cognos 8. Cognos 8 has got its own critical mass now. We talked earlier, Les and I were talking about the success of Cognos 8; combined Cognos 8 cumulative revenue is over $1 billion, just the success of that investment. It's a very, very solid, powerful revenue stream.

I think to Steve's question that preceded yours, Scott, the kind of signals that we're sending to our PowerPlay customers of our further investment is also going to give us the opportunity to stem that decline maybe on the PowerPlay side have it turn up. Those are some of the things that we're thinking about.

Scott Penner - TD Newcrest

Okay. Tom, if I could just quickly just clarify on the guidance, given your comments, should we assume that the rest of that $100 million or so that's left of the repurchase plan is spent in the back half of the year?

Tom Manley

You're asking me if we have plans to continue buying back stock in the second half?

Scott Penner - TD Newcrest

Basically, is that in your guidance that you're giving today?

Tom Manley

Yes.

Operator

Your next question comes from Mike Abramsky - RBC Capital Markets.

Mike Abramsky - RBC Capital Markets

On the recent industry consolidation that's gone on, I know you look at acquisitions all the time. Have you perhaps focused your efforts to look for acquisitions perhaps a bit more intensively than normal, either for scale or other reasons? Would you limit yourself to a mid-sized acquisition or would you contemplate something bigger?

Rob Ashe

Well, Mike, you know we don't comment specifically on the size of what we're going to do. I would say that a lot of the industry consolidation is focused more than anything else on the good work we've already done in the market to provide an integrated solution.

Again, I just want to reiterate other folks are following what we've done. So we've already got a good solution in the marketplace. We do believe that with our strong balance sheet and the growth opportunity there are acquisitions we can do. We are always looking and interested to find ways to add acquisitions.

I've always said that the two key variables for me are strategic fit and ease of integration and those continue to be what we focused on when we look at these acquisitions.

Mike Abramsky - RBC Capital Markets

You haven't included accretion or debt in that list, though?

Rob Ashe

There's many other things I didn't include too, but obviously our focus in terms of doing acquisitions is make them accretive, we're not here to do dilutive acquisitions. Debt is just a function of size and whatever and I wouldn't rule out debt, but it's not something top of our list right now.

Operator

Your next question comes from Nathan Schneiderman - Roth Capital Partners.

Nathan Schneiderman - Roth Capital Partners

I was hoping we could go back to the big deal issue in the quarter. I guess a lot of the angst over the quarter wouldn't be there if you had pushed across a few more seven-figure deals. So I was hoping you could drill down and talk about the issues in executing these seven-figure deals. Why do you think there was the problem this quarter despite improved processes, like your Interlock system that you've spoken about in the past? Was it sales versus churn related, is it a sector issue related to all these acquisitions, some customer concerns? Just help us analyze why there was this problem over these seven-figure deals.

Rob Ashe

Okay. I will do that. First of all, on sales force churn, I just want to make the point that as it relates to retention and our footprint of 390, which is great from a Q1 perspective over Q4, we really have reduced churn. In fact, coming out of the blocks with our kickoff, we had a lot of momentum incentive plans in place, so I felt very good about that. To be honest, I would have liked to have done more business in the first two months of the quarter. We did have a lot of activity just getting the year geared up. We had our Forum in the first quarter, a lot of things going on.

But as you take a look at the next quarter and you just look at something I would term as pipeline quality and where deals are in the sell cycle, within Salesforce.com and if you know Salesforce, you know the higher the cycle number, the better off you are. We have a lot more of our pipeline in later sales cycle as compared to Q1.

As it relates to the bigger deals, I do not feel an issue around our ability to close big deals as indicated by the performance in Q4. We had different ways of getting there in Q1. We had multiple paths, not just one path. We would have liked to have done more license business, frankly, but a lot of that has carried over. We haven't lost any significant deals, so I don't think that there's any significant execution-type things that we need to be worried about.

There has been consolidation in the industry and you need to have those discussions with customers. I feel good about those discussions that we can have because of the clarity of our solution sets versus having multiple products in the same space. So I think that the conversations that we can have with customers about being a good partner can be positive. We do need to execute against the pipeline. That's our job and that's what we plan to do.

Nathan Schneiderman - Roth Capital Partners

So just real quick, consolidation then lengthened sales cycles a tad?

Rob Ashe

Well, I can tell you consolidation and where it's happened is mainly the office of finance, we had 20% growth in the quarter year to year. There will be select customers that need to have more conversations, because frankly, with that consolidation, there hasn't been complete clarity with our competitors in terms of what they're going to do. That's what I mentioned before in terms of the zig zag. It's okay to say, well, I'm going to change products, but it's not okay for the customer really trying to drive performance management value. In that sense, customers want to make clear decisions. I think they can make very clear decisions with Cognos and really that's what we're trying to do, is take advantage of that opportunity.

Operator

Your next question comes from Daniel Cummins - Banc of America.

Daniel Cummins - Banc of America

You made reference to progress you've made with the IBM partnership. I wonder if you could just expand on that for us?

Rob Ashe

Well, I'm going to let Les comment mostly on that, but I'll just tell you that we're a year into that partnership, 15 months into that partnership at a strategic level, many years at levels below our elevation to strategic partner last March. From where I sit watching the business and watching the business develop strategically, I'm very pleased with the way that not only has the relationship developed, but it has allowed us to drive a phase to the market that's much more solutions oriented. Les has been pushing, but the IBM relationship helps, because they're such a solutions oriented organization.

So strategically, I think it's really helped us with the interface in the market. I think that a year and a quarter into that relationship that we've seen good broad-based adoption and acceptance within that channel.

Daniel Cummins - Banc of America

Are they more than an incremental contributor now in terms of improvement for your greater than $200,000 deals?

Les Rechan

Well, we've done some of the biggest deals we've ever done with IBM, for example, in the public sector. The focus with them in the case of industries, is very targeted. So you think about the risk management solution set and finance, we're doing joint forums with them for the first time, we roll those out in the quarter, very good attendance. I think the pipeline is building there, the crime information warehouse has been very successful. The workforce performance solutions, we do joint work with them, they present at our government forum.

So, yes, many of those deals are sizable and it's really based on the industry alignment that we have. So I would say that in the past year from an annual report perspective on that relationship, we met all of our targets on both sides. Of course, we want to extend those targets to be bigger this year, we have a lot to work to do, and we're going to work with them appropriately to get that done. There's definitely good traction there, both from an industry perspective as well as with their global business solutions.

Daniel Cummins - Banc of America

Would it be the case that anybody else is kind of dropping back, just perceiving that IBM is more keyed up to work with you and they'd rather go elsewhere?

Les Rechan

No because I think that IBM, number one has other partners, it's not exclusive to Cognos and we're not exclusive to IBM. In fact, you see us working with people like HP, you saw us announce they had a new Neo View data warehouse that they announced that we're certifying Cognos 8 on. We're working with Teradata, we're working with a lot of the players out here. I mean customers are doing so many different things and I think the key here for us, because the environment is heterogeneous with multiple data sources, we want to be working with these integrators that have that capability and they like Cognos for that reason. That we can sit on top of all these complex environments which many times have multiple transaction systems in there, like SAP and Oracle plus Teradata and we sit on top of that, and those integrators package themselves around that.

So I wouldn't say that anybody has stepped back. I think if anything, the bigger integrators are stepping up because they see a great opportunity here and our ability as a heterogeneous player is really positive.

Operator

Your next question comes from Tom Roderick - Thomas Weisel Partners.

Tom Roderick - Thomas Weisel Partners

I was hoping we could just review the competitive landscape here in wake of the Hyperion/Oracle merger. The obvious answer would certainly seem to be that there is a lot of opportunity out there, but in looking at perhaps what was perhaps a tougher close rate on some of the big deals, are you seeing Oracle with some of its account control out there serving to freeze some deals or slow down some of the sales cycles? Or are you seeing no impact, or is it strictly a beneficial impact post that acquisition?

Rob Ashe

I would say no more than usual. We've always, for two years now we've been calling this a very competitive marketplace that we see these infrastructure vendors and we work to differentiate ourselves from them and we've made significant steps over the last two years to develop a go to market model now under Les' leadership to be able to compete at an account level with these companies, that's completely independent of all the great product stuff I talked about.

So it's competitive, we see them in big accounts, whether it's Oracle or SAP or whoever it might be. We work hard to promote our strengths and our account coverage and solution and success model. So I wouldn't say it's any different than it's been.

I think that the realignment opportunity we see is really around (1) the extent to which these companies are going to be integrating these things for the years to come, and (2) the extent to which customers aren't committed to those particular infrastructures suddenly become quite open and interested in what alternatives are out there.

For instance, a non-SAP customer that we were competing with before the acquisition suddenly if probably going to be a lot less interested than they were before the SAP acquisition. And similar thing is true with a Hyperion customer that might be sitting on top of SAP. A realignment focus and continuing to compete, we have stated quite categorically, we think it's a net opportunity for the company. We still feel that way.

Les Rechan

I think the concern customers have, particular with Hyperion would be the product road map which isn't perfectly clear as yet. The other thing and I was pleased, I just got back from our recognition event, where we actually had some of our new elite performers, some of our top sales folks that actually come from Oracle in the past year, so we've been able to make some of those people part of the Cognos family, and that's positive as well, just in terms of the reality of the landscape. So performance management's a different business. It's different than transaction systems, and I think that customers are looking for partners in this area.

Tom Roderick - Thomas Weisel Partners

Just briefly, turning to your own product road map, when you look at the planning side of the equation, are you seeing any hold-up in terms of demand in front of the integration of planning into the Cognos 8 release? What sort of demand in general are you hearing from customers about the integration of that product?

Rob Ashe

Our customers are responding just overwhelmingly positive for many points of innovation in our finance product line. We just held a Customer Advisory Board at our Customer Forum and I attended the dinner after the Advisory Board and very, very excited about what they see coming down the road. Were there any delays? Well, I mean, Cognos planning license revenue in the quarter was one of its highest growth ever on a percentage basis, so I would say, no, that we're not seeing delays in front of that release.

Operator

Your final question comes from Frank Sparacino - First Analysis Securities.

Frank Sparacino - First Analysis Securities

I'm just trying to reconcile license growth when you talk about CA growing nicely given it's about two-thirds of the license revenue and then office of finance growing nicely. The math doesn't seem to work to me when you look at the overall license growth of 3%, so I'm just hoping you can help me with that.

Tom Manley

Well, I think that the Cognos 8 is about 80% of our BI revenue, I think we said that. Where we declined in revenue was really in our legacy BI products, that really brought the overall average down to the 3%.

Rob Ashe

In addition to legacy applications all across.

Tom Manley

Yes.

Rob Ashe

Okay. Well, thank you, operator. So just to close down, we're pleased with the results this quarter. As I said, the license revenue wasn't quite where we would have wanted it to be with our double-digit expectations, but I'm very confident that we will be on track to hit double-digit license revenue growth for the full year.

I think that the teams are well aligned, I think the capacity is good, and as I've said many times on the call, I think the product lineup is particularly strong. So we feel really good going into our second quarter. So thank you for joining us this evening and good night.

TRANSCRIPT SPONSOR

Cornerstone OnDemand Logo

Want to understand the future of human resources software?

Cornerstone OnDemand is the leading provider of SaaS solutions for integrated talent management, covering the human capital life cycle from hire to retire.

We offer over 30,000 online training titles and performance tools for compliance and analytics to help companies maximize workforce productivity and achieve organizational excellence.

Learn about talent management and our industry leading products for learning management, corporate social networking, onboarding, compensation, compliance, employee performance management and succession planning at CornerstoneOndemand.com.

To sponsor a Seeking Alpha transcript click here.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Cognos F1Q08 (Qtr End 5/31/07) Earnings Call Transcript
This Transcript
All Transcripts