COGN - Zacks Investment Research



December 27, 2007

Research Associate: Ruchika Banka, M.Fin.

Editor: Jyoti Lakhotia, M.Fin.

Sr. Ed.: Ian Madsen, CFA: imadsen@; 1-800-767-3771 x9417

111 N. Canal Street, Suite1101 ( Chicago, IL 60606

| Cognos Inc. (COGN - NASDAQ) | $57.57 |

Note: This report contains substantially new material. Subsequent reports will have changes highlighted.

Reason for Report: 3Q08 Earnings Results (Prev.: IBM to acquire COGN, November 29)

Brokers’ Recommendations: Positive: 6.7% (1); Neutral: 86.7% (13); Negative: 6.7% (1) Prev. Ed: 5, 19, 1

Brokers’ Target Price: $58.00 ([pic] $2.65 from last edition; 13 firms) Brokers’ Avg. Expected Return: 1.0%

Recent Events – Summary

December 20: Cognos announces 3Q08 financial results ended November 30, 2007.

November 12: IBM and Cognos announce a definitive agreement for IBM to acquire Cognos.

October 25: Cognos completes the acquisition of Applix.

October 03: COGN conducts Analyst Day meeting.

Overview

|Key Positive Arguments |Key Negative Arguments |

|COGN product set has evolved into a more integrated offering and growth|Large well-capitalized competitors like infrastructure vendors MSFT, IBM, |

|in large deals reflects customers’ desire to standardize on software |ORCL, SAP, and SEBL are expanding their product solution by integrating |

|vendors. |greater business intelligence functionality, encroaching on COGN’s sector.|

|Cognos 8 will extend business intelligence to mobile devices boosting |Currency fluctuations can have a material impact on Cognos's top and |

|its long-term growth. |bottom lines. |

|The acquisition of Celequest has enhanced the position of Cognos within|A weaker BI spending environment can lead to revenue slowdown in the |

|next generation BI technologies and delivery mechanisms. |absence of a diversified revenue stream. |

| |The new product introduction from large software vendors and ERP players |

| |could lead to pricing pressure for the company. |

Headquartered in Ottawa, Canada, Cognos Inc. (COGN) is a global provider of business intelligence (BI) software. The company's solution helps improve business performance by enabling planned performance management, supported by effective decision making at all levels of the organization through consistent reporting and analysis of data derived from various sources. Its integrated solution consists of its suite of BI components, analytical applications, and performance management applications. COGN is the only company to support all of these key management activities with the complete solution that spans all of these essential components of CPM – enterprise planning, score carding, and business intelligence. For more information, please visit .

COGN’s Fiscal Year ends on February 28.

Recent Events – Details

On December 20, 2007, Cognos announced 3Q08 results. According to the company’s press release, revenue and non GAAP EPS came in at $290.0 million and $0.51, respectively. The quarter revenue and non-GAAP EPS results surpassed the Street consensus estimates of $279.1 million and $0.49.

On November 12, 2007, IBM and Cognos announced the two companies have entered into a definitive agreement for IBM to acquire Cognos in an all-cash transaction at a price of approximately $5.0 billion or $58.00 per share, with a net transaction value of $4.9 billion. The acquisition is subject to Cognos shareholder approval, regulatory approvals and other customary closing conditions. It is expected to close in the first quarter of CY08.

On October 25, 2007, Cognos announced the completion of the Applix acquisition. Applix is a publicly-held company based in Westborough, Massachusetts and an industry leader in analytics. All remaining outstanding Applix shares have been converted into the right to receive $17.87 per share in cash. Applix is now an indirect, wholly-owned subsidiary of Cognos. The acquisition of Applix builds on the proven strength of Cognos 8 Planning, Cognos 8 Controller, and Cognos 8 Business Intelligence. Applix extends the Cognos solution to address financial performance analysis and optimization, including new solution areas, such as, profitability, sales mix, and price/volume variance analysis. IDC estimates the worldwide market for packaged applications for Financial Performance and Strategy Management at almost $2.0 billion for calendar 2007.

Revenue

|Revenue - FYE Feb 28 |

|Positive |6.7% |

|Neutral |86.7% |

|Negative |6.7% |

|Max. Target Price |$58.00 |

|Min. Target Price |$58.00 |

| Avg. Target Price | $58.00[pic] |

|Analysts with Price Target/Total# |13/15 |

Risks to the target price achievement include volatility in global IT environment, increasing competition from other enterprises, the company’s failure to meet future capital needs in order to support operations, fluctuations in foreign exchange rate and its inability to successfully integrate any current or future acquisition.

Please refer to the Zacks Research Digest spreadsheet on COGN for further details on valuation.

Capital Structure/Cash Flow/Solvency/Governance/Other

Balance sheet

Cash - The company ended the quarter with $167.5 million in cash and equivalents, which is lower than the $439.4 million cash balance the company had at the end of the last quarter. The decline in cash levels was a result of Cognos using approximately $306.0 million of its cash to purchase Applix in 3Q08. Given the fact that the company’s cash balance has been very strong for quite some time, the company has put it to good use in the way of share repurchases as well as acquisitions. Operating cash flow in the quarter was $6.6 million versus $22.3 million in the last quarter and $23.5 million in the year-ago quarter.

Deferred Revenue – Deferred revenue ended the quarter at $1.9 million, down from $236.6 million in 2Q08. COGN’s deferred revenue typically declines for each of the first three quarters before being replenished in 4Q.

DSO - DSO (Days sales outstanding) was 70 days versus 57 days last quarter, and was in line with management’s target range of 65 to 70 days.

Employees Strength

3Q08 marked the most employees COGN has hired in the past seven quarters. The company's count of quota-carrying sales representatives increased sequentially from 411 to 441 (highest ever level), reflecting the addition of salespeople from its acquisition of Applix. Management expects to have 450 sales representatives after the close of the Applix acquisition (expected in the October to December time frame).

Other Developments

Share Repurchase Program Announced

After spending over $300.0 million on the Applix acquisition, the company will have about $200.0 million in cash. Management indicated securing a $200.0 million line of credit recently in order to have the opportunity to react quickly to acquisition prospects or any other spending initiatives. COGN announced an extension of its Open Market Share Repurchase Program to repurchase additional shares worth $200.0 million (expiry October 2008).

Analyst Day Highlights

COGN hosted its annual financial Analyst Day on October 03, 2007, in Boston. At the analyst day, Cognos described the returns expected from its significant investments in a services-based Cognos 8 platform, expansion of the sales force and recent acquisitions. These investments are expected to drive double-digit growth in both the license and total revenue lines through FY08 and FY09. While adverse currency moves have muted FY08 margin expansion, management looks for non-GAAP operating margins to finally exceed 20.0% in FY09.

Key highlights on the Analyst Day event can be summarized as follows:

• Management's optimism about the market opportunity and particularly its confidence in Cognos's ability to execute is very high.

• Efforts over the past few years have been mainly devoted to building and hardening the Cognos 8 architecture. Now, with sales head count being aggressively added, the focus will be realizing the value of that early investment.

• The emerging market opportunity is being underestimated by investors. Cognos signed its first ever multimillion dollar deal in China last quarter.

Potentially Severe Problems

There are none other than those discussed in other sections of this report.

Long-Term Growth

The long-term growth rates for COGN fall within the range of 12.0% (CIBC) and 23.0% (RBC Cap.). Digest long-term average growth rate is 16.6%.

In order to further strengthen the current product portfolio, management launched a new generation of Enterprise Business Intelligence Series, which include Cognos ReportNet, PowerPlay, and DecisionStream. This new release will continue to expand the deployment of new platform. The company also launched new releases of Cognos Metrics Manager, Cognos Controller, and Cognos Planning.

The company struck a multi-year deal with Boeing. Cognos indicated that the deal was a multi-year umbrella agreement with revenues to be recognized as and when Boeing rolls out seats. One analyst (CIBC) estimates the potential will certainly be greater than $10.0 million over the next 3 to 5 years, which is Cognos’s largest of such deals to date.

Another analyst (ThinkEquity) believes feedback from a couple of customer events suggests that Cognos 8 sales cycles are challenging to navigate, with no clear signs of easing, and indications that existing customers are taking a cautious approach to Cognos 8 migrations. Additionally, the analyst thinks that if no suggestion of macro acceleration is given, increasing competition is likely to constrain License revenue growth and valuation.

Upcoming Events

On March 19, 2008, the company is expected to announce its 4Q08 & FY08 results.

Individual Analyst Opinions

POSITIVE RATINGS

RBC Cap. – Outperform ($58.00 target price): 12/21/07. The firm maintained an Outperform rating with a target price of $58.00 due to the high probability of deal completion. INVESTMENT SUMMARY: The firm considers COGN to be the best strategic fit for IBM.

NEUTRAL RATINGS

BMO Capital – Market Perform ($58.00 target price): 12/21/07. INVESTMENT SUMMARY: The firm sees IBM’s proposed acquisition of Cognos at $58.00 per share as a reasonable price for the company and recommends shareholders tender to the offer, as it believes there is a low likelihood that another offer will surface.

Broadpoint Capital – Neutral (No target price): 12/20/07: The firm reiterated a Neutral rating following the announcement of COGN to be acquired by IBM.

Newcrest – Hold ($58.00 target price): 12/20/07: The firm upheld a Hold rating and maintained a target price of $58.00 following the announcement of COGN to be acquired by IBM. INVESTMENT SUMMARY: The firm believes the offer will achieve the required shareholder support and regulatory hurdles.

Wedbush – Hold ($58.00 target price): 12/21/07. The firm downgraded its rating from Buy to Hold and revised the target price from $54.00 to $58.00, given the likelihood that IBM’s acquisition of COGN and that no other vendor will make a competitive bid for the company. INVESTMENT SUMMARY: The firm believes investors should buy COGN shares as the company’s long-term growth strategy remains intact, the market for BI products remains robust and healthy, and ORCL’s proposed acquisition of HYSL could yield positive benefits to the company in the near term. Given the strong demand for financial performance products, it expects the deal to be marginally dilutive to FY08 results and slightly accretive in FY09.

CIBC – Sector Perform ($58.00 target price): 12/20/07: The firm reiterated a Sector Perform rating with a target price of $58.00 to reflect the current IBM acquisition bid. INVESTMENT SUMMARY: The firm sees little reason for the deal not to be completed shortly after the shareholder meeting. Cognos's results suggest the business model is intact, certain regulatory approvals have already been received, and shareholder approval appears likely.

Cowen – Neutral (No target price): 12/20/07. INVESTMENT SUMMARY: The firm maintained a Neutral stance on the stock, attributable to the acquisition.

Friedman, Billings – Market Perform ($58.00 target price): 12/20/07: The firm maintained a Market perform rating with a target price of $58.00 following the announcement of COGN to be acquired by IBM. INVESTMENT SUMMARY: According to the firm, IBM's acquisition of COGN makes strategic sense, as it fills a void in its software suite.

Goldman – Neutral ($58.00 target price): 12/21/07: The firm adhered to a Neutral rating with a target price of $58.00, attributable to acquisition. INVESTMENT SUMMARY: The firm views Cognos as one of the key assets for purchase in the consolidating sector. It believes the company is likely to continue benefiting from ongoing growth in the business intelligence market, particularly as large enterprises standardize on a single BI vendor.

Jefferies – Hold ($58.00 target price): 12/20/07. The firm maintained a Hold rating but raised the target price from $48.00 to $58.00. INVESTMENT SUMMARY: The firm does not expect any competitive bid to IBM's all-cash offer. It believes IBM is paying a rich price and the strategic fit looks stronger than with any other company.

MorganStanley – Equal weight ($58.00 target price): 12/20/07. INVESTMENT SUMMARY: The firm believes Cognos can continue to leverage the strong demand trends in BI, despite management’s reluctance to reflect this strength in its forward guidance and that margin improvement should enable Cognos to outperform throughout FY08. The firm continues to see the successful completion of the announced acquisition of Cognos by IBM as the most likely outcome for the stock and forecasts limited potential for upside from the current level.

Pacific Growth – Neutral (No target price): 11/12/07. INVESTMENT SUMMARY: The firm maintained a Neutral rating, attributable to the acquisition announcement.

Raymond James – Market Perform ($58.00 target price): 12/21/07: The firm reiterated a Market Perform rating and a target price of $58.00, attributable to the proposed acquisition.

UnionBankSwitz. – Neutral (No target price): 12/20/07: The firm reiterated a Neutral rating with a target price of $58.00 following the announcement of COGN to be acquired by IBM.

NEGATIVE RATINGS

None

NOT EXPLICITLY RATED

National Bank Financial – Tender ($58.00 target price): 12/21/07: The firm downgraded its rating from Sector Perform to Tender following the announcement of COGN to be acquired by IBM and in the absence of a competitive bid.

GMP - Tender to the Offer ($58.00 target price): 12/20/07. INVESTMENT SUMMARY: Based on the strong valuation, the firm offers a “tender to the offer” stance.

DROPPED COVERAGE

Deutsche Bank – 11/12/07: The firm dropped coverage on COGN following the acquisition announcement.

Thomas Weisel – 12/20/07: The firm has suspended the rating and the target price following the announcement of COGN to be acquired by IBM.

Research Associate: Ruchika Banka

Copy Editor: Pushpanjali B.

Content Ed.: Jyoti Lakhotia

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