Taking Stock: Business-Intelligence Demand Stays StrongTaking Stock: Business-Intelligence Demand Stays Strong

inding pockets of strength in technology these days is a tough task. One day it looks like semiconductors are recovering; the next day, they're down 10%. This wouldn't be so bad if it didn't affect every subsector of technology. So where is an investor to hide these days outside of gold, real estate, and bonds? Well, one surprising pocket of strength remains in business-intelligence software, which includes companies such as Cognos (COGN-Nasdaq) and Business Objects (BOBJ-Nasdaq).

Why is business intelligence doing well while other sectors lag? A big part of the answer is that business-intelligence software generally is able to demonstrate a clear return on investment to buyers in a very short period.

The ability to access data throughout a company is a compelling business proposition, especially if it lets employees make more-profitable business decisions more quickly than competitors or understand customers better. The software can integrate with your customer-relationship management software as well as with your supply-chain systems. It can optimize the profitability of customers and measure the effectiveness of your supply-chain systems.

Mind you, just because the business fundamentals are strong doesn't guarantee that the company's stock will rise. We may get an early heads-up on the business strength of the group when Cognos reports earnings at the end of September for the fiscal second quarter ended Aug. 31. I fully expect the company to be on track to make its earnings goals this year.

Companies such as Cognos that are in product-upgrade cycles will see short-term a benefit to their top line. Cognos will benefit from its recently launched Series 7 product. Companies with a large and financially strong installed base will have a distinct advantage during this downturn. Maintenance and service fees suddenly become very valuable as product revenue growth remains weak. Still, given the weakness in technology spending, business-intelligence software companies will be forced to cut operating expenses to manage earnings.

The biggest risk remains a slow economy and stagnant IT spending. Enterprise software spending ultimately will tie into company IT budgets, and the near-term outlook isn't very good. Any additional uncertainties such as the recent disclosure that Business Objects' CFO, Thomas Weatherford, will retire by the end of this year will only add to investors' discomfort.

Current stock prices are no bargain. Cognos earned 48 cents per share in its fiscal 2002, which ended in February, and it's projected to earn about 71 cents and 88 cents per share in fiscal 2003 and 2004, respectively. At the current price of about $19.75, the fiscal 2003 forward price-to-earnings multiple for Cognos is 27.8. That's not exactly cheap, though it's in line with historical multiples. Business Objects is priced at about $15.50. The company earned 70 cents per share last year. It's projected to earn 62 cents per share in calendar 2002 and 85 cents per share in 2003. This places the 2002 price-to-earnings multiple at 25.0--again, consistent with its historical normalized trend. Clearly, investors are getting a little smarter about valuation.

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