by Frank Sparacino

Dog Days

During the 2001 summer months (June 1 to August 31), the NASDAQ fell 15% and appeared ready to test its earlier April lows and levels not seen since 1998. Unfortunately, these numbers could be viewed as encouraging in light of the performance of our publicly traded business intelligence (BI) universe, which plummeted 33% on average. The following is a summary of results for the quarter ended June 30 at a number of the key BI vendors.

Brio Technology

Brio posted dismal results for the June quarter, its first quarter of fiscal 2002. We were surprised at the magnitude of the revenue shortfall, which resulted in a 29% year-over-year drop in software license revenue to $13.5 million. Compounding the challenges associated with a stringent IT-spending environment were significant internal changes at Brio, including a restructuring of its North American sales force and changes in product development and marketing. A major marketing initiative will be launched in conjunction with the company's user conference scheduled for October. The new campaign will focus on re-branding Brio as an analytic software platform that integrates a number of complementary business intelligence technologies such as query and reporting, online analytical processing, enterprise reporting, and portal.

Despite generating an $8 million loss from operations during the quarter, Brio produced positive cash flow of $2 million, largely the result of increased collection efforts that resulted in its A/R balance declining sequentially by $15 million to $20 million. We expect the company's cash position, which totaled $15 million as of June 30, to decline to between $11 million and $13 million in the September quarter. This range should represent a bottom for Brio's cash position as the company expects to reach break-even EPS for its September quarter with increasing profitability thereafter. We also expect Brio to close shortly on a favorable round of funding, boosting its cash reserves by $10 million to $20 million.

Business Objects

Business Objects was one of the few software companies across any sector to report better-than-expected results with June (second) quarter revenue of $101.5 million, up 20% year-over-year. The story for Business Objects continues to be North America, which accounted for a record 40% of total revenue. While Europe, which accounted for 53% of total revenue, grew only 7% year-over-year, North America grew 46% year-over-year and 18% sequentially. Another positive surprise was the closing of seven deals in excess of $1 million (four in North America and three in Europe).

We have been critical of management's strategy with respect to analytic applications. In 1999, Business Objects created an independent subsidiary called Ithena to develop, market, and sell pre-packaged analytic applications. Earlier this year, Ithena was assimilated back into the company, a clear sign that this new business failed to gain any traction. Management has shifted its focus to a new infrastructure product called Application Foundation. The product has quietly been in development since the beginning of the year and was first released in May. This "new" product leverages its existing business intelligence functionality with significantly enhanced application development capability and new, pre-built templates for building customized analytic applications.

Application Foundation is specifically targeted at competitors such as AlphaBlox (private) as well as MicroStrategy. Despite some early signs of progress (i.e. a $1 million-plus transaction with NuEdge, one of the first companies to join Business Objects' Open customer relationship management [CRM] Partner Initiative as a value-added reseller) during the second quarter with the new product, it is too early to tell it will be a major success and provide the additional growth driver we believe the company needs.

Informatica

Other than its revenue shortfall, the most surprising news from Informatica was its expectation of a substantial increase in operating expenses and management's remark that the company will not return to break-even EPS or profitability until the December quarter at the earliest. One of the primary reasons for this is higher rent at the company's new corporate headquarters in Redwood City, Calif. The other factor is more discretionary in nature and involves Informatica's decision to build pre-packaged analytic applications.

Not unlike other companies in the software sector, the issues for Informatica today are largely macroeconomic in nature. At the same time, we recognize the challenges the sales force faces related to successfully selling both applications and the company's core infrastructure technology.

Despite its revenue shortfall, June (second) quarter revenue of $47.1 million was up 39% year-over-year. A sharp sequential decline in international revenue of 48% and lower-than-expected productivity from the sales force were the major factors in the disappointing results. On the other hand, positive developments were 1) sequential growth of 6% in its North American operations and 2) the addition of 98 new customers, up from 75 in the first quarter.

MicroStrategy

Our comments regarding MicroStrategy exclude results at its Strategy.com subsidiary. The company reported June software license revenue of $20.3 million, which represented a sequential increase of 9% and the best performance of any vendor in the sector. As a reference point, Business Objects grew license revenue by 1% on a sequential basis to $61.0 million, while Informatica reported a 20% sequential decline in license revenue to $28.2 million. Brio Technology and Cognos Inc., which both recorded a sharp sequential decline in license revenue in their most recent quarter, are less relevant due to different fiscal year/quarter ends.

Our main issue with MicroStrategy is its operating cost structure (particularly general and administrative [G&A] expenses at 22% of total revenue last quarter), which remains out of line with industry peers and software vendors in general. However, the company does deserve a great deal of credit for reducing 1) total operating expenses (excluding amortization) by 41% from a year ago and 2) headcount to 1,129 by the end of July from 1,869 at the end of March. As a result of its aggressive restructuring plans, the company is nearing profitability (still expected during the fourth quarter of this year) and putting to rest ongoing viability questions with a significantly improved cash flow position.

Lastly, the three key metrics we focus on: 1) new customer additions and the percentage of license revenue from new customers, 2) deal size metrics, and 3) indirect channel (including OEM) momentum, were all encouraging.

About the Author

Frank Sparacino (fsparacino@firstanalysis.com) specializes in research and investment at First Analysis, an integrated, research-driven investment firm. His area of expertise is infrastructure software, with a focus on business intelligence.