Business Objects Struggles in Q2

The company, still a $1 billion business, looks to new initiatives and belt-tightening to shore up license revenues.

Business Objects is in a precarious position. While its overall revenues are up, its software license earnings are down for its second quarter of 2006 while the company waits for key initiatives to pay off, including a build-out of its services sector, customer migration to its new XI platform and mid-market penetration with new on-demand offerings.

Business Objects posted second-quarter 2006 earnings July 26 that fell short of initial guidance for software revenue, but which fell less than the giant business intelligence software maker had recently warned.

During an after-market conference call with analysts and press July 26, Business Objects said that while total revenue for the company grew at double-digit rates (CEO John Schwarz declined to be more specific), license revenues came in below expectations.

Business Objects reported that its second quarter net income plummeted to $7.9 million, or 8 cents per share, from $23.1 million, or 25 cents a share for the same year-ago period.

And while total revenue for the quarter grew 12 percent to $294.5 million, license revenues fell 1 percent to $123.1 million.

Earlier in the month, on July 6, Business Objects officials put out a preliminary warning that its second-quarter numbers would not meet expectations.

At the time, the company said its profit for the quarter could be between 5 cents and 8 cents per share, rather than the 10 cents to 13 cents that had been forecasted previously.

The company also said revenues would see a shortfall, from the $295 million to $300 million initially forecasted, down to $287 million to $291 million.

During the July 26 earnings call, Schwarz blamed the shortfalls on reduced closing rates on large deals, poor execution in Europe and not yet achieving its goals in Asia.

"Overall, only four license deals in the quarter were greater than $1 million. That alone accounts for shortfalls in the quarter—compared to 9 deals [over $1 million] in the previous quarter and 13 deals the second quarter last year," said Schwarz.

Total revenues in the Americas came in at $168 million, up 36 percent for the quarter.

Offsetting that, total revenue for EMEA for the second quarter was $107 million, down 8 percent from the previous year, and total revenue in Asia-Pacific and Japan was $20 million, down 10 percent from the same year-ago period.

At the same time, Business Objects is facing issues with customer migrations to its newer namesake XI and XI Release 2 platform that brings together newer BI capabilities—performance management, reporting, query and analysis, data integration—with the companys Crystal Reports functionality, acquired in 2005.

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While the Americas region is seeing a good deal of action, the European region is not seeing the same.

"Id say there is a difference in behavior between Americans and Europeans," said Schwarz.

"American customers tend to be not as risk-averse [and are] willing to migrate and add new features at the same time; Europeans tend to be more serially focused, migrating first and adding new features later."

Business Objects nonetheless garnered $82 million in XI revenues in the quarter—up 51 percent from the same quarter last year—and XI Release 2 now accounts for more than 70 percent of the XI license revenues.

"The challenge we face is not lack of demand, but migration tends to slow down sales," said Schwarz.

To mitigate the software license shortfall for the quarter, Business Objects put in place a couple of new initiatives and is building on some older ones.

Four new initiatives going forward include new customer programs to accelerate migration to the XI platform and acquire new licenses; targeted marketing in the mid-market, particularly around its Crystal on-demand products; a newly established sales team focusing on XI migration specifically; and adding more forecasting capabilities to its own planning cycle.

To slow down previously planned spending for the end of 2006, Business Objects plans to focus efforts on bringing in only critical new hires; reduce its reliance on consultants (a cash outlay thats costing the company quite a bit, according to Schwarz); defer the upgrade of a San Jose facility; and renegotiate leases on existing facilities given current market conditions.

Given its new belt-tightening plans, Business Objects said its guidance for the coming third quarter is for total revenue of $1.2 billion to $1.21 billion, or between 72 cents and 80 cents per share.

"This quarter has not shaken our confidence in the substantial opportunity ahead," said Schwarz, who commented that he is not seeing any unusual pressure from the likes of SAP, Oracle, Microsoft or IBM, each of which has increased its focus on the BI market in 2006 alone.

"The market for BI remains strong and represents a significant opportunity for Business Objects as the leader [providing] a powerful combination of integration and analytics."

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