Business Objects reports Q3 2006 results

Business Objects, the world's leading provider of business intelligence (BI) solutions, today announced results for the third quarter ended 30 September 2006.

Total revenues for the third quarter of 2006 were $310 million, up 19% year-over-year. Licence revenues for the third quarter of 2006 were $132 million, up 9% year-over-year. Services revenues, including maintenance and global professional services, for the third quarter of 2006 were $179 million, up 27% year-over-year.

US GAAP diluted earnings per share for the third quarter of 2006 were $0.21, flat year-over-year after including approximately $11 million of additional stock-based compensation expense under FAS 123(R) in the third quarter of 2006.

Non-GAAP diluted earnings per share for the third quarter of 2006 were $0.41, up 37% year-over-year. Total revenues and diluted earnings per share exceeded the high-end of the company's guidance range for the quarter.

All figures referred to herein are stated in US dollars unless otherwise indicated. The three months and nine months ended 30 September 2006 non-GAAP results, as defined below in the section "Use of Non-GAAP Financial Measures", differ from results measured under US GAAP as they exclude amortisation of intangible assets, write-off of in-process R&D, and stock-based compensation expense. US GAAP numbers for the three months and nine months ended 30 September 2005 do not include stock-based compensation expense under FAS 123(R).

A reconciliation of US GAAP to non-GAAP results is included at the end of this press release.

"Our revenues grew 19% year-over-year and 5% sequentially in a typically weaker quarter on the continued strength of the Americas and significantly improved contribution from Asia-Pacific and Japan," said John Schwarz, chief executive officer of Business Objects. "We continued to improve our margins, concluded nine deals over $1 million, expanded the breadth of our enterprise performance management and enterprise information management solutions, and gained traction in the mid-market."

Revenue growth in all geographies:
Total revenues in the Americas for the third quarter of 2006 were $175 million, up 27% year-over-year. The Americas closed six transactions over $1 million in licence revenues. Total revenues in Europe, Middle-East and Africa (or EMEA) for the third quarter of 2006 were $113 million, up 7% year-over-year (up 3% in constant currencies). EMEA closed two transactions over $1 million in licence revenues, including one in excess of $5 million. Total revenues in Asia-Pacific and Japan (or APJ) for the third quarter of 2006 were $23 million, up 19% year-over-year. APJ closed one transaction over $1 million in licence revenues.

New products drive growth in licence revenues:
Licence revenues for enterprise performance management (EPM) solutions, including planning, budgeting, and dashboard applications, were $19 million for the third quarter of 2006, up 138% year-over-year. Licence revenues for enterprise information management (EIM) solutions, including data quality and data integration, were $13 million for the third quarter of 2006, up 74% year-over-year. Licence revenues for core business intelligence solutions were $100 million for the third quarter of 2006, down 5% year-over-year, but up 4% from the second quarter of 2006.

As customers complete migrations and older versions of our products are displaced by BusinessObjects XI, we expect this segment to return to growth. Included in the above categories, licence revenues for BusinessObjects XI were $96 million for the third quarter of 2006, up 47% year-over-year.

Maintenance and consulting drive growth in services revenues:
Maintenance revenues for the third quarter of 2006 were $129 million, up 24% year-over-year. Global services revenues for the third quarter of 2006 were $50 million, up 34% year-over-year.

Company continues to improve margins:
Income from operations on a US GAAP basis for the third quarter of 2006 was $29 million, or 10% of total revenues, as compared to $30 million, or 12% of total revenues, for the third quarter of 2005. However, the third quarter of 2006 included approximately $11 million of additional stock-based compensation expense under FAS 123(R). Income from operations on a non-GAAP basis for the third quarter of 2006 was $53 million, or an increase to 17% of total revenues, as compared to $42 million, or 16% of total revenues, for the third quarter of 2005. The effective tax rate on a US GAAP basis for the third quarter of 2006 was 43%, as compared to 41% for the third quarter of 2005. The effective tax rate on a non-GAAP basis for the third quarter of 2006 was 33%, as compared to 38% for the third quarter of 2005. Net income on a US GAAP basis for the third quarter of 2006 was $20 million, flat year-over-year, after the inclusion of additional stock-based compensation expense from FAS 123(R). Net income on a non-GAAP basis for the third quarter of 2006 was $39 million, up 39% year-over-year.

Strong balance sheet and cash flow:
Total cash, cash equivalents and short-term investments were $504 million at 30 September 2006, up $167 million from 31 December 2005. Total deferred and long-term deferred revenues were $262 million at 30 September 2006, up $53 million from 31 December 2005. Net cash flow from operating activities was $220 million for the nine months ended 30 September 2006.

Other business highlights:
Notable customer wins in the third quarter of 2006 included: Australia Post, Banner Health, BMC, British Vita Unlimited, Defense Logistics Agency, Europcar, Groupe Sodexho Alliance, Italferr S.p.A. Gruppo Ferrovie dello Stato,Johnson Controls, Land and Agricultural Bank of South Africa, Kaiser Permanente, Kyobo Life Insurance, Minist`ere de l'Agriculture et de la Peche, Northamptonshire County Council, Siemens Business Services, US Social Security Administration, Tribune Company, US Army, US Navy, USTRANSCOM, and Zions Bancorporation.

In October, Business Objects was again named the business intelligence (BI) market share leader, according to the 2005 BI platform market share report issued by Gartner. In September, IDC issued the report "Western European Business Intelligence Tools, 2005 Vendor Shares" (IDC #LT07N, August 2006), which stated that Business Objects has strengthened its position as the leading BI vendor in Western Europe. In August, Crystal Vision Server XI was named a Midmarket Product of the Year by CMP Media's VARBusiness magazine.

The company launched BusinessObjects Data Quality XI, a suite of products that advances the data quality solutions integrated from the acquisition of Firstlogic, Inc. The company released its integrated planning, budgeting, forecasting, and consolidation solutions on the BusinessObjects XI platform. Business Objects and Salesforce.com expanded their partnership to deliver Business Objects reporting and dashboard capabilities on AppExchange for Salesforce.com customers.

Business Objects announced the availability of Crystal Reports for Eclipse, a report design and deployment environment for Java application developers. In the third quarter of 2006, Business Objects added over 20 new OEMs and over 100 new VARs to the company's community of partners.

Addition of ALG Software strengthens enterprise performance management offering:
On 2 October 2006, the company completed its acquisition of privately-held Armstrong Laing Limited, or "ALG Software", a leading provider of profitability management and activity-based costing solutions. ALG Software's profitability management and activity-based costing solutions represent a fast-growing segment of the EPM market and complement the existing Business Objects EPM solutions. The acquisition was an all-cash transaction of approximately lb30 million GBP (approximately $56 million USD at then current exchange rates) and will be accounted for under the purchase method of accounting.

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Business Objects offers the following guidance for the quarter ending 31 December 2006. Total revenues for the fourth quarter are expected to be up on a sequential basis due to both a seasonally stronger fourth quarter and the impact of revenues from the ALG Software acquisition. Total revenues have been increased to an expected range of $348 million to $356 million. US GAAP diluted earnings per share are expected to range from $0.29 to $0.34. Non-GAAP diluted earnings per share are expected to range from $0.53 to $0.58. Non-GAAP diluted earnings per share for the quarter ending 31 December 2006 are expected to add back approximately $12 million of amortisation of intangible assets, approximately $12 million of stock-based compensation expense, and approximately $3 million of in-process R&D, which would impact EPS by approximately $0.24, after tax effect.

Business Objects updates the following guidance for the fiscal year ending 31 December 2006. For the full year, the company has revised its revenues and non-GAAP earnings guidance upward from the previous guidance due to the higher than previously forecast third quarter results as well as the impact of revenues from the ALG Software acquisition. The company has decreased its US GAAP diluted EPS guidance due to the purchase accounting expenses of the ALG Software acquisition.

Total revenues have been increased to an expected range of $1.231 billion to $1.239 billion. US GAAP diluted earnings per share are expected to range from $0.71 to $0.76. Non-GAAP diluted earnings per share are expected to range from $1.57 to $1.62. Non-GAAP diluted earnings per share for the year ending 31 December 2006 are expected to add back approximately $48 million of amortisation of intangible assets and the write-off of in-process R&D and $44 million of stock-based compensation expense, which would impact EPS by approximately $0.86 per share, after tax effect. The US GAAP guidance includes stock based compensation expense from the application of FAS 123(R). This anticipated stock based compensation expense of approximately $12 million in the quarter ending 31 December 2006, and $44 million for the full year 2006, includes the impact of options assumed in prior acquisitions, as well as prior employee grants, and estimated employee grants for the current year. These expected expenses are based on estimates, including future stock price, employee turnover, growth in new employees, grants to current and new employees, stock volatility, and future interest rates.

The outlook for the quarter ending 31 December 2006 assumes a US dollar to euro exchange rate of $1.26 per EUR1.00, a US dollar to Canadian dollar exchange rate of $0.89 per CDN $1.00 and an effective US GAAP tax rate of 43%, and a non-GAAP tax rate of 33%. The non-GAAP tax rate differs from the US GAAP tax rate due to the elimination of the tax rate effect of the US GAAP expenses that are being eliminated to arrive at the non-GAAP expenses. Fully diluted shares outstanding are expected to be 96.2 million for the fourth quarter and 95.5 million for the full year of 2006.

The above information concerning our forecast for the fourth quarter and full year 2006 represents our outlook only as of the date hereof, and we undertake no obligation to update or revise any financial forecast or other forward looking statements, as a result of new developments or otherwise.

Business Objects prepares its financial statements in accordance with US GAAP. Because the company is listed on both the Eurolist by Euronext in France and the Nasdaq Global Select Market in the United States, it is required to separately report consolidated financial statements prepared in accordance with both US GAAP and International Financial Reporting Standards (IFRS). The most significant identified differences between the two reporting standards for Business Objects relate to the treatment of stock-based compensation expense, the accounting for deferred tax assets on certain intercompany transactions and the accounting for business combinations.

In accordance with French regulations and IFRS, Business Objects filed with the Autorit'e des March'es Financiers in France its Document de R'ef'erence 2005 on April 24, 2006 under the registration number R.06-038, which included its consolidated financial statements for the year ended on 31 December 2005. The Document de R'ef'erence 2005 includes the consolidated information that Business Objects published on April 26, 2006 to the Bulletin des Annonces L'egales Obligatoires (BALO) in France. In addition, the company published its mid-year financial statements for the first half of 2006 in accordance with IFRS in the BALO in France on 20 October 2006.

The non-GAAP financial measures such as operating income, net income, and earnings per share information for the third quarter and full year included in this press release are different from those otherwise presented under US GAAP as these non-GAAP measures exclude certain charges. These charges include the write-off of in-process research and development, amortisation of intangible assets, and stock-based compensation expense. The non-GAAP tax rate differs from the US GAAP tax rate due to the elimination of the tax rate effect of the US GAAP expenses that are being eliminated to arrive at the non-GAAP expenses. Business Objects has provided these measures in addition to US GAAP financial results because management believes these non-GAAP measures provide a consistent basis for comparison between quarters and of growth rates year-over-year that are not influenced by certain non-cash charges or impacts of prior period acquisitions, and therefore are helpful in understanding Business Objects' underlying operating results. In addition, this press release also includes non-GAAP measures that use a constant currency to separate the impact of conversion from other foreign currencies to US dollars from other changes in our business. These non-GAAP measures are some of the primary measures Business Objects' management uses for planning and forecasting. These measures are not in accordance with, or an alternative to, US GAAP and these non-GAAP measures may not be comparable to information provided by other companies. Reconciliations of US GAAP to non-GAAP results are presented at the end of this press release.