Cognos Watches Its Contracts Grow

A justification for M&A in the software industry is that it has become exceedingly difficult to land megaclients. After all, information technology budgets are tight. And, over the past 20 years, companies have already invested a significant amount in IT. With the large number of software vendors, customers also realize they can negotiate heavily on pricing.

But, as for Cognos (Nasdaq: COGN), the company reported significant customer wins in its fourth-quarter report. In fact, the company landed its first contract above $10 million.

Moreover, Cognos added 1,215 contracts in excess of $50,000, 208 in excess of $200,000, and 18 in excess of $1 million. Some of the new customers include Abbott Laboratories (NYSE: ABT), Amazon.com (Nasdaq: AMZN), CDW (Nasdaq: CDWC), CircuitCity (NYSE: CC), and even the U.S. Marines.

In the fourth quarter, revenues surged 27% to $256.3 million, and profits increased 18% to $54.3 million. For the full year, revenues increased 21% to $825.5 million, and net income increased 35% to $136.6 million.

Cognos is a leader in business intelligence reporting. The significance of its service is quite simple: Companies spend millions in developing information technology systems yet have limited ability to analyze the data these systems provide. With Cognos, a company can mine and analyze myriad data sources, such as customer relationship management and enterprise resource planning systems -- within which vast amounts of proprietary customer and company data are contained. A company can find weaknesses in an organization and make forecasts, budgets, and model scenarios.

Essentially, companies need to understand the "why" behind their performance -- Cognos products are intended to offer a solution such that companies are able to discern root cause elements to under- and/or overperformance. The alternative is often unwieldy at best -- companies often gather it via Excel sheets, which are often difficult to manage on a real-time basis and lack the ability to distill data into granular bits.

But more and more, companies are looking to third-party providers like Cognos. And, according to the company's guidance, it looks like this trend will continue. In the next quarter, Cognos expects revenues between $202 million to $210 million with earnings per share ranging from $0.22 to $0.25. And full-year is expected to range from $930 million to $950 million with earnings per share between $1.55 and $1.62.

Why are customers willing to spend big money on Cognos software? Well, it is often difficult to determine the return on investment for software investments. However, with Cognos, companies are seeing a clear ROI -- which they will certainly pay for. True, digital companies such as Amazon.com generate huge amounts of data; but traditional companies, such as Circuit City and Abbott Laboratories, do so as well. If spending money on Cognos' solutions means mining more profits from customers and discerning just where opportunities lie, it is definitely a "must have" technology solution.

Fool contributor Tom Taulli does not own shares mentioned in this article.