Business Objects (BOBJ) announced preliminary Q2 2006
results late Thursday and its stock was down 21.5% on Friday. It is over 50%
below its 52-week high on February 1,
2006. What’s going on?

Business Objects missed its revenue and earnings estimates
for the quarter. The company’s revenues and earnings are both growing BUT not
as much as the company projected or Wall Street anticipated. Missing quarterly
expectations is a sin on Wall Street. Missing them more than once is an even
bigger sin.  (Business Objects missed or
met the low end of expectations, depending on your viewpoint, last quarter.)

Business Objects said the shortfall in the numbers reflected
longer times to close large deals and a slower than anticipated transition to
its latest release, XI R2, especially in
Europe.

Are these reflective
of industry trends or are they company specific?

First, technology companies are not the darlings they were
during the Internet Bubble. Actual earnings and revenue growth matter now. BI
software firms have to meet or beat estimates in order to keep their stocks
growing.

Second, future growth rates are projected to be in the mid
to upper single digits for overall BI software revenue, which reflects:

• A more mature and potentially saturated market, especially in the larger corporations that have been the “cash cows” for the top-tier BI vendors.
• Ongoing constraints on IT budgets

Third, companies are taking their time on large budget
purchases with lengthier review cycles and an anticipation of heavy software
discounting, particularly towards the end of a quarter (which means that some
deals slip to the next quarter.)

Fourth, companies no longer automatically upgrade hardware
or software anymore. It is becoming increasingly commonplace for companies to
be one or two major releases behind their software vendors’ current releases.
This gets even more exacerbated when a software vendor is phasing in a major
acquisition or additional products to their product line spread out over
multiple phases. This had been true for Business Objects and many of its peers.

Finally, Business Objects and its big pure-play brethren of
Cognos (COGN), Hyperion (HYSL) and MicroStrategy (MSTR) are facing increasing
competition for the BI dollar. Enterprise Resource Planning (ERP) systems and
database vendors, such as SAP, Oracle (plus PeopleSoft, Siebel, Retek, etc.),
IBM and Microsoft, who all partner with the BI pure-plays are becoming much
more direct competitors of them. The BI pure-plays are also going after the
enterprise application space with Performance Management (PM) applications, but
to some degree that might just be playing into the enterprise systems vendors’
hand.

So far, all these trends should impact Business Objects as
well as its competitors. Indeed, Cognos, Hyperion and MicroStrategy are down
33%, 21% and 23% from their respective 52-week highs. So much of the stock
anguish is felt across the board.

Business Objects is a good company with solid management and
an excellent product line (the latest Forrester Research reviews put BOBJ at
the top of its class.) Good companies do not always make good investments.
Sometimes the company expectations are too high or it is shifting from a
hyper-growth period to a more reasonably paced one (and the stock’s P/E ratio
has not contracted to reflect that reality.) This is NOT a column issuing a
buy, sell or hold recommendation. In fact, this is not a stock analysis at all.
I have had many people ask about Business Object’s stock drop and wonder if it
is anything to worry about. In relation to their BI projects not at all,
regarding stock investing I certainly do not know.

One final note, does Business Objects and its pure-plays
stock drop, and associate market capitalizations, mean that they might be
bought by on of the big enterprise software firms? Would Business Objects (or
Cognos, Hyperion or MicroStrategy) make a great acquisition target for SAP,
Microsoft, IBM, Oracle? It’s possible.  (Oracle
considered the purchase before, and Larry does not seem to be stopping in his
buying binge.) Might Google even
consider buying one of them? Stay tuned….