Update: Business Objects earnings fall ahead of its merger with SAP

Business Objects reported a 19 percent rise in revenue for the third quarter, driven by services, but earnings were dragged down by a shortfall in license revenue, recent acquisitions and legal costs.

While the income figures are broadly in line with preliminary results announced on Oct. 7, the business intelligence software vendor had expected its earnings to be better. The results come about two weeks after SAP announced plans to acquire Business Objects for $6.7 billion.

Earnings for the quarter fell to $6.4 million, or $0.07 per share, from $19.6 million, or $0.21 per share, a year earlier, Business Objects said. It had predicted earnings of $0.16 to $0.20 per share.

The earnings reported include a charge of around $7 million, equivalent to $0.05 per share, to settle litigation with Decision Warehouse. Business Objects had previously honored Decision Warehouse as its top distributor in Latin America: the company now resells products from Hyperion, which was recently bought by Oracle, and BEA Systems, which Oracle is trying to buy.

Revenue for the quarter, which ended Sept. 30, was $369 million, up 19 percent compared to a year earlier. The growth was driven by revenue from services such as product maintenance, up 27 percent, and consulting and training, up 34 percent year on year.

Growth in license revenue lagged, up just 6 percent compared to a year earlier, although license revenue from all product lines continued to grow, the company said.

The acquisition of Cartesis, completed on June 1, and of Inxight Software, completed on July 3, added around $21 million in revenue for the quarter. About $5 million of that came from license sales, the company said.

Business Objects also profited from exchange rate fluctuations: while total revenue grew 19 percent year on year, at constant currency rates it grew just 15 percent, while license revenue grew 2 percent at constant currency rates.

CEO John Schwarz had three explanations for the shortfall in license revenue, which he said were due to “20 to 30 missed deals at the high end of the marketplace.”

In the U.K. public sector, traditionally a strong market for Business Objects, the arrival of a new prime minister and uncertainty about a general election led some customers to delay purchases, Schwarz said.

Another factor was the crisis in global financial markets, which also led some customers to defer spending plans, he said.

Schwarz is confident those customers are not lost, though: “We expect deals that didn’t close in Q3 to close in Q4 or the following quarter,” he said.

Finally, acquisitions also had an effect on license revenue. Rumors surfaced in the French press early in September that Business Objects could be acquired, prompting some potential customers to wait and see.

The effort of integrating Cartesis and Inxight may have taken its toll too. “It’s also conceivable we distracted ourselves with our own acquisitions,” said Schwarz.

Business Objects warned that there’s more uncertainty ahead — and not just because of SAP’s bid for the company, announced Oct. 7. The unexpected shortfall in third-quarter licensing revenue, added to uncertainty about customers’ future spending ahead of the merger, prompted the company to withdraw previously issued financial guidance. The company said investors should no longer rely on its optimistic July 25 statement suggesting that earnings per share would reach between $0.83 and $0.91 for the year and that annual revenue would top $1.5 billion.

Despite the uncertainty, Schwarz is still optimistic. “We feel the Q4 opportunity is undiminished,” he said, adding that SAP’s offer to buy the company is already prompting some SAP users who are not yet Business Objects customers to take a closer look at the company’s business intelligence offering.