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4 stocks that make sense of every sale
Business intelligence, software's hot new thing, mines data to help companies detect fraud, spot trends and manage inventory. Here are the four big players.
By Michael Brush
Hey, thieves, listen up. You'd better think twice about using stolen credit cards. Chances are increasing that the next time you try it, youll be watched in ways you never even thought about.
While youre waiting for your purchase to clear, the retailer youre ripping off may be quietly using new software to check the card against a statistical profile of its owners spending habits. In seconds, the retailer should know if the current purchase fits regular patterns -- or looks fishy.
For thieves, software that flags unusual purchases is a new problem. For investors, however, it's a new opportunity. Some of the software industry's most dynamic growth is coming from the so-called business intelligence (BI) sector, says T. Rowe Price analyst Ken Allen. Business-intelligence companies offer software that provides deep, easy-to-interpret data on business trends to managers.
This week, we took a look at the trend and at the top publicly traded players in the field: MicroStrategy (MSTR, news, msgs), Hyperion Solutions (HYSL, news, msgs), Cognos (COGN, news, msgs) and the French company Business Objects (BOBJ, news, msgs).
From catching crooks to in-store placements
Business-intelligence software companies do much more than help their customers catch con artists at the checkout counter. Here are some other examples of how BI software is used:
- Pharmaceutical companies and retailers such as Best Buy (BBY, news, msgs) and Hot Topic (HOTT, news, msgs) use it to provide daily updates of sales trends so they can tweak marketing efforts, right down to product placement inside stores.
- The Miami Dolphins football team uses Hyperion software to track and manage ticket sales.
- Insurers use BI software to find certain word combinations that suggest doctors offices are submitting fraudulent claims.
- Large retailers use it to watch checkout clerks, monitoring for certain keystroke patterns -- such as lots of returns in the final minutes of a shift -- that indicate fraud.
A 50% drop in credit card fraud
Does business-intelligence software really make a difference? Consider this:
In the first six months that Amazon (AMZN, news, msgs) used this kind of software, sold by the privately held SAS, the online retailer reduced credit card theft by 50%. That kind of success is hard to argue with, and it helps explain why many BI software companies grew at a healthy clip in 2003.
Last year, we had our best year in four years, says Jim Davis, who heads marketing at SAS, a BI software company in Cary, N.C. In 2003, sales grew in the low teens over the year before, up from 4% growth in 2002. This is the best weve felt in the last three or four years. The trend is strong enough that only a geopolitical event can throw it off track.
Big growth in this sector is anything but rare. In its most recent quarter, for instance, publicly traded MicroStrategy saw revenue increase by 23% over the year before. It added 201 new customers, the highest new customer count in over three years. Its stock jumped 247.6% in 2003 and is up another 22% so far this year.
Helping make sense of the mess
At its core, BI software helps companies transform the massive amount of data churned out by their computer systems each day into insights that can improve their businesses.
A typical large company has more than a dozen database management and operating systems and hundreds of separate software systems to carry out transactions with customers and suppliers. The numbers from all these systems are usually stored in different formats. BI software helps managers extract knowledge from that mess.
We sit one level removed from the transaction systems, and we gather data out of all of them to help managers make more sense out of the data, says Godfrey Sullivan, Hyperions chief operating officer.
BI software allows you to peer into your own corporate data and bring trends or anomalies to the surface, says Sanju Bansal, the chief operating officer at MicroStrategy. And it allows you to report on them widely so people who can have an impact on those trends actually have the tools in their hand to make better decisions. As people peer into the data, they are surprised what they can pull out of it.
In a sense, the spread of BI software today is a natural outgrowth of the Y2K-inspired massive upgrade of computers, which left businesses with tons of data but little help analyzing it. Companies want to get the most value out of those systems instead of leaving everything locked away in a database somewhere, says T. Rowe Prices Ken Allen. BI software gives them the tools to let them track the metrics that matter to their business. As a result, Allen thinks BI will continue to be one of the fastest-growing areas in the software sector.
| Business intelligence software makers | |
What makes BI so hot
Lets take a closer look at why business intelligence software has been so hot, and why it probably will be for the next five or 10 years.
The data explosion. Thanks to the digital age and the greater use of software to manage a companys operations -- so-called enterprise software -- the explosion in the amount of data piling up inside companies will only continue. The amount of data will probably double every year, experts say.
The democratization of the workplace. Many companies are pushing decision making out to the edges, relying on ever-larger shares of their workforces to size up situations and make spot decisions to keep customers happy. They need quick analyses of data to support their decisions.
BI software is cheap, and its easy to know when it pays off. The typical price of a BI app (that is, the software plus its installation) is just under $100,000. So if you're working at a large company, you dont need to knock on the finance chiefs door to get approval to buy it. And companies can quantify pretty quickly whether a BI app is adding to profit margins. Once it does, the BI vendor has an easier sell into other divisions. We penetrate, saturate and radiate, says Cognos Chief Financial Officer Tom Manley. (By contrast, enterprise software deals normally fall in the $500,000-to-$2 million range.)
Penetration levels are low. Manley estimates that BI apps have spread through only about 10% to 15% of the companies that could be using them. We are in the early stages of the BI growth evolution, agrees MicroStrategys Bansal. Finally, after a decade of gestation, BI has taken root and people say, Wow, this technology gives us a better handle on our business, and we can use it to save money or make money. Sanju thinks sales in the sector could grow by 10% a year for the next five to 10 years.
A new round of BI products is coming out. Well spare you the details, which you can explore at the company Web sites, but each of the BI companies has a fairly robust product cycle ahead of it. That can be a good recipe for improved sales. Cognos and Hyperion, for example, are rolling out products that offer alternatives to the cumbersome process of planning by piecing together lots of spreadsheets from underlings.
And all the BI vendors offer products that play into a growing business consulting theme known as corporate performance management. While basic BI offers tools to understand where a company has been, performance management helps managers use those insights to plan ahead and track progress.
Every company develops a strategy, says Manley. Then you build a plan to identify what metrics can ensure you are moving there. Then you put a whole bunch of business intelligence in there to measure it every day and push accountability beyond finance and out to people who are responsible. That is a key element of where we think the market is moving toward, corporate performance management.
Regulatory reform. New corporate reporting requirements under the Sarbanes-Oxley law were supposed to fuel demand for BI apps, but everyone is still waiting for this to play out. It still might.
The downside: low barriers to entry
As good as all this sounds, there are risks. First, new -- and powerful -- players are entering the scene, including Microsoft (MSFT, news, msgs), Siebel Systems (SEBL, news, msgs) and SAP (SAP, news, msgs). (Microsoft is the publisher of MSN Money.)
Next, Nathan Schneiderman, a software analyst at Wedbush Morgan, points out that a shift in investor psychology in the software space could lead to money flows toward the enterprise software stocks such as Oracle (ORCL, news, msgs), PeopleSoft (PSFT, news, msgs) and SAP.
Spending on enterprise products has fallen anywhere from 30% to 50% in the past two years. If enterprise software companies start to close more deals now that the economy is strengthening, investors may move money from BI software stocks to the enterprise space -- even if BI software companies continue to do well.
Finally, just about all the major BI companies recently bought other software companies to build out their capabilities. Now, they have to successfully integrate them, and that isnt always easy. Besides, much of the impressive earnings growth at BI companies like Hyperion, and, to a lesser degree, Cognos and Business Objects, stems from these acquisitions. Only MicroStrategy has been posting really strong sales gains without the help of acquisitions. This makes MicroStrategy look like one of the strongest stock plays in the sector.
On the other hand, the takeover fever in the software space has yet to cool down, even if PeopleSoft rejected Oracles takeover offer earlier this week. And that takeover fever makes Hyperion -- with its relatively low valuation -- look like a tempting target for the likes of SAP or Siebel Systems, both companies that want to build their presence in the BI software space.
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