Corporate mergers do not always bring the immediate bottom-line boost anticipated – as Hyperion Software’s merger with Arbor Software last August attests. The financial applications turned OLAP vendor has issued a profit warning for its second quarter numbers due on January 20th. Hyperion Solutions blamed an ‘underestimated short term decline in sales productivity particularly in North America’ for its failure to meet analysts’ profit and revenue projections. The second quarter First Call consensus had been 31 cents a share. Hyperion said it was likely to come in below that at between 25 and 30 cents on revenues of $105 million for the quarter ending December 31st 1998 – also below expectation.
The profit warning was not entirely unexpected. Hyperion stock had already taken a tumble, dropping 21% to $26.25 in the first week of December, on news that there was a potential weakness in the company’s application business which came out of an AMRO investor meeting. And confirmation from Hyperion’s management that there was indeed a few difficulties on the application development side did little to raise analysts’ long term projections for the company, or its stock price for that matter. On August 25th 1998 Hyperion’s share price hit a 52-week high of $50.75, bathing in the afterglow of the merger’s completion but the stock has since slumped and closed on Friday at $19.0625.
In a conference call to analysts back in October Hyperion CFO, Stephen Imbler, accepted that Hyperion’s pumped up post-merger product portfolio had created some confusion for some customers. With a plethora of products to sell including analytical applications Enterprise, Pillar and Spiderman and the OLAP products of Essbase, MBA and Wired for OLAP, it was not just the market that was having a hard time working out where each fitted into the overall scheme. Cross-training the respective Arbor and Hyperion sales forces was posited as a way around that aspect of the problem, but this clearly did not happen as quickly as the company had hoped resulting in a negative impact on sales.
Imbler also said that the application business had taken a pounding following the expiration of a one year multi-million dollar reseller agreement with Baan for Hyperion Financials. We had $8 million in pre-paid royalties from Baan for fiscal 98 but Baan bought Coda so our agreement with them terminated. Our analytical apps business won’t be as strong, he warned investors. (Baan’s Coda purchase provide it with financial software so it no longer need Hyperion).
The financial cloud currently hanging over Hyperion is likely to loom large for a least another couple of quarters. The company has warned that it will not meet a third quarter target of $33 cents a share either, citing a shift in customer spending patterns towards Y2K as a further obstacle to profitability. The market heaped scorn on this theory leading analysts to lambaste the company and downgrade its stock. We think Y2K is a relatively weak excuse for the company to miss the next two quarters, reflecting sales management’s failure to pre-qualify and accurately perform loss analysis, said First Albany, adding that Hyperion was the only business intelligence vendor it knew that was experiencing a Y2K effect.
The investment house immediately downgraded Hyperion stock from ‘Strong Buy’ to ‘Buy’ and predicted that a poor December and March quarter would damage June earnings too. We have long thought the upcoming June quarter presented the biggest challenge for the company (32% of revenue for the year based on our most recent estimate.) We felt this was feasible as long as the company had a head of steam moving through the previous two quarters. It now appears Q2 and Q3 represent challenges… making the most recent Q4 target appear insurmountable, it said. First Albany is now predicting a 1999 earnings per share figure of $1.32 on projected revenues of $450 million – at least $50 million less than Hyperion executives had been projecting.
CEO John Dillon could not have said truer words when he stated at the tail end of last year that Our vision is spot on. Our challenge is execution.
As if this was not bad enough, Hyperion still has some technical challenges to address. Hyperion’s analytical applications do not sit well with the acquired Arbor Essbase engine. Even though the merger was ostensibly enacted to create an integrated suite out of Integration Server, Essbase, Wired for OLAP (the client technology for accessing Hyperion applications that Hyperion Software acquired by way of Arbor acquisition of AppSource in December 1997), its web gateways and development tools, there is much to do to achieve this.
Integration difficulties could cause yet further damage in coming quarters as customer delay upgrades until this engineering feat is achieved.
There has also been some suggestion that Hyperion/Arbor’s scalability arguments against Microsoft SQL Server will start to look a little threadbare by the end of the year, as Redmond rolls out its own OLAP offering. At best this could result in Hyperion having to radically alter its pricing structure to be able to compete against the Microsoft marketing machine.
