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B2B software maker a bright spot amid shaky sector

Business Objects receives a round of applause from Wall Street, highlighting a narrow niche of the sector where optimism still reigns.

    Business-to-business software developer Business Objects received a round of applause from Wall Street on Friday, highlighting a narrow niche of the sector where optimism still reigns.

    The French company specializes in providing corporate clients with "business intelligence"--analytical tools to carve out detailed demographic and behavioral information about consumers. Marketers prize such data because it helps set attractive price points for products, maximize advertising expenditures, keep track of customers and possibly woo them back for future purchases.

    The so-called business intelligence niche is small but growing, as numerous American and European competitors try to make the data available in real time over the Internet. Some experts say the niche is less prone to recessions than the larger business-to-business or technology industry because corporations need to understand their advertising expenditures and customer buying preferences even more critically during cash-strapped downturns.

    Paris-based Business Objects seemed relatively recession-proof on Thursday, when it reported an exceptional fourth quarter. Though many technology companies could not beat lowered expectations of institutional investors, Business Objects reported earnings per share of 37 cents--blowing away Wall Street's estimate of 31 cents.

    The company also said fourth-quarter net income rose 70 percent to $16.1 million, from $9.5 million in the same period of 1999. Fourth-quarter sales were $105.8 million.

    The company also raised its forecast for per-share earnings and sales in 2001 as it adds American customers such as Hewlett-Packard and international behemoths such as Swiss conglomerate Nestle.

    Business Objects executives said they expect 2001 per-share earnings of $1.20 to $1.25, up from an October forecast for $1.15 to $1.20. Sales will rise to between $452 million and $460 million, executives said during a Thursday conference call with analysts. Previously, they were hoping for sales of $445 million to $457 million.

    J.P. Morgan analysts James Pickrel and David Rudow said the quarterly report indicates that Business Objects "has really begun to pull away from the pack in the business intelligence market, a space that continues to look healthy in the midst of the economic slowdown."

    The analysts "enthusiastically" reiterated their "long-term buy" rating. The company currently holds a price-to-earnings ratio of 58.

    "The company's shares look reasonably priced for a high-growth software company with substantial size, category leadership, good profitability, geographic balance and consistent performance," the duo gushed in a research note issued Friday morning.

    CIBC World Markets and Wit SoundView reiterated "strong buy" ratings. First Albany boosted Business Objects to "strong buy" from "buy." French investment company CIC-EIFB raised it to "buy" from "overweight."

    Business Objects shares ended the regular session up more than 9 percent at $79.56 on the Nasdaq. The stock is up about 20 percent since Monday and almost 42 percent since the beginning of January.

    Wall Street was particularly giddy over the company's wide profit margins. Gross margins were an impressive 85.7 percent, well ahead of the expected 84.5 percent. Operating margin was 22 percent, exceeding estimates of 21 percent.

    Analysts credited the 1,888-person company for its lean operations. But the weakness of the euro is also having an unintended but positive side effect.

    Research and development costs were $10.9 million, or 10 percent of revenue, far less than the $13.3 million that the company had predicted previously--based mainly on the depressed value of the euro. Most of the company's research and development facilities are in France.

    But with the stellar quarter comes a raised benchmark. Wall Street ratcheted up its expectations for the company considerably on Friday morning.

    Merrill Lynch analyst Scott Phillips praised the company for its "blowout" quarter and promptly raised his 2001 revenue forecast $10 million to $459.8 million, boosting his earnings-per-share projection to $1.24 from $1.17. The investment bank has a 12-month target price of $119 on Business Objects--a 48.3-percent increase from its current share price.