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Page 218 of 401
 
Thanksgiving 2008
 
© 2008 by BeyondProxy LLC. All rights reserved.
www.manualofideas.com
PHOTOCOPYING & FAXING WITHOUT PERMISSION IS PROHIBITED.
SPSS (Nasdaq: SPSS)
Chicago, IL, 312-651-3000Technology: Software & Programming, Member of S&P SmallCap 600http://www.spss.com
 
Trading Data Consensus EPS Estimates Valuation
Price: $24.30 (as of 11/14/08) Month # of P/E FYE 12/31/07 14.7x52-week range: $21.98 - $43.36 Latest Ago Ests P/E FYE 12/31/08 12.8xMarket value: $441 million This quarter $0.45 $0.56 7 P/E FYE 12/31/09 12.4xEnterprise value: $284 million Next quarter 0.48 0.50 7 P/E FYE 12/31/10 12.7xShares out: 18.1 million FYE 12/31/08 1.90 1.92 7 EV / LTM revenue 0.9x
 
Ownership Data
FYE 12/31/09 1.96 2.11 7 EV / LTM EBITDA n/aInsider ownership: 1% FYE 12/31/10 1.92 2.13 2 EV / LTM EBIT 5.4xInsider buys (last six months): 0 LT EPS growth 11.9% 11.9% 5 P / tangible book 3.4xInsider sales (last six months): 7
Latest Quarterly EPS Surprise Greenblatt Criteria
Institutional ownership: n/a Date Actual Estimate LTM EBIT yield 18%# of institutional owners: n/a 11/4/08 $0.55 $0.44 LTM pre-tax ROC n/m
Operating Performance and Financial Position
($ millions, except 
Fiscal Years Ended LTME FQE FQE
per share data)
12/31/01 12/31/02 12/31/03 12/31/04 12/31/05 12/31/06 12/31/07 9/30/08 9/30/07 9/30/08Revenue 174 209 208 224 236 262 291 309 72 75Gross profit 153 185 192 210 220 243 273 288 68 69EBIT (34) (17) 0 7 28 34 50 52 13 13Net income (26) (17) 9 6 16 15 34 38 8 11Diluted EPS (1.90) (0.99) 0.53 0.31 0.85 0.73 1.65 1.97 0.41 0.55Cash from ops 14 (1) 22 12 52 48 85 79 17 17Capex 33 24 12 15 17 17 19 20 5 7Free cash flow (20) (25) 10 (2) 35 31 66 58 12 10Cash & investments 31 15 36 37 84 140 307 307 297 307Total current assets 119 89 113 116 144 207 376 361 358 361Intangible assets 92 67 73 74 73 77 80 83 80 83Total assets 252 214 229 235 272 333 501 488 488 488Short-term debt 1 3 3 3 3 0 0 0 0 0Total current liabilities 93 99 96 102 106 114 139 122 119 122Long-term debt 0 6 6 3 1 0 150 150 150 150Total liabilities 119 112 109 107 108 116 292 275 270 275Preferred stock 0 0 0 0 0 0 0 0 0 0Common equity 133 102 120 129 164 217 209 213 218 213EBIT/capital employed -116% -75% 1% >100% n/m n/m n/m n/m n/m n/m
Ten-Year Stock Price Performance and Trading Volume Dynamics
Oct 08Oct 07Oct 06Oct 05Oct 04Oct 03Jan 00Jan 00Jan 00Jan 00 $0$10$20$30$40$50$60
 
 
 
Page 219 of 401
 
Thanksgiving 2008
 
© 2008 by BeyondProxy LLC. All rights reserved.
www.manualofideas.com
PHOTOCOPYING & FAXING WITHOUT PERMISSION IS PROHIBITED.
BUSINESS OVERVIEW
SPSS provides analytics software, with “predictive analytics”technology improving processes by providing “forwardvisibility” for business decisions. SPSS was founded in 1968.
SELECTED OPERATING DATA
FYE December 31 2005 2006 2007YTD9/30/08
% of revenue by type: 
License 46% 48% 49% 47%Maintenance 43% 42% 41% 43%Services 11% 10% 10% 10%
Revenue growth by type: 
 License 12% 16% 15% 5%Maintenance 5% 7% 8% 13%Services -14% 4% 5% 6%Total revenue growth 5% 11% 11% 8%
Selected items as % of revenue: 
EBIT 12% 13% 17% 16%D&A 7% 6% 6% 7%Capex -3% -2% -2% -2%Capitalized software -4% -5% -5% -5%
% of revenue by geography: 
 U.S. 44% 42% 41% 40%Europe 42% 43% 44% 44%Pacific Rim 15% 15% 15% 16%
INVESTMENT HIGHLIGHTS
•
 
$3 billion market growing in low teens.
SPSStargets advanced analytics ($1.5 billion, growing at10%) and CRM analytic applications ($1.5 billion,growing at 13%). SPSS has less than 10% share.
 
•
 
Predictive Analytics software improves processes
  by providing visibility for key decision makers andautomating decisions to meet business goals. SCSSclaims that Predictive Analytics ads significantlymore value than business intelligence software.
 
•
 
Customer list includes
 
95% of Fortune 1000,
allmajor countries, all U.S. State governments, every branch of the U.S. Military, all top U.S. universitiesand 75% of top European universities.
 
•
 
Steady margin improvement from 2004-07.
SPSSachieved EBIT margins of 3% in 2004, 12% in2005, 13% in 2006, and 17% in 2007.
 
•
 
Repurchased $28 million of stock YTD
and $72million in 2007.
 
•
 
Low-cost $150 million convert due 2012,
with aconversion price of $47 per share and a fixedinterest rate of 2.5%.
 
•
 
Guiding for revenue growth of 4-6% and EPSgrowth of 15-20% in 2008,
with expected revenueof $302-308 million, non-GAAP EPS of $1.90-1.98.
 
•
 
Investors may under-appreciate
 
underlyinggrowth,
as revenue has grown more slowly thanlicense revenue. Consistent double-digit licensegrowth reflects strong adoption of SCSS software.
 
•
 
Stock price implies 13% trailing FCF yield,
12xtrailing P/E and 12x forward P/E.
 
INVESTMENT RISKS & CONCERNS
•
 
“Very challenging economic times”
and dollar appreciation have hurt YTD results. License sales inEurope and Japan have not met expectations. Salesin northern Europe have been affected by a lack of sales capacity, an issue the company is addressing.
•
 
Primary worldwide competitor
in each targetmarket is the well-respected and larger SASInstitute (>$2 billion revenue). SPSS also competesagainst NCR, Fair Isaac and Oracle.
 
•
 
Recently updated poison pill.
The company has ashareholder rights plan in place that discourages theacquisition of more than 15% of SPSS shareswithout the company’s approval.
 
COMPARABLE PUBLIC COMPANY ANALYSIS
($mn)
MV EV EV/Rev P/TB08P/E09P/EFIC 650 1,034 1.4x n/m 8x 7xMSFT 178,445 159,698 2.6x 9.2x 10x 9xMSTR 422 295 .8x 3.7x 10x 10xORCL 87,110 85,326 3.7x n/m 11x 10xSAP 41,890 39,852 2.8x 119.0x 14x 13xSPSS 441 284 .9x 3.4x 13x 12x
MAJOR HOLDERS
CEO Noonan 3%
│
Other insiders 2%
│
T Rowe 11%
│
 Barclays 7%
│
AXA 6%
│
State Street 6%
│
Brown 6%
│
 Ellington 6%
│
Daruma 5%
RATINGS
VALUE
Intrinsic value materially higher than market value?

 
MANAGEMENT
Capable and properly incentivized?

 
FINANCIAL STRENGTH
Solid balance sheet?

MOAT
Able to sustain high returns on invested capital?

EARNINGS MOMENTUM
Fundamentals improving?

MACRO
Poised to benefit from economic and secular trends?

 
EXPLOSIVENESS
5%+ probability of 5x upside in one year?

THE BOTTOM LINE
SPSS is a compelling magic formula selection. The impressive client roster, including 95% of the Fortune 1000, highlightsSPSS’s advantage in predictive analytics software. This niche market appears to have better long-term characteristics thanmost other software segments, which tend to undergo rapid change and attract vicious competition. SPSS’s primarycompetitor, the SAS Institute, has been a solid performer for many years, and we believe SPSS could achieve similar success.
 
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A Quarterly Publication of BeyondProxy LLC www.manualofideas.com Thanksgiving 2008
T
HE
“M
AGIC
F
ORMULA
”
 
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