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1 Leadership in predictive analytics ANNUAL REPORT 2004

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3 Dear Shareholders: It has been said that the past is a prologue. Two-thousand four appears to have laid promising groundwork for SPSS and predictive analytics in the years ahead. The marketplace began to catch up to us. For the first time, the emerging predictive analytics market was formally recognized as a distinct software sector by one of the top industry analyst firms, IDC. IDC projects the predictive analytics market will exceed three billion dollars by While the first half of 2004 was full of challenges for SPSS, we addressed these challenges vigorously and comprehensively. Under the leadership of our new CFO, we took major steps to tighten our financial controls and introduce new cost efficiencies. We thus converted challenges into opportunities to make SPSS a more financially stable company for 2005 and beyond. In 2004, we unveiled two major predictive analytics applications that allow organizations worldwide to extend the benefits of predictive analytics further and deeper into their enterprises than ever before. We also delivered significant new releases of our major predictive analytics tools. This past year at SPSS was marked by more than new technology. For all of 2004, revenues were a record $224.1 million, compared to $208.4 million in Our license revenues increased across all our major offerings, geographic markets, and customer segments. Sales of SPSS data mining and statistical tools were at record levels, resulting in year-over-year double-digit growth. We also saw increasing acceptance and higher revenues from our new predictive applications. And growth in maintenance revenues continued strong as renewal rates steadily improved for all our major products. We entered 2005 feeling confident. From our core technologies to our financial processes, we have established a solid foundation throughout our company to further develop and grow our enterprise. SPSS is well-poised to gain traction in the expanding market of predictive analytics. We believe that 2004 is the prologue for much more far-reaching and exciting developments from within SPSS and the predictive analytics market. Sincerely, Jack Noonan President and Chief Executive Officer 1 1 Source: Worldwide End-User Business Analytics Forecast: Core Versus Predictive, IDC #32642, December 2004

4 SPSS The Future is Always Now For SPSS and its customers the future is always now. Nothing more succinctly conveys the powerful essence of predictive analytics software. And nothing better characterizes the essence of SPSS the company that first conceived predictive analytics technology and is at the vanguard of its development. SPSS predictive analytics is furnishing top organizations worldwide with the capability to generate the critical insight they demand today for the wide range of challenges they face tomorrow. This is too vital a business trend to go unnoticed. In late 2004, the leading analyst firm IDC confirmed the emergence of predictive analytics as a distinct software sector. IDC projects that the market for predictive analytics will be $3.0 billion by Return on investment (ROI) is the catalyst for this growth. IDC, in a separate assessment, has found that business applications involving predictive analytics software generate an average ROI of 145 percent much higher than that for other business analytical software 3. As predictive analytics software is increasingly understood as a leading-edge information technology, the leadership of SPSS, naturally, is also being increasingly recognized: January 2004 Intelligent Enterprise names SPSS as the No. 1 company to watch. June 2004 SPSS is selected as the winner of the customer relationship management (CRM) category in The Banker Technology Awards, run by the Financial Times Group. 2

5 September 2004 SPSS strength in data-mining capabilities a core feature of predictive analytics is confirmed by the analyst firm META Group, which publishes a comparative vendor ranking report on data mining tools. SPSS receives the top ranking of market leader. Sustained business leadership is not something that can be auctioned and bought on the open market. It must originate from within an organization, be carefully cultivated and supported, and be in harmony with an organization s defining attributes. SPSS defining attributes deep roots, a penetrating vision, and expansive horizons constantly fortify its leadership and fuel its success. 2 Ibid 3 Source: Predictive Analytics and ROI: Lessons from IDC s Financial Impact Study, IDC #30080, September 2003 More than 95% of the Fortune 1000 and more than 95% of the Fortune 100 are SPSS customers. The top U.S. commercial banks are SPSS customers. Twenty-one of the top 25 retailers worldwide harness SPSS products. All 50 U.S. state governments use SPSS analytics. The top Fortune 500 telecommunications companies are SPSS customers. More than 90% of the top U.S. universities use SPSS. The top 10 pharmaceutical companies in the world use SPSS analytics. Customers in more than 100 countries use SPSS software. More than 85% of the top U.S. consumer packaged goods companies use SPSS analytics. 3

6 Deep Roots During its 37-year history, SPSS has become a global leader by providing innovative software that helps organizations use data for better decision making. SPSS began as a software product called the Statistical Package for the Social Sciences, which was developed at Stanford University. More than three decades later, SPSS is the leader in predictive analytics technologies, enabling corporations, governments, and academic institutions around the world to gain measurable advantage Norman H. Nie, C. Hadlai (Tex) Hull, and Dale H. Bent develop a software system based upon the idea of using statistics to turn raw data into essential decisionmaking information Nie joins the University of Chicago s National Opinion Research Center and continues development of the software system. Hull joins Nie in Chicago, while Bent returns home to Canada McGraw-Hill publishes the first SPSS user s manual and distributes it through college bookstores. Demand for SPSS software accelerates, as do royalties from sales With the sales of SPSS growing rapidly, the IRS determines that SPSS is a small software company, which threatens the non-profit status of the University of Chicago. This eventually leads to incorporation Led by Nie and Hull, SPSS incorporates and establishes a virtual monopoly within academia. The software s portability enables institutions to use it on large mainframe computers such as Control Data 6000 series, Burroughs, Univac 1108, GE (subsequently Honeywell), and Digital Equipment Corporation (DEC) systems SPSS begins attracting government and corporate users, including NASA, Procter & Gamble, and Anheuser-Busch. 4

7 1984 SPSS unveils the first statistical analysis package to appear on a personal computer SPSS is the first to release a statistical software package for the Microsoft Windows PC operating system. Nie turns over day-to-day management of the company to Jack Noonan, who becomes president and chief executive officer. Nie remains chairman of the board Under Noonan s leadership, SPSS acquires Quantime, a leader in market research application software Noonan continues to expand the company, acquiring Integral Solutions, Inc., a pioneer in data mining software Growth through acquisition continues with the addition of ShowCase, a provider of business intelligence software for the middle market, and NetGenesis, a Web analytics software provider SPSS adds text mining software to its product offering through the acquisition of LexiQuest, Inc., a leader in the development of linguistics-based information management software The company introduces PredictiveMarketing, an automated predictive analytics application with behind-the-scenes analytics for marketers, and Predictive Web Analytics, a solution that enables organizations to turn their Web data into deeper customer intelligence Predictive analytics comes of age as it is formally designated a distinct sector by leading industry analysts. SPSS accelerates the introduction of predictive analytics applications, leveraging skills and integrating technologies from recent acquisitions, including DataDistilleries. 5

8 Penetrating Vision SPSS and Predictive Analytics Leading organizations are increasingly harnessing SPSS predictive analytics software to draw reliable conclusions about current conditions and future events by applying sophisticated analysis techniques to enterprise data. SPSS predictive analytics engenders actions that demonstrably improve critical business processes, including those that directly affect how people act as customers, employees, patients, students, and citizens. SPSS predictive analytics gives organizations consistent control over decisions made throughout their enterprises every single day. Gone are the days of ad hoc, reactive decision-making. Armed with predictive analytics, organizations can reliably extrapolate future behaviors and events, enabling these organizations to use data to make proactive decisions when and where they need to be made. If traditional business intelligence (BI) solutions make organizations more intelligent with refined data, predictive analytics takes it a key step further by making the data much more intelligent. Noted Intelligent Enterprise magazine (March 2005): Predictive analytics, or the application of data mining algorithms to discover patterns in data is already a competitive advantage for large organizations on the cutting edge What makes predictive analytics different from traditional BI analysis is that you re letting the data do the talking. 6

9 Predictive analytics directs, optimizes, and automates decisions. These data-driven decisions enable business processes to proactively drive optimal outcomes because they are delivered as recommendations to the people and systems that can take effective action. Among the numerous examples: Combining predictive analytics with organizational business knowledge provides insight into such critical issues as customer acquisition and retention, up-selling and cross-selling, fraud detection, and outcome improvement. By measuring uncertainty surrounding business issues, predictive analytics enables proactive risk management, refining key decision-making processes through controlled, iterative testing of potential actions and their likely intended and unintended consequences. Predictive analytics findings and their corresponding business rules can be deployed within front-line operational systems to identify new revenue opportunities, measurable cost savings, repeatable process improvements, and sustainable competitive advantages. SPSS predictive analytics brings measurable, enterprise-enhancing results to organizations that realize the future is always now. 7

10 SPSS Customer Successes 8 Chase-Pitkin Home and Garden, a division of supermarket chain Wegmans Food Markets, Inc., operates home improvement stores in New York state and has more than 2,600 employees. Chase-Pitkin is using SPSS predictive analytics to track items and calculate shrink an unexplained absence of product. SPSS is now used corporate-wide as the source for all store information, enabling departments to uncover trends and make quicker, more strategic decisions. Using SPSS, Chase-Pitkin successfully identified the top 16 items that represented 50 percent of its shrink. By focusing on these 16 items, including monitoring them with store cameras, Chase-Pitkin managers were able to determine that shoplifters smuggled these particular items. They have since developed policies to prevent theft and also now inventory these items on a weekly basis. As a result, shrink on these items has been reduced by more than 50 percent. FBTO Verzekeringen is a Dutch insurance company and part of Benelux Achmea Holding, a subsidiary of the European insurance and financial services group Eureko. FBTO has approximately 500,000 customers and underwrites more than one million car, health, home, and life insurance policies. To reduce direct mail costs, FBTO sought a solution that would allow it to model customer behavior, predict customer needs, anticipate customer reactions to special offers, and then use these insights to make its marketing campaigns more effective. The company chose SPSS predictive analytics to identify those FBTO customers or prospects with a better-than-average propensity to purchase a financial product. FBTO monitored the effectiveness of the SPSS technology by rolling out marketing campaigns in an experimental fashion using a control group. Comparing its previous approach of mass mailings to its new, more targeted approach, FBTO found that its conversion rate increased by more than 40 percent and its direct mailing costs decreased by 35 percent.

11 Engine of Innovation SPSS has always been about innovation, not imitation. And in 2004, the SPSS engine of innovation continued to hum loudly: Web Mining for Clementine, unveiled in January 2004, provides Clementine users with the ability to analyze Web data in the SPSS data mining environment. SPSS Text Analysis for Surveys, launched in June 2004, offers a unique tool for survey researchers to gain attitudinal and behavioral insight from open-ended survey responses. The successful launch of the first two SPSS predictive analytic applications, PredictiveMarketing and PredictiveCallCenter, in April and May of 2004, respectively, demonstrates that SPSS is harvesting the fruits of its November 2003 acquisition of DataDistilleries. SPSS leverages in late 2004 the open, standards-based design of its award-winning data mining workbench, Clementine, to offer easy integration with the IBM DB2 Data Warehouse Enterprise Edition, the Microsoft SQL Server 2000 Analysis Services, and the Oracle Database 10g. 9

12 Expansive Horizons Befitting a worldwide leader, SPSS has ambitious, but attainable, strategic goals for 2005 and beyond: Drive greater awareness of the value of predictive analytics, especially among information technology (IT) professionals Many organizations are still unaware of the considerable return on investment that can and has been achieved from implementations of predictive analytics. As a leader, SPSS will continue playing an instrumental role in educating the marketplace about predictive analytics and promoting its expanding deployment. Deliver the right analytical functionality to the right professionals throughout an organization SPSS will continue to support enterprise environments with technology that is highly scalable and adaptable to multiple platforms, as well as maintain its ability to develop plug-and-play components for building future applications. Leverage the company s expertise in analyzing information about people The SPSS legacy of providing technology and services to organizations examining people remains at the core of the company s expertise and differentiates SPSS from other players in the predictive analytics market. SPSS will further develop capabilities that integrate data about people s attitudes with information about their behavior to build more powerful predictive models. 10

13 Focus on primary vertical industries SPSS primarily targets the worldwide commercial industries for financial services, telecommunications, and market research, as well as the worldwide markets for government and education. This vertical orientation will continue to be afforded a high priority in SPSS delivery of predictive analytics applications that address particular business problems. Accelerate growth through partnership and acquisition Since 1994, approximately half of SPSS revenue growth has derived from acquisition of other software firms. These acquisitions have expanded the technology and expertise of SPSS into new areas of predictive analytics. SPSS will further work to expand its partnership network to facilitate sales of its software and participate in related services engagements. Maintain robust product cycles SPSS will continue to develop and enhance cutting-edge software technologies and products. SPSS will focus primarily on extending the capabilities of its primary statistical and data mining tools; upgrading existing and developing new predictive analytics applications; improving the interoperability of various SPSS tools and applications; and continuing to build reusable components for use in developing new analytical tools. 11

14 Seasoned, Agile Leadership Resisting the too-many-cooks-in-the-kitchen syndrome that plagues other companies, SPSS has successfully created a highly streamlined leadership structure. The byproduct is seasoned leadership that is not set in its ways, and is agile enough to stay ahead of a fast-evolving marketplace. SPSS President and Chief Executive Officer Jack Noonan Jack Noonan became President and Chief Executive Officer of SPSS Inc. in January Noonan brings more than 30 years of experience in several key areas of the computer industry. He began his career in 1967, working in field engineering and systems development for IBM. Since joining SPSS, Noonan's technological vision and direction have taken the company from a small, start-up entrepreneurial organization, with a single product offering, to an intelligent, business-minded public company with over 40 product offerings. Noonan's strategy of combining internal development with acquisitions is instrumental in the company's growth. SPSS Executive Vice President, Chief Financial Officer, and Secretary Raymond Panza Executive Vice President, Chief Financial Officer, and Secretary Raymond Panza joined SPSS in August 2004 with 30 years of experience. From , Panza was Vice President, Finance of Thomson, a leading provider of technology and service solutions. From , Panza was the Vice President and Chief Financial Officer of Thomson s Digital and New Media Services units. Panza served as the Vice President, Investments and Alliances for Ameritech Corporation from ; and from , he was the Vice President and Chief Financial Officer for Ameritech s Custom Business Services. SPSS Executive Vice President and Chief Technology Officer Jon Otterstatter Jon Otterstatter became Executive Vice President, Chief Technology Officer for SPSS in March 2001 with the acquisition of ShowCase Corporation. Otterstatter oversees all SPSS research, development, and support activities. Previously, Otterstatter was ShowCase s Executive Vice President, Technology and Services. In this capacity, he was responsible for R&D of business intelligence products for the IBM iseries platform. He has been a member of the executive committee and a corporate officer since June 1999 when ShowCase went public. Otterstatter joined ShowCase Corporation as Vice President, Development in May

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16 SPSS Inc. 233 S. Wacker Drive, 11th floor Chicago, Illinois USA SPSS is a registered trademark. Other SPSS products named are trademarks of SPSS Inc. All other names are trademarks of their respective owners SPSS Inc. All rights reserved.