70% Market Share Threatened as Big Competitors Loom : Quotron Faces Formidable Rivals
As any Super Bowl champion will attest, getting to the top is often easier than staying there.
So it also goes at Quotron Systems Inc. Since 1970, the Los Angeles-based firm has risen from near bankruptcy to amass a 70% share of the lucrative and fast-growing business of supplying electronic stock quotations and other computer information services to brokers, financial institutions and others.
But these days the firm faces the growing threat that rivals will erode its market-leading position.
Merrill Lynch & Co.--which is Quotron’s largest customer, providing about 25% of its business--is forming its own venture with International Business Machines Corp. to compete directly with Quotron. Automatic Data Processing Inc., a leading provider of computerized accounting services for small- and medium-size businesses, also is threatening to take a chunk of Quotron’s pie.
Other high-technology giants such as Wang Laboratories Inc. and American Telephone & Telegraph Co. are often mentioned as new entrants to the field who could give Quotron a tough fight.
The much-smaller Quotron may not have the financial muscle to defend its position effectively against these giants, some analysts say. To remain fully competitive, they say, it may have to be acquired by a bigger firm with deeper financial resources.
As if these long-term threats weren’t enough, Quotron lately has had its share of short-term headaches as well.
State-of-the-Art Product
Its newest product, a state-of-the-art information and word-processing system called the Quotron 1000, has encountered some early bugs with its software, a common but nonetheless costly problem with new computer products. The millions of dollars that Quotron spent to develop the 1000 have flattened the firm’s earnings in last year’s third and fourth quarters, ending a string of robust quarterly profit increases.
The slump in the brokerage business during the latter part of 1984, due to reduced stock trading volume, further depressed the firm’s earnings and stock price, making it even more prone to a takeover.
“A lot of people think Quotron will not remain independent,” says analyst Osman Eralp of the San Francisco-based brokerage of Hambrecht & Quist Inc.
“They certainly could use capital from a much bigger firm,” says William J. Ritger, an analyst with the New York brokerage of Dean Witter Reynolds Inc.
But competitive challenges are nothing new for Quotron or its chairman, chief executive and president, Milton E. Mohr. Although the firm pioneered electronic stock quotation services in 1959, by 1970, when Mohr took over, it was near bankruptcy and its market share had shrunk to a mere 6%.
By shedding some unprofitable businesses, undertaking some bold financing deals and keeping his products ahead of the competition, the feisty 69-year-old Mohr revived Quotron and built it up to its present dominant position.
Mohr confidently predicts that Quotron will not only retain its current market share but has a good shot at gaining more.
“People seem to be under the impression that we’ve been without competition in the past,” he says. “We’ve always had very strong competition.”
To add market share, Mohr says he hopes to expand sales to such newer customers as banks and insurance companies. He also is expanding overseas, through a joint venture with Dow Jones & Co. and the Associated Press.
But Quotron’s future is mainly staked on the success of its new 1000 system. It will become Quotron’s only product once it completely replaces its predecessor, the Quotron 800, introduced in 1971.
The 1000 includes all of the services of the 800 system, such as up-to-the-minute stock and commodity quotes, business news from Dow Jones and others, order processing and interoffice messages. But it adds such office-automation capabilities as word processing, data-base management and electronic mail, thus creating a versatile one-stop system for virtually every office task.
These and other features puts the 1000 “at least a couple years ahead” of any rival product, Mohr boasts. And it won’t be easy for anyone to catch up, he argues, because the system is so complex that it will take years to develop something comparable.
“You can put in all the money in the world, and you will still require four or five years to make it happen,” he says.
Accordingly, Mohr pooh-poohs the threat of the Merrill Lynch-IBM combination. The venture, called International MarketNet (IMNET), plans to begin installing its systems in the third quarter of this year, but it could take two or three years before the process is complete and all the bugs are worked out. So far, the new venture has been unable to wrest away a major Quotron customer, Hambrecht & Quist analyst Eralp says.
Negotiating With Merrill
In the meantime, Merrill Lynch has contracted to remain as a Quotron customer until at least 1988. The firms are negotiating to extend that to 1990, Mohr says.
IMNET officials contend that their product’s greater flexibility will make it superior to Quotron’s.
“We have every expectation that we will become the leader in this industry,” says Joe Agro, IMNET’s vice president for marketing and market development.
IMNET also hopes to boost its attractiveness through an arrangement, announced earlier this month, whereby its data can be transmitted to customers at home or in their offices over a portion of the Public Broadcasting Service’s television signal.
Analysts say Quotron faces other threats as well.
Automatic Data Processing, the Roseland, N.J.-based provider of computerized accounting services for businesses, became a threat when it acquired GTE Corp.’s electronic stock-quotation system in 1983. Because it could offer its services at a lower cost than Quotron, ADP “could take market share (from Quotron) faster and bigger than will ever be taken by IBM and Merrill Lynch,” Dean Witter analyst Ritger says.
Another “substantial” threat is the possible defection of Shearson Lehman Bros. Inc., a major brokerage that accounts for about 19% of Quotron’s revenue, analyst Eralp says. Shearson Lehman could switch to ADP, he says.
Reuters, a dominant supplier of electronic financial information systems in Europe, also threatens a major push into the United States.
But Mohr contends that Quotron has yet to lose market share. And even if it does, the appetite for financial information is growing so fast that there “is still tremendous growth potential,” analyst Eralp says.
Meanwhile, Quotron’s short-term problems are easing. The initial bugs with the 1000 system will soon be ironed out, Mohr says, although the product is “nine months behind where we should be.” With higher trading volume returning to the stock market, the brokerage business should be increasing its orders for terminals.
‘Worst Is Over’
“There is a lot of feeling that the worst is over,” Eralp comments.
But Quotron’s quarterly earnings will continue to be flat through the first half of this year, Mohr predicts. In the fourth quarter of 1984, the firm earned $6.6 million, down slightly from $6.7 million in the 1983 quarter. For all of 1984, it earned $26.8 million, up only 12% from 1983, sharply lower than the 41% earnings gain in 1983. Revenue in 1984 rose to $189.8 million, up 23% from a year earlier.
With a recent stock price of about $11 per share, compared to a 1984 high of $32 per share last summer, Quotron remains ripe for a takeover, analysts say. Wang was rumored as a possible suitor last December, but both it and Quotron denied the reports.
Mohr says he is always interested in exploring any takeover possibilities, although there is nothing in the works now.
But he insists that Quotron can prosper without hooking up with a wealthier suitor. He points out that the firm has only $31 million in debt, compared to $180 million in shareholders’ equity, and access to a $65-million revolving credit line.
