Lotus Writes a Program for Its Own Expansion : Amid Shake-Out in Computer Field, Software Firm Seeks New Opportunities

Mention the possibility of doing battle with IBM, and the president of Lotus Development Corp. can get downright agitated.

“If you mean do we worry about competition, well, of course, we do,” snaps Jim Manzi, president of the leading maker of software for desk-top computers. “Do we worry more about IBM? Absolutely. Will we do anything differently? No.”

But, in fact, Lotus is doing much that is different under the guidance of the 32-year-old executive.

Manzi is in charge of a newly formulated diversification plan for the 3-year-old software leader, which hopes to position itself as an “information services” company that will join the Fortune 500 within five years.

The plan, which will be formally presented at the annual shareholders meeting on Monday, signals Lotus’ determination to avoid the fate of many high-technology companies that have fallen on their faces after a few high-flying years.

The plan also reflects the slowdown, shakeout and consolidation taking place in almost every segment of the computer market. Weaker software makers are folding, and even hard chargers such as Lotus, whose 1984 sales of $157 million were triple those of the previous year, have been forced to worry about how to sustain growth.

So now, the software maker has embarked on a strategy of using joint ventures and acquisitions to diversify into related areas. These include artificial intelligence, a largely unproven software technology to make computers learn from experience; magazine publishing, and a service to provide desk-top computers with information such as stock prices.

“We have a heck of a lot on our plate,” says E. C. Prokopis, senior vice president of finance and operations. “I wouldn’t rule out anything.”

At least a few Wall Street analysts worry that Lotus’ expansion could take the company into areas that are too risky or that could send it in too many directions at once. But even the skeptics agree that Lotus has a better chance of surviving than most software makers.

“There’s a good rationale for the moves they’ve made recently case by case,” says William Shattuck, an analyst at Montgomery Securities in San Francisco. “But I am a little concerned from a management point of view. I want to make sure they’re not taking too much a shotgun approach.”

Liz Menten, a computer analyst at Gartner Group in Stamford, Conn., agrees that Lotus is entering a period of risk but adds, “They have to. There’s nothing safe out there.” That is just the way Manzi sees it.

Since its founding by Yale-educated Mitchell D. Kapor in April, 1982, Lotus has dazzled the computer industry by becoming the premier maker of software for personal computers in the office.

Its first software package, 1-2-3--which was introduced the year the company was founded--is an electronic spreadsheet that manipulates numbers. The program is nearing its 123rd consecutive week as a top seller on software charts.

Symphony, Lotus’ second product, combines the ability to process words, create graphics, crunch numbers and link up with other computers. Though less successful than 1-2-3, Symphony has also been a persistent best seller since its introduction last summer.

With only those two products, Lotus tripled its revenues in 1984 over the previous year. Earnings jumped more than 150% to $36 million.

A third package, the long-awaited Jazz, is expected on the market a week from Monday. The package, which is several months late, will give users of Apple Computer’s Macintosh a so-called integrated software, allowing them to process words, manipulate numbers, send messages to other computers and create graphics.

Jazz is considered essential to the success of Macintosh, whose slow sales have been blamed largely on a lack of such software. Some industry observers, however, say that Jazz may come too late and that Apple already has missed its chance to nudge aside IBM in the office arena.

Failure of Apple’s Mac would hurt but not ruin Lotus, which expects to get 10% to 20% of its anticipated $219 million in revenue this year from Jazz sales.

Together, Lotus’ three software programs should provide solid revenue growth for several years, though not at the explosive rate to which the company has become accustomed in its short life.

With the slowdown in personal computer and software sales, however, the company doesn’t want to depend on current products alone.

Manzi sees vast possibilities for broadening Lotus’ product line, but he rules out certain areas--hardware for one because of the high start-up costs and low margins. He also dismisses multi-user technology, which allows several personal computer users to hook into a central unit and share software. Such sharing would cut into Lotus’ unit sales.

Although Lotus has not yet devised a marketing strategy for many of its anticipated projects, Manzi insists that the company remains focused, with its target the fast-growing market for information.

Quality Is Key

Despite the company’s fast growth, he says, Lotus has been able to maintain quality. Delays in Jazz shipments had raised concerns that the company was getting out of control.

“We’ll sink or swim based on the quality of our products,” says Manzi, who, after a stint as a newspaper reporter, got a master’s degree in economics and spent several years as a trouble-shooter for McKinsey & Co., a consulting firm, where his clients included many of America’s and Japan’s leading electronics companies.

“So far, so good,” he is fond of saying.

Despite the pervasive shakeout in personal computers, the software industry has remained relatively healthy. Market leaders such as Lotus, Ashton-Tate, based in Culver City, and Microsoft of Bellevue, Wash., have continued to see strong gains.

Lotus, which is No. 1 in sales, rich in cash ($68 million) and free of long-term debt, is particularly strong.

Two weeks ago, however, IBM blew a chill into the market as only Big Blue can by announcing that, for a temporary time, it would give away software with some of its Personal Computers. The announcement elicited protests in the industry, coming as it did after IBM’s decision last year to produce its own series of business software programs.

Fortunes Could Change

Until that time, IBM had shown little interest in software sales, permitting companies like Lotus to ride its coattails by creating products for IBM and IBM-compatible desk-top computers. If IBM becomes keen to win the software market, which was worth an estimated $2 billion in 1984, fortunes could change overnight.

Manzi scoffs at the idea that his company could be crushed by IBM, but others at Lotus are less sanguine.

Other competitors have not been idle, either. Later this year, Microsoft plans to introduce Excel, a powerful software program to give Macintosh users spreadsheet, data management and graphics capabilities.

Lotus says growing competition in software is a key reason that the company wants to diversify. Analysts applaud the idea in general but question some of the specific projects, saying the technology is unpredictable and the competition too stiff.

Such uncertainty causes Montgomery Securities analyst Shattuck to call 1985 a “risky” year for Lotus, even though he keeps the company on his list of recommended stocks.

At Robertson, Colman & Stephens in San Francisco, analyst Brian Mutert says, “Diversification is a tricky business.”

Price Relatively Low

Optimism and caution pervade Wall Street’s view of the company, acknowledges Lotus’ Prokopis. That, he says, is why the company’s stock is selling at a price that is relatively low when compared with its earnings per share. Lotus’ price-to-earnings ratio of 10 is considered sub-par for stocks of technology companies expected to grow rapidly. The stock closed Friday in over-the-counter trading at $30.50 a share.

Several aspects of the company’s new strategy have been announced in the last two months. This month, for example, Lotus unveiled a magazine for Lotus software users, apparently unfazed by the recent failure of many such publications.

It also acquired financially strapped Software Arts, winning several talented software writers from what had been a significant competitor. And it formed a special group to concentrate on software for the science and engineering community.

In late April, it announced plans to acquire Dataspeed for $6 million. The purchase will enable Lotus to deliver instantaneous stock results from most major stock markets to individuals in large U.S. cities.

Cash-poor Dataspeed has been praised for its products. The moderately priced gadgets, which range from a hand-held radio to a desk-top receiver the size of a bread box, pick up market results via radio transmission and display them on computer screens.

IBM Plans Venture

But, here again, Lotus will encounter IBM, which later this year will begin a joint venture with Merrill Lynch to offer financial news through personal computers.

In March, Lotus announced a joint venture with Cullinet Software, the leading supplier of software for IBM mainframes. The two companies will try to beat IBM in the development of a practical link between personal computers and mainframes. Such links now are too cumbersome for widespread use.

Last month, Lotus and Intel, the leading microchip maker, announced that they had collaborated to create a printed circuit board and software that will expand the memory of IBM PCs and compatibles.

Lotus also has begun several other joint ventures--including a major one in artificial intelligence software--with former Lotus employees who have gone off to pursue their own projects, frequently with the blessing and funding of Lotus.

Lotus says it hopes that the expansion will convince customers and Wall Street that the company has staying power. That, says R. B. Scott, director of corporate communications, is crucial in the software market, where technology changes quickly and companies that had blockbuster first products have found it all but impossible to repeat their success.

Management Restructured

To handle the diversification and the company’s growing work force, which has climbed to just less than 1,000, Lotus has restructured its top management over the last year.

Founder Kapor remains chairman and chief executive, but he handed the presidency and responsibility for day-to-day operations to Manzi last October. Kapor, who has been considered the driving force of the company, will concentrate on long-term projects.

“We’ve got to change Wall Street’s perception that we’re a one-product company,” says Scott, referring to the huge success of 1-2-3. “We also have to convince them that this company won’t fall apart if Kapor’s car goes off the road--God forbid.”

Scott joined Lotus three months ago to manage a newly created department that oversees the company’s contact with the press and investors and is responsible for directing advertising.

Chief of finance Prokopis, who previously held a similar job at United Technologies, has been with the company only about 10 weeks.

Manzi says those who doubt the company’s future success don’t understand the fast-moving information industry.

“I don’t like to stay in a job more than four years,” he says. “If we don’t make the Fortune 500 in a few years, we might as well hang it up.”

CH, Los Angeles Times