Deals Fuel Software Firm’s Growth : High-Tech: CEO Leslie Crane began his business at the dining room table five years ago. This year sales are predicted to exceed $100 million.
Leslie Crane is looking forward to June. That’s when his Software Toolworks Inc., a Chatsworth software maker, will unveil a product at the Consumer Electronics Show that Crane says “has the potential for being the most exciting consumer electronics product of this year or the recent past.”
Just what is it? For now, Crane, Software Toolworks’ chairman and chief executive, will say only that it is a “combination hardware-software” product that will work with virtually any personal computer and with the blockbuster Nintendo video game system.
Whatever it is, there may be a big difference between Crane’s view of the product’s potential and its actual sales. But given Crane’s success to date with Software Toolworks, it’s easy to understand his great expectations.
Since Crane, 56, started the company on his dining room table five years ago, Software Toolworks, which sells video games and other entertainment, business and educational programs, has been a house afire in terms of growth. Thanks also in part to several small acquisitions, the company’s sales have soared from $516,000 in its fiscal year ended March 31, 1986, to about $22 million in fiscal 1990. (The actual results haven’t been released yet.)
Moreover, Crane said he’s comfortable with analysts’ predictions that its sales will reach $90 million to $100 million this year. Profits keep leapfrogging, too. In the nine months that ended Dec. 31, Software Toolworks’ earnings nearly doubled to $3.9 million from $1.4 million, and analysts estimate its current-year profit will hit about $20 million.
As a result, the company’s stock has been on a nearly steady climb in recent months. The stock closed Monday at $15.75 a share in over-the-counter trading, up from $4 last August (adjusted for a 100% stock dividend paid last month). Software Toolworks now has a total stock market value of $300 million, giving Crane’s personal 20% stake a paper value of $60 million.
The stock’s climb lately has attracted the attention of short sellers who are hoping Software Toolworks trips. Short sellers are investors who sell borrowed stock with the expectation that they can buy it back at a lower price for a profit, and short interest in Software Toolworks--the shares that have been sold short but not yet repurchased--jumped 52% in mid-April to 575,000 shares, or about 3% of Software Toolworks’ 20 million shares outstanding.
Crane, who gained moderate fame in the 1960s as a late-night talk-show host on ABC, said the short sellers “are no cause for concern here,” because whenever a company has rapid growth “there are going to be some people who are not true believers.”
Software Toolworks’ success is attributed to several factors. The company, in part through its acquisitions, is diversified and thus not dependent on one source of revenue. For instance, early this year it bought Mindscape Inc. in a stock swap valued at $40 million, and Mindscape is one of 50 or so software publishers worldwide that are licensed to publish game cartridges for the Nintendo system. (Japan-based Nintendo sells the main control box, or hardware, for about $100 each.)
Software Toolworks also develops games and other software for personal computers. Its “Chessmaster” series of chess games and its “Mavis Beacon Teaches Typing” tutorial program have been bestsellers.
The company also uses its excess production capacity to duplicate and package floppy disks for other software developers, “one of the few people in the software business to do that,” said Robert F. Kleiber, who follows Software Toolworks for the brokerage firm Piper Jaffray & Hopwood in Minneapolis.
Crane also has his software engineers designing so-called “operating environments” for several overseas computer makers, such as the Dutch giant N.V. Philips, that are about to enter the U.S. market. The programs are graphic guides that help the computer’s user select specific programs, such as word processing, from the computer’s data base.
Diversification was necessary because “I did not want this company to be subject to the vagaries of the entertainment retail software marketplace, which can be very cyclical and very fickle,” Crane said.
Nonetheless, analysts estimate that 50% or more of Software Toolworks’ sales and operating profits are related to Nintendo cartridge sales, which has the analysts watching the Nintendo story closely. And lately there has been talk of a slowdown in Nintendo’s phenomenal growth over the past few years, which has put Nintendo systems in one-fifth of U.S. homes.
Kleiber said it appears that Nintendo will sell up to 9 million hardware units this year. That’s down from 10 million in 1989, “but it’s not like the market’s collapsing,” he said, adding that Software Toolworks and other software developers should sell about 70 million Nintendo cartridges in 1990.
“The growth is decelerating and perhaps the sale of cartridges may be about to plateau for a while, but I don’t think it’s a replay of the early 1980s when Atari crashed and burned,” said Vincent L. Turzo, a analyst with Gulfstream Financial Associates Inc. in Boca Raton, Fla.
Crane has to sidestep other potential problems, such as letting Software Toolworks’ growth get out of control. To bolster management, he recently turned over the president’s post to a new hire, Elizabeth Barker, 34, who had been with Software Toolworks’ investment banker Montgomery Securities in San Francisco.
He also has to keep an eye on such customers as Philips. The Dutch company’s computer business has struggled lately--last week it reported a plunge in first-quarter earnings, in large part because of computer problems--and any prolonged slump might affect Philips’ push into the U.S. market and its need for Software Toolworks’ software.
In addition, Crane also has to keep developing hit programs for personal computers to extend Software Toolworks’ growth. He tries for “evergreen” programs that remain popular for years, such as the “Chessmaster” series or its new program “Toolworks World Atlas,” a program that displays color maps.
Using the music business as a metaphor, Crane explained his evergreen theory by comparing current pop hits with the perennial favorite “White Christmas” by Bing Crosby. “I personally would rather own the publishing rights to Bing Crosby’s ‘White Christmas’ than to Prince’s next record,” he said.
Still, “people are fickle and being able to come up with the next successful product to keep the momentum going is always a tough job,” Kleiber said. Indeed, some game publishers for Nintendo say retailers are beginning to pare the number of games they’re willing to carry to only the top sellers.
Crane said “If there’s any bad news about the Software Toolworks, the analysts and the Street know about it even sooner” than when the company announces good news. “Fortunately, we haven’t had any bad news yet and we see none on the horizon, knock wood,” Crane said, rapping his knuckles on his desk.
SOFTWARE TOOLWORKS AT A GLANCE
Software Toolworks Inc. in Chatsworth makes entertainment, educational and business software programs for personal computers, and it is licensed to design games for the popular Nintendo home video system. Software Toolworks, which went public in 1986, also provides duplication and packaging services for other software producers.
For fiscal years ended March 31; in millions.
