Software at Your Service
The customer is king, you might have heard it said. But that’s old news. Nowadays, marketers lament that the customer is dictator.
Whether the hand that holds the checkbook belongs to a middle-class consumer or a purchasing manager for a giant multinational, the easy sells are getting rare. Competition has intensified while choice has exploded. As a result, companies are finding that building relationships through customer service requires a sea change in bringing information to sales and marketing.
“It’s now an accepted truth: Customers are every company’s most important asset,” says venture capitalist Roger McNamee. “In the new world, you have to put all the information in the hands of the customer or as close to the customer as possible.”
A fast-growing group of software companies--tagged with such acronyms as FOA for front-office automation or CIS for customer interaction software--are enabling that transition, and, analysts say, offer a compelling investment theme. The leaders, Siebel Systems, Vantive, Scopus Technology, Clarify and Remedy, are all based in the Silicon Valley area.
Their products catalog the range of contact each customer has had with a company so that all sales and customer-service employees have immediate access to it. For instance, workers at telephone product-support centers will know the status of each caller’s complaint. A salesman in the field might be clued into which clients are at risk for defection.
Proponents say this automation-aided focus cuts redundant effort while boosting customer loyalty and satisfaction. For large firms with an extensive clientele, such tools create an economy of scale in marketing and service. Visa, for one, uses Scopus’ call-center software to manage customer inquiries and problem resolution at its London Information Center, which provides phone support to banks in 22 countries.
Front-office automation is considered the logical next step after companies, typically manufacturers, have computerized their back-office functions: accounting, inventory control, human resources and the like. The more mature back-office niche has generated a number of big winners among software stocks. Just take a look at the graceful, persistent ascent of Baan’s chart over the last three years--and its $8.7-billion valuation.
The opportunities in front-office software might be substantially larger, since customer care is an issue for every company, not just manufacturers. In 1997, the industry compiled well over $1 billion in revenue, according to market researcher Aberdeen Group of Boston. Aberdeen forecasts annual growth exceeding 30% for a $3.4-billion market in 2000.
“Virtually every company that has customers or a sales force will automate this process through information technology,” said analyst Emeric McDonald of Amerindo Investment Advisors. “The opportunity is enormous.”
However, investors shouldn’t expect to just kick back and collect profits. Due to the unpredictability of the group, it will take some work to get paid at the front office.
Wall Street has kept a microscope trained on these upstarts since their initial public offerings in 1995 and ‘96, crowning some with monumental share prices until it became clear that they were having a hard time converting booming revenue into profits. For the most part, analysts attribute the glitches to the trials of managing high growth in an emerging industry.
Clarify and Remedy have had the stuffing knocked out of their stocks. Scopus, which went through a similar cycle, is planning to merge with kingpin Siebel Systems in a $460-million stock deal. Vantive’s bottom line remains strong, but the stock has languished.
Consolidation and company-building are just two forces roiling this sector. Staying ahead of the technology curve and fending off intrusions by outsiders add to the excitement.
Siebel has some of the makings of a long-term smash. It plays in the sweet spot of the market, a niche known as sales-force automation marked by potent growth and limited competition. Salespeople use Siebel software to harness the data involved in field sales, such as tracking leads, configuring products to customer requests and much more.
The company’s revenue more than tripled in 1997 to $119 million, bolstering confidence that the rough-and-tumble arena has produced a true leader. Such growth in a wide-open industry is what drives the stock’s valuation, now in the neighborhood of $2 billion.
Not surprisingly, the merger announcement has spurred some selling. Software combinations are never easy, posing the challenge of integrating both technology and corporate cultures. Such fears could help Vantive’s pitch to clients.
However, Scopus’ customer-support and call-center technology will enable Siebel to offer a comprehensive product line, which is key to the future of the software market. Scopus’ laggard growth might weigh on its suitor, but its 400-plus customer base won’t hurt.
Siebel’s bid for breadth is a bow to Vantive’s extensive product line. Though Vantive turned in 80% growth in 1997, the stock was found guilty by association with struggling peers. Lately it’s been rising as investors realize that the company is on track to meet its 80-cents-a-share earnings estimate for 1998, casting it as a relative bargain. Most analysts rate it a strong buy.
“Vantive has had management consistency, it made its quarterly numbers, but the stock has gone sideways,” said James Pickrel of investment bank Hambrecht & Quist. “Now it has to deal with the issue of size in a consolidating market.”
Size is an issue Clarify is also grappling with, along with filling out its sales force, acclimating to a new CEO and, according to analysts, keeping up technologically. Early last year, horrified investors watched the stock plummet from almost $60 to $7, largely under the weight of warnings of flat sequential revenues.
The signals from Clarify are not exciting but do hint at a turnaround, and the stock has crept back into the mid-teens. Sarah Bernstein of brokerage Wheat First Union forecasts 49% revenue expansion in 1998 and EPS improving to 32 cents from 18 cents, then more than doubling in 1999. She rates it an outperform.
Remedy’s specialty is software for the internal help desk, where workers request service for their computers and networks.
A $50 stock last fall, the company fell out of Wall Street’s good graces after IBM announced the takeover of a Remedy rival, Software Artistry. More bad news: Remedy’s fourth-quarter earnings came in 5 cents shy of estimates, and powerhouse Network Associates wants a piece of the help-desk pie.
What might get lost in the gloom is that there’s a lot of demand out there and Remedy is selling at a cut-rate price-earnings ratio of 23.
Looking ahead, these firms are well-positioned for the time when the Internet enables self-service on a mass scale. In Bernstein’s view, “Web applications will be a new area for the front-office vendors. Electronic commerce allows customers to solve their own problems or directly buy products rather than go to the sales force. It’s an extension of the front office.”
If the Web is a bright spot on the horizon, the designs of the back-office vendors cast a shadow. Baan, SAP and database giant Oracle Corp. are trying to invade but have done little damage so far.
It’s unlikely that the invaders will have best-of-breed technology in the front office, but they do have scale. That’s another reason Siebel and Scopus decided to tie the knot. “I wouldn’t rule out the chance of further acquisitions,” says Hambrecht & Quist’s Pickrel.
However “emerging” the front-office fold seems, in the software business there’s always someone whose mission it is to make you obsolete. From venture capitalist McNamee’s point of view, most of the industry is “trapped” in aging formulas that put heavy time and cost burdens on customers.
His heads-up to investors: Be on the lookout for Pivotal Software and Onyx Software, the next-generation players that promise quicker, cheaper deployments and more flexible features. He expects them to go public within a year.
*
Edward Silver can be reached at emsilver@msn.com
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Revenue Growth Looks Satisfying
Shares of the front-office software leaders have turned in an uneven performance, but all have seen rapid revenue growth. Emerging companies such as these are often valued as a multiple of annual revenue rather than earnings.
*--*
Valuation Ticker Monday Yr-to-date 1997 revenue as multiple Stock symbol close change growth rate of revenues Siebel Systems SEBL $27.69 + 33% 203% x 16.8 Vantive VNTV 32.50 + 30 83 x 7.0 Scopus Technology SCOP 19.25 + 61 73 x 4.5 Remedy RMDY 20.75 - 5 60 x 4.4 Clarify CLFY 14.38 + 23 57 x 3.5
*--*
Sources: Wheat First Union, Bloomberg News
