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CEOCFO CEOCFO Monthly Analyst |
"To print this page go to file and left click on print" Over 300,000 developers and 20,000
customers worldwide ROGUE
WAVE SOFTWARE
5500 Flatiron Parkway John Floisand CEOCFOinterviews.com Company
Profile:
Rogue
Wave Software, Inc. is a leading global infrastructure software and consulting services
company. Its large-scale,
platform-independent business frameworks, components and services provide the fastest way
to deliver durable, mission-critical applications. Over
300,000 developers and 20,000 customers worldwide use Rogue Wave to develop comprehensive,
enterprise-level, general business and e-business applications. Headquartered in Boulder, Colo., Rogue Wave has
offices located throughout the United States, Europe and Asia. Ceocfointerviews: Tell my readers about your company. Mr. Floisand: Rogue
Wave was formed in 1989 and has been public for over six years. Over the past 12 years we have built a global
brand, becoming the industry leader in the C++ software component sector. Recently, we
have focused our efforts on providing our software to a broader audience of corporations
working to build enterprise wide systems, allowing us to leverage full software platforms
from our original component architecture. In
addition to our core C++ offerings, our Large Scale Object Solutions (LSOS) initiative is
a set of technologies that enables customers to develop reliable and flexible large-scale
business applications faster than they have even been able to in the past. LSOS removes
customers from the complex technology that forms the underlying architecture of very large
on-line transaction processing systems, allowing them to focus primarily on their business
application requirements. The primary technology of the LSOS initiative is Object Systems Framework (OSF). OSF provides an abstract and integrated platform for the construction of large-scale, object-oriented applications using a variety of underlying technologies including application servers, databases, and messaging systems. OSF does not implement these technologies itself, instead providing a flexible and easy-to-use abstraction layer that ties these systems together. Using
OSF, Rogue Wave developed GMRD (Global Master Reference Database) software in response to
the financial industry’s need to have a clean data solution as part of the
development of a faster and more effective settlement processing mechanism. In the past
year, we put GMRD to work by developing a specific application for a Fortune 500 financial
customer to solve their reference data problems, helping the company to achieve the
Securities Industry Association T+1 initiative. The
move from T+3 to T+1 will generate approximately $2.7 billion in savings to the industry,
and its implementation represents an approximate $8 - $10 billion market. We believe that the underlying OSF technology can
be applied across a diverse group of industries that have similar large-volume
transactional issues and be sold as a stand-alone product to companies developing their
own enterprise systems in-house. Ceocfointerviews: You became the CEO this past October. What has been your biggest challenge thus far? Mr. Floisand: I
was appointed interim CEO in October and officially took the CEO role in January. In
addition, I served on the board for the previous two years, so I know both the company and
its Founder, Tom Keffer, extremely well. The
primary reason I was brought on board was to help in developing a vision and strategy for
the company as it transitions to a new way of doing business. My greatest challenge will
be to take the next step from where the last CEO left off by building upon our core
products and services and implementing a strategy and vision to continually move our
products up the value chain. This will enable
us to become a more integral partner with our customers, thereby driving higher revenue to
Rogue Wave. Ceocfointerviews: How do you plan on realizing that vision, that
is, what strategy do you have in mind? Mr.
Floisand:
Without going into too much detail, our strategy has four basic components. First, we see a great opportunity to experience 8
- 10% growth in our core C++ business going forward.
In order to capture that growth, we are expanding our international sales
and marketing teams, reinvigorating current and past relationships, modifying our pricing
cycle to better coincide with our customers’ needs, and developing new relationships
with systems integrators and other partners to give our products a broader reach. Second,
we plan to deploy our GMRD application throughout the financial services industry, both
domestically and abroad. Our strategy
involves approaching the largest financial institutions with a customized solution while
developing a shrink-wrapped product for the smaller institutions, by the end of this year. Third,
we see a tremendous opportunity in selling the underlying OSF technology in both C++ and
Java to companies interested in developing their own enterprise-wide applications. We see this as a major growth driver for the
company in the future, as the cost will be relatively small to the customer, but it will
give them an unparalleled degree of flexibility and cost savings in designing and
implementing their own enterprise-wide solutions. Finally,
we will leverage our success in developing the GMRD product to target other strategic LSOS
market opportunities. We have tentatively
identified several verticals that have the same high volume transaction/straight through
processing needs as the financial service industry and believe that our technology can be
modified to create a holistic solution for these verticals.
Overall, we will maintain a very disciplined focus to ensure all of our
products are working towards a common goal. One final point on all of this — I’d
like to be very clear here —we do not expect this to happen overnight. This is an evolutionary process that will require
dedication and cooperation throughout the organization in order to be accomplished over
the next several years. Ceocfointerviews: It sounds like you have a substantial opportunity
with your GMRD application? Mr. Floisand: There
certainly is a significant opportunity for us with the GMRD application, but we see the
real long-term opportunity being in the OSF technology.
In the near-term, the opportunity for GMRD is that we address a fundamental
need for financial institutions that are approaching straight through processing (STP),
that is, the need for clean reference data. The
Tower Group recently found that about 30% of trade errors are due to bad reference data
and automating the process without clean and reliable data only leads to the straight
through processing of errors. By implementing
our solution, financial institutions can improve their quality of service and achieve
substantial cost savings. However,
we recognize that the GMRD opportunity is necessarily constrained by the number of large
financial institutions that can afford and need to implement a processing system of this
size. That is why the OSF technology
represents the long-term opportunity for this company.
Not only can we continue to develop other large-scale applications for
industries such as telecom and healthcare, but we can license the underlying technology to
companies looking to build their own applications without having to do all of the
‘heavy lifting’. Currently, a C++
version of the technology is available, while a Java version will be available by the end
of this year. Both sell for about $500,000
per license/installation. Ceocfointerviews: Going back to the core C++ business, how do you
work with your customers to help them in building their IT infrastructure? Mr. Floisand: Our
research group develops the C++ code from line one on up. Our Fortune 500 clients depend
on us to develop mission-critical solutions that will meet their organizational needs. To most efficiently produce that technology, we
use database and operating system neutral technology, which gives our clients the most
flexible, portable and cost effective infrastructure components in the marketplace. We strive to be a partner with our clients and not
just a technology vendor by supporting the widest array of operating systems and databases
in the industry. To
that end, our deployment-based sales model creates an environment in which we are
successful only if our customers are successful. Our
original transaction-based, licensing business model sold products directly to developers
and then added incremental revenue through the sale of upgrades. Today, our
deployment-based model allows us to sell to a much wider marketplace, achieve greater
penetration in existing client accounts, and tie our future success to that of our
clients. In fact, one of the first things I
did since becoming CEO was to update our development cycle to twice a year so our
customers could benefit from bigger incremental changes in our software and we could
capitalize on more significant revenue opportunities while lowering our development costs. Ceocfointerviews: Would you say that your customers are more like
partners? Mr. Floisand: Absolutely. We have a trusted brand with some of
the world’s largest companies. We work hard every day to maintain that brand loyalty
by creating quality, valuable products. Our
philosophy is that our success is intimately tied to that of our clients. If we are not creating value for them, then they
will look to other infrastructure providers to do so.
At the end of the day, the customer really is our number one focus. Ceocfointerviews: What industries do your customers come from? Mr.
Floisand:
We sell to a broad range of Fortune 500 companies. For
our C++ products, our primary customers are in the financial services/banking,
telecommunications, technology, and aerospace/defense industries. As for our GMRD product, the first target market
is large financial institutions, as it is designed to help them cope with the T + 1 issue
I discussed earlier. We believe we can sell
another GMRD application in fiscal 2002, in addition to our current engagement. Into 2003 and beyond, we expect to sell several
more GMRD engagements to other large financial institutions. And, since the underlying OSF technology is
designed to be highly flexible, we plan to continue exploring other industries in which
the technology could be used to develop meaningful applications. Ceocfointerviews: Can you discuss how your revenues break down
across business and geographic lines? Mr.
Floisand: In terms of business line, the majority of our
revenue comes from our core C++ infrastructure products.
About 55% comes from software sales and 35% comes from support services. Our consulting revenue is about 10% of the total,
primarily derived from the implementation of our LSOS strategy. In terms of geography, the majority comes from the
United States, about 80% of revenue in 2001. Our
international business has been extremely successful and continues to grow, and we see
huge opportunities, particularly in Asia Pacific. I
believe it is possible for this company to have a revenue split of 50% from the Americas,
30% from Europe, and 20% from Asia Pacific, versus 66%, 30% and 4%, respectively, at the
present time. Ceocfointerviews: It sounds like you are planning some aggressive
moves internationally. Can you tell us a
little more about that? Mr. Floisand: Certainly. We have recently hired several key individuals to
run our international operations. Specifically,
the sales and marketing functions have been localized to where the business takes place,
giving our managers a very high degree of autonomy and flexibility. These individuals bring with them vast amounts of
knowledge and expertise, not to mention key relationships in each region. While
we are still in the process of filling out the teams, we see an opportunity to generate a
significant portion of our revenues from these markets in the coming years. In fact, three
of the top four markets for C++ products are in the Asia/Pacific region: Japan, China, and
India. We believe the deeper penetration of
these markets will allow our core business to grow at a rate of 8 - 10% per year in the
foreseeable future. We can also leverage
these developing sales and marketing organizations for our LSOS strategy. With global financial centers such as London,
Geneva, Tokyo and Sydney facing the same T+1 issue as New York, we expect to have some
very significant international opportunities for the GMRD product as well. Ceocfointerviews: Every company wants to stay fresh. What are you doing to keep your technology new and
innovative? Mr. Floisand: We
are constantly working to improve our offering with an entire research staff in place to
aid in the effort. Our research team is
continuously looking into new technologies and new applications, identifying additional
uses for the technology and improving its capabilities and usability. GMRD is a good example of innovation spurred by
our research and consultations with customers. It
began when a client came to us with a problem: achieving T+1 with clean reference data. By leveraging our core skill sets in components,
C++ and Java, and adding a little innovation, we developed a suite of software that
enables companies to comply with the regulation at reduced costs. In
addition to our internal research efforts, we conduct external research through our online
Technology Access Center (TAC). Through our
Web site, developers can access the TAC and thereby gain access to technology previews of
products before they go to market. Developers
can download the technology, work with it and help identify additional markets. In a sense, through TAC, we have opened up our
research efforts to a broader group. Although
every technology that goes to the TAC will not necessarily become a product, the TAC will
continue to be a valuable tool for us to gain insight into the potential markets for new
technologies. Currently four technologies are
accessible through TAC: “Bobcat”, “Ratchet”, “Persian” and
“Ruple”. “Bobcat”
is a C++ implementation of the Java Servlet API. It
builds on the core Rogue Wave product line and provides a highly efficient, scalable,
robust and portable servlet API written entirely in C++.
In essence, it allows you to connect your C++ legacy system to Java. “Ratchet” and
“Persian” form the foundation of our Web Services strategy. Ratchet offers
developers who have object-oriented expertise an easy to use, high-level abstraction for
handling the details of XML documents with C++. Persian allows C++ code to consume other
Web services, written in any language, without writing a single line of SOAP or HTTP code,
enabling easy creation and consumption of high-performance Web services. “Ruple” leverages Tuple
space technology and offers a foundation for applications to collaborate transparently and
independently by selectively and securely sharing documents over the existing Internet
infrastructure and technology. As
you can see, we have a lot of new, innovative technology, but we are being prudent in the
move from technology to product. We are
seeking, considering and implementing developer feedback so that our final product will be
well refined and targeted in a manner that will maximize our revenue. We are not in the
business of creating technology for its own sake, but rather, we want to develop products
that will have a meaningful use for our customers’ business challenges and will be
profitable for us. Ceocfointerviews: You have highlighted several exciting internal
growth initiatives for the company. Given
your sizable cash position, do you expect the company to grow through acquisitions as
well? Mr. Floisand: We
are currently exploring several attractive partnership opportunities that would allow us
to leverage our knowledge base and existing sales and marketing organizations to bring
more high-quality products to the marketplace. Any
outright acquisition would have to have at least three primary attributes to be
considered. First,
it would bring complimentary products or services into our offering and augment our value
to our customers, within the confines of our core mission. Second, it would be available
at a reasonable price and be immediately accretive, and third, it would have to have a
compatible corporate culture similar to ours. Being
a seasoned management team, we have learned to identify the possible dangers and to avoid
them. Therefore, any acquisitions
opportunities that we uncover will be examined carefully and pursued cautiously where we
see fit. However, we have the luxury to not
be acquisitive in order to continue to grow. Ceocfointerviews: Why
are companies in the software space getting less attention from investors these days? Mr. Floisand: It’s
not that we are getting less attention from investors as much as investors are no longer
willing to give companies ridiculous valuations based entirely on intriguing technologies
or future potential alone. We are coming off
a tremendous period of technological innovation that completely changed the world, and in
a relatively short period of time. We have
become so accustomed to huge, overarching changes, that we no longer view the incremental
opportunities as exciting. However, there are
exciting opportunities for improving existing technology in terms of its usability,
functionality and stability, or for applying existing technologies in new ways. As an investment vehicle, stocks of many software
companies are still a great growth option, with generally high margins and return on
invested capital, with great growth futures ahead of them.
In fact, we have been engaging in a buyback program because we believe it is
a solid use of funds at current prices. The
real-world solutions we develop for our customers are perfect examples of this trend.
Software companies are receiving less attention from investors because now they are
focused on building customer relationships, developing usable technology, and generally
building solid, long-term business models – all things that do not capture individual
investors’ imagination or interest in the same way that these companies have in the
recent past. Rogue Wave will remain
dedicated to addressing our client’s needs in existing markets, and not simply
chasing the next trend. Ceocfointerviews: To conclude, from an investment standpoint, what
are your company’s most compelling aspects? Mr. Floisand: First
of all, our business model is understandable and its potential is obvious. By deploying
our technology throughout entire companies, we have increased our revenue opportunity
exponentially. Our
core C++ business is growing and is capable of financing higher growth initiatives. With our GMRD application, we have gotten sign-off
from our first major customer and we have already developed the sales and marketing
infrastructure to leverage that reference site across the marketplace in the near term. Longer term, we are exploring additional markets
for the OSF technology and will continue to penetrate existing markets. Further,
we are financially stable with almost $30 million in the bank, absolutely no debt, and a
clean balance sheet. We have a global client
base of Fortune 1000 companies and plan to continue expanding our operations
internationally. From a strategic standpoint,
we have been through a couple of difficult years, restructuring the company to focus on
our strengths. However, with our recent key
management hires, we believe Rogue Wave has turned the corner and is now poised for
sustainable, long-term growth. Finally, we have a compelling valuation, as we are currently valued slightly above cash, indicating that the Street has not given us credit for our growth opportunities and core brand and business. Our cross-platform technology makes us an ideal partner for many companies that need reliable systems to interact with their legacy architecture. We provide that technology, which is of the highest quality in the industry, at very competitive prices. Coupled with the growth initiatives outlined above, we strongly believe that this company will experience strong results over the next several quarters and years. disclaimers © CEOCFOinterviews.com – Any reproduction or further distribution of this article without the express written consent of CEOCFOinterviews.com is prohibited. |
