Andy on Enterprise Software

Netezza heads to market

July 20, 2007

The forthcoming Netezza IPO will be closely watched by those interested in the health of the technology space, and the business intelligence market in particular. Netezza has been a great success story in the data warehouse market. From being founded in 2000 its revenues have risen dramatically. Its fiscal year ends in January. Revenues have climbed from $13M in 2004 to around $30M in 2005 to £54M in 2006, to $79.6M in fiscal year ending January 2007. Its revenues in the quarter ending April 2007 were $25M. Hardly any BI vendors can claim this kind of growth rate (other than Qliktech), especially at this scale. Its customer base is nicely spread amongst industries and is not restricted to the obvious retail, telco and retail banking. So, is this the next great software (actually partly hardware in this case) success story?

Before you get too excited, there are some things to ponder. Note that in 2006 Netezza lost $8M despite that steepling revenue rise. In the latest quarter it still lost $1.6M. This is interesting, since conventional wisdom has it that you can only IPO these days with a few quarters of solid profits, yet Netezza has yet to make a dime. Certainly, it would be fair to assume that if it can keep growing at this rate, profit will surely come (at least its losses are shrinking) but the past has showed that profits can be elusive in fast growing software companies. Also, the data warehouse market is certainly healthy, advancing at 9% or so according to IDC projections, but this is well below Netezza’s growth rate. More particularly, Netezza only attacks one slice of the data warehouse market, the high data volume one. If you have a small data warehouse then you don’t need Netezza, so only certain industries will really be happy hunting grounds for appliances like Netezza. This can be seen in the Teradata story, which is Netezza’s true competitor. Teradata has stalled at around $1 billion or so of revenue, growing just 6% last year (of course most of us wish we had this kind of problem). Certainly Netezza can attack Teradata’s installed base, but enterprise buyers are notoriously conservative, and will have to be dragged kicking and screaming to shift platforms once operational. So this to me suggests that there is a ceiling to the appliance market. If true, this means that you cannot just draw an extrapolation of Netezza’s current superb revenue growth. I have not seen this written about elsewhere, so perhaps it is just a figment of my imagination, and Netezza will prove me wrong. However you can look to Teradata to see that even it has entirely failed to enter certain industires, typically business to business industries where data is complex rather than high in volume. Fo example there is scarely a Teradata installation in the oil industry, which fits this category of complex but mostly low volume data (except for certain upstream data).

So, bearing this in mind, what would be a valuation? Well, solid companies like Datamirror are changing hands for 3x revenue or so, though these are companies with merely steady growth rather than the turbo-charged growth demonstrated by Netezza. So suppose we skip the pesky profitability question, accept this is a premium company and went for five times revenues? This would lead to a valuation of $400M on trailing revenues, maybe $500M on this year’s likely revenues. Yet the offer price of the shares implies a market cap of $621M, virtually eight time trailing revenues, and six times likely forward revenues.

This is scarcely a bargain then, though it is a multiple that will bring joy to the faces of other BI vendors, assuming that the IPO goes well. Of course such things are generally carefully judged, and no doubt the silver tongued investment bankers have gauged that they can sell shares at this price. However for me there seems a nagging doubt, based mainly on what I perceive to be this (in my view) effective cap on the market size that appliances can tackle, and to a lesser extent that lack of proven ability to generate profits. The markets will decide.

The performance of Netezza shares will be a very interesting indicator of the capital market’s view on BI vendors, and will show whether enterprise technology is coming in from the cold winter that started in 2001. Anyway, many congratulations to Netezza, who have succeeded in carving out a real success story in the furrow that for so long was owned by Teradata.

Postscript. On the first day of trading, no one seems troubled about any long term concerns.

Open source data modelling

July 13, 2007

The open source movement continues to ripple into the business intelligence field. Now you can get hold of a data modelling tool that is open source rather than having to buy Erwin, thanks to a Canadian consulting firm called SQL Power Group. I am not familiar with this company but as a consulting firm this seems to be a sensible move, since after all they would not be maintaining the tool as a proper software product anyway, but adapting it to each client’s need on site. By making it open source they gain publicity, and may encourage others to improve the tool in which they have skills. So now you can have a data modelling tool, a database (mySQL), and assorted ETL and BI tools (Pentaho Greenplum, Jaspersoft etc). The penetration of open source is a matter of some debate. While Aberdeen Group reckon 18% of firms are now using open source BI tools, it is less clear what the level of penetration actually is within companies. It is one thing to have a small departmental pilot running, another to commit wholeheartedly to open source tools on an enterprise-wide scale. Clearly it would be a brave company who went aggressively down this path, as you are essentially taking on a major customisation and support project. Certainly you will save some licence fees, and that is not to be sneezed at, but it is less clear what trade-off there is in terms of customisation costs against these savings. I suspect that in the short term, at least, the main effect will be for enterprises to use these tools as a stick to beat traditional reporting vendors when it comes to price negotiations. This will certainly have some negative consequences of profitability for the likes of Business Objects and Cognos if the movement really takes hold and becomes a credible threat. At present I have not really seen this happening in my own experience.

I would invite anyone who has direct experience of an open source BI project to comment here on your experiences, good or bad. I could be wrong but my guess is that I am not expecting a blizzard of replies, despite the emerging interest. Interest is not the same as deployment.

The evidence mounts

July 2, 2007

The annual IDC business intelligence report shows a reassuring 11% rise in overall BI tool revenues in 2006. Regular readers of my blog know that a couple of my long-term viewpoints are that: (a) Microsoft is the vendor with the long-term best position due to its ownership of Excel, which is still the BI front-end that end-users actually want and (b) that specialist BI tools will never, contrary to many BI vendor projections, have a place on every desktop, due to the rather dull reason that most people do not need one.

Is there any evidence for these hypotheses? Well, Microsoft’s BI revenues grew 28%, while the major specialist BI vendors grew by 7% (Business Objects) and 9.8% (Cognos). As IDC analyst Dan Vesset notes, “IDC does not yet see a substantial impact on the market from the strategy and marketing messages of most BI vendors seeking to reach a broader use base”. Nor will it ever, in my opinion.

Also of note is the formidable performance of Qliktech, which grew by a little matter of 97% to USD 43.6 million revenue. Its offering to the mid-market offering based on in-memory search technology continues to get considerable customer traction. I have a soft spot for this company, having been asked to look at it for a venture capital firm as an investment when it was still a tiny company; I am very relieved that I recommended that they invest – otherwise I imagine that they would be hunting me down like a dog right now.

Has the fizz gone out of Cognos?

June 25, 2007

Cognos’ latest quarterly results were rather a flat affair. Licence revenue is just 3% up year over year, while quarterly revenue was respectable at USD 237M, but what growth there was came mainly from product support fees (up 13%) and services (up 10%) which is less than an ideal mix for a software vendor. On the positive side, an operating margin of 12.6% is quite good, and up significantly from the 9.6% of last year.

Less good was that there were 7 deals over USD 1 million, down from 13 the same time last year. Europe and Asia did better than the US. It seems that the financial applications business is doing better than the traditional core BI tools business, which is rumoured to be shrinking.

Overall these are certainly not bad results, but in a fairly healthy BI market they are hardly sparkling, which seems to be reflected by a dip in the share price.

BI for everyone?

May 29, 2007

As usual, Philip Howard has some thoughtful comments on the subject of enterprise data warehousing. The recent plethora of data warehouse appliances, pioneered by Netezza but now popping up from companies ranging from start-ups to HP, certainly has the potential to change the data warehouse landscape. However as Philip points out, it is less clear that data warehouse appliances need be connected with” ubiquitous BI”. I have written previously st some length on my view that there is really no obvious reason for the “democratisation of data” i.e. with anyone in the company having unfettered access to corporate data using whizzy reporting tools. Quite apart from whether the tools are really cuddly enough (doubtful) the question rarely asked is why would this vision be necessary or even appropriate? There are certainly people in a company whose job it is to analyse data: they would be, er, analysts. Everyone else pretty much needs a limited set of data to get on with their jobs, and certainly I would be nervous if every factory worker and truck driver in a company decided to spend an hour or two a day investigating corporate data warehouses. A salesman needs a limited of set of numbers in a year: “here is your quota” while I struggle to see why people outside finance or marketing (and only a subset of those) really need to be spending their time wrestling with data at all.

To be sure one class of people benefits from a “BI tool on every desktop”: vendors, both BI vendors and those selling associated databases and hardware. I have yet to read any articles in Harvard Business Review from CEOs complaining that their profits would be higher if only every employee in the company had a BI tool. BI ubiquity seems to me a solution in search of a problem.

Business Objects Discovers Text

May 22, 2007

Business Objects continues to broaden its offerings, in this case into the area of text search by buying Inxight , a company that was founded in 1997 based on research at Xerox Parc, and steadly built up an impressive customer list, partly through OEM arrangements. Its technology competes with Autonomy, Clear Forest and Stratify, and is strong in the area of multi-language support. The company had struggled somewhat in terms of market momentum, especially given the very hefty venture capital financing that it received (it was up to a $22M Series D round by 2002, following $29M of funds in 2001). Although its numbers are not public (and the purchase price is unclear at this point), it seems unlikely that it was yet profitable. Business Objects strong balance sheet provides a sensible home for the technology, and Business Objects’ very capable sales and marketing is a good match for a company with strong technology which has not executed that well in these areas. Text search is certainly an important and growing area in these days of increased regulation, and this adds a useful additional arrow to the Business Objects technology quiver.

The missing link

May 14, 2007

I thought that Connie Moore made a good point in an article regarding BI and BPM: BI vendors are missing out on the “process” end of things. I would go broader than that and say that MDM vendors are similarly missing a trick, and that in MDM it matters more. If you are building some reports then process may certainly have relevance, but when it comes to master data it is central. How does master data get created, read, updated and deleted? For example a marketing manager may want to introduce a new consumer type (as an aside, I discovered to my general mortification this week via garlik.com that I am classified in marketing terms as a “contented grey”, which I suppose was better than some of the painful sounding alternatives like “constrained solo”). This is a new type of master data and you can be sure that a major new type will have impacts on several systems, so will require quite probably a review or two before it goes upstairs for sign off. That process of creating, review, revision and sign-off currently probably happens by email, yet it should really be managed properly by a workflow tool. This is exactly what MDM should be all about, and yet most of the vendors I saw at the recent trade show in London had a look as blank as a Woolworths shop assistant when I asked them about workflow and process within their tools.

Several of the successful MDM projects I have seen make process quite central to the project. A few MDM products have support for workflow, but most are missing out and will need to work with other vendors to provide this, which is a less appealing proposition to customers than having an integrated approach.

Tibco buys Spotfire

May 3, 2007

Tibco has made a serious foray into the business intelligence area via its announced acquisition of Spotfire this week. Spotfire has built up an excellent position in the visualisation space, starting in the pharmaceutical industry and then expanding into areas like upstream oil services. Based in Stockholm, it has successfully penetrated the US market, and its CEO Chriotopher Ahlberg has always impressed me. In a sea of failed visualisation vendors which never seem to catch on properly, Spotfire has a been a rare commercial success.

Spotfire’s revenues are not public, but are likely to be around USD 50M, so the USD 195M cash price paid for the company is a healthy one, reflecting Spotfire’s excellent momentum and differentiated technology. What will be interesting is to see whether Tibco is really the company that is best placed to exploit Spotfire’s technology. Tibco’s strong position in financial services will give Spotfire access to an attractive market. and while the companies’ technologies are broadly complementary, visualisation is a different animal than EAI, so it is less clear to me that the Tibco salesforce will be ideally placed to understand and successfully explain the benefits of Spotfire. The stock market seemed a little unconvinced as well, Tibco’s share price dipping on the announcement. Sensibly, Tibco is retaining the Spotfire brand and keeping the company as a separate division under Christopher Ahlberg.

Given the scale of the acquisition, this signals a serious move by Tibco into the broader BI market.

Swings and roundabouts

April 26, 2007

Business Objects quarterly results reveal a continued split between the success of the enterprise performance management business relative to the stagnation of the core reporting business. License revenue overall was up 9% to USD 137M, but though “information and discovery and delivery” (traditional reporting) had a decent quarter the annual licence revenue for this part of this business is actually in decline. Rather disappointingly, management will no longer publish the split of revenue between the different businesses, presumably to avoid pesky analysts pointing out that there core business is in decline.
On the positive side, the continued diversification away from reporting e.g. with its Cartesis acquisition this week, means that Business Objects has been following a sensible strategy to avoid being caught up too badly by the core reporting malaise.

As with most large software companies, services revenue plays an increasing role, up 29% from a year ago. Business Objects has always done an excellent job of sales and marketing, and this is reflected in the 12 deals of USD 1 million in size (up from nine in the corresponding quarter a year ago). Financially, cash from operations was a healthy USD 107M, with overall cash at USD 675M.

Another one bites the dust

April 23, 2007

The consolidation trend in the BI industry continued today with Business Objects (ticker symbol BOBJ) announcement of their intention to buy Cartesis, who are essentially a poor man’s Hyperion. One in four Fortune 500 companies use Cartesis for financial consolidation, budgeting and forecasting, and they had USD 125M in revenues, but reportedly had struggled with growth. The purchase price of USD 300M is less than two and a half times revenues, so is hardly what you would call a premium price (Hyperion went for 3.7 times revenues), though no doubt Apax, Partech and Advent (the VCs involved) will be grateful for an exit. This is not the first time Cartesis was bought (PWC bought Cartesis in 1999) but Business Objects is a more logical owner. Not only it is a software company, but the French history of Cartesis should make it an easy cultural fit for Business Objects. With Hyperion disappearing into the maw of Oracle then there were only so many opportunities out there in this space. Business Objects superior sales and marketing should be able to make more of Cartesis than had been done, and strategically this takes Business Objects up-market relative to its core reporting, which makes good sense.