Deltek's Second Bite at the IPO Cherry (Part I)

In the last decade or so of covering the enterprise applications market, I've witnessed so many products and vendors disappearing and reappearing under a different name, ownership, etc., but it is for the first time now, at the end of 2007 that I saw basically the same vendor go public for the second time (and in a 10 year timespan). Namely, Deltek (evaluate its flagship product), the leading provider of enterprise applications software designed specifically for project-focused businesses (those with business processes revolving around the engagement, execution and delivery of projects), has done it again. Its common shares begun trading November 1, 2007 on the NASDAQ Global Select Market under the trading symbol "PROJ". Previously, the company, which was founded in 1983, used to be publicly traded under the symbol "DLTK" from 1997 till late 2002/early 2003, when it was de-listed and went private again (for the time being).

I don't intend to bore you with the financial figures (about the number of shares offered, its current share value, market capitalization, etc.), since many wire alerts have repeatedly already done so. What is more interesting here is Deltek chief executive officer (CEO), Kevin Parker's statements that the company -- which, as mentioned above, was taken public 10 years ago before being taken private about five years later by the founding deLaski family -- launched its second initial public offering (IPO) as a means to boost recognition of the Deltek brand. Parker believes that it is an important time to have a broader audience, and the company is thus focusing on expanding globally. Proceeds from the offering will be used to pay down debt, which Parker said will give the company greater ability to reinvest in the company.

In his recent blog post, Ray Wang of Forrester Research is quite positive and upbeat about the IPO, and fully agrees with Parker's ideas and justifications. Myself, I often tend to mostly agree with Ray, with the difference that one should always mention some caveats too (and please, can anyone show me a single company without some challenges?). On the other hand, a report that preceded the Deltek IPO by a few months (i.e., it was posted after Deltek's pre-IPO S-1 filing with the U.S. Securities and Exchange Commission [SEC] ) was quite negative, berating the S-1 filing (especially the "Description of business" part) as sounding so outdated (so 1990-ish), and without any references to the contemporary trends like Service Oriented Architecture (SOA), Software as a Service (SaaS)/On-Demand, Web 2.0, etc. Also, the article opines that the heydays of the Professional Service Automation (PSA) market (one in which Deltek competes) are far behind us (I might agree with the fact that the PSA acronym might be a "goner", but not really the market opportunity -- certainly not in a services economy).

Sure, for one, it is very likely that many passages from the Deltek's 1997 S-1 filing were leveraged 10 years later too (after all, most products are still the same and serve the same customers). In fact, it is quite likely that the justifications for the IPO back in 1997 sound quite similar to those of Parker's today (e.g., expansion, improved brand recognition, visibility, and whatnot). Deltek had indeed made a number of acquisitions previously as a public company and had reached the US$ 100 million mark by 2002. The de-listing at the end of 2002 was justified by the fact that being public was just too much of a hassle and unneeded expense for the C-level executives (due to the just introduced Sarbanes-Oxley Act [SOX]-compliance then, etc.) without much real benefit. This was particularly true in terms of the (lack of) freedom to make decisions (i.e., the market nervousness often stifles the CEO to make bold and risky moves). Thus, why should anyone believe that this time the IPO will work much better than before, especially given the timing of poor stock performance across the board? Is there anything fundamentally different at Deltek now compared to 10 or five years ago?

To answer that question, let's first go back to the beginnings of Deltek. Founded in 1983, Deltek started as a supplier of accounting systems to the US Federal government. The vendor has since certainly gained the lion's market share within the government contractors that are located within  250 miles of Washington DC (the so called DC beltway). These are businesses of all sizes that sell services to the US Department of Defense (DoD) and like agencies, and are thus audited by the Defense Contract Auditing Agency (DCAA). During the 1990s, Deltek evolved to become a niche vendor of project-based enterprise systems, primarily to the architectural, engineering, and construction industries, in addition to government contractors. While its flagship enterprise resource planning (ERP) product Deltek Costpoint (for larger customers, evaluate this product) was released in 1995, in 1998 Deltek acquired former Harper & Shuman, Inc. (in which year it exceeded 5,000 customers and US$50 million in revenue). In 2000, the company acquired former A/E Management, Inc. and Semaphore, Inc. and released Deltek GCS Premier (for small government contractors, evaluate this product), while 2002 saw the first release of Deltek Vision for professional service companies (evaluate this product). In 2003, the company reached the US$100 million revenue mark and was  taken private.

First time I attempted to analyze Deltek was in the early 2000s, and that was not an easy task at all (to put it mildly) -- the glorified family run software company had a number of disparate and seemingly incoherent solutions, some of which were just point solutions and/or were on legacy technologies (e.g., many were not Web-enabled at the time) and had little presence outside North America . The vendor did not seem much interested in explaining to analysts and market observers its strategy at the time anyway, other than referring to itself as a financial information/management solution for the government sector. It all radically changed in early 2003, when Deltek engaged a seasoned marketer Judith Rothrock (previously with Lawson Software [evaluate its flagship product], an occasional competitor to Deltek, and Hyperion [now Oracle Hyperion, evaluate this product]).

She helped Deltek craft the differentiation message from the all too common "Widget world" and "ERP for manufacturing" arena that was the matter of course by then, and to accordingly start promoting "the ERP vendor of choice for Project-Based Businesses" mantra (which continues today too). In other words, most ERP systems still handle defined, high-volume repetitive unit production cycles, and unit-centric business processes. Also, in this widget world, there is hardly any estimate of completion accounting, hardly any interim basis for revenue recognition, and traditional supply chain management (SCM) principles apply. Conversely, in the "Project world", businesses have to:

  • Plan and Forecast Detailed Activities by Project;

  • Manage the Overall Project Lifecycle;

  • View Key Business Drivers by Project;

  • Calculate Revenue, Billings and Indirect Rate Allocations by Project;

  • Analyze Profitability and Job Performance at all Levels of the Enterprise by Project; and

  • Manage Key Metrics and Trending by Project.

The other important messaging idea Rothrock provided was to simplify a marketing messaging/positioning rationale for Deltek’s three major product lines, which previously were not only impossible to understand externally, but that even had internal sales channel conflict.  By creating an “at a glance”  x/y axis grid that graphically depicted the solution targets based on two distinct client parameters:  1) business size/complexity and 2) technology requirements, the world finally “got” what Deltek was all about. All other (sometimes confusing) point and/or legacy solutions (e.g., Deltek CRM Proposals, evaluate this product) have been subordinated to one of the three major product lines.

These major products were (and still are):
1. Deltek Costpoint (evaluate this product) is the company's most comprehensive enterprise management software solution specifically designed to meet the unique needs of sophisticated project-driven organizations and automate mission-critical business processes. Looking at its functional footprint -- business development, project management, financial management, human resource (HR) management, operations, manufacturing, earned value management (EVM), and corporate performance management (CPM) -- this product suite would likely not impress much at first glance (except for the recently added critical EVM functionality).

However, the Java 2 Enterprise Edition (J2EE)-based product suite aims to deliver the entire project lifecycle value by enabling businesses to 1) Win more business (via capabilities like client and contact management, opportunity forecasting and management, services estimating, and proposal automation), then 2) Execute (via capabilities like EVM, financial & project accounting, resource management, and project management), and finally 3) Improve Performance (via capabilities like corporate and project budgeting, risk management, real-time business metrics, and performance reports).

This is where the "rubber meets the road", given that Costpoint also addresses today’s additional challenges for such large project-based enterprises. These are to ensure compliance, improve cash flow, secure data, enhance efficiency, etc. While more details on how Costpoint can accommodate these challenges will be discussed later on, it suffices to say here that Deltek’s Strength is compliance, in terms of DCAA-, Federal Acquisition Requirements (FAR)- and Cost Accounting Standards (CAS)-compliant structures and features. Given the sheer number of Deltek's customers, its software would possibly be the “most audited software in the world” by government agencies.

2. Deltek Vision (evaluate this product), on the other hand brings together most of critical business processes for the successful operation of the professional services firms engaged primarily in private sector work. The "youngster" Microsoft .NET-based suite (rewritten based on best-of-breed functionality of other legacy brethren products, like Deltek Sema4, Deltek Advantage or Deltek FMS), aims to improve business performance, streamline operations, and help win new business. To that end, it combines financial management, time and expense (T&E) management, billing, project management, resource planning and management, document management, client relationship management, and proposal and marketing automation, all into one integrated solution.

The gist of Deltek Vision's value proposition is to empower project-based professional services businesses to maximize profitability by reducing budget overruns and increasing resource utilization. As a good example how Vision can significantly impact a professional services firm’s bottom line -- a 2 percent increase in utilization of 60 billable resources, each billed at US$85 per hour, increase the bottom line by nearly US$200,000. Conversely, without such capabilities, firms face challenges of constant budget overruns and poor resource utilization across projects.

3. Deltek GCS Premier (evaluate this product) is the Microsoft Windows-based, enterprise accounting solution currently marketed to small to mid-sized businesses (with up to 80 employees or so) focused on earning revenue from government contracts. This product was released in March 2000, and, in addition to its Windows-based interface, features flexible, component-based software construction achieved with Microsoft Visual Basic and ActiveX controls. GCS Premier was designed specifically to ensure that Deltek's legacy System1 (DOS-based) customers could easily migrate to GCS without the necessity of data conversion while preserving System1's critical processing programs, complex reports and other time-tested legacy programs.

This product group's positioning and rationalization strategy certainly helped me produce my first series of articles on Deltek in early 2004. In 2005, the Deltek founders sold the majority (75 percent) of ownership to New Mountain Capital LLC., which then brought Kevin Parker (formerly chief financial officer [CFO] of PeopleSoft, now Oracle PeopleSoft evaluate this product) as new President and CEO. Immediately after, Deltek acquired former Wind2 and thus exceeded 10,000 customers and US$150 million in revenue. Fast forward to nowadays, the company has over 12,000 customers worldwide, is quite profitable and with strong growth (with the 2006 revenues of US$225 million). Over 1,000 employees now work in 13 offices worldwide. Following the IPO, New Mountain's stake will be roughly 53 percent, according to a regulatory filing with the SEC.

Given that Deltek has never been associated with the terms like "flashy", "glitzy", "cool" (or so), and given that it has not been very proactively informing the market about its moves and intentions from 2005 on, some observers might have begun to think of Deltek as sounding tired, stagnant and non-differentiatable. Certainly we haven’t seen much new or interesting on the marketing front, since that noteworthy repositioning time in 2003.  I think the apex was when Deltek's then enlightened marketing engine churned out such cheeky gems as challenging the likes of the Big 3 ERP leaders at the time, by taking the entire back page of the June 6, 2003 Wall Street Journal business section with a signed “come to us” letter authored by Ken deLaski, the former Deltek CEO and President.

The Part II of this topic will thus analyze the recent times at Deltek and whether the company has lately evolved and separated from the competition, and whether it is going to be a very strong public company. Your views, comments and opinions, etc. are welcome in the meantime.
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