Vendor
Genesis:
Remedy Corporation (NASDAQ: RMDY) was incorporated in November 1990 to
take advantage of the possibilities inherent in client-server computing.
The company's base technology was the Action Request System, a versatile
tool with which customers can specify their workflow procedures and functions.
The Action Request System (AR System) offers capabilities for defining,
building, monitoring and measuring complex workflow-driven processes.
The AR System was initially sold as a tool to companies that wanted to
build their own applications. One such company is Wal-Mart, where the
AR System is the backbone of many of the chain's internal operations.
Remedy then began using the AR System to build pre-packaged solutions
for internal help desk, change management, and asset management applications.
In the mid-nineties Remedy was a hot stock. At that time and through 1998,
its sales were almost exclusively based on the AR System, which customers
used to build their own applications. However, by 1998 Wall Street's favors
had been placed elsewhere.
In the intervening years the company has grown to be a significant supplier
of products for employee-intensive business practices. Through 1999 the
product line evolved to specialize in support functions for Information
Technology operations, organized into three groups: Service Management,
Customer Relationship, and Employee Workplace Automation. These are the
foci of individual strategic marketing units.
All
of Remedy's homegrown applications were built on the AR System, and acquired
ones have been retooled to work on that base. The Service Management group
concentrated on the Remedy Help Desk, a client server application used
for the tracking and resolution of IT support requests. Remedy is the
leading vendor and owns almost 25% of the internal help desk market. Other
products in this line include Remedy Change Management, which is tied
for second place in its market, Remedy Asset Management, and Remedy Service
Level Agreements.
The
Customer Relationship Management unit is built upon the acquisition of
BayStone Software in October 1998 and the Sales Continuum sales force
management product from Pipestream Technologies in 1999. Products include
Remedy Quality Management, Remedy Customer Support, and Remedy Leads
Management.
In
1998 Remedy began to recognize the importance of the Internet, for both
its promise and its implications for the client-server market. This led
to the development of the Employee Workplace Automation unit, recently
renamed as eBIS. The first product in this line was Remedy Purchasing@Work,
an entry into the red-hot market for self-service purchasing. The company
added Remedy SetUp@Work to this product line. Remedy SetUp@Work supports
new employee setup, individual and group moves, and employee exit.
Although
promised for 1999 the company did not release a travel and expense management
product. However the company is now close to announcing a partnership
agreement that will allow it to offer a travel and expense product.
Revenue has grown consistently and substantially, with revenues rising
from $20 million in 1994 to $229 million in 1999. (See Figure 1). Annual
growth has been less than 50% only in the last two years, with the low
point at 22% in 1998, and 1999 at the 45% level.
Figure
1
Spending,
both on Research and Development and on Sales and Marketing, has been
growing, as shown in Figure 2. On the average over the past few years,
sales expenses have been about twice research expenses.
Figure
2
The
company has been profitable since 1994. (See Figure 3). The company has
licensed its software to more than 4,800 customers at more than 8,800
sites. Of these, approximately 3700 have been with Remedy since at least
1998 and were customers of the AR System. In 1Q1999 about 15% of license
revenues were from packaged applications, and in 1Q2000 that number had
increased to about 35%, with 10% derived from the two newest applications
eCRM and eProcurement. In 1999 46% of revenues came from partners. Most
revenues outside the United States come via partner relationships. Over
90% of customers renew their maintenance agreements on a yearly basis.
Figure
3
Remedy
has some noteworthy financial credentials. It has a healthy 13% profit
margin (19% operating margin) and boasts an excellent average collection
period of 72 days. However, some recent trends bear watching. The ratio
of net income to net sales decreased slightly from 0.23 for 1997 to 0.13
for 1998, and improved only slightly for 1999. Also, the growth in R&D
investment is low at 21%. A third metric, the mix of license and service
revenues, is discussed below.
Vendor
Strategy and Trajectory:
Remedy looked into the future and saw two things. First, the market potential
of business-to-business e-commerce. Second, it recognized that the magic
word is "Enterprise." In April 1999 Remedy lost the services of reseller
Barnhill Associates to competitor Peregrine, Inc. Barnhill switched not
because of the quality of Remedy's products, which it found that customers
liked, but because it heard its customers looking for enterprise level
solutions, not only in help desks but also in other areas such as asset
and facilities management.
Remedy got the message and responded quickly with a pair of strategic
acquisitions. In July 1999, the Company acquired Pipestream Technologies,
Inc. (Pipestream), a privately held provider of state of the art modular,
customer relationship management software, including sales force automation
applications. Two months later Remedy acquired Fortress Technologies,
Inc. (Fortress), a privately held enterprise asset management process
consulting firm. This provides Remedy both with expertise for developing
asset management projects and a consulting business.
By
the end of 1999 the trade press was full of articles about how the next
important area was going to be customer relations management for web-based
businesses. In February of 2000 Remedy acquired Axtive Software Corporation,
a company whose technology and products help its customers personalize
the experiences of their website visitors.
Remedy
is targeting sales at companies with between $100 million and $1 billion
in sales; on average its customers have about 1000 users of its products.
Its corporate mission is to accelerate its customers' move into e-business
while enabling them to differentiate. This is a new direction, designed
to capitalize on the strength of the new economy.
The
mission has two components, represented by the two product areas that
rose from a recent reorganization. The e-Customer Relationship Management
group combines Remedy's traditional CRM products with its new Internet
products. With the acquisition of Axtive we can expect to see strong personalization
features pervade these products.
An even more important component of customer service will be integration
between various modes of customer service: Web, phone, and e-mail. The
eBusiness Infrastructure Solutions group provides products to bring technology
to employee-facing applications and to infrastructure support tasks. Early
additions to this line will be tracking of capital assets and of leased
items, and support for auctions to eliminate unused inventory.
Integration
between these two divisions is likely to come (probability 80%) through
supplier side e-procurement. While Remedy is arranging to partner with
a number of best-of-breed marketplaces (Commerce One being the first),
so that it can leave the supplier side of e-procurement alone, we expect
that it will ultimately move into this space. If so, its goal will not
be to compete with its marketplace partners but to leverage its technology
to offer a stronger support package for prospective market makers.
We also think it likely (probability 60%) that Remedy will develop (by
acquisition) B2C technology. Providing a solution for its customers who
want to enter into retail commerce on the net would be a logical way to
repackage its CRM tools.
Remedy is about to hop on the ASP bandwagon. At present it offers a subscription
service for smaller customers, but selling to application service providers
will increase the range of this service, one that is attractive for both
smaller customers and ones that need to make a quick entry into one of
Remedy's solutions, without the pain of becoming a large-scale Internet
service provider, something that is far from Remedy's core competence.
ANALYSIS:
Vendor
Strengths
Remedy has built all of its products on its AR System, and has wisely
taken the time to integrate each new acquired product with it. The payoff
is that different products work well together and that cross-selling and
repeat selling have a simple story to support them.
Remedy
also has a massive installed base utilizing various components of the
AR system. This gives a much lower cost of sale, as it can sell add on
products very easily.
Remedy is also blessed with cash and earnings. It has been profitable
since 1995, and the profits have essentially been increasing each year
(with the exception that 1998's profits were smaller than those in 1997).
Figure
4
Finally,
Remedy has a strong international presence. With customers in 70 countries,
34% of the company's revenues come from outside the United States. These
sales are primarily through channel partners, and can therefore grow without
substantial investment by Remedy in sales force or post-sales support.
Vendor
Challenges
Remedy has a very broad product line and, as yet, not much visibility
as an "e" technology company. For example, while they are well known as
a traditional help desk vendor, they have not yet made themselves well
known in the eCRM area.
With
its acquisition of Axitive, Remedy should have a good story to tell about
personalization in its eCRM product and elsewhere. There are currently
many vendors in that space, and the competition for mindshare is intense.
Mindshare affects both future sales and future partnerships. (Not, perhaps,
as much as an established customer base of 4800 customers does.)
Still, we know that Remedy is not relying solely on its established base
for new product sales, and should not hide its bushel under a flower.
If the Axitive product is the equal of other personalization products,
then Remedy should be showing up at more than just the traditional CRM
conventions. Membership in the Personalization Consortium would be a good
step.
Also, while Remedy does have its share of dot-com customers, they are
not primarily technology drivers. The current customers will help Remedy
stay abreast of emerging business requirements, but the company should
also court some companies using bleeding edge technologies. These companies
are going to remain the drivers of technologies in many of Remedy's areas,
because they have the clearest vision of what can be done on the Web and
the greatest sense of urgency about making it happen. Remedy needs more
experience playing in that sand box.
We prefer software companies to keep their focus on licenses. Looking
at the balance between product and service revenues, as shown in Figure
5, we see that the ratio has been edging toward services. A different
measure reinforces this: while total revenues grew at 45% from 1998 to
1999, support revenues grew at 55%.
If
this were just a one-year movement it could be attributed to new products
or to the Guaranteed@Remedy program. But the ratio has been moving slightly
toward services for some time. We want to point out that the ratios are
within the bounds of what financial analysts consider healthy, and that
we don't necessarily expect the ratio to go beyond those bounds. We simply
want to point out that Remedy needs to watch this. We're all in favor
of good service and support, but Remedy can find other ways to deliver
them to their customers.
Moving the mix toward partners is one possible way, and it should be explored.
Likely to accelerate this trend is Remedy's new Guarantee@Remedy program,
which guarantees installations of products in fixed time intervals ranging
from 30 to 90 days, depending on the product. While the concept is a good
one, both demonstrating the company's confidence and providing real value
to customers, the downside is a need to increase and train installation
service staff. Remedy says that it is beginning to build more service
partners, which may help improve this ratio.
Figure
5
BOTTOM
LINE
Vendor Predictions
Profitable, with a good product mix and a respected technology, and showing
no reservation about adapting to new business trends, Remedy should be
one of the ones to beat. But there are a few financial indicators that
the company will want to attend to. Given that it can manage this, the
technology and product lines should provide sufficient momentum to keep
the company moving forward.
Vendor
Recommendations
A fast start product that gets a company up quickly with a restricted
functionality might prove to be an attractive complement to the Guaranteed@Remedy
program, especially to dot-coms and smaller businesses. With cash, cash
equivalents and short-term investments totaling $172.4 million at the
close of 1999 Remedy is almost certainly looking at more acquisitions
of companies and technologies. We'd like to see some investments along
these lines that put Remedy ahead in some technology areas. Given that
Remedy wisely integrates newly acquired products with the AR System, technology
acquisitions may have to be somewhat speculative to still be on the leading
edge when released. But there is an explosion of new technologies that
are clearly directed at serving real business problems, in personalization
and other areas, and the recently unfriendly IPO environment should surface
some attractive candidates.
User
Recommendations
A user should have no serious concerns at this time about Remedy. Overall
we believe that their product offerings and situation are sound. When
considering any of the Remedy products in a selection, pay attention to
the other product capabilities they offer. Given their unified reliance
on the AR System, adding additional products from the suite will be an
easy decision later on. So it's worth making sure that those products,
as well as the one under evaluation, will have the right features and
performance for your needs. We think it makes sense to go into a Remedy
purchase expecting to take other suite products in the future.