Remedy Corporation: Poised for a Comeback?

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D. Geller - May 17 , 2000

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.

 

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