September - 2001 - issue > Cover Feature

Microcontrollers Holding Up

Arizona based Microchip Technology, whose specialized semiconductors include eight-microcontrollers, has performed well, despite the semiconductor market meltdown.

“The microcontroller marketplace is more stable, compared with some of the other segments,” said Gordon Parnell, Microchip’s CFO. “We are the only company focused on the 8-bit microcontroller and the focus is a key element of our success.”

Microchip earned $142.8 million in 2001, up 40 percent from a year ago, while sales increased 29.4 percent to $715.7 million.

“We believe the market share gains achieved by Microchip in the microcontroller business are mitigating the severity of the semiconductor downturn and enabling the company to outperform the sector,” writes Christopher Danely, vice president at Merrill Lynch. Parnell declined to estimate the company’s revenues for 2002.

Welcome to the Digital Age

According to IDC, PC monitor worldwide revenue will grow to $58.1 billion in 2004. That development bodes well for Sage, which makes digital display processors.

Predicting that the demand for analog interfaces will steadily decline (although the transition from analog to digital may be slow), Robertson Stephens analyst Tore Svanberg thinks Sage is well positioned against both its competitors Genesis Microchip and Pixelworks. A First Call survey of analysts estimated that the firm would reduce its loss in the next quarter. Svanberg expects company revenues to be $12 to $13 million by June 2002, with profitability by June 2002.

Meet and Beat

SonicWALL CEO Sreekanth Ravi points out that while he manages a $100 million company and Exodus is a billion dollar company, SonicWALL still has a market cap greater than that of Exodus. He attributes that disparity to discipline, specifically consistently meeting Wall Street expectations.


It’s no secret that the Street punishes erratic performance, and Ravi speaks of conservative profitability as the core of his strategy. “We grew up in an era without a safety net,” he says about starting a company in the early 90s. SonicWALL, though founded in 1991 (by Ravi and his brother Sudhakar), never took outside capital or debt financing until February of 1999, when it took $5 million from Bay Partners.


Ravi highlights the company’s 11 consecutive quarters of positive cash flow as validation of the more conservative approach. SonicWALL, which develops and sells Internet security appliances, has positioned itself within what Ravi assures is a growing market segment. SonicWALL’s remotely manageable hardware security products target small and medium-sized enterprises looking for hassle-free protection from the wealth of security problems the Internet brings.


SonicWALL’s gross margins top 70 percent, according to Ravi, and the company is growing revenues while earnings are flat across the industry. That’s not to say it won’t be tough to stay on track in the next few quarters. “Q3 and Q4 will really test the bottom of the market,” Ravi says of the overall tech sector. SonicWALL’s strong balance sheet, including $230 million in cash reserves, should provide reasonable protection from real trouble, as the company grows to 500 people by the end of the year.

Getting Profitable

Vic Verma is upbeat these days. The president and CEO of Savi Technology, which raised $20 million in May, declares that his company is not going to raise any more money. The Sunnyvale-based firm makes tagging devices and supporting operating systems to track shipments of goods in real time for supply-chain visibility.

“Never again,” Verma says. “We’re done.”


Why such confidence in the midst of a high tech wreck? The company has $45 million in cash and a low burn rate (reported to be about $1 million a month). That, according to Verma, is steadily decreasing. Savi also has a $112 million contract from the U.S. Department of Defense (DoD) for tracking military goods. The contract will run out at the end of 2002, but Verma is hopeful it will be renewed. DoD initially funded Savi’s SmartChain technology.


Texas Instruments and Raytheon once owned Savi, but a $10 million management buyout ended that connection. Verma claims the company has a post money valuation of $400 million, compared with $200 million in 1999. Savi has raised $78.2 million so far, with Singapore-based k1 Ventures as lead investor.

Its customer base has expanded in recent years to include Europe and Asia, which account for 20 percent of sales. Savi’s prominent customers include Singapore Airlines, USPS, Dell and Hutchison Whampoa.

In spite of all Verma’s optimism, Savi, founded in 1989, is still not profitable. The CEO provides a predictable response: “We will be profitable Q1 next year.” To achieve that Verma will have to out-execute competitors Motorola, Marconi and the Descartes Systems Group.

From “Hot” To Bought

Sharewave was an si100 company in 1999 and 2000. On July 19, Cirrus Logic announced that it was acquiring ShareWave for $92 million in a stock-for-stock transaction. From “hot” to “bought,” ShareWave’s fortunes seem to have foundered, considering it raised an impressive $59.5 million in five rounds of funding. Cisco, Microsoft and Intel are just some of the companies that invested in the firm.


“I believe that the company may have had a down round in its history, given the length of its existence, the amount of money raised and the recent downward adjustment in public market valuations,” says Arnab Chanda, senior research analyst at Lehman Brothers, who covers the communications IC space.
Stan Victor, spokesman for Cirrus Logic, only described the acquisition as a “good deal.”


“The valuation presents a good return to both investors and employees,” says ShareWave co-founder and CTO Amar Ghori. He argues that many acquisitions in the communications sector last year were based on inflated stock prices, and that their values have significantly depreciated since they were acquired. In that context the ShareWave deal looks more respectable.

Using ShareWave’s Whitecap technology, Cirrus hopes to capture a section of the networked homes market, which is expected to grow from 4.1 million homes in 2000 to 18.9 million in 2004. “We are very bullish on the demand for home networked technologies,” says Ghori, “The alliance with Cirrus really helps us.”
The technology will allow the transmission of high fidelity multimedia content wirelessly throughout the home. Eric Ross, an analyst with Thomas Weisel who covers Cirrus calls the deal a “great acquisition,” adding, “Essentially it gives them [Cirrus] the Mpeg decoder and encoder products, which will add another piece to their revenue stream.”

Chanda suggests that by 2004, the WLAN semiconductor market could be a billion-dollar industry. Describing it as one of the most exciting growth areas in communications over the next three years, Chanda points to Intersil and Agere as the two major players in the field.

“ShareWave has a MAC, [Media Access Controller] which is part of the solution for multi-protocol WLAN,” Chanda explains. “Cirrus already has a position in the wired home networking market based on the HPNA [Home phone-line networking alliance] and it is likely that the purchase of ShareWave will contribute to Cirrus’ WLAN solution.”

Being acquired at a modest valuation has been a relatively respectable exit for ShareWave, considering the shake out that the communications sector has undergone. Only time will tell if other companies in the sector will suffer a lesser fate.

Still Bullish on Telecom?

Dot-com incubators had their glory days. But then “incubator” became a dirty word in the technology world, as Divine Interventures, Idealab! and others imploded around their shaky business models. So when Comstellar Technologies and Raza Foundries were launched last year, their respective founders clearly didn’t want to call the new ventures incubators, for fear of guilt by association.

To be fair, neither is an incubator in the way that Divine or Idealab! were. But now the telecom market has tanked almost as spectacularly as the dot-com explosion. Will the Raza and Comstellar model still work? How many cutting-edge telecom startups can the market sustain? The two companies have involved themselves in some solid technology deals and have shown some success in these tough times. Both Raza and the tech-savvy founders of Comstellar could just make it work.

Fighting the Crowds

in the Optical Space
Like so many others, Luminous Networks aims to be a shining star in the embattled networking equipment market. The Cupertino, Calif.-based firm makes optical networking products for metropolitan area networks.
Luminous raised $80 million in June, an impressive achievement given the current economic climate. Pyramid Technology Ventures led the third round. The company has raised more than $148 million.

“Definitely harder,” was the way Alex Naqvi, president and CEO of Luminous, described his latest effort at raising money. “I talked to over 60 investment banks over three months, while I used to speak to 10 and complete the round,” he said.

The company’s PacketWave optical switches enable telecommunications carriers to deliver a combination of Internet IP traffic, interactive and broadcast video, and toll-quality voice services, all on a single platform for the first time. Naqvi said this distinguished his company from competitors Extreme Networks and Riverstone, because neither supplies voice and data together.

Riverstone does provide voice applications. In response to that, John Hamburger, a spokesperson at Luminous, said that Riverstone’s solutions are “more of a voice-over-IP solution.” He added, “Riverstone is not able to support toll-quality voice on a fiber ring in MANs.” The point is that Luminous is entering a crowded space.

The company’s is currently burning $3 to $4 million. Naqvi declined to disclose revenues, but named China Netcom as a major customer.
Naqvi said Luminous plans to go public next year, “depending on market conditions.” Of course.

Still Growing

The second quarter of this year was the seventh consecutive one in which Manhattan Associates met or beat analyst expectations. During a time of profit warnings and lowered estimates, the Atlanta company’s revenues increased 4.3 percent to $36.1 million; net income rose 5.8 percent to $4.8 million.

Manhattan Associates software includes modules for managing, shipping, receiving, and tracking orders as well as counting inventory. The company also sells third-party computer hardware to complement its software, including bar code scanners and printers.


Co-founded by Deepak Raghavan, the company serves 800 customers spanning a broad range of industries — notables include Calvin Klein, Abbot Laboratories and Seiko.
Analysts expect the company to earn 76 cents a share in 2001.

Cashing in on Globalization

Vastera’s software automates international trade logistics. As markets become more interconnected, The Dulles, Va.-based company could find itself well positioned.


So far it’s been a good year for Vastera. While revenue doubled in the quarter ended June 30, the company narrowed its pro forma loss to nine cents per share from 20 cents a year ago.


“Increasingly, companies are recognizing the potential returns from our solutions, particularly from our managed services offering,” explains Arjun Rishi, CEO and co-founder. It’s clear however that Vastera will need to grow revenues in a tough environment if it wants to navigate the uncertainty of the next few quarters.
Analysts continue to post a “buy” recommendation on Vastera’s stock. A Deutsche Bank Alex Brown research report estimates that the company will have revenues of $62.6 million and a loss of 32 cents per share in 2001.

Solidly Installed

InstallShield welcome back! The company did not make it into last year’s si100, when perhaps its standard and well-established business model displayed not quite enough pizzazz for the hype-filled industry of the day. But this is a time for solid proven companies, so here it is included again.


Founded in 1987 by CEO Viresh Bhatia, and Rick Harold, its CTO, the company is the software installer of choice for just about any software product available on the market.


The Schaumburg, Ill. based company also sells products to distribute software on the Web and to create product demonstrations. Another revenue stream is generated by providing related consulting and training services. InstallShield has around 300 employees and estimated revenues of $50 million in 2000.

Looking for Direction
The largest segment of the Internet security software market is $2.8 billion and is expected to grow to $7.8 billion by 2004. This is the market that Oblix, which was featured in the si100 two years in a row in 1999 and 2000, hopes to capture.


Founded by Chairman Nand Mulchandani, Oblix builds software for authorization and administration within the Internet security market segment.

This was a significant shift for the company, which before former Symantec chief executive and tech heavyweight Gordon Eubanks took over as CEO in 1999 simply provided software solutions for enterprise directories that eliminated the need for paper directories, office maps and organization charts. Though the company still provides those applications, the emphasis has changed to Internet security.

Oblix does have some customers, but after more than two years under Eubanks’ command the company doesn’t seen to be making the powerful inroads into the security market that might have been expected.

One wonders how the change in business model has worked for Oblix. “We continue to have our publisher solutions in our product portfolio, though they are a small portion of our revenues,” says Enrique Salem, senior vice president of products and technology at Oblix. “The NetPoint (security) product comprises 80-90 percent of sales.”

The NetPoint technology allows customers to apply a single sign-on and user identity management on the Web across large enterprise networks. The recently launched new version has met with significant response, according to Salem. Oblix’s customers include Charles Schwab, i2, Amex, Hitachi, British Airways and Xerox, some of whom, he insists, account for revenues of more than $1 million.

However, a source at Lehman Brothers said Oblix is struggling financially and is looking to raise more money, a charge that Salem strongly denied.


“That’s not true,” he said. “We’re no way looking for funding right now — we have enough money to last us till Q3 next year.”


The company is still not cash flow positive. Salem expects that to happen in the first half of 2002. If that happens, Oblix will find its way back into the si100. For now, the amount of competition in the space will make large-scale success difficult.

Going After A Market Leader

Atesto hopes to penetrate the Internet and intranet testing and management market by offering applications that can be deployed through a traditional Web browser. Unlike market leader Mercury Interactive, which sells software that needs to be physically installed on site, Atesto’s service can be managed remotely. Network operators can test functionality via laptops, wherever they are.


Atesto has 10 testing and measurement servers running in the United States, as well as five in Toronto, London, Singapore, Sydney and Tokyo. Atesto has 35 customers, including MCI WorldCom, Global Crossing, Nordstrom, and SiteSmith. Each roughly accounts for $30,000 to $40,000 in revenues.


Ronnie Ray, Atesto’s vice president of marketing, said that the company expects to be profitable by the second half of 2002. In April, it raised $15 million in second round funding led by the Sprout Group. Ray said that the burn-rate was around $500,000, up from $400,000 a few months ago, although the post-money valuation of $40 million remainsthe same.


Atesto will not need to raise further funding if it continues to meet targets, he said. That should not be a problem, he contends, because the company has consistently achieved its goals in the previous two quarters. While there are many competitors in the Web testing and management space, some with significant revenues, Ray admits all of them aim to outdo the “big guy” in the market — Mercury Interactive.


“Basically we want to change the model — the way licensing is done — and make a dent in Mercury’s market,” Ray said. “There’s no number two in the space; we want to be number two after Mercury.”


Atesto expects to have revenues between $3 million and $4 million for the 2001 fiscal year. Second place in the market seems a long way off: Mercury Interactive posted $307 million in revenues in 2000.

Looking for Differentiation

Ascent Computing Group no longer wants to be a run of the mill IT consulting firm. In July 2001, the White Plains, New York based company introduced voice applications to its product portfolio. Ascent developed the application over 15 months, and now needs to raise money to effectively market the product.


“We are looking for some VC funding,” said Sunil Nikhar, founder and CEO, with urgency in his voice. “We need to grow in this market as fast as possible.”


Nikhar argues that Ascent’s business solution distinguishes it from competitors such as Tellme and BeVocal.

The company has prepared demos for ABN Amro and Canon, both of whom have scheduled orders.
The market for voice-enabled businesses is enormous. It is expected to grow to around $41 million by 2005, according to Nikhar, who explains that Ascent has identified only $2 billion of that market. Why such a small portion? Because that encapsulates the market that it has expertise in, namely insurance, retail, manufacturing and healthcare.


In reality, however, the voice products market is full of competitors looking for market share, and the road will be tough.


“Consulting has provided us with the opportunity and the clients [to enter this new area],” Nikhar said. “It’s our bread and butter.” For now the company will need to stay close to this core competency, as it does its best to evolve.

Offshore Business

Even as Cognizant Technology Solutions coexists with purely Indian companies like Infosys, company Founder Kumar Mahadeva sees his offshore model as a differentiator.


With headquarters and a significant team in the U.S., Mahadeva assures that his company delivers advantages in terms of offshore cost while also developing a strong platform to target corporate clients in the U.S. A good part of Cognizant’s revenues still come from onsite work in the U.S.


Cognizant clients include Northwest Airlines, Ace Hardware, Blue Cross Health, First Data, and many more. How will Mahadeva keep Cognizant competitive as many others begin to target the offshore model as an advantageous way of doing IT services? He explains, “Hundreds of companies have development centers in India, but relatively few have pulled off large-scale IT projects to end users.” That is rapidly changing.

Tried and True?

The traditional onsite IT consulting model has carried Covansys (formerly CBSI) this far, so why change things? The U.S. firm has grown to almost half a billion dollars in revenues largely through strong client relationships with large companies in corporate America.


The company, founded by Raj Vatakutti in 1985 is performing relatively well. However it is companies like Covansys — principally involved in supplying bodies to client sites — that may be heavily affected by a reduction in IT spending by U.S. corporations in the softening economy, especially as Indian competitors like Infosys also run after a shrinking market. Even this solid business model may need to evolve.


Good ongoing revenue from existing clients will help Covansys, and VP and COO Venu Vaishya assures that the company has more than enough resources to weather the storm

Keeping Customers Loyal

Michigan-based HTC Global Services hopes it can continue to retain its customers. Madhava Reddy, the company’s president and chief executive officer, founded the IT solutions company 11 years ago and in the same year, HTC bagged its first client, KMart.


The company helped to develop a computer system for the giant retailer’s automotive service centers that would make the task of managing estimating, scheduling and keeping track of customers more efficient. More than a decade later, KMart is still a customer, along with the likes of AT&T, Oracle, DHL and Detroit Edison.

In 1994, HTC opened a development facility in India. The privately held company has around 850 employees and $46 million in revenues. A tough time for midsize IT services firms awaits. HTC will need to keep Kmart and others on board.