Gideon Hollander,
Chief Executive Officer
Interviewed by George S. Mack
Most of us use Windows at home. But you could be one of the many people who go to work and use an ugly green-screen monster from the pre-Renaissance mainframe generation. JACADA (JCDA) enables large corporations to get more use out of their investment in legacy systems where their giant databases reside. These companies would love to change the ugly green interface and Web-enable their employees, partners and customers. And that's just what JACADA helps them do for a fraction of what it would cost to change an old mainframe system for a new Windows-like application. JACADA's customer list reads like a who's who of the Fortune 1000 and government institutions. It includes LOCKHEED MARTIN (LMT) , DAIMLERCHRYSLER (DCX) , the University of Georgia, CARDINAL HEALTH (CAH) , Prudential Insurance, BANK OF AMERICA (BAC) , CATERPILLAR (CAT) , the National Institutes of Health and the United States Air Force. [JACADA reported fourth quarter earnings on Feb. 7. It's revenue for the quarter was $7.8 million, and its net income was $0.02. For the full year, its top line was $25.1 million and it earned $0.04 a share.]
[THE INTERNET ANALYST — GEORGE S. MACK] Would you be considered an enterprise software company?
[GIDEON HOLLANDER] We're considered more an Internet infrastructure software company, but our products work with our customers' enterprise software.
[GSM] Give me an idea of what you can do for companies that are using old mainframe systems.
[GH] There's a gap between where these companies are and where they want to be. We have a unique solution that rapidly opens these legacy systems to the Web. For example, if you're a DELTA AIR LINES (DAL) pilot or crewmember, and you'd like to see your schedule — where you're due to fly and when — you would check special terminals in DELTA's lounges at the airport. There are also call centers where the crew can call in about their flights. But now DELTA wants to decrease the cost of the call centers and, at the same time, give better service and enable crewmembers to get this information from their homes or hotels. So they are taking their existing systems and Web-enabling the crewmembers so they can check scheduling from homes or hotels.
[GSM] And there's no ugly green screen. What they see looks like a Web page, is that correct?
[GH] Correct.
[GSM] What kind of legacy software does your customer base use?
[GH] Most of the software we encounter runs on IBM (IBM) mainframes. So it's mainly homegrown. There are at least two mainframe vertical markets where everything is homegrown: the insurance market and the Federal and State governments.
[GSM] This shows my ignorance, but here's the question: Why don't these Fortune 1000 companies just call an enterprise resource planning (ERP) software company, like ORACLE (ORCL) , SAP (SAP) , J.D. EDWARDS (JDEC) or PEOPLESOFT (PSFT) , and convert their systems over?
[GH] It's a very good question, and it gets to the point. It depends on what the company has. If you have an ERP application, and if the system is quite generic, then you can consider replacing the system. However, if you have an application that is unique — homegrown or a unique vertical — which is 70% of the market, then you don't have the option to replace. So you're now down to two options — to rewrite the program or improve it, as we do.
[GSM] Then why not rewrite the application?
[GH] Rewriting is a costly operation and, in the end, it could fail. One example of this is MANPOWER (MAN) , the United States' largest temp agency. The company tried to rewrite the system, and after four years, it had to give up and write off more than $50 million. MANPOWER came to us, and we gave them a solution in less than four months. And it had most of the functionality for which MANPOWER was willing to spend a lot more money.
[GSM] Tell me about your business model.
[GH] Most of our customers are Fortune 1000 companies, but 40% of our revenue comes not from these customers but from software vendors, which are older than the SAPs and PEOPLESOFTs. For example, COMPUTER ASSOCIATES INTERNATIONAL (CA) is a vendor of our software, and that company would like to compete with SAP and PEOPLESOFT. So it is "OEMing" (original equipment manufacturing) our technology. So when a customer purchases a package and gets a Web-user interface, it might be that our software is enabling that.
[GSM] I can't believe so many companies are still using those old green-screen computer systems.
[GH] According to GARTNER GROUP (IT) , 70% — that's seven-o percent — of the world's data is still on mainframes. It's hard to believe, but when you look at the Fortune 1000, it's everywhere.
[GSM] You grew quite substantially between the ends of the third and fourth quarters.
[GH] We've been growing in a very constant way in the last five years — between 50% and 70%. We know how to maintain that internally and externally, and our business model can sustain that for the long term. Also, one of the unique things in this market is that for the last seven quarters we've been profitable.
[GSM] The economy has changed dramatically since the end of the third quarter. Are you seeing any of your customers changing their minds or scaling back or putting a hold on their plans to buy?
[GH] We believe that there is a slowdown. We read about it everywhere, and it's going to affect everyone. But with a slowing economy, you think about reusing instead of replacing. During tough times, we don't buy a new car. We stay with the car we have for two more years. But we may spend a couple thousand dollars to improve the engine. This is what we hope will happen for JACADA when a lot of companies look for ways to save. We hope they'll say, "let's reuse what we've got." So the slowdown could be very beneficial to us.
[GSM] That was a good analogy — to fix up the old car versus buying a new one. But it's theoretical. Have you seen customers change their plans?
[GH] Changing plans — not yet. But I'll tell you what we do see. We still see a very strong pipeline, and we see very high demand for our solutions. During the first few years, what we saw were early adopters, but now we're getting to the mainstream customers.
[GSM] Have you seen any changes in buying behavior?
[GH] We see that there is less pressure to buy the solutions. The dot-coms created pressure on the brick-and-mortars, and they had to make decisions very quickly. But this pressure is less than it was before. That's the big change we're seeing these days. We spend a significant amount of time with our people to teach them how to create this pressure in other ways.
Jacada
(JCDA)
Market Cap $104.3 million
Shares Outstanding 18.33 million
Recent Stock Price $5.69 (2/5/01)
52-Week Range $34.87 to $4.25
Price to Estimated (2001) Revenue: 2.8-times
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Year's end in December EPS Revenue (millions)
1999A ($0.06) $14.6
2000E $0.03 $24.523
2001E $0.13 $37.816
2002E $0.30 $57.0
Source: S.G. Cowen Securities
[GSM] Will acquisitions play a part in your growth, or do you just intend to grow internally?
[GH] First of all, we can grow internally, and we haven't done any significant acquisitions in the past. However, these days there are enormous opportunities — a lot of start-ups and private companies that are having significant problems — and we are looking for acquisition opportunities that can expand our solution.
[GSM] Most of these opportunities would probably be small shops of software people.
[GH] Probably. However, we'll also look at the big ones. We'll look at everything. In the last several months, we've spent a lot of time looking for opportunities, because we're seeing several opportunities per week.
[GSM] Giddy, can you become a billion dollar in revenue company?
[GH] Yes, and that's the reason we're here.
[GSM] When?
[GH] Our plan right now is to grow to $100 million in the next three years. That's the growth rate. After that, I believe it's going to take five or six more years to get to a billion dollars. |
