CrossKeys at the Crossroads
By Derk Mellon
Ottawa Business Journal
By most accounts it has been a miserable fiscal 1999 for CrossKeys Systems Corp.
After 12 consecutive quarters of record revenue, the Kanata-based telecommunications software company closed out the year with the announcement
that its fourth-quarter earnings fell 53 per cent to $5.1 million.
Though the company actually increased its yearly revenues by 13 per cent to $43.8 million, the end result was a year-end loss of $1.5 million or eight
cents a share.
The dismal financial results were just the foul-tasting icing on the cake for the Newbridge Networks Corp. affiliate.
In the wake of the company's poor financial results, John Selwyn, company founder and CEO, stepped down and was replaced by former SHL
Systemhouse president Ian McLaren on May 1.
Investors were also forced to watch as CrossKeys stock price on the TSE plunged from a 52-week high of $16 to $4. By the end of last week,
CrossKeys stock was trading at $5.70.
CrossKeys was also left trying to explain why Germany-based Siemens AG, one of its major channel partners and revenue streams, decided to wind
down a lucrative development project and take the work in-house. In fiscal 1998, Siemens accounted for 44 per cent of the company's total channel
revenues.
Despite warning of a Siemens revenue loss in its 1998 general report, the sudden end to the project caught many analysts by surprise.
And through no fault of its own, CrossKeys was forced to swallow a $1 million one-time charge after West End Systems, a local high-tech firm,
declared bankruptcy.
It's a far cry from late 1997, when CrossKeys raised $45 million during its initial public offering and listed at $14.95 on the TSE.
"This company has been hit by four or five different buses at the same time," says Barry Richards, a senior high-tech analyst with Sprott Securities.
Despite the rough Q4, Richards believes CrossKeys can turn it around. Sprott Securities has a short-term hold and a long-term buy recommendation
on the company.
"CrossKeys is at a crossroads in a lot of ways," says Richards.
The company is broadening its product line and is trying to make the move from a project-driven firm to a company that's in the business of selling
products.
The move might prove to be a blessing for the company as the global market for performance management software is expected to double in the next
three years to $1.2 billion.
CrossKeys is also trying to reduce its dependence on Newbridge, which accounts for over half of the firm's revenues.
But any success in fiscal 2000 will depend on McLaren's ability to expand the company's sale channels and close more deals with would-be partners.
One of Ian McLaren's first tasks as CEO of CrossKeys Systems Corp. was to officially announce that Q4 earnings for the Kanata-based firm fell 53
per cent.
Since then, the former head of SHL Systemhouse has been busy trying to expand the company's sales and marketing team, target new customers and
prepare for an ascent to the top of the telecommunications software market.
In his first interview as head of CrossKeys, McLaren sat down with Ottawa Business Journal to discuss the direction of the company, the fallout of the
Siemens project and the future of the Newbridge-CrossKeys alliance.
Why take on the job at CrossKeys?
I think this company is absolutely 'launchable.' I did a lot of research before I came here and I probably would like to have come here three months
earlier. I talked to a lot of customers, a fair number of people inside of CrossKeys, the financial groups and everybody kind of had that same thought
that this company is well founded in engineering, they have great people and good products. The products are becoming commercially available at a
time when the market is ready to pop, so it was kind of being at the right place at the right time. But as you looked at the company it was your typical
kind of Canadian software company. It was still relatively small in terms of the grand scale of the industry and needed to launch in terms of exposure
and push in the marketplace.
You put a lot of time and effort into making this decision. Now that you're here, what is your vision for CrossKeys?
The vision is to position this company as one where it is recognized as having true expertise in this industry as opposed to a relatively predictable slow
growing company that sells a few products. I don't mean that in a negative sense, this company has been pretty phenomenal. It has matured. But I think
we can grow the company three or four times its original size. This is not pie in the sky, this is a vision that is realistic. At the same time, I don't mind
taking risks.
John Selwyn has said that he is an engineer at heart. How would you describe yourself?
I'm a sales and marketing guy. John is an engineer at heart and you can see it in the growth of the company. John was an engineer who brought this
company off the ground and had a vision of creating products and did a great job of doing so. But he is an engineer. When I talk about building
channels and a direct sales force, that is not something he is very comfortable with.
I think the board of directors was looking for someone to take it to the next level.
I'm sure you've heard the criticism of CrossKeys, that it's dependent on too few clients for the large majority of its revenues. How do you respond to
this?
I think we have to put things in perspective and consider the company's level of maturity. What has been done at CrossKeys so far has been right on
the nose. That's true in terms of getting expertise to play in the multi-vendor side and getting products that are market-ready for performance
management.
We talked at our fiscal kick-off that this is like getting ready at base camp to make the ascent to the top of the mountain. We got a lot of expertise,
we're sitting at base camp now, and now we have to pick a strategy to get up there.
We want to get our product line on the map. We have to put a big focus on channels and we want to have a much more sophisticated marketing and
sales force that can get out and talk to those major players in the industry. We need to start getting other people to buy into our products. For the most
part, we have been Newbridge-centric É That has been a great way to get to where we're at right now, but the next step in the vision is to augment
that.
Don't get me wrong, this isn't a move away from Newbridge. At the same time, however, we have to have a channel strategy that has the Newbridges,
the Nortels, the Ciscos and the Ascends.
You will also see announcements coming from the systems integration side of things. Each of those companies has a telco-arm that sells into the
carriers. (This week, CrossKeys will announce an agreement with EDS that will see the U.S.-based company embed CrossKeys technology into its
solutions).
That means being able to close the deal or clinch sales, something that your predecessor John Selwyn attributed to the poor financial results in Q3 and
Q4. What do you think?
If you look at the companies we are talking to, it's the major players in the industry. I think we have beaten ourselves up a little bit too much thinking we
would hit the sales ramp sooner than we did. These are long-term decisions that people are making. They are not made overnight.
Plus, our products are just maturing now. For example, Resolve SI was just released June 1.
Getting back to Newbridge, critics some say the companies are too closely linked to one another. How do you get out of that shadow?
People do say that. They say Newbridge is our biggest channel, that our board is made up of Newbridge and our year-end is tied to Newbridge. How
do we get out of that? I don't think we need to get out. What we need to do is to build our other channels to the same level that we have with
Newbridge.
We don't want to get away from Newbridge. On the contrary, we want to double and triple our business with them. But like I said, we can't be
Newbridge-centric. We have already changed our year-end so that it ends a month earlier than Newbridge. That will help us focus on our other
channel partners and it will allow us to better predict our business because Newbridge is still a big portion of our revenues. We have also agreed to
make changes to our board which will allow us to bring in other expertise and that give us a better balance in terms of what market we're in.
Another channel partner, Siemens, decided to wind down its project with your company. Most would see that as a thumbs down for CrossKeys?
Siemens was a project to do specific work. It became a huge project, but it was a one-time thing. In the grand scheme of things, it was not where our
products were going.
Sure, it would have been nice to have that project keep going until the products came through, then we would not have had that blip. But it should not
be viewed as, 'Oh my God, the Siemens thing is gone.' It was going to go.
What would be more important in the marketplace would be to see us signing a marketing or general distribution agreement. That would be a more
significant thing than the write-down of a one-time, albeit huge, project.
So the focus is on products rather than projects?
It's a bit of an evolution, where we take the engineering experience from the projects and turn them into products, and those products have to be based
on where the industry is going.
When can we see the results of this evolution?
I think it will take two to three quarters. But until then, it won't be three quarters of inactivity. You will see more relationships being formed, channels
filling out and agreements being signed like the one with EDS. Then people will be able to say 'okay,' I can start to see a mass distribution of
CrossKeys' core product.
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Thanks to Joseph Fletcher for pointing out this article
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