Monday 30 August 1999
CrossKeys gives CEO fiery baptism
Karyn Standen
The Ottawa Citizen
It's a good thing Ian McLaren doesn't believe in
omens. On May 10, his first active day as chief
executive and president of CrossKeys Systems
Corp., Mr. McLaren had to tell analysts and the
media that missed sales meant the Kanata
software company would suffer a loss from
operations of about 21 cents a share in its fourth
quarter, slamming the door on 12 consecutive
quarters of growth.
CrossKeys' stock took a beating the next day,
plunging to a new 52-week low of $4 before
recovering slightly to close at $5.10, a
23-per-cent drop on the day.
Then, just weeks after his "disappointing"
introduction as the new head of CrossKeys,
Mr. McLaren was hoisted 12 metres into the
rafters of the Kanata Theatre as unsuspecting
employees gathered below.
The stunt was part of a company-wide celebration to kick off CrossKeys'
new "climb the mountain" corporate booster, aimed at instilling energy and
focus into a company that appeared to have lost both.
As leader of the charge up the "mountain," Mr. McLaren was supposed to
"rappel" down from the heights of the theatre to inspire the CrossKeys
troops.
The problem, though, was no one seemed to anticipate that it would take
more than the planned five minutes to assemble most of CrossKeys' 270
employees in the theatre.
Mr. McLaren was left to dangle for half an hour, alone save for a
professional mountain climber hired to help out, and doing a slow bake
under the hot theatre lights that blazed just inches away.
Down below, one employee, aware of the secret stunt, was heard to joke
that if Mr. McLaren had enough personal insurance CrossKeys could make
its next quarter just by dropping him.
It takes a pretty committed new CEO not to view getting burned twice in
quick succession, first by investors and then by his own employees, as a sign
it might be wise to move on.
Fortunately for CrossKeys, though, Mr. McLaren sees something in the
company worth hanging around for.
CrossKeys develops software used to help telecommunications companies
keep tabs on the performance of their networks.
After enjoying strong and steady growth for the past couple years,
CrossKeys ran out of steam earlier this year.
In February, the company said revenue in the next six months would slow,
brought on by the bankruptcy of an important customer, lower sales to Asia,
Latin America and through a key distribution partner, and the loss of a
contract with Siemens AG (which added as much as $4 million in past
quarters).
In April, John Selwyn stepped down as chief executive of the company he
founded, saying the company could not afford to have him learning on the
job.
Even so, Mr. McLaren, a former president of MCI Systemhouse Canada,
says CrossKeys's technology and employee skill set is "very strong." The
company just needs "the drive to get going."
"The strategy is, 'Guys, we're at base camp. We have all the equipment and
people. We just have to quit being afraid to climb this mountain. We're going
to the top of the mountain, so let's go,'" he said, referring to CrossKeys's
new, mountaineering-style mantra.
On Thursday, nearly four months after joining CrossKeys, Mr. McLaren will
share the strategy for taking the company to new heights with shareholders
and the financial community at large at CrossKeys' annual general meeting.
It's not a new game plan, he says, "but the fever to get it done in a hurry is
new."
In today's world of high-speed communications, networks are built by
various manufacturers, using different technologies. That means service
providers need software that lets them perform on a range of platforms, both
for efficiency and to save the cost of having to replace network components
that may otherwise be incompatible.
And that means software developers supplying service providers must have
the technical skills to "cater to everyone," or else they will limit themselves to
a dwindling slice of the market, says Barry Richards, an analyst with Sprott
Securities Ltd.
"Multi-ness is the key because there are so many different people (service
providers) and options. CrossKeys needs to be compatible with different
people."
As part of its M-cubed strategy, CrossKeys in April said California-based
Ascend Communications Inc., the fourth-largest maker of computer
networking equipment, will market CrossKeys' service and network
performance software.
In June, it announced a marketing deal with EDS, a worldwide supplier of
information technology services.
One month after that, CrossKeys said it was partnering with Nortel
Networks Corp. to develop software aimed at helping service providers
manage multi-vendor, high-speed communications networks more efficiently.
According to Mr. McLaren, these deals are part of CrossKeys' plan to
forge alliances with equipment makers, systems integrators and solutions
providers in order to "have our product across multiple technologies."
"The Nortel announcement in particular was a flash of what's to come," he
said. "We're well into discussions with all the major equipment
manufacturers, and over the next couple months, you'll see them signing up in
terms of channels."
He declined to reveal any revenue projections for the contracts, but did say
"we need to be, within the next two years, a $250- million company versus a
$45 million company."
Along with partnering with major equipment and service providers,
CrossKeys will likely make its own acquisitions, mainly to access new
technology, Mr. McLaren said.
Additionally, CrossKeys is investing $15 million equally in product
development and channel development "over the shorter term."
And the company has boosted its sales team by six to strengthen the
company's U.S. and European marketing, and plans to hire an additional
100 people to swell divisions across the company.
CrossKeys is also tinkering with its board of directors, and plans to diversify
it by recruiting five new members with broad experience in the
telecommunications industry.
One board member who isn't "an issue", however, is chairman Terence
Matthews, says Mr. McLaren.
Mr. Matthews is also chairman and founder of Newbridge Networks Corp.
CrossKeys is an early affiliate of the networking giant.
Mr. Matthews' investment firm and Newbridge have a combined stake in
CrossKeys of 44.5 per-cent. Furthermore, about 50 per cent of CrossKeys'
sales each quarter come through its Newbridge channel.
Analysts say that in order to sell to the large telecos which comprise its
market for networking software, as it plans to do in its multi-vendor strategy,
CrossKeys must distance itself from Newbridge, a competitor to companies
CrossKeys hopes to sell to, and even from Mr. Matthews.
CrossKeys is "too close to Newbridge," said James Kedersha, an analyst
with SG Cowen and Co. "They need to convince the world that they're
multi-everything (in terms of the company's multi-vendor strategy), and they
have to make the board more independent" of Newbridge.
Sprott Securities analyst Barry Richards agrees.
"People have been concerned about the relationship between CrossKeys
and Newbridge in terms of its (CrossKeys) multi-vendor strategy. The street
would like to see him (Mr. Matthews) not as the chairman (of CrossKeys'
board). At the extreme end, a lot of people would like to see him off the
board all together, to make it clear that CrossKeys is its own animal."
Mr. McLaren dismisses those concerns, pointing in particular to CrossKeys'
deal with Nortel, which competes with Newbridge in some product areas.
"I don't think (Newbridge's and Mr. Matthews' relationship with CrossKeys)
is the issue, or we wouldn't have signed Nortel. We had Nortel understand
that, even with the ownership position of Newbridge, we have ways of being
able to manage that internally and being able to firewall it, and not have any
fears of passing information back and forth," he said, referring to comments
by some analysts that potential customers could be scared off by concerns
CrossKeys could reveal their corporate secrets to Newbridge.
Yet while making it clear that Newbridge "will always be a key channel for
us," Mr. McLaren says CrossKeys is aiming for a "balanced" sales strategy.
"Our goal will be to increase Newbridge's sales (in terms of revenue to
CrossKeys), but at the same time have seven or eight other channels of their
size moving at the same pace."
In terms of when its deals with Ascend, EDS and Nortel will start paying off,
Mr. McLaren says it usually takes six to nine months after securing a channel
before revenue starts to appear.
So far, analysts are impressed with what Mr. McLaren is doing at
CrossKeys.
"Mr. McLaren has done his homework, and he's going with the momentum,
which is what he should do. He's not afraid to move forward with big
initiatives, and CrossKeys has the capital to do that," said Mr. Richards,
referring to CrossKeys' war chest of $55 million in cash and cash equivalent.
Mr. Richards particularly likes CrossKeys' focus on growing revenue as
opposed to shoring up earnings. Mr. McLaren says CrossKeys "should not
expect to be back to positive earnings per share until late third quarter,
fourth quarter."
Mr. Richards, who is projecting a loss of 10 cents in CrossKeys first
quarter, says "revenue growth is really the key to valuation, because people
investing in technology companies are looking for growth."
He also says CrossKeys has lots of room to grow, pointing to annual growth
rates of between 75 per cent and 105 per cent for some companies similar
to CrossKeys.
For his part, Mr. McLaren likens CrossKeys' potential to a powerful sports
car that has been locked away in a garage far too long.
"We're in an industry where it is totally fragmented. There is no big player,
and the market place is massive, so we're in the right place at the right time."
"We can choose to stay on a relatively conservative course, which probably
leads to being put out of business in two or three years or being bought. Or,
we can choose to take this Porsche out for a drive and take it up to 180
miles an hour and see what it can do. I would rather be involved in taking it
up to 180 miles an hour." |
