Roots in Israel, Head in Silicon Valley
June 30, 2002
By SCOTT HARRIS
UNNYVALE, Calif. - Back when the term Y2K sent shivers through the business world, Mercury Interactive happily catered to companies that needed to check system upgrades, solidifying its position as a leader in the obscure software-testing market. As the year-2000 business played itself out, Mercury executives spied a new opportunity.
"One day in early 1999, we said the Web is the future — we have to focus our efforts," Amnon Landan, the chief executive, recalled.
Mercury Interactive, a Silicon Valley company with roots in Israel and offices in 25 countries, soon became a force in the new field of Web management. Its client list now includes about 75 percent of the nation's 500 largest companies; government institutions like the State Department, Army, Navy and Air Force; CBS's Survivor.com; and the author Stephen King. While software testing provides the bulk of Mercury's business, Web management has grown to produce more than 20 percent of revenue in just over two years.
Now Mercury has repositioned itself again, having figured out a way to profit from the dot-com implosion by helping businesses tune information technology they already own. Industry and financial analysts say Mercury is strengthening its grip as the market leader in fields that are growing in importance, while most software companies are struggling. Mr. Landan, who is also president and chairman, concurs.
"Short term, the downturn is not good for us," he said, citing reduced revenue and a stock price about half its level of a year ago. "Long term, it's actually positive."
Mercury's resilience was reflected in its first-quarter performance. In the 10 days leading up to its April 12 report, Mercury stock shed 30 percent of its value, a slide attributed to revenue warnings from software giants like Oracle and the conflict in Israel, home to a quarter of Mercury's 1,600-member work force, including most of its research and development staff. But when the quarterly report was issued, it included 18 percent growth in revenue, and earnings of 14 cents a share beat Wall Street forecasts by 4 cents. The stock jumped 25 percent in a day.
Analysts and Mercury executives cite several factors for the company's success. One is simply that tight times tend to hit smaller companies harder, as risk-averse customers gravitate toward market leaders like Mercury. The company is also regarded as having a focused, aggressive and prescient management. "Mercury has a good reputation in being inventive and creative and able to spot trends," said Theresa Lanowitz, an analyst at Gartner.
The company's latest service, ActiveTune, is a case in point. Mercury saw an opportunity in companies that gorged on information technology "solutions" during the dot-com craze without knowing how to best use the new technology.
"Everybody was afraid of getting Amazoned," Mr. Landan said. "They didn't want to get left behind."
Companies loaded up on consumer-response management software because it was the hot new thing, he said, but had only a vague notion of how it would be used. Now, with budgets tight, those companies want to squeeze value out of their investments. ActiveTune is intended to do just that. "Today we are cleaning all of this mess," Mr. Landan said.
This is also an opportunity for Mercury's rivals. Tommi A. White, chief operating officer of Compuware, said that many companies were frustrated with troubled systems that caused costly disruptions in assembly lines or distribution. Compuware markets what it calls a "family of products" covering the spectrum of building, testing and managing systems.
Mercury's tuning service "is really nothing new," said Richard Pugh, the sales director at Compuware. "It's just a different spin on the same type of service."
If so, it has been an effective spin, said Katherine Egbert, an analyst at C. E. Unterberg, Towbin. Companies did not necessarily know that they needed ActiveTune, she said, adding, "It's only been out a couple of quarters, but it's done pretty well." Mercury is working on software that would transform its service into a product that companies could use on their own.
Mercury's headquarters is in the heart of Silicon Valley. Inside his spare corner office decorated with photographs of his wife and four children, Mr. Landan, 43, carries himself with a no-nonsense air. The tuning business is still new, he said, one that he predicts will be as successful as Mercury's more-established testing line and its Web performance-management products and services.
MERCURY'S Israeli roots may have influenced the company's rigorous culture. Mr. Landan seems almost serene when he says the recent Palestinian-Israeli strife has not affected Mercury's operations. "You have to understand," he said. "We were developing the early version of our product when Scud missiles were falling on Tel Aviv." On time and under budget, he added.
When necessary, the company has been disciplined. In July 2001, sensing a downturn in the technology industry, Mercury cut 140 jobs and its executives took a 15 percent pay cut. That was only two months after Mercury had expanded by paying $147 million cash for a Colorado software company. "They understand that survivability is more important in a tough environment than growth," said Thomas Berquist, a Goldman, Sachs analyst.
Mercury executives say they have more than 60 percent of the market for enterprise software testing, while Ms. Lanowitz of Gartner puts it closer to 50 percent. But Mercury is so dominant, she said, that its rivals — Compuware, Rational Software, Segue Software and Empirix — have to demonstrate clearly why their products are better suited to a customer's particular needs. In the growing Web-management field, Mercury's chief rival is BMC Software.
Mercury was established with the idea that software could test software. In the late 1980's, Mr. Landan was among a group of engineers at Daisy Systems who had grown frustrated with testing Unix systems manually. In 1989, led by Daisy's founder, Aryeh Finegold, they started Mercury Interactive to make software testing tools, raising $11.5 million in venture capital. (Mr. Finegold left in 1999.) Mercury was a pioneer in the field — along with Segue and SQA, a company that Rational acquired in 1997. It became profitable in 1993, with $5 million in venture financing still in the bank, Mr. Landan said. It went public the same year.
Mercury expanded its business from testing Unix to testing Windows and to testing enterprise-resource programs that help companies run and manage internal systems. In 1998 and 1999, it earned significant profits by testing Y2K upgrades.
Then the business world fully embraced the Internet — and found that systems can falter under intense traffic. Mercury developed a line of performance-management tools for Web-based applications with names like ActiveWatch and Topaz. This business helped to vault Mercury into the ranks of America's fastest-growing businesses; in 2001, Fortune ranked it No. 9 in this category.
Not all of Mercury's tools are home-grown. Its acquisition of Freshwater Software, based in Boulder, Colo., in May 2001 enabled it to add a popular Web-troubleshooting tool called SiteScope — and more than 3,000 clients.
In a place notorious for its new-economy flash, Mercury is something of a throwback. Analysts say the company has a distinctly old-economy style — conservative, stable and tightfisted.
By high-technology standards, Mercury's leadership has been relatively stable, said Mr. Berquist of Goldman, Sachs. The geopolitical risks of its operations based in Israel, he added, are offset by the tax breaks Mercury receives for its presence there. Some other software companies, he added, would have been wise to follow Mercury's lead in reducing payrolls last year.
Mercury's cautious manner extends to its dealings with Wall Street. Writing in Israel Business Arena, Shlomi Cohen, a fund manager, recently suggested that "Landan inherited the art of managing the expectations, particularly those of the analysts," from Mr. Finegold.
But Mr. Landan said, "The day you start managing for Wall Street is a very bad day and your business is going to suffer for this." He named Enron and Global Crossing as negative examples. "It is very common in high tech to create hype," he said. "We are the other way around. We have this big steak with very little sizzle."
The chief operating officer, Kenneth R. Klein, said: "A lot of companies overpromise and underdeliver. We've been underpromising and overdelivering for a long time."
ERCURY has a stealthy reputation, Mr. Berquist said, largely because its products are so technical. But while its products are little known to the public, Ms. Lanowitz emphasizes that testing and Web-management tools are becoming ever more important as Internet transactions become more complex.
"Software should be like a utility," she said — as reliable as water from a faucet. "We shouldn't be confronted with messages like Java script at line 275: `Do you wish to debug?' You sit there and go, `What? I don't know.' " The next wave for Mercury and its rivals, she suggested, may be upgraded testing for wireless applications.
Given the opportunities, Mercury suddenly does not seem so averse to promotion. "We can no longer fly in stealth mode," Mr. Landan said. "Spending is tight, and we are playing a much bigger game than we played before. We'd like to be a billion-dollar company. There are high risks but big rewards."
There is also the sobering risk that troubles in his homeland could complicate Mercury's agenda. So far, 10 or 15 employees in Israel have been called up for military duty, Mr. Landan said, not nearly enough to affect operations. All-out war, he said, could lead to contingency plans like the evacuation of workers and their families to the United States. "I think the likelihood is very low," he added. "And if that happens, we'll all be occupied with the bigger picture."
In the meantime, from a Silicon Valley haunted by empty offices where dot-commers famously "drank the Kool-Aid" of dubious business plans, Mercury Interactive busily peddles software and services that are supposed to make companies leaner and meaner — or more like Mercury. As Mr. Landan put it: "We drink our own merlot." |
