SALES AND MARKETING
Rational markets and sells its products and services directly through
telesales field operations, sales organizations, and the World Wide Web and
indirectly through channels such as value-added resellers (VARs) and
distributors.
Rational's direct selling approach couples sales of its integrated software
tools with high-value technical consulting services. Rational has established
a major-account direct sales and technical consulting organization in the
United States, Canada, Europe, and the Asia/Pacific/Latin America region.
Rational's sales, marketing, and professional services organization consists
of 861 individuals, operating out of corporate headquarters in Cupertino,
California, and from field offices in other locations throughout North
America, the United Kingdom, France, Germany, Sweden, The Netherlands,
Belgium, Switzerland, Australia, Hong Kong, Taiwan, India, South Korea, New
Zealand, Japan, and Brazil. Rational's direct international operations are
staffed almost exclusively by local personnel. Rational also has distributors
and resellers in North America, Europe, and Asia Pacific.
In support of its sales efforts, Rational's marketing department conducts
comprehensive programs, which include maintenance of an extensive World Wide
Web site, an electronic subscription service for news announcements about
Rational, print advertising, direct mail, public relations, trade shows, and
ongoing customer communications programs. Rational also keeps its customers
informed of advances in the field through technical papers and other mailings.
The Company also has an extensive set of relationships with independent
software vendors (ISVs) including Microsoft, PeopleSoft, and Oracle. These
companies work closely with Rational on marketing and technology programs,
providing customers with a comprehensive, easy-to-use development and testing
solution. The marketing relationships often involve one or more of the
following programs: joint advertising campaigns, exchange of mailing lists,
reciprocal use of logos in marketing literature, and joint promotions,
seminars, or trade-show presentations.
International sales accounted for approximately 34%, 27%, and 27% of the
Company's revenues in fiscal 1998, 1997, and 1996, respectively, and the
Company expects that international sales will continue to account for a
significant portion of the Company's revenues in the future. International
sales are subject to inherent risks, including unexpected changes in
regulatory requirements and tariffs, difficulties in staffing and managing
foreign operations, longer payment cycles, greater difficulty in accounts
receivable collection, potentially adverse tax consequences, price controls or
other restrictions on foreign currency, and difficulties in obtaining export
and import licenses. Any material adverse effect on the Company's
international business would be likely to materially and adversely affect the
Company's business, operating results, and financial condition as a whole. The
Company's international sales are generally denominated in local currencies.
From time to time, the Company enters into short-term forward exchange
contracts to hedge against the impact of foreign currency fluctuations on
accounts receivable denominated in local currencies. Gains and losses on the
conversion of foreign payments into U.S. dollars may contribute to
fluctuations in the Company's results of operations. Although the Company has
not experienced any material adverse impact to date from fluctuations in
foreign currencies, there can be no assurance that the Company will not
experience a material adverse impact on its financial condition and results of
operations from fluctuations in foreign currencies in the future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations: Overview: Revenue: International Sales."
PRODUCT PRICING
Rational's software licenses are normally perpetual, fully paid-up floating
or node-locked licenses. Floating licenses limit the number of simultaneous
users on a network instead of being associated with a specific user or
computer. Node-locked licenses limit a software license to a single computer.
Rational also offers other kinds of licenses, such as project licenses that
provide selected Rational tools to all the developers working on a specific
project.
The bulk of Rational's net product revenue in fiscal 1998 was derived from
sales of its ClearCase, Rational Rose, testing, and Rational Apex product
families. A ClearCase license is $3,000 on UNIX or Windows NT. Elements of the
Rational Rose family range in price from $495 for a single-user PC version of
Rational Rose, to $3,600 for Rational Rose 98 Enterprise Edition on a PC, to
$8,400 for a floating license of Rational Rose/C++ on a UNIX workstation.
Rational's Purify, Quantify, and PureCoverage products range in price from
about $500 to $2,000, depending on platform and specific combination. Elements
of SQA Suite, available on Windows, range from $1,395 for SQA Manager to
$3,295 for SQA Suite Team Test Edition. The price of preVue ranges beyond
$100,000 for a high-capacity version. Elements of the Rational Apex family
range in price from $22,000 for a Rational Apex Ada license on UNIX to $35,000
and above for an embedded-systems version of Rational Apex. Rational's
products are often sold in multiple quantities to teams of software developers
working together in a client/server environment. Rational offers standard
discounts based on dollar volume in a single-purchase order.
Rational also offers a support program that entitles a licensee to receive
all enhancements and upgrades to the licensed product that are published in
the succeeding 12-month period, as well as certain other support services.
Annual fees for support generally range from 15% to 20% of the software
license fee.
Rational's packaged training courses are offered in the form of open-
enrollment public courses and in-house courses at customer facilities, which
range from $1,750 per person for a typical four-day course to between $3,000
and $12,500 for in-house courses, depending on the length of the course and
the maximum number of students in the class. Rational's packaged consulting
services range from approximately $50,000 to several hundred thousand dollars.
Custom consulting generally is priced on a time-and-materials basis.
See "Factors That May Affect Future Results: Adverse Impact of Promotional
Product Versions on Actual Product Sales."
COMPETITION
The industry for tools for automating software application development and
management is extremely competitive and rapidly changing. Rational expects to
continue to experience significant and increasing levels of competition in the
future. Bases of competition include corporate and product reputation,
innovation with frequent product enhancement, breadth of integrated product
line, the availability of integrated suites and bundles, product architecture,
functionality and features, product quality, performance, ease of use,
support, availability of technical consulting services, and price. Rational
faces intense competition for each product in its product lines, generally
from both Windows and UNIX vendors. Because individual product sales are often
the first step in a broader customer relationship, Rational's success will
depend in part on its ability to successfully compete with numerous
competitors at each point in its product line.
Rational faces competition from software-development tools and processes
developed internally by customers, including ad hoc integrations of numerous
standalone development tools. Customers may be reluctant to purchase products
offered by independent vendors such as the Company. As a result, the Company
must educate Prospective customers about the advantages of the Company's
products versus internally developed software-quality systems.
Rational faces competition from, among others, Intersolv, Inc., Platinum
Technology, Inc., Select Software Tools plc, Cayenne, Oracle, IBM Corporation
(IBM), Sun Microsystems, and Sybase Inc., as well as numerous privately held
tool suppliers offering traditional CASE tools that compete with the Rational
Rose approach to visual modeling and component-based development. Rational's
RequisitePro requirements-management product faces competition from companies
such as GEC-Marconi. Rational's software-testing tools--Purify, Quantify,
PureCoverage, SQA Suite, Rational Visual Test, and preVue--face competition
from Compuware, Mercury Interactive Corporation, Segue Software, Inc.,
Intersolv, Inc., Computer Associates, Platinum Technologies,
Terodyne, Cyrano, SQL Bench International, Inc., and several private companies
offering testing-automation tools. Microsoft, Compuware, Oracle, Sybase, and
several of the major UNIX platform vendors, including Sun Microsystems,
Hewlett Packard, Digital Equipment Corporation, Silicon Graphics, Inc., and
IBM, also compete with Rational with respect to software-quality products and
testing tools, with testing products customized to certain of their other
software products. Rational Apex for C/C++ faces competition from, among
others, major UNIX platform vendors such as Sun Microsystems, Hewlett-Packard,
and Digital Equipment Corporation, which have C/C++ compilers and debuggers
and in some cases programming environments for their platforms. In addition,
numerous privately held companies offer compilers, debuggers, and programming
environments that compete with Rational Apex. Rational's ClearCase, ClearDDTS,
and ClearQuest product line faces competition from various suppliers offering
products with configuration and change management functions, including
Continuous Software Corporation, StarBase Corporation, Hewlett Packard, True
Software, SQL Software, LTD., Intersolv, Inc., Sun Microsystems, and IBM. The
Rational Apex Ada product line faces competition from Aonix, Green Hills
Software, Inc., and a large number of other suppliers offering Ada products
for native and embedded systems.
The Company also experiences competition with respect to a number of its
products, both from utilities commonly bundled with versions of operating
systems and from standalone product offerings. For example, versions of UNIX
are commonly bundled with utilities (such as SCCS and RCS) that provide
version control, which is part of the functionality provided by ClearCase.
Some system vendors, such as Sun, already have products, such as Workshop,
that provide features similar to those in Purify or others of the Company's
products and would compete directly with such products if offered on a
standalone basis. The Company's recently announced ClearQuest defect-tracking
product is expected to compete with products from LBMS, Inc., which was
recently acquired by Platinum Technology, Inc. There can be no assurance that
Sun, which has a license to some of the Company's patents, will not introduce
standalone products that compete with the Company's products. Companies
offering products competitive with Rational Summit and ClearCase in the UNIX
marketplace include Sun, which offers TeamWare, IBM, which offers
Configuration Management/Version Control (CMVC), Computer Associates (CA)
through its acquisition of LEGENT Corporation, which offers the Endeavor WSX
product, and Platinum through its acquisition of Softool Corp., which markets
CCC Harvest. In addition, there are several smaller, privately held companies
that market competitive products, including Continuous Software Corporation,
which markets Continuus/CM. Other companies have offered version control or
configuration management products outside the UNIX market. Companies in this
category include CA, Intersolv, and Microsoft. CA has a large installed base
of its configuration management product on IBM mainframes. Intersolv has a
large installed base of DOS and Windows software developers. In 1994,
Microsoft acquired OneTree Software, which offers a version control product.
The Company expects additional competition from other established and emerging
companies.
Rational believes that the major competitive factors in its markets are
corporate and product reputation, breadth of coverage by an integrated product
line, product architecture, functionality and features, product quality,
performance, ease of use, quality of support, availability of technical
consulting services, and price. Rational believes that its combination of an
integrated family of products supporting component-based development
throughout the software-development lifecycle and its emphasis on controlled
iterative development, visual modeling, and an architecture-driven process,
coupled with its extensive major-account direct sales and technical consulting
organization and the supporting channels such as telesales, VARs,
distributors, and the World Wide Web helps it compete.
Rational believes that the increased level of competition it observed in
fiscal 1998 will continue to increase. Certain of Rational's competitors are
more experienced than Rational in the development of software-engineering
tools, databases, or software-development products. Some of Rational's
competitors have, and new competitors may have, larger technical staffs, more
established distribution channels, and greater financial resources than
Rational. There can be no assurance that either existing or new competitors
will not develop products that are superior to Rational's products or that
achieve greater market acceptance. Rational's future success will depend in
large part on its ability to increase its share of its target markets and to
license additional products and product
enhancements to existing customers. Future competition may result in price
reductions, reduced margins, or loss of sales, which in turn would have a
material adverse effect on the Company's business, results of operations, and
financial condition. |
