The slowdown in the IT market that created a lot of trouble for most software companies and threw to the mat even heavyweights like NICE-Systems (Nasdaq: NICE), which had to publish a profit warning, has left Mercury Interactive Corporation
(Nasdaq: MERQ) unscathed. Mercury deals in software testing and application performance management. At close of trading yesterday, Mercury published its Q4 financial statements, which show that the company continued to press ahead, beating even the most optimistic forecasts.
Mercury’s revenue for 2000 was $307 million – 64% higher than in 1999, when revenue totaled $187.7 million. The company’s profit for 2000 was $64.7 million – 86% higher than in 1999. At close of trading yesterday, the share price was about $81, reflecting a company value of $6.5 billion.
Q4 revenue was 62% higher than in the corresponding quarter in 1999, and profit grew 73% to $25.8 million, or $0.28 per share – higher than analysts’ forecasts of $0.24. The company said that cash revenue from current operations increased by $34 million in Q4. The company now has some $603 million cash in its coffers, of which $500 million were raised through convertible bonds carrying 5.5% interest.
At the conference call, Mercury CEO Amnon Landan announced that the company had raised its revenue forecast for Q1 2001 and the whole of 2001.
Landan said, “We’re raising the 2001 revenue forecast from $400-410 million to $420-425 million. This means that the growth forecast has been increased from 37-40% to 37-42%. We’re raising the revenue growth forecast for Q1 2001 from 35-45% to 46-51%. The company has raised its Q1 2001 revenue forecast by 6%, from $82-87 million to $92-98 million.”
Best quarter ever
”Our last quarter was the best the company has ever had,” Landan said. “It was the most important year in Mercury’s history. There was strong demand for all product lines and in all geographical areas. We continued to witness strong growth, and we managed to carve out additional market slices in the testing market.
”Mercury relies neither on one-time giant deals with specific companies nor on last-minute deals. At the same time, in the past quarter we signed five deals, each of which is worth more than $1 million. In the past we didn’t use to have more than one or two such deals per quarter. The bottom line is that our target market and product demand have strongly increased, and I believe that Mercury is poised to become a $1 billion company.”
Software outweighs services
Most remarkable among the handsome results posted by the company in 2000 is that software-generated revenue far outweighed service-generated revenue.
In Q4 2000, software-generated revenue totaled $71.4 million, whereas service-generated revenues amounted to $26.1 million. In other words, revenue from the sale of services represents 26% of the company’s income, while revenue from the sale of software make up 74% of income. For the sake of comparison, in Q3 2000, 68% of the company’s revenue came from software sales and 32% from service sales.
This is highly significant for Mercury’s future growth. While service-generated revenue is based on past revenue, software sales generate future revenue (from services). Such revenue forms a firm basis for revenue in the coming quarters. And if this is not enough, Mercury has deferred revenue of $78 million, which further strengthen its revenue prospects for the quarters ahead.
VP international Operations Uri Agmon, who is in charge of the company’s operations in the Far East, told “Globes”: “Mercury is steadily pressing ahead with its aggressive growth. The company was only little affected by the jolts that rocked what goes by the name of the new economy. One of the reasons is that our business is highly decentralized, spreadi over all market segments. We’ve recently boosted our positions among government ministries and banks – a new area for us.”
”Globes”: You have $800 million in cash right now. In the past you said you were planning to use this cash to buy companies and technologies. Have you been actively looking for them?
”At this stage, we’re merely looking for opportunities and examining many companies and technologies. We’ll choose what is suitable for the company’s development. At the moment, we’re looking mainly in two directions: one is technology capable of tracking problems that interfere with the performance of Internet systems. The other is in fact more far reaching. We’re looking for technologies that will enable us to recommend solutions to problems. At the moment, there are no automatic solutions for correcting performance. If we find such technologies, we’ll be pleased to acquire them or the companies that develop them.”
Do you have new agreements with Internet providers?
“We have twenty partners that are Internet providers in various countries. We recently signed a cooperation agreement with PCCW of Hong Kong. PCCW will use our technology for conducting tests, managing application performance and monitoring for its customers. We signed similar agreements with two providers in Japan and we are on the way to signing with another three. The revenue model is the same as always – shared revenues.”
When the third quarter financial reports were published, Amnon Landan said that Mercury’s revenues from dot.com companies constituted less than 10% of overall revenues. Has this changed?
“No. A similar percentage of company revenues still come from dot.coms.”
Aren’t you seeing a decline in revenues from these companies?
“I don’t think so. Whoever needs our product has no choice but to buy it.”
Information technology is currently suffering from a slowdown. It’s reasonable to assume that software companies want, or will shortly want, to cutback on expenses. How did you overcome this?
“It would be suicide to sell unchecked software in a period of slowdown. Companies understand this and know that a poor quality product is perceived by customers as money thrown away. It will be companies that come out with better products that will succeed in growing in a shrinking world.”
Fewer, bigger customer
“This is not bad news. On the contrary. The Internet has made these companies dependent on it. All their income depends on the Internet. Without it, there’s no Amazon, for example. The Internet is not losing its power, it’s gaining.
“It’s true that there are fewer players and there may be even fewer in the future, but players that remain will be much larger, with much more complicated systems. For example, Amazon now sells quantities that seven companies used to sell. Just like any economy, the weak fall by the wayside and the strong survive. As far as Mercury is concerned, this means we’ll have more big customers and I believe new large companies will arrive on the scene. We’re constantly getting more customers. The bigger the customer, the more he needs products that Mercury sells, and the more he comes back to us.”
Mercury, set up in 1989 by Aryeh Finegold, develops automatic testing systems for software and in the past year, has become an Internet infrastructure company, developing tools to examine overloads and response time on client/server systems and Internet site overload testing systems, for e-commerce.
Mercury has 40% of the software testing market and recently entered new areas, including APM application performance, Internet hosting, cellular and media streaming services. At this stage, these activities contribute relatively little to the company’s revenue, but they are expected to constitute a substantial percentage in the future.
Published by Israel's Business Arena on 18 January, 2001