Investors Hug Software's New BabiesRobert D. Hof
Have investors gone insane? Last November, software startup PeopleSoft Inc. was overwhelmed by the reaction to its $36 million initial public offering. The first day, shares in the $32 million Walnut Creek (Calif.) company shot up 70%, to 29. Then, on Feb. 3, Powersoft Corp. in Burlington, Mass., raised $71 million in a $20-a-share offering that nearly doubled on its first day of trading--giving the company a stratospheric price-to-earnings ratio of 90. Two days later, investors bid up the IPO of Silicon Valley data-base company Gupta Corp. to 34--nearly twice the offering price and three times the price that underwriters originally asked.
It may sound crazy. But the euphoria marks nothing less than the birth of a new kind of software company. PeopleSoft, Powersoft, and Gupta are just three of the most visible offspring selling "client-server" programs. These startups, chased by older software giants hungry for new markets, are finally beginning to make the promise of client-server computing a reality. Says Forrester Research Inc. analyst Stuart Woodring: "This is the year that people in client-server software get rich."
'CATCHING UP.' Suddenly, after being in short supply, there are lots of client-server programs--enough to drive what Forrester predicts will be an 88% expansion in the market this year for these programs, which let individuals working on personal-computer "clients" share information and programs used on so-called servers. Powersoft, for instance, now sells programs that make it easier for companies to write applications such as inventory or accounting systems for the new setups. Gupta supplies data-base programs that are easy enough for PC users to handle but powerful enough to track the sales and budget data for a corporate division or an entire midsize business. Some programs, such as PeopleSoft's human-resources management system, do jobs such as payroll that used to be done only by mainframe programs.
While installing client-server programs is no snap--and, at up to $800,000 per program, not cheap--it can be quite rewarding. United Airlines Inc., for instance, expects to save $10 million over the next five years by using a PeopleSoft program instead of a mainframe package to keep records of 140,000 employees and retirees. The savings come from cutting the staff needed to manage the mainframe and by being able to alter the software more quickly when rules or policies change.
Despite the lovefest on Wall Street, the client-server startups aren't home free. Mainframe-software makers, such as Dun & Bradstreet Software and Germany's SAP, which have lengthy relationships with big customers, are now rushing client-server products to market. Admits PeopleSoft CEO David A. Duffield: "The competition is catching up." He adds that selling client-server systems can be difficult because information-systems executives fear that they will lose power as they phase out the old technology. "Big companies often have political problems and bureaucracy," says Duffield. "No software can solve that."
A CLEAN SLATE. Some startups have already run into roadblocks. An early client-server star, Cooperative Solutions Inc. recently laid off its 10-person sales force. The company, which makes software for developing banking and retail applications, says it found that customers preferred to deal with more established suppliers of such software, such as Tandem Computers Inc.
Still, the startups have one big advantage: a clean technology slate. Older companies wrote their programs in brittle programming languages, such as Cobol, that are hard to modify or adapt for new computer systems such as PCs or servers running the UNIX operating system. "It's a whole new paradigm," observes Frank Dodge, who in 1969 co-founded mainframe software house McCormack & Dodge, which three years ago was merged into Dun & Bradstreet Software. Now, Dodge runs his own client-server software firm, the Dodge Group, a Waltham (Mass.) startup that plans to compete with D&B in the market for financial
So far, it's hard to argue with most of the results--like Powersoft's 351% jump in 1992 revenues, to $21.2 million, or PeopleSoft's 154% profit rise in the same year. Maybe investors aren't so crazy after all.