Software's Comeback Kid

Just 18 months ago, personal computer pundit Stewart Alsop called for Jim P. Manzi's resignation as chief executive of Lotus Development Corp. In his biweekly PC Letter, Alsop lambasted Manzi for letting Lotus' share of the spreadsheet market slide from 80% to 55%. He also dug into Manzi for losing too many key executives and staking the future of the company on "groupware," a new kind of software for networks. Recently, though, Alsop issued a retraction. "I was wrong," he wrote in a recent issue of InfoWorld. "I'm chewing [my words] as fast as I can."

He's not the only Lotus watcher who is doing a double take. All through 1991 and 1992, Lotus was Wall Street's favorite punching bag. Rampant executive turnover, late and bug-ridden software releases, and declining market share had bloodied the No.3 PC software maker. From August, 1991, to September, 1992, investors bid down Lotus' stock from 41 to 17, knocking its market value from $1.7 billion to just $750 million. Manzi, who had been a management consultant before joining Lotus in 1983 to market the 1-2-3 spreadsheet, was roundly criticized for lacking the leadership and technological vision to keep pace with arch-rival Microsoft Corp. in the fast-changing software industry.

BIG LEAD. But it is precisely Manzi's vision and leadership, as critics such as Alsop acknowledge, that have put Lotus in position to take on Microsoft--and have helped nearly double Lotus stock to 36 since January. It was Manzi who in the late 1980s kept the Notes groupware program alive when others in the company wanted to cancel the project. Now, Notes is the clear leader in groupware, which allows teams of workers on a network to swap information and collaborate on projects. "This is the source of our long-term differentiation versus Microsoft," says Manzi.

While the groupware push laid the foundation for Lotus' long-term strategy, Manzi also worked hard over the past two years to shore up the existing business. He stabilized management, cleaned up product development, and brought out a new 1-2-3 for Microsoft's Windows system. The program has gotten strong reviews, and in the first quarter of 1993 Lotus' share of the Windows spreadsheet market jumped from 27% to 34%, while Microsoft's dipped from 63% to 56%, says International Data Corp.

Sound like a successful turnaround? Yes, but there's still one thing missing: rising profits. Price competition in Windows programs and a steep falloff in sales of programs that work with the older MS-DOS software standard are hammering profits. With price pressure and the costs of acquiring Approach Software Inc., a maker of data-base software, analysts expect net income of half last year's $80 million. Indeed, after one-time charges for acquisitions and staff reductions, Lotus has only once surpassed its 1987 earnings level (chart)--even as revenues have more than doubled. Part of the problem is industrywide, says Neal Hill, an analyst at Forrester Research Inc., who estimates that average gross margins in PC software are sinking from 80% to 60%.

Manzi claims that Notes will help Lotus fight that trend. "We're at the start of a very big new business cycle that has enormous implications for the company," he says. A well received new version of Notes, analysts say, should deliver $100 million in sales this year, up from $50 million in 1992. That will immediately help the bottom line, since Notes has scant competition and little price pressure. The package is now in use by more than 350,000 workers at 1,500 corporations, including Andersen Consulting, Coopers & Lybrand, and Unilever. In a soon-to-be announced deal, the European branch of General Motors Corp. is expected to buy Notes for all its white-collar workers.

CONSISTENT. The surge of interest in Notes has Manzi thinking big. He predicts that it will bring in several hundred million in revenue annually in three to five years. More important, customers are using Notes to get different types of applications programs to exchange information across networks. "It manages consistency between very diverse applications," says Charles Neill, president of Logistics Solutions, a Waltham (Mass.) software company. Using Notes as the pathway, the company's programs for natural-gas distributors automatically steer pricing information over a network from several pipeline companies to help customers pick low-cost delivery routes.

Manzi predicts that Notes will one day control most of the document-management tasks that workers do on networks--from retrieving electronic news clippings to shuffling around sales reports to keeping track of a work group's schedules. In short, Manzi says, office workers will use Notes as their main program--to navigate through networks and use software and information stored on other computers.

One sign of how Notes is catching on in this role: Recently, software rivals such as Microsoft, WordPerfect, and Borland International have announced plans to make their programs work with Notes. Analysts figure these companies are at least 18 months away from fielding competitive groupware products. Meanwhile, Lotus has already adapted 1-2-3 and its word-processing and electronic-mail programs to work with Notes.

A more immediate boost for the Lotus bottom line could come from diversification. Over the past three years, Lotus has bought makers of data-base, word-processing, and electronic-mail packages. Along with Notes, these programs are finally reducing the company's dependence on spreadsheets, where revenue is flat and competition is fierce. Sales of 1-2-3 now account for only half of Lotus sales--down from 74% in 1990. And with this larger range of products, Manzi expects a less erratic future, since he'll have a steady stream of maintenance fees and upgrades from many product lines instead of one.

All of this has encouraged analysts to expect double-digit revenue and profit gains. They estimate that revenue will grow from $900 million to nearly $1 billion this year. Net income will decline in 1993--unless Lotus actually collects damages from a copyright infringement suit it won against Borland, which Borland plans to appeal. But earnings should jump 75%, to about $80 million, in 1994. "Lotus has executed its product strategy," says First Boston analyst Paul Johnson. "I'm a believer the financial results will follow."

While revamping the company, Manzi has also made a few personal changes. Within the computer industry and on Wall Street, the 41-year-old executive had developed a reputation for being abrasive. Once, at a meeting with Wall Street analysts, he mocked them by claiming to have anticipated their questions and rattling off a list of yesses, noes, and I won't says before anyone could query him. Says an analyst who attended: "He was bragging that he was going to leave people unsatisfied."

MELLOW. Eventually, Manzi went back to his former employer, management consultants McKinsey & Co., for a mentor to act as his behind-the-scenes adviser on the fine points of being a CEO. Soon, his sarcasm seemed to mellow. Instead of having a reputation for driving away key executives, he has been able to attract managers with broad experience. Six of Lotus' 29 vice-presidents are former CEOs or presidents at other software companies. These days, he's even known to roll up his sleeves and head for Lotus' kitchen to whip up Italian food for overworked programmers.

But being a nice guy and a great chef won't help fend off Microsoft. More and more software these days is being sold in "suites"--bundles of four or five applications for one low price. Microsoft's Office bundle now outsells Lotus' rival SmartSuite by 6 to 1, and Microsoft got 30% of its $580 million in applications-software sales from suites last quarter. While Lotus may be the player in the best position to take on Microsoft in suites, it will be a rough fight. The next version of Microsoft Office is "the single most important thing we'll be doing next year," says Microsoft Senior Vice-President Pete Higgins.

To keep Microsoft at bay, Manzi hopes to get 50% of total revenues from suites, up from 20% now. To do it, Manzi says he'll spend half his $50 million annual advertising and promotion budget to push SmartSuites. If he can stand up to Microsoft in the battle for bundles and keep ahead in groupware, Manzi should continue to deflate his critics.

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