Category Archives: vertical search

Convera Run-Rate Dips Below $1M

Convera reported its third quarter FY09 results yesterday with revenues of $0.239M for the period ending 10/31/08. This means Convera’s run-rate (4x the most recent quarter revenues), has now dipped below $1M.

Here’s a chart of Convera’s revenues from continuing operations for the past 7 quarters (recall that they sold Retrievalware in April, 2007):


Overall, I’d say the burn-the-ships attempt at transition (covered previously here and also again here) from a Federally-focused enterprise search vendor to a hosted ad-sharing-driven vertical search platform is not going well.

In previous reports, the company has said that it derives a high proportion of revenues from a single (unidentified) customer. It seems perhaps that customer is no longer happy:

The decline in revenue is due to a contractual dispute with a significant customer. Revenues from providing services to this significant customer for the three months ended October 31, 2007 included $234,000 of minimum revenues and $270,000 of minimum revenues for the three months ended July 31, 2008. As a consequence of this dispute, we recorded no revenue from the customer during the three months ended October 31, 2008.

Viewed differently, even if that customer were happy, revenues would have been $0.519M, a new record, but nevertheless a small number both in an absolute sense and, more importantly, when compared to operating expenses which came to $6.3M for the quarter.

The company has burned almost $10M in cash since 1/31/08 (i.e., about $1M/month) and ended the quarter with $26.8M in cash. During the same period, the stock has fallen from about $2.12/share to $0.34/share, an 84% drop.

As of this moment, Yahoo!Finance reports a market cap of $19.7M, suggesting an enterprise value of -$7.1M, making Convera worth about 74% of its cash on hand.

The Convera Transition: 1Q09 Results (Updated)

(Updated: I read the earnings call transcript and made a few changes.)

One of the items I’m tracking in this blog is Convera’s burn-the-ships attempt at transition from a Federally focused enterprise search provider to a vertical search platform provider.

(See prior posts: Honey I Shrunk the Company, Fast Hires Autonomy’s Convera Guys, What Happens When You Sell Your Revenue, Honey I Shrunk the Company II)

Yesterday, Convera announced their first-quarter fiscal 2009 (1Q09) financials, so let’s check in and see how things are going:

  • Revenues of $0.40M
  • Year-over-year growth of 24% compared to 1Q08 revenues of $0.32M
  • Consecutive growth of 44% compared to 4Q08 revenues of $0.28M
  • Ending cash and equivalents of $31.4M
  • Cash burn of $5.3M
  • COGS of $1.8M on running the hosted services, suggesting gross margins of -348%
  • 6 new Excalibur-supported vertical sites (for a total of 45)
  • 1 new publisher launching an Excalibur-supported site (for a total of 25)

My analysis:

  • The revenue numbers are still tiny in an absolute sense; usually the law of small numbers would apply, meaning that off such tiny figures we’d see multi-hundred percent growth rates. At 24% compound year-over-year growth, it takes Convera 5 years before they’re doing million-dollar quarters. Yikes.
  • The 44% consecutive growth rate out-pacing the 24% year-over-year growth rate is usually a good sign as it implies acceleration. However, due to the seasonality of software revenues, I believe that year-over-year growth is the more reliable (and easily interpreted) growth metric. Ergo, I put more faith in the 24% than the 44% as the indicator of real growth.
  • That said, an up-quarter from 4Q to 1Q is usually a good sign since software (and to a lesser extent SaaS) companies tend to have back-loaded, seasonal sales that result in a saw-tooth revenue curve where 1QN+1 revenues are often a bit less than 4QN, even when the company is experiencing strong growth.
  • That said, Convera’s 4Q08 was worse than their 1Q08, providing an easy comparison point for the 1Q09 numbers. Simply put: does 44% 1Q09 consecutive growth mean “great 1Q09,” “bad 4Q08,” or a bit of both? (Sometimes, the easiest way to interpret all these relative growth rates is just to make a chart, which I eventually did, and included above.)
  • The cash burn rate is sustainable over the mid-term, but not the long-term. They have $31M in cash ($35M including $4M held in escrow) and they are burning $5M/quarter. At that rate, the cash lasts 7 quarters.
  • Overall customer acquisition to-date seems good, and 25 publishers signed-up is fairly impressive. But, in my opinion, publishers are drawn — like moths to a flame — to the something-for-nothing idea that they can invest little and get a vertical search site. The question is will Convera ever be able to charge enough to run a profitable business? Right now, Convera is subsidizing their customers’ sites to the tune of more than $20M/year. Going forward, they’ll either deliver enough value to extract enough revenue to run a profitable business, or their customers will scatter like cockroaches when they try. Time will tell.
  • The new customer acquisition/deployment figure of 1 suggests deceleration and is, in my opinion, not good.
  • The company says 75 vertical sites are under contract (compared to 45 launched) with 25 publishers. This sounds good and tends to indicate broad acceptance of the strategy.
  • But the earnings call transcript reveals that a single customer accounted for 80% of revenue during 1Q09 and this same customer was 82% of revenue in 4Q08. I sure hope Convera keeps this customer happy, since they’re doing only $100K/quarter in revenues without them. This undercuts the credibility of the claims that support broad success.
  • In the transcript, CEO Pat Condo gives revenue growth guidance for 2Q09 of “over 25%.” It’s not clear if means consecutive or year-over-year growth.
  • There’s a lot of happy talk about traffic both in the press release and in the earnings call transcript. I’ve disregarded it for two reasons: (1) it’s a busy week and I’ve not had time to fully parse it, and (2) the kind of traffic in which I’m most interested turns to revenue and should show up in the financial statements.
  • In the transcript, they say that total 1Q09 expenses net of non-cash charges for depreciation and stock-based compensation were $3.6M. They guide that the same expense metric will run between $2.8M and $3.4M per quarter in the coming year. This, and other comments, suggests they have done some heavy cost-cutting, and thus that the cash will last even longer than my previous calculation suggests.

Overall, I’d say the experiment is still in progress. Convera has plenty of cash to keep it running, so let’s see what happens. Personally I’ll be watching customer acquisition and deployment, revenues, revenue concentration, and cash.

(And, by the way, Convera, you can revise government out of your safe harbor statement; you sold that business to Fast some time ago.)

Ultimately, I’m cynical on the notion of cheap-as-chips vertical search. I believe the answer for publishers is not to focus on lowering costs, but instead to focus on creating value. For more on that riff, read (the end of) this post (Blind Eyes, Industry Analysts and Lessons from B2B) or see my slides from the recent E-Publishing Innovation Form in London, embedded below.

Vertical Search Presentation from the EPublishing Innovation Form

I had the pleasure of attending and speaking at the EPublishing Innovation Forum in London this week, chaired by David Worlock, chief research fellow, at Outsell, Inc.

I participated in two sessions, the closing panel with Hugo Drayton of Phorm (a controversial behavioral ad network that collects data at the ISP level), Vin Crosbie of Digital Deliverance (a management consultancy to the media industry, particularly newspapers), and Leonard Brody of NowPublic (a citizen journalism news website fueled by crowdsourcing).

My primary participation, however, was in a session entitled Risks and Opportunities in Vertical Search, where I spoke with Iain Fletcher from Convera, a company that has wholly, boldly, and some might argue, insanely (given that they sold off 93% of their revenue stream), repositioned itself as a vertical search platform provider. (As I always say, I give Convera an A+ for commitment, if not a similar grade for strategy. The concept is interesting, by the way, but the question is can it support a viable ongoing business?)

My main messages were:

  • The risk in vertical search is kidding yourself into thinking that you can make money with a site that’s nothing more than you can throw together in a half-day using Google Custom Search Engine.
  • The opportunity is in adding value. I focused a lot on audience intimacy and value because that’s where I believe publishers can build safe, profitable, sustainable markets in the face of horizontal forces such as Google.
  • I said that I disliked the term “vertical search” because I think it sets too low a bar. To most people, I think vertical search means a domain-specific crawl and returning results list of links to documents. That’s not enough.
  • I echoed the thoughts of Andrew Richardson from Wolters Kluwer Health who spoke the day prior and, among other things, argued that contextual design is an appropriate methodology for building online information services.
  • I briefly argued in favor an XML platform approach to delivering such products and services. (Because you can put all your content in one place and then XQuery to quick build products which should be viewed as experiments — fail early and often.)

In summary, my vertical search talk said: don’t think about vertical search; think instead about content applications. Don’t build search sites that are low in value-add. Build applications that help users accomplish tasks.

Here, courtesy of Slideshare, are my presentation slides.

Or-Die Networks: Verticalizing Vertical Search

I’ve tracked FunnyOrDie.com since its inception, largely because our Sequoia partner / board member, Mark Kvamme, was heavily involved in its creation. Mark’s son, Michael, an aspiring stand-up comedian, came up with the idea. The site launched with a now famous video entitled The Landlord featuring Will Ferrel, below, which has been viewed more than 50M times. If you’re so inclined, here it is.

Frankly, it’s not my favorite sketch, but let’s not miss the point. The beauty of FunnyOrDie is that it becomes not only a vertical comedy-focused YouTube, but it also becomes the center of a community of comedians. I have a friend or two in that community and they’re all aware of the site and use it frequently. Plus, I’d say the mixing of uploaded user-generated and professional (e.g., Will Ferrel) content was another clever innovation.

The reason for my catchy headline is that some people would say that video search itself is a form of vertical search. Ergo, YouTube is a form of vertical search. Now, when you generalize the idea of FunnyOrDie to other market segments, you then end up verticalizing vertical search.

And, as I learned the other day, that’s precisely what they’re doing. They’ve transformed the concept from FunnyOrDie.com to Or-Die Networks and have launched two sister sites: ShredOrDie with Tony Hawk and BlueCollarOrDie with Jeff Foxworthy, Bill Engvall, and (my favorite) Larry the Cable Guy.

The formula, it appears is:

  • Identify a category
  • Get a relevant celebrity to lend branding and provide some content
  • Leverage the technology platform

Clever stuff. I wish them luck.

Convera Update: What Happens When You Sell All Your Revenue?

The not surprising answer: you end up a tiny company.

Convera’s 2QF08 results?

  • $255,000 in revenues. Yes, that’s measured in dollars, not kilodollars. Approximately the amount it would take to buy an Aston Martin V8 Vantage. A nice car mind you, but a car. One car. They must set the record for smallest public company.
  • A 275% growth rate, but off a tiny base. For perspective, if they can maintain a 275% growth rate, then in two years they’ll be doing $3.5M quarters and should still be a record small public company.
  • One customer accounted for 92% of revenue. So, they’re actually one $235K deal plus $20K company.
  • Loss of $6M in the quarter.

I’ve heard one Convera customer describe them as “cheap as chips.” You can see it in the numbers. They still have $54M in cash, so they can keep losing $6M/quarter for a long time (i.e., 9 quarters).

It’s hard for me to imagine that under these circumstances they’re a stable partner on which to bet a company’s vertical search strategy. But I know some folks are doing it anyway, probably based on the “cheap as chips” argument.

Those without kevlar stomachs might take a look at MarkLogic as a platform for vertical search instead. We have a different base business model (we charge for enterprise software, don’t spider, and don’t host). But our business development guys are starting to look at revenue sharing models for vertical search sites if that’s of interest to you.

Motley Fool coverage of Convera is here. The company’s official 2QF08 press release is here.

The Relevancy Quest

In the classic book, The Innovator’s Dilemma, Clayton Christensen concludes that a key reason leading companies fail is because they spend too much energy working on sustaining innovations that continuously improve their products for their existing customers. Seemingly paradoxically, he points out that these sustaining innovations can involve very advanced and very expensive technology. That is, it’s not the nature of the technology used (e.g., advanced or simple) that causes innovation to be sustaining or disruptive — it’s who the technology is designed to serve and in what uses.

I think search vendors need to dust off their copies of The Innovator’s Dilemma. Why? Because, for the most part, they seemed wedged in the following paradigm, which I’d call the relevancy quest:

  • Search is about grunting a few keywords
  • The answer is a list of links
  • The quest is then magically inducing the most relevant links given a few grunts

And it’s not a bad paradigm. Heck, it made Google worth $140B and bought Larry and Sergey a nice 767. But can we do better?

Some folks, like the much-hyped Powerset, think so. They’re challenging the grunting part of the equation, arguing that “keyword-ese” is the problem and the solution is natural language. They seem unphased both by Ask Jeeves’ failure to dominate search and by the more than 20 years of failed attempts to provide natural language interfaces to database data, used for business intelligence (BI). As I often say, if natural language were the key to BI user interfaces, then Business Objects would have been purchased by Microsoft years ago for a pittance and Natural Language Inc.’s DataTalker would rule BI. (Instead of the other way around.)

But I respect Powerset because at least they’re challenging the paradigm and taking a different approach to the problem. And, while I sure don’t understand the cost model, I also respect guys like ChaCha because they’re challenging the paradigm, too. In ChaCha’s case, they’re delivering human-powered search where you can literally chat with a live guide who helps you refine your search.

I can also respect the social search guys, including the recently launched Mahalo, because they’re challenging the paradigm as well — using Wisdom of Crowds / Web 2.0 / Wikipedia style collaboration to created “hand-written results pages” for topics, such as the always searchable “Paris Hilton.”

The folks I have trouble understanding are those on the algorithmic relevancy quest, companies like Hakia, a semantic search vendor (interviewed here by Read/Write Web) whose schtick is meaning-based search, and who comes complete with a PageRank ™ rip-off-name algorithm called SemanticRank ™. Or Ask who recently launched a $100M advertising campaign about “the algorithm“. These people remind me of the disk drive manufacturers who invested millions in very advanced technologies for improved 8″ disk drives (to serve their existing customers) all the while missing the market for 5.25″ disk drives required by different customers (i.e., PC manufacturers).

Are the Hakias of the world answering the right question? Should we be grunting keywords into search boxes and relying on SomethingRank ™ to do the best job of determining relevancy? Is the search battle of the future really about “my rank’s better than you rank” or equivalently, “my PhD’s smarter than your PhD”? Aren’t these guys fighting the last war?

As usual, I think there are separate answers for Internet and enterprise search.

On the Internet side, sure I think search engines can certainly use more “magic” to improve search relevancy. For example, they can use recent queries and a user profile to impute intent. They can use dynamic clustering and iterative query refinement (e.g., faceted navigation) to help users incrementally improve the precision of their queries.

More practically, I think vertical search and community sites are a great way of improving search results. The context of the site you’re on provides a great clue to what you’re looking for. Typing “Paris Hilton” into Expedia means you’re probably looking for a hotel, where typing it EOnLine means you’re looking for information on the jailed debutante.

Of course, there are a host of Web 2.0 style techniques to improve search like diggs and wikis which can be put to work as well.

Increasingly, our publishing and media customers are going well beyond “improving search” and changing the paradigm to “content applications” — systems that combine software and content to help specific users accomplish specific tasks. See Elsevier’s PathConsult as a concrete example.

On the enterprise search side, I think the answer is different. As I’ve often mentioned, on the enterprise side you lack the rich link structure of the web, effectively lobotomizing PageRank and robbing Google of its once-special (and now increasingly gamed and hacked) sauce.

When I look for the answer of how to improve search in an enterprise context, I look back to BI, where we have decades of history to guide us about the quest to enable end-user access to corporate data.

  • Typing SQL (once seriously considered as the answer) failed. Too complex. While SQL itself was the great enabler of the BI industry, end users could never code it.
  • Creating reports in 4GL languages failed. Too complex.
  • Having other people create reports and deliver them to end users was a begrudging success. While this created a report treadmill/backlog for IT and buried end-users in too much information, it was probably the most widely used paradigm.
  • Natural language interfaces failed. Too hard to express what you really want. Too much precision required. Too much iteration required.
  • End users using graphical tools linked directly to the database schema failed. While these tools hid the complexities of SQL, they failed to hide the complexity of the database schema.

It was only when Business Objects invented a graphical, SQL-generating tool that hid all underlying database complexity and enabled users to compose an arbitrary query that the BI market took off. Simply put, there were two keys:

1. The ability to phrase an arbitrary query of arbitrary complexity (not a highly constrained search).

2. The ability to hide the complexity of the database from the underlying user

While no one has yet built a such a tool for an arbitrary XML contentbase (and while I think building one will be hard given the lack of requirement for a defined schema), MarkLogic customers use our product every day to build content applications that generate complex queries against large contentbases, and completely hide XQuery from the end-user.

Simply put, it’s not about improving search. It’
s about delivering query. That’s the game-changer.