Category Archives: Fast Search

More on Fast's "Extensive" Profit Warning

See this Forbes story for more information on the situation at Fast Search & Transfer. The shortfall seems bigger than I previously posted:

  • The 2Q07 revenue guidance I cited was evidently the bottom of a consensus range of $50M to $60M (see below)
  • The company’s new guidance is $34M to $38M
  • The company’s 2Q06 revenues were $38.5M (though the SEB Enskilda analyst says that “historical revenue figures are now called into question,” seeming to suggest a possible restatement.)

Quotes from the Forbes story:

Fast Search & Transfer fell 0.3 to 10.45 [NOK] as analysts got to grips with the implications of the internet search firm’s extensive profit warning last Friday.

Last Friday shares in Fast slumped almost 30 pct after it warned that its second-quarter results were unlikely to meet market expectations, with sales coming in at 34-38 mln usd compared to what analysts say is a consensus forecast of 50-60 mln.

The group blamed ‘changes in business practice’ and the tightening of internal control procedures, along with lower sales, a rise in exceptional items and the need for an increased provision for bad debt.

Analysts had already expressed serious concerns about Fast’s accounting procedures, and particularly the aggressive methods of recognising revenues. However today they said Fast’s profit warning had been even more severe than had been expected.

[…]

The broker said that despite previous warnings over margins, strong top-line growth had ‘continued to support the investment case’. SEB said last week’s warning had ‘called the historical revenue figures into question’.

‘Its profit warning was more extensive than our concerns about its aggressive revenue recognition and receivables write-downs,’ the broker said, arguing that the firm’s cost base is ‘clearly geared to significantly higher revenues than the company expects’.

[…]

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Fast Search & Transfer Warns Big Time

See this story where Norwegian enterprise search vendor, Fast Search & Transfer, makes a significant (~$15M revenue shortfall) 2Q07 earnings warning:

Fast Search & Transfer closed 4.25 nkr lower at 10.75 after the search platform specialist warned its second-quarter results were unlikely to meet market expectations, with sales coming in at between 34-38 mln usd compared to what analysts say is a consensus forecast in the region of 50 mln.

The group said ‘changes in business practice’ and the tightening of internal control procedures have had an adverse impact on second-quarter revenues.

‘We believe that these changes had an impact of 10 mln usd when compared to the first-quarter results,’ it said. ‘In addition, a shortfall in expected sales revenues has had a further adverse impact of about 5 mln usd in the quarter.’

On top of this, Fast said the second quarter has seen exceptional items worth a combined 5 mln usd, which means expenses in the quarter are also going to come in ‘higher than market expectations’.

Additionally, Fast said it expects to make an increased provision for bad debt ‘in excess of the 6 mln usd previously communicated’. Fast is scheduled to release it second quarter results on Aug 8.

For a long time, I’ve felt that Fast was the MicroStrategy of enterprise search; so concerned with showing high growth that it — how do I put this nicely — let the basics slide. Frankly, I didn’t draw that conclusion all by myself; some of it came from reading a few financial analyst reports about them, other information came from discussions with former employees who described the culture in terms that reminded me of MicroStrategy, and some came from my general sense that Fast was spread too thin, with too many initiatives for a company their size.

By my math, this means the “high growth” vendor in enterprise search is actually shrinking. Per the 2Q06 earnings release, revenues in 2Q06 were $38.5M. Their new 2Q07 guidance is $34 to $38M, so they are shrinking somewhere between 1% and 12%.

If you think financials don’t matter when it comes to market perception, think again. And I’m not talking about the Norwegian stock market, I’m talking about the customer market. As a customer, or industry analyst / consultant who advises them, tell me how you would feel about a supplier who is:

  • 70% of the leader’s size, profitable, and growing at 50%

Versus:

  • Less than half the leader’s size, unprofitable, and shrinking

It makes quite a difference, doesn’t it?

While most industry analysts would not admit it, they look a lot at reported vendor financial results in determining their opinion of a company, the effectiveness of its strategies, and ultimately things like its placement on a magic quadrant or equivalent diagram.

I’d note (and I’d guess the timing of all this is not a coincidence) that Fast announced the appointment a new president and COO this week, Joseph Krivickas.

Velkomen, Joe. I hope you brought a mop.

Disclaimers:

  • We compete with Fast, although indirectly
  • I am a CEO analyzing the market, not a financial analyst analyzing stocks, and I do not make buy/sell recommendations
  • See my FAQ for more

Autonomy Hires Fast's Convera Guys. Huh?

Things are sure crazy in enterprise search.

  • First, Verity forgets to invest in product innovation for several years, leaving themselves open to a general market-share assault and subsequent acquisition by Autonomy — a company less than one-half Verity’s size at the time they acquired them. That’s rare. (See here for more.)
  • Then Convera decides that the only thing that it knows how to do (sell search inside government) isn’t worth doing and, in response, amazingly sells off the part of their business that accounts for 93% of their revenues. That’s rarer. (See this post: Honey, I Shrunk the Company).
  • Then Fast announces its intention to acquire Convera’s $2.6M/quarter Retrievalware business for $23M. Paying 2.3x revenues for a business shrinking at nearly 30% is pretty rare, too. Normally, using my rules of thumb, a flat $2.6M/quarter business might be worth $10M (i.e., 1x revenues). A shrinking one might be worth half that.

If things work out as it appears:

  • Fast will end up with Convera’s technology
  • Autonomy will end up with Convera’s people

Since it’s hard to support the technology without the people (see my post on the Oracle/SAP lawsuit here), and since neither company is US-owned, that should make Convera’s largely defense and intelligence customers pretty sketchy on the whole affaire.

Combine this chaos with:

  • The Government’s desire to use XML as an open and standard format.
  • The Intelligence Community’s desire to use XML enrichment technologies to create richer and richer markup
  • XQuery’s ability to express powerful queries in a high-level fashion against that markup
  • MarkLogic’s ability to process complex XQueries against large contentbases with high-performance

And all roads seem to point in MarkLogic’s direction.

Honey, I Shrunk the Company: Convera Sells Retrievalware to Fast

Two days ago, Norwegian enterprise search vendor Fast Search and Transfer announced an agreement to purchase the Retrievalware business from Convera for $23M. You can find the press release here.

Let’s try to understand what this means.

First, some background on Convera. Technically, Convera is a seven-year old company created through the combination of Excalibur Technologies and Intel’s Interactive Media Services division. I’d always thought of Convera as the re-branding and reincarnation of Excalibur, a search company that has been around for over 20 years. Convera always struck me as a company that historically did well in Federal government (e.g., defense, intelligence), but that never appreciated its own strengths.

Financially, Convera has not done well. For example, in its most recent quarter, 4Q07 (FY ends on 1/31), Convera reported total revenues of $2.8M, down 24% from 4Q06, and a net loss of $9.7M. Retrievalware revenues in 4Q07 totaled $2.6M, down 27% from 4Q06. Looking over the longer term, the FY06 10-K, shows on page 23 that annual revenues have monotonically decreased since 2004, descending from $29.3M to $25.M to $21.0M and, per this press release, to $16.7M in 2007, reducing the company nearly by half over the past 4 years.

I’d occasionally joked that it was perhaps appropriate that the company’s headquarters were on Gallows Road.

Convera has some quirkiness it its history, detailed in this Washington Post story. I’d guess that one reason Convera has not been content simply to be a Federal play is that Herb Allen is a medial mogul, running an exclusive conference in Sun Valley, and arguably the premier investment house in media and entertainment. Hey, when you’re on the Forbes Billionaire List already, why mess around with a Federal play when, with luck, you might convert it to the next Google, and without luck you lose what amounts to a rounding error? When billionaires play, it’s rarely to make pocket change and it’s usually for keeps.

This is speculation on my part, but my guess is that Allen’s involvement is what accounts for Convera’s schizophrenic past, as evidenced by this graphic that I took off their homepage today.

To me, Convera is one small ($10M run-rate), shrinking company with two strategies: vertical search platform and enterprise search engine. Or, I should say, was.

After this deal, it seems that Convera becomes a tiny ($800K run-rate) company with one strategy. While it’s hard to believe — and I’ve had to check the figures a few times to do so — Convera seems to have sold the business that accounts for 93% of their revenues. While I might question their wisdom or sanity, I certainly can’t fault them on commitment.

Let’s flip over to the Fast side of the equation.

Since no MBA who passed quant class would pay $23M for a $10M business shrinking at 24%, there needs to be more going on here. In this IWR blog post, CEO John Lervik says that the deal helps Fast in “aiming at the lucrative government market,” which this InformationWeek story says accounts for about 70% of the acquired business.

That’s consistent with Fast’s recent comments about tactical acquisitions, and I suppose the business argument is that they can try to sell their search technology to the Retrievalware installed base. The success of that strategy will depend on a number of variables:

  • Have Retrievalware customers already and long-ago found alternative paths forward?
  • Are those that remain customers merely interested in keeping existing systems running?
  • Is enterprise search technology the appropriate replacement technology?
  • Will government customers, particularly in the sensitive defense and intelligence sectors where Convera did much of its work, be comfortable buying from foreign suppliers? [See note below.]

In our experience, particularly in Federal government, XML content servers are often a better replacement technology than contemporary search engines. That’s because (1) government likes XML as a storage format since it’s open and standard, (2) the ability in XQuery to express arbitrarily complex queries, (3) the ability to easily hook a series of best-of-breed extraction / enrichment tools together in an open architecture, and (4) government contentbases are often massive in scale and require the ability to run very complex queries against very large contentbases with high performance.

The last point requires obeying “rule 1” of database performance, which troubles search engines because, compared to XML content servers, they have a limited ability to push constraints to data.

As for Convera’s vertical search platform strategy, I’ll say one thing: they have most definitely burned the ships on landing in the New World.

Time will tell whether they go on to greatness or get eaten by the natives. Either way, there’s no going back now.

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Note: I do not claim definitive expertise on whether the US government or sectors of it can or should buy software from US or foreign suppliers. While I do know that the Buy American Act exists, it seems to exclude software in section 25.103 (e). Despite that, I often hear that there are “issues” with foreign suppliers in the more sensitive sectors of government and I would welcome email pointing me to relevant regulations. Meantime, I have disabled comments on this post to avoid repeating a problem I had in the past with what I suspect were competitors testifying anonymously and anecdotally to the contrary. Since it’s my blog, I will share my opinion based on the people I’ve asked this question. Please feel free to send me information (e.g., links to regulations) so I can learn more.

See the FAQ for information on my comment policy.