A Focus on Enterprise Software – Wall Street Reporter Interview –

Killian Brandon, Senior Analyst with the WallStreet Reporter’s (WSR) interview with Cincom CEO Tom Nies on Monday Dec. 12, 2005

WSR: Our guest today is Mr. Tom Nies, president and chief executive officer for Cincom Systems.  Cincom Systems is a leading supplier of software and services to help companies simplify the management of complex business processes.  Headquartered in Cincinnati, Ohio, Cincom is privately held.  In addition to being the longest serving CEO in the computer industry in 2005 Tom Nies was recognized for his accomplishments by winning the International Stevie Award for best executive in the worldwide International Business Awards. Congratulations Tom and thank you for joining us again.

TN:     Thank you very much Killian it’s a pleasure to be with you.

WSR: Now Tom perhaps we can start today with the recent 2005 financial results that Cincom announced. The numbers were extremely strong perhaps you can just take us through the bold numbers and explain really what the drivers were there.

TN:     Well first of all we made both of our annual goals.  We increased our total revenue, gross revenue by 41% last year.  That was above our target increase.  We doubt very much whether we can have a similar 40% increase this year but we’re very happy with that.  The most important thing though is not necessarily the revenue growth but can we continue to sustain margins with revenue growth and the criteria we use to measure that is our return on investment capital.  And last year our average return on invested capital was about 65% and that is right on average of what we had been able to do over each of the last 4 years.  So our growth rate in revenue size was dead on what we’ve been able to do in the last 4 years, but we maintained the same rate of return on average invested capital of 65%.  So we were very, very happy with that.  Now our old line traditional businesses which we have been in for many years did not show the same 40% growth.  Quite frankly we grew those in the range of about 12 to 15%.  But the newer businesses we’re operating in had significant beyond the 40% which gave us overall a 40% growth.  So we’re quite happy to see new businesses growing rapidly and this confirms a lot of the investments that we’ve made in the years past.

WSR: Certainly now the industry that the companies focusing on is very dynamic.  What are some of the developing trends that you’ve seen and how well positioned is Cincom to really capitalize on these new trends.

TN:   Well first of all let me summarize the trends in 2 words -– there is rapid and radical change.  Rapid means that things are moving a lot faster every year and that’s cumulative.  That means we have shorter life cycles for products.  We have to get to a break even and in a profit position recover our investment quicker and so on.  The radical idea means that there’s a lot of new changes coming into the marketplace that enables us to go into new areas we’ve never been before.  And we’re seeing companies who’ve been successful in going through those radical changes having some great success.  The blackberry for example, the IPOD, EBay, Google and others are examples of companies who have been clever enough to see new opportunities and take advantage of radical or radically different opportunities and capitalize on them.  We’re trying to do the same and we’ve got a couple of areas that are growing very rapidly and we think that there’s good promise for us here.

WSR: Perhaps you could elaborate for us on these new areas that the company is focusing on?

TN:  First of all the idea of buying software by the transaction, ASP models.  Instead of making the up front capital investments, along implementation cycle, companies are looking more and more to go to buying software by the transaction.  There’s volume changes or some different competitor comes they can move to a better opportunity area.  So the traditional areas of large scale investments of capital and then an ongoing maintenance fee to continue to develop and support that in house.  Those trends I believe are moving toward outsourcing if you will more of the processing and buying software as a service.  And I think that’s a radical change into the future.  Twenty five years ago 80% of all people were building applications internally.  Today less than 20% are building internally.  They are buying application packages but I believe that in another 10 to 15 years from now we will see application packages no longer being bought nearly so much.  Customers will have outsourced if you will processing, buying applications by the transaction.  Thats an area we’re in and it’s growing very rapidly for us and for others.  So I think that’s a trend of the future and I think that a lot of the older trend software vendors, some of the very biggest ones by the way who sell application software according to the historic models represent opportunities for us offering it better, faster, cheaper, more cost effective alternative so we’re targeting that.

WSR: You referred there Tom to some of the larger software vendors in the markets so that we can look to the competitive landscape now.  How does Cincom really differentiate itself from those larger competitors?

TN:     Well first of all we are ourselves one of the large competitors in that we are among the top 2% of all software firms in size.  But the way we differentiate ourselves primarily is to emphasize a higher value to the customer at a much, much lower cost.  The much, much lower cost then delivers them a much bigger return on their investment and we attempt to deliver that return on investment faster and quicker.  And we try to minimize and reduce all the risk for them.  Now you might ask well how do we do this as an overall lower cost.  Well first of all the software application systems that we offer are typically priced significantly lower.  Maybe half as much to a third as much as similar technology from a lets say SAP, Oracle or People Soft would cost.  But the real major difference is that the implementation cost which are really in my judgment waste of the cost to implement the services.  We will typically bring that in at 1/5, 1/7, 1/8, 1/10 the cost.  So much, much lower investment for very, very similar technology and solutions is what our primary emphasis is and that just give a much bigger ROI for the customer.

WSR: And you have actually gone on record as saying that is the goal for the company.  That for every $1.00 invested with Cincom in software and services our customers typically achieve a return on investment of at least $10.00.

TN:     That’s a minimum for us and we have delivered as much as 30 and 40 times as much.  But yes, they should get at least $10.00 of return on investment.  So a 5 million dollar investment with us represents we believe, should deliver a minimum of 50 million dollars of return for that customer over time.

WSR: That’s certainly very impressive.  Now if get to the area of partnerships and how important they are for the company.  For example it was recently announced the signing of a commercial agreement with Telecom to provide document management solutions in the market in Spain, if you could tell us the importance of these partners.

TN:     Well we represent an infrastructure which has, we think, pretty good capacity and capability but its limited.  We believe that the more we can embrace partners, allies, relationships and provide our offerings to them or take offerings from them and move them through our distribution system the more we multiple ourselves.  In a similar way we are looking to making acquisitions.  Acquisitions of other company’s opportunities, product lines, business situations which again represents a partnering opportunity.  People with capital to invest we’re inviting to join with us in these acquisitions and then we hope to be able to deliver very high returns on their investments for them.  Better returns on investment than they’ll find anywhere else in the software industry.  So all forms of relationships or alliances is what we’re trying to develop now and we’re trying to build on our track record.  We’re not offering pie in the sky or promises without a track record that they can compare.  And so I think over a 4 year period showing 65% return on investment for ourselves is a track record.  Not that we promise that but that is something that we can show that we have been able to deliver and we hope to expand rapidly and grow the business through investment, as well as in alliances.

WSR: Now I know one of the key drivers behind Cincom success is the strength of the leadership team.  Perhaps you could bring our listeners up to date now on the current background of the management team.

TN:     Well we like to think, we once called ourselves “The World’s Most Experienced Software Company” and by that we mean that we’ve been in business almost 40 years but the average term of employment within our company is over 15 years.  Among our management staff the average term of employment with us is even long.  It’s not to say we don’t have some people with 3 to 5 years.  But we have people who believe deeply in what we’re dong, their committed deeply to us, they are part of our team and they have considerable strengths that they bring as well as loyalty to our company.  I think this is essential in our business today.  It’s hard to build on a management team that’s always in transit.  So we try to get some permanents to our organization.  We move the managers within our company from wall to wall so that there is some movement, their not doing the same old thing all the time but they stay within Cincom.  So this broadens their experience, builds more general management capability and helps to get better team work.

WSR: Now the company has a very impressive track record.  Looking ahead to the future now what major objectives have you laid out for Cincom over the next 12 to 18 months?

TN:     Well, over the next 12 to 18 months we want to grow the company by at least 25%.  But we believe that growing the company 20% per year compound for the next 3 to 5 years is also a possibility.  We’re eager to do that and grow but not at the sacrifice of profit margins or return on invested capital.  So we’re going to seek to grow as fast as we can in absolute revenue terms and percentage of revenue growth but with the eye to the bottom line keeping margins up or increasing and keeping return on invested capital close to if not better than the kind of percentages we’ve earned over the last several years.

WSR: Now Cincom is certainly a global company which particular verticals or geographic markets do you see the most promise?

TN:     Though the manufacturing is moving rapidly from the west to the east.  So in the east China, the Asia, Pacific rim area we are see a lot of growth opportunities in manufacturing as new situations are being developed there and we’re doing a lot of emphasis on moving our manufacturing systems and capability there.  It’s not to say we’re abandoning the west in manufacturing, we’ve trying to help the western manufactures become more cost efficient through innovation, simplification of their businesses and so on.  But in so far as expanding manufacturing systems, the primary emphasis there is in the east.  In the west our primary emphasis is finance, financial services organizations and government type businesses where there significant growth in those particular areas.  So it depends really on which geographic market you’re talking about.  So but, financial services, government and manufacturing are three primary emphasis of concentration but they’re not the same in every part of the world.

WSR: You mentioned earlier the company looked to strategic acquisitions, is the company current looking for acquisitions locally.

TN:     We are, we are looking but judicially and cautiously.  We’re not looking for companies that are looking to be bought out.  We’re looking for opportunities that have technology that we can grow in the future.  So we’re not interested in catching sort of declining companies and some how or other cutting cost in those companies or reducing head count to show a return on the investment.  We prefer to find companies which have potential but they don’t have the worldwide distribution, the management strength of the economic capacity to maximize their potential.  So we are looking and we will continue to look for the right kind of company.

WSR: Excellent, now finally just before we conclude today.  Perhaps in summary you could give our listeners in the investment community who’d like to follow Cincom’s progress just some of the key things that we should look out for now going forward.

TN:     With regard to Cincom or the marketplace?

WSR: With regard to Cincom.

TN:     Well I think the key thing is can we fulfill our promises.  Can we make that 20 to 25% revenue growth?  Can we continue to make ROI?  Can we continue to bring new products in the market and have those new products grow at a faster rate than the overall company is growing?  These are some of the criteria that we measure everyday and I think potential investors or people who’d like to follow our firm should also be equally critical of and careful to observes.

WSR: Well certainly a very compelling value proposition and a company to watch onto follow. Tom I’d like to thank you for joining us again at the Wallstreet Reporter.

TN: Thank you very much Killian it’s always nice to talk to you have a good Christmas and Holiday season.

WSR: Always a pleasure Tom.

TN: Thank you very much.

Our guest today has been Tom Nies, President and Chief Executive Officer for Cincom Systems.  The company is privately held and further information can be found at cincom.com.