Wall Street has turned its back on Wang Global since it bought Olivetti’s network and systems integration business, Olsy, last March, in a bid to buy itself a global services business. The $380m integration costs involved in absorbing Olsy’s $2.2bn business have eroded the company’s earnings, dragged its stock price down and left investors wondering when the deal will have a positive impact on Wang’s bottom line.
It’s been difficult to attract Wall Street’s attention since we began delivering losses to our bottom line. A negative EPS has clearly been an impediment to investors understanding our company. We were a $1.3bn operation that had to absorb a business almost double our size. That’s a very big bite for us and we had to make sure we executed well, says Frank Caine, CFO at Wang Global.
But good execution from the company’s standpoint differs from Wall Street’s understanding of the term. And the company is well aware of the difference. We’re eager to produce positive EPS figures and that should happen next year. Accounting rules dictated that we had to recognize the bulk of our acquisition costs last year, says Caine, and that hurt our numbers.
Since closing the Olsy transaction, Wang has reported a series of charge laden quarters. In its most recent December quarter, the company reported a loss of $16.4m (including $41.5m in restructuring charges on revenues of $1.03bn). The figures were further skewed by it changing its fiscal year end from June 30 to December 31 1998. For the six months to December 1998 it made a loss of $27.6m on revenue of $1.82bn.
That said, the results demonstrate that Wang is seeing revenue growth even though it has failed to be profitable. And, if Caines’ predictions turn out to be correct, this revenue growth will dramatically escalate in 2000. It wouldn’t surprise me if we did $2bn in the US, $2bn in Europe and $0.5bn in Asia Pacific next year, he told us.
This target is not beyond the realms of possibility. By the close of 1999, Wang Global will have completed its planned 31,000 reduction in headcount and fully absorbed the Olys network and systems integration business. It will also have accounted for the bulk of the integration charges having written off $155m in 1998 and $155m in 1999, leaving $70m to absorb in 2000. The company is also aiming towards returning to the 22%-23% gross margin levels it had been regularly delivering pre-Olsy and believes that will also happen next year.
Wang’s next big challenge is to grow market share and visibility in the harsh and fiercely competitive services sector. Although Wang only plays in one area of this business – the desktop and network integration services sector – it is forced to compete with service monoliths such as IBM Global Services and EDS. They can offer enterprise services such as datacenter outsourcing and application integration in addition to the type of services Wang provides. It also has to compete with hardware vendors such as HP and IBM that can leverage their PC and server businesses to generate pull through service revenues.
To compensate Wang Global has forged close partnerships with Cisco and Dell where the networking and PC vendor exclusively sell Wang services with their respective products. We will continue to leverage Dell and Cisco’s success in the market place by offering installation, support and management of hardware assets plus some value-add services, says Caine. Under a partnership agreement announced last year, the company also works with Microsoft to build e-commerce and banking packages around NT. It is also building a 25,000 strong team of Microsoft certified consultants, although this partnership is no doubt fueled by Microsoft’s 8% stake in the company. This has cemented its vested interests in seeing NT installed as the preferred operating system in the mid-sized market where Wang is strongest.
The desktop and network outsourcing market was worth around $150bn globally and is predicted to be growing at 15% per annum. But even with Olsy, Wang still owns a very small portion of the market. Conservative analyst estimates peg Wang Global’s market share at 1% alongside Compaq/Digital’s services business and Unisys, which own a similar portion of the market. EDS had a 2% share. Fujitsu’s share was 3% while IBM was the market leader with a 4% stake. The market is clearly fragmented which plays to its strengths, Caine argues, as no one vendor dominates, which leaves ample room for its own growth.
Medium-sized multinational companies with no more than 1,000 desktops. That’s our target market, says Caine. But there has been some suggestion that the provision of desktop and network outsourcing services alone is not enough to service this sector of the market. Wang Global is one of only a few vendors in the market to offer these services alone. Network and desktop outsourcing are attractive to some mid-sized operations but a lot of these companies still want to outsource the datacenter, says Doug Chandler at IDC.
However, the expansion of Wang’s business beyond its current core focus would probably overstretch the company at a time when it needs to start demonstrating to Wall Street that it is a viable investment opportunity. The company, therefore, plans to make some smaller strategic acquisitions to bolster its desktop and networking practices. But it will concentrate on growing its business in this area rather than expanding to focus on enterprise-wide services. Our win rate is pretty good. In the last seven or eight quarters we have won 40% of proposals, says Caine, who argues that Wang is now in the strongest position it has ever been to take on the rest of the vendors in its space.
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