The network computer bandwagon, fueled by rhetoric and extravagant claims, has been rolling along for about 18 months now. But despite the dazzling future predicted for thin client computing by Oracle CEO Larry Ellison, the chief proponent of the concept, the early vendors of NCs are finding themselves scrabbling for a foothold on a steep incline. Among these companies is Boundless Corp, which over the last year has undergone a punishing and messy makeover program, with the goal of transforming itself from a dowdy terminal vendor to a glamorous NC company. The first step was a name change, agreed in September and finalized in May of this year. The company, formerly SunRiver Corp, settled on Boundless Corp in order to emphasize its focus on the network computers manufactured by its Boundless Technologies subsidiary. But more fundamental changes were also required, and the demanding task of restructuring the struggling company has already passed through several hands. CEO Gerald Youngblood was ousted in November last year, reportedly at the insistence of the board of SunRiver Group, which still owns a 53% stake in Boundless Corp. He was replaced by Leonard Mackenzie, who was given the remit of streamlining operations and establishing a new focus on Ncs. Almost immediately, Mackenzie took some pretty drastic measures. Boundless, it was decided, would discontinue its internet security and electronic commerce software subsidiary, TradeWave Corp, which it had been planning to take public. Despite heavy investment, TradeWave lost $2.5m in the first nine months of 1996, on revenues of just $1.9m. Boundless took a paltry $350,000 for its assets from Florida- based firewall specialist CyberGuard. Furthermore, in December and January, the company reduced its headcount by over a third, with the loss of 130 employees. Under Mackenzie’s leadership, Boundless reduced its bank debt from $28.1m to $17.1m and achieved profitability in its core Boundless Technologies business. Nevertheless, the company finished the year with a net loss of $11.2m on sales of $138 million, compared with a profit in 1995 of $2.6m on sales of $95m, although much of the loss can be attributed to restructuring.
Six month turnaround assignment
In May, six months after his appointment, Mackenzie was replaced by Gerald Combs, chief of SunRiver Group. According to the company, Mackenzie was employed on a six month turnaround assignment, and would be returning to run his gasoline distribution company. Under Combs, the brutal campaign of cost- cutting has continued, and a new line of ‘second generation’ NCs, named Viewpoint, has been launched, along with network administration software, Viewpoint Administrator. But has Boundless reaped the rewards of the aggressive strategies introduced by MacKenzie and Combs? Certainly, the company’s most recent financial results would not seem to point to a dazzling future. Revenues for the second quarter plummeted 30% to $23.2m, compared with $32.9m a year earlier. According to Joe Gardner, CFO of Boundless, the principal reason for the decline in sales is the overall decline of the text terminal market, which in 1996 accounted for 80% of the company’s revenues. In spite of this, Boundless has managed to achieve profitability in the first two quarters of fiscal 1997. For the first six months, the company reported net income of $1m, compared with a net loss of $503,000 for the corresponding period of the previous year. Gardner is confidently forecasting that Boundless will finish fiscal 1997 in the black. However, profits have largely been achieved through cost-cutting, a tactic which is unlikely to prove sustainable. R&D expenses decreased 34% in the second quarter, for example, while sales and marketing costs were cut by 37%, despite the launch of new products in May. What is more, despite having reduced its debts considerably, the company remains highly leveraged. As of June 30 1997, Boundless had a negative tangible net worth of $1.4m, and total liabilities of $43m. Further declines in sales or profit could seriously jeopardize Boundless’s ability to meet its financial obligations. A further point of concern is Boundless’s dependence on three major customers, Digital, NCR and IBM. In 1996, Digital and NCR accounted for 16% and 14% of total revenues. Although both are contractually obliged to buy from Boundless until late 1999, they can cancel the agreements under certain circumstances without compensation. Clearly, any terminations would be disastrous. Furthermore, in the company’s most recent quarter, sales of text terminals to IBM accounted for 17% of revenues. If, as expected, users migrate from text terminals to NCs, the relationship between IBM and Boundless is unlikely to prosper – Boundless’s rival, Network Computing Devices, is already manufacturing network computers on behalf of IBM.
New technologies
Acknowledging that the decline of the terminal market is likely to accelerate with the introduction of new technologies, Boundless is now totally reliant on the success of its NCs to survive. However, according to Boundless, uptake of NCs has been hindered by squabbling in the industry between rival camps led by Bill Gates, who favors a low-cost PC approach, and Larry Ellison. We are now where we expected to be in the first quarter of 1997, says Gardner. Revenues from the company’s NCs, he says, are expected to increase during the third and fourth quarters with the availability of the new Viewpoint TC models and Viewpoint Administrator software. Boundless has already received large orders from Sears Roebuck and AT&T. The long-term strategy is to target the 35 million users of text and X terminals worldwide, and convince them to migrate to Boundless NCs. This includes the company’s own text terminal customers. Our current installed base of text terminal users are our NC customers of tomorrow, says Gardner. But this transition clearly needs to be both smooth and rapid. For a company as financially frail as Boundless, any further delay in the uptake of network computers could lead to a loss of independence.
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