After a profit warning, the Norwegian enterprise search firm’s second quarter figures saw a net loss of $26m – down from net income of $2.7m a year earlier – on revenue down 11.4% to $34.1m.
Yesterday the company said it is streamlining operations and is committed to regaining profitability in 2008; it will pair down to around 730 staff and reduce its quarterly cost base by over $12m.
We have not been very good at operational excellence, said CEO and co-founder John Lervik in a Computer Business Review interview. In fact that’s an understatement.
We are looking at our customer relationship management systems, our corporate infrastructure. We are focusing a lot more on operational efficiency. The good news is people say ‘that’s very easy to do’. Because it’s much harder to do great technology, and we have done that part already, Lervik said.
But we have simply not focused on [operational execution]. We are going to be much more focused on it especially over the next two to four quarters.
Lervik said that the firm has spread itself too thinly, targeting deals that were either only ever going to lead to a one-off project, or on the promise of revenue that it perhaps accounted for too early.
Search can be so broad, but we need to focus on the replicable areas, Lervik said. In two years’ time some of these other areas will become more replicable but we need to focus on operational processes, procedures and controls.
We will extend our leadership in the media, entertainment and communications sectors, and will expand the use of advanced search technology in other sectors such as financial services, retail and government. While concentrating efforts on certain key markets, we expect profitable growth from our new revenue base, Lervik said.
We grew very rapidly beyond $100m and we became the leader in our field; now we need to excel in our operations.
It’s my responsibility. There are no excuses, it has not been good at all. But now we are putting a plan in place to execute on this, he added. In the next couple of quarters we will have a more streamlined organization.
But Lervik also noted that, Nothing of this has to do with our customers. They are still buying our products and we have remained focused on our customers and technology.
As for the recent questions that arch-rival, UK-based Autonomy has floated about FAST’s accounting, Lervik said: We both follow International Financial Reporting Standards and US Generally Accepted Accounting Principles, and we even have the same auditors. But accounting is not black and white. There are also judgments to make. Sales were very eager to get deployments, and so they signed shorter forms of agreements: MOUs [memoranda of understanding].
But that created these very long payment terms which really hurt in accounting terms. We have definitely now addressed that and are being much more stringent, so we will reduce DSO [days sales outstanding] etcetera, he said.
But when you see rapid growth you need to prioritize – there are always 1,000 things you can improve. We have not always been identifying what we should have prioritized, or what we have overlooked.
If I did it all again I would still have prioritized the technology and our customers, but you also need to introduce operational excellence. I should have done that sooner, Lervik said.
You need a strong management team, too, so I also hired a new COO [Joe Krivickas] who used to be CEO of a couple of hardware companies.
Asked how the FAST board reacted to the latest disappointments around operational execution – which are clearly the CEO’s responsibility – Lervik said, Of course none of us liked that. But it is very clear what we need to do, and the board still sees that we have a great opportunity. They have a very long-term view.
Our View
A refreshingly honest account of what can go wrong at a firm that is focused on technology and customers but not up-to-scratch operationally. Yet as Lervik says, its own revenue recognition issues and dip into the red are not necessarily going to impact customers one iota.
But with the company’s share price roughly halving in the past year as these issues dragged down its profitability and sales, its shareholders on the Oslo Stock Exchange will surely have preferred that the firm got a grip on its operational procedures rather earlier than it did. Besides, FAST’s chief rivals – Autonomy, Endeca and a way behind in enterprise search at least, Google – will no doubt make much of this in sales engagements.
But to be fair, for a company founded just 10 years ago and now with around 3,500 installations, there are lots of things that FAST has got right. Plus with the enterprise search space still a largely untapped market, there should be plenty of business yet to be had for several vendors in the space including FAST. The market is too nascent to be ruling out any of the current crop of providers, with or without execution issues of their own.
