Once Mosaix, the main threat to Melita in the mid-tier call center market was purchased by telecoms heavyweight, Lucent Technologies, its rise to dominance looked imminently achievable. The largest vendor in the in-bound/out-bound and call blending systems market had been eliminated and the players that were left no longer looked worthy opponents. Frantic, poorly executed acquisition activity in this space had littered the landscape with a number of causalities leaving the field open for Melita to realize its IPO dream of market leadership.
A rising star in the out-bound market, Melita’s former competitor Davox fell by the wayside when it attempted to merge with in- bound calling specialist, Answersoft in May 1998. Although the business combination managed to increase revenues by 15.8% to $88.9 million, profits dropped by more than 50% to $8.5 million for fiscal 1998.
EIS, another competitor, also failed to reap the benefits of diversification into call center integration and CTI workflow technology through acquisition. Its 1998 company revenues were actually smaller than those achieved before its mid-90’s buying spree, dropping $26.7 million to $58.7 million on losses of $2.9 million.
Even Mosaix, which also bought workflow software and then began to financially falter, was still witnessing declining revenues until it was rescued by Lucent. Revenues fell $11 million to $110.1 million in 1998 on profits that had more than halved to $4.2 million.
While its competitors’ indulgences in M&A activity cost these vendors dearly, ravaging earnings and sabotaging growth rates, Melita flourished. The company rounded off seven quarters of sequential earnings growth in Q1 1999. Revenues were up 41.9% to $93.4 million and profits increased 11.4% at $11.7 million in 1998.
Melita, however, stuck with its core business in predictive dialing and outbound calling systems that seemed at the time to the most viable strategy for success. That was until last week, when it took the acquisition plunge buying NT-based out-bound call system vendor, SmallWonder Softworks and collaboration software specialist, eShare. Melita is now heading in the same direction as Genesys and Geotel. It is trying to widen the call center into a contact management center with web, email, voice and fax capabilities, says Kevin Volpe at Gartner Group.
Diversification, he argues, is necessary to counteract the shrinkage in these vendors’ core market. The dialer business is at the very end of its technology cycle. Rather like Davox, EIS and Mosaix before it, Melita needs to branch out, says Volpe. This business had been shrinking for quite some time and market contraction had provided the catalyst that set off the flurry of deal-making activity in the last three years (see the earlier report on Call Center Consolidation Causes Chaos).
But will Melita find, like many of its competitors, that diversification comes at the expense of future profitability and revenue growth?
Probably not, say analysts. First off, unlike its competitors Melita is not resting future hopes for growth on a fully integrated broadened software portfolio. It is looking to cross- sell acquired products into its existing installed base. Second, it is in a relative position of financial strength when compared with many rivals. We’ve built a well developed call center model that can be fairly easily extended out onto the web and down into the small business market. However, the development of a contact management system is some 12 months away and is not a linchpin on which the success of this deal rests, confirms Dan Lowring, CFO at Melita.
The company’s base of 600 corporates in financial services and banking will be the first target for the acquired eShare collaboration software. The vast majority of our customers are looking for some kind of web-based tools that can be used as an alternative to a call center suite to provide on-line customer assistance, says Lowring. Melita will also sell its Explorer c
all center system and the acquired Exchange systems (from SmallWonder) into the eShare client base.
eShare had around 1,000 client sites using its web-based collaboration tools which started life as chat room software. Although the privately held company was not yet profitable it was fast growing. Revenues jumped from $750,000 in 1997 to $3.7 million in 1998. Melita claims that the business will continue to grow at a 100% clip at the very least for the next three years.
We will see eShare revenues of at least $8 million this year and $16 million next year, says Lowring, justifying the reason Melita paid what many analysts regard as an astronomical $79.1 million in stock for the Internet start-up. The price seems really high but eShare alongside Acuity are the market leaders and a .com focus always makes valuations outrageous. If Melita can achieve the revenue targets it is claiming then I suppose it will be worth the money, says Steve Robbins at the Yankee Group.
Melita’s second acquisition, which closed on the same day as the eShare acquisition announcement, was less controversial. SmallWonder Softworks, a Mom and Pop operation that had built a small albeit profitable business in NT-based call centers for SMEs (small and mid-size enterprises), broadens Melita’s core business in the mid-range $50 to $200 million market place to the low end of the market. We build complex call systems that involve PBX and ACD integration. SmallWonder sells standalone packages to companies wanting to set up a telemarketing department, says Lowring.
With SmallWonder, Melita has effectively bought itself an extra $3 million in revenues for the equivalent of $4 million (with some undisclosed performance related earn-outs) in company stock. The call center market for the SME market is worth $350-$400 million, according to Lowring. If Melita can achieved $3 million in sales by word of mouth (the company did not have a sales and marketing operation) then there is no reason we can’t quickly achieve a significant increase in sales, he says.
But while Melita continues to maintain market momentum using acquisitions as a stepping stone to provide future growth in the call center space, there is an ever present threat from the customer relationship management freight train rumbling in the distance. As these markets converge there is more impetus for enterprise software vendors with sales automation, help desk and customer support expertise such as Siebel, Clarify and Vantive to sweep up the more frail call center weaklings and thwart Melita’s ambitions to retain a lead in its call center heartland.
