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July 21, 1998

THE TEST OF TIME: MERCURY LOOKS BEYOND YEAR 2000 TOOLS

By CBR Staff Writer

At a recent IT conference in the US, Jayaram Baht, vice president of marketing at Israeli software testing tools company Mercury Interactive, got chatting with another delegate, an information systems manager at a large US financial institution. How did his organization test its software, inquired Baht? We deploy it and see if it works, was the blunt reply. The response is typical, says Baht. Just 10% of the world’s companies use automated software testing tools. Mercury Interactive’s task, he says, is to convince the other 90% that, with the rise of complex, distributed software environments, software testing technology is both necessary and desirable. But even if market penetration of testing tools remains low, Mercury Interactive has found the area profitable. The company is the leader in software testing, according to recent research from the Yankee Group, controlling 45% of the market. Mercury Interactive has translated that dominance into solid growth and healthy profits. In fiscal 1997, net income rose 45% to $6.7m, up from $4.6m in 1996. Revenues were up 41% to $76.7m. The company was established in Tel Aviv in 1989 and listed on Nasdaq in 1993. Research and development work is still carried out in Tel Aviv, but the company’s corporate headquarters are in Sunnyvale, California, and it depicts itself as a largely US operation. We are a US corporation, registered in Delaware, and headquartered in the heart of Silicon Valley, says Aryeh Finegold, founder and chairman of Mercury Interactive. However, he emphasizes that the company’s corporate culture of loyalty and commitment owes more to its Israeli heritage, than to Silicon Valley, where headhunting is rife and staff turnover high. Mercury Interactive’s software enables customers to run new, untried software applications in a controlled environment to see if it matches expectations and, if not, to identify problem areas. The company’s products are being used to detect data- related flaws in programs as part of Year 2000 (Y2K) compliance projects. At present, Y2K products account for 25% of revenues. Mercury Interactive also markets a range of products that test for European economic and monetary union (EMU) compliance.

Finite source

But clearly, both Y2K and EMU projects are likely to prove finite sources of revenue, and although Mercury Interactive argues that it will have more than enough work in these areas to keep it busy for the next two to three years, it has broadened its portfolio with the launch of testing products for enterprise resource planning (ERP) software and electronic commerce. Launched in 1997, these areas accounted for 25% and 15% of revenues respectively in the first quarter of fiscal 1998. Surprisingly, given the lucrative market for software services, Mercury Interactive says it is not interested in getting into the implementation and consultancy market associated with its products, at least for now. The economics of running a software company are very different from the economics of running a consultancy company, says Moshe Egert, the company’s vice president of European operations. However Finegold, is more circumspect. We’re not religious in our business philosophy. It is tempting to target those consultancy revenues, but it would take up a lot of our resources, so the answer for now is no, he says. The company is, however, open to potential acquisitions. If we can buy unique technology that will help us, we will, says Finegold. The company has $100m in cash for such purposes but currently its only spending plans are two new buildings, one in Israel and one in California.

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