COVER

MAKING MILLIONS

Canadian software companies are leaders in a highly competitive global computer market

DEIRDRE McMURDY,BRENDA DALGLISH,ANDREW WILLIS July 17 1995
COVER

MAKING MILLIONS

Canadian software companies are leaders in a highly competitive global computer market

DEIRDRE McMURDY,BRENDA DALGLISH,ANDREW WILLIS July 17 1995

MAKING MILLIONS

COVER

Canadian software companies are leaders in a highly competitive global computer market

DEIRDRE McMURDY

It is the final punctuation mark for the end of an era. Last week, Smith Corona Corp. of New Canaan, Conn., one of the last North American companies to manufacture typewriters, formally filed for bankruptcy protection. Company executives said that personal computers had eliminated the demand for their product and they reported that Smith Corona was left with total net assets worth just $284.8 million. That is only slightly more than the advertising budget that Microsoft Corp. of Redmond, Wash., has earmarked for the launch of the latest version of its personal computer operating system, Windows 95.

Not since the late 18th century, when the widespread availability of cheap steam power unleashed the Industrial Revolution, has there been an innovation with the socioeconomic resonance of the computer. Last year, for the first time, more U.S. households acquired personal computers than television sets. And as the access to computers has become more widespread in businesses of all sizes and in homes, the computer industry itself has evolved at an increasingly rapid pace—along the way creating a stable of new Canadian millionaires whose brands have conquered the world.

Their products are familiar names—CorelDRAW and WinFax— and their companies, including Cognos Corp., Corel Corp., Delrina Corp., Hummingbird Communications Inc. and Newbridge Networks, are gaining global attention for their innovative products. Together they represent a multibillion-dollar-a-year industry that, even a decade ago, barely existed. Clustered around universities, such as the University of Waterloo, and research facilities, such as those in Kanata, Ont., the software companies have become core building blocks in Canada’s New Economy.

In the beginning, there was hardware: massive, costly mainframe computers that were the exclusive preserve of experts within big government and big corporations. The next wave, in the 1980s, brought an array of faster, smaller personal computers that could perch on any desktop or nestle in a lap.

But it is software that is now on the march, adding value to hardware, providing customized services for mass-produced computers and connecting incompatible systems into a seamless global communications network. Says Michael Bauer, associate professor of computer science at the University of Western Ontario in London: “Hardware is no longer an end, it’s a means. It’s a base platform for the software that is carrying technology on the next leg forward.”

The heightened emphasis on software is already apparent in the recent spate of strategic acquisitions and mergers in the sector. Earlier this year, software company Alias Research of Toronto, maker of the three-dimensional PowerAnimator software, was taken over by Silicon Graphics of Mountain View, Calif. In 1994, Softimage of Montreal, which produces special-effects software, was acquired by Microsoft. Last month, IBM Corp., whose corporate roots are planted firmly in the mainframe business, paid $4.8 billion to acquire the established brand-name software developer Lotus Development Corp., maker of the profitable spreadsheet

program Lotus 1-2-3 and Lotus Notes.

Then last week, Toronto-based Delrina Corp. announced that it was joining forces with Symantec Corp. of Cupertino, Calif., in a $568-million share-exchange deal. Both companies have business-form product lines and could suffer with the release of Microsoft’s new, improved Windows 95 software.

Industry analysts say that they expect the consolidation to continue, especially because Canadian high-technology stocks are now attractively priced for U.S. investors.

Another incentive for additional mergers is the growing need to develop strong brandname recognition in a competitive market.

According to technology analyst Mark Lawrence, with Loewen Ondaatje McCutcheon Ltd. in Toronto, as computing power has become broadly available to the general population, software has become “more a consumer retail business than a technological one.” He adds that the need of a recognized brand name to gain retail distribution will also push software mergers.

Just as in the consumer-goods industry, software has become a business where low margins must be offset by high sales volumes and a significant chunk of what is known in the computer business as consumer “mindshare.” That means that, as Microsoft has clearly demonstrated, aggressive, global marketing is essential for success. After all, when IBM searched for a top executive to turn the ailing computer giant around financially, it turned to Lou Gerstner, whose previous career experience was at the packaged-goods company RJR Nabisco.

In order to recover the considerable costs of software development, companies have to act fast—and globally. Although a high price may be charged for a new software product initially, it does not take long for competitors to improve upon it. That means that the volume of early sales must be high. “The economics of the software business force companies to think globally,” says Paul Kennedy, president of computer consultancy IDC Canada.

But at the same time as global market pressures are pushing the software industry to consolidate, there is still considerable ongoing fragmentation. While larger, combined companies may increasingly dominate the business, their focus is on the high volumes of massmarket sales. As the companies get larger and more innovative, they create new, specialized niches for smaller companies. “The big companies may drive the big trends,” says Bauer, “but the smaller companies feed off that, constantly adding value and providing specialized services.”

According to industry observers, Canadian companies have so far excelled at finding and dominating specialized software niches. Already, there is an impressive list of home-grown success stories, and among their ranks the financial rewards for entrepreneurs and investors alike have been significant. But for even the leading contenders, the fast pace of change, the intense global competition and the challenges of managing a small business create a constant juggling act. After all, today’s Microsoft can quickly become tomorrow’s Smith Corona.

LEADERS OF THE PACK

A handful of Canadian entrepreneurs have successfully made the transition from high-tech upstarts to the international ranks of software industry leaders. In the process, they have become multimillionaires and created knowledge-intensive jobs at home. But while they all clearly enjoy the view from the top, they are also acutely aware that the only way to stay in the game is to keep innovating, upgrading and expanding their existing product lines.

SAILING PAST THE COMPETITION WITH CUSTOM COMPUTERWARE

COGNOS: Michael Potter

PRODUCT: computer customization software

1994 REVENUE: $150 million

Even when he is discussing his retirement plans, Michael Potter is mathematically precise. Potter, chairman and chief executive of software developer Cognos Inc. of Ottawa, says that in a few months—when he steps down from the active role he now plays in the company—he intends to spend exactly one-third of his time sailing. “But a third of my time is all I’ll ever spend on a boat,” declared Potter, who has a masters degree in physics. “It’s just too inactive intellectually.”

Although Potter’s debonair manner seems uncharacteristically calm by the standards of the frenetic software industry, he is one of the Canadians who has struck it rich in the business. Cognos, which Potter, 51, founded in 1969, is a recognized global leader in the business software market. And, as Potter points out, thriving for that long is a feat in an industry where most of the leading-edge companies of 10 years ago are now out of business. “I’ve always said that perseverance is a more valuable quality than skill or luck,” he noted.

But Cognos has more than just endurance—it scores well in skill and luck, too. One of the toughest challenges for an established software company is to develop a second generation of products that prove to be as popular and as profitable as its first. Cognos got started by developing custom software for individual businesses; in time, it began to develop software tools to enable businesses to customize their computer systems to meet their individual needs. Five years ago, it introduced a new product line of so-called business intelligence software, which businesses can use to organize their own data. Cognos president Ron Zambonini says that luck helped with the development of its second-generation products, Impromptu and PowerPlay. “A lot of the drive behind those products came from one of our customers who had this problem with data and asked us to help,” said Zambonini. “That gave us an early lead. We got a hot product in a hot market”

While Cognos begins to eye the consumer market, its business intelligence products are paying off handsomely. Last year, Cognos reported sales of $150 million. Recently, its share price soared to $40, from $25 at the beginning of the year, giving the company a current market capitalization of more than $500 million. Potter, who owns 23 per cent of the company’s shares, can clearly afford to retire. He intends, however, to keep the shares and remain on the company’s board of directors as the company’s largest shareholder.

As for the recent rash of takeovers and mergers in software, Potter considers it as a healthy sign of maturation. “The large firms are developing a great deal of resources, power and marketing capabilities,” he said. “Companies like Microsoft and Oracle are turning into real juggernauts.” But he says that does not necessarily mean that they will crush small and mid-sized software companies. In fact, he notes that every innovation creates new opportunities for others.

Still, Potter sounds slightly wary of the market power that the giants exert, noting that “it is the most successful companies that appear to be the most likely to be taken over now.” He says that one of the key things that Cognos will be looking for in the executive it hires to replace him is a familiarity with acquisition strategies and techniques. “I don’t know for sure that we will want to do acquisitions,” he said, “but I

1......nrrirr ■ know that we want to have that capability.” He said that

Cognos is currently well-positioned to launch a takeover because it has “lots of cash on hand and a stock price that’s appropriately valued.” But countering that, he added, “We already have a lot on our plate.” Associates describe Potter as a perfectionist who has trouble relinquishing the micro-management of those projects he undertakes personally. He says that he is stepping down from the day-to-day operations to pursue other interests. Unmarried, Potter says that he does not consider his retirement a symptom of a mid-life crisis. “I wouldn’t use that term,” he said, “but if I stood back and looked at my life from one end to the other, I would definitely be disappointed if I did not free myself up to investigate other choices and to pursue other possibilities before I was too old.”

As an avid sailor, Potter says that one of the first retirement projects he may undertake is circumnavigating the world in his yacht. He also intends to spend some of his time helping other technology companies grow. After he announced that intention at Cognos’s annual meeting last month, he said, his office was inundated with inquiries from small companies. “It may take me a couple of years,” he said, “but I’d like to find two or three or four that I could make a contribution to.” For Potter, apparently, even sailing around the world cannot match the exhilaration of technology.

BRENDA DALGLISH

A GRAPHIC EXAMPLE OF SUCCESS

COREL: Michael Cowpland PRODUCTS: computer graphics software 1994 REVENUES: $164 million

Michael Cowpland is one fast talker. It is difficult to tell whether the rapid-fire delivery of the chairman and president of Corel Corp. is one of the reasons for his success in the relentlessly fastmoving software industry, or whether, after more than 20 years in the sector, his speech has accelerated to the pace of the industry. After all, speed is of the essence in the highly competitive software game. “It’s war,” says Cowpland brusquely.“People are getting shot down in flames around us all the time. You can’t rest on your laurels for a minute, because the industry changes every month.”

Cowpland knows what he is talking about at 52, he has already founded two successful high-tech companies. Mitel Corp., which cornered a lucrative niche in the telephone switching market with its key telecommunication software components, was an industry powerhouse in the 1970s and early 1980s before hitting technological problems that slowed it down. More recently, Cowpland started up Corel Corp., which develops and markets the popular graphics application software CorelDRAW, which allows users to create elaborate designs on their personal computers. Corel, which posted sales of $164 million in 1994 and has a current market capitalization of $1.2 billion, has been a recent stock market favorite. Since the beginning of the year its share price has almost doubled to $24. Cowpland personally owns about 18 per cent of the Ottawabased company, bringing his estimated worth to more than $200 million.

Cowpland says that Corel’s future becomes ever more assured even as the software industry matures. “As the products get more sophisticated and as the cost of marketing grows, there’s much less chance of a sudden surprise,” he said. “It’s no longer possible for four guys in a garage to bring out something that could blow us out of the water.”

But Corel has never shied away from competition. In 1992, it revolutionized the pace of the international software industry by releasing new versions of its products more frequently. Instead of bringing out a software upgrade every 18 to 24 months—then the industry standard—Corel began introducing new versions of its most popular products every 12 months. Then, instead of replacing the earlier versions of its software with the newest version, it continued to sell discounted older versions to users who did not need the latest technology.

Cowpland insists that the sales potential

for graphics software is much greater than for other types of software, such as spreadsheet and word processing programs. “Graphics isn’t like word processing, say, where after you get a spell check and a grammar check and all the fonts you want, there really isn’t much more that you can add,” he said. “With graphics there’s almost no end of revision possibilities.”

With a firm grip on its niche within the graphics software market—Corel predominantly caters to computers that use Microsoft Corp.’s hugely popular Windows operating system rather than the Macintosh system—it is now expanding its product lines to include computer games. Next year, Cowpland says, Corel will begin to offer a desktop video system that will allow users to communicate with each other via computer networks, while viewing video pictures of each other. As for the rash of takeovers sweeping through the software industry, Cowpland declares that Corel is only marginally involved. ‘With a market cap of $1 billion,” he said, “we’d be a pretty large chunk for someone to bite off.” Although the company is a frequent buyer of technology, he said that Corel is not interested in taking over other software companies as has the industry’s leader, Microsoft Corp. of Redmond, Wash. Cowpland says that by buying only the technology, Corel gets what it wants from a takeover without having to take on some other company’s problems.

The paths of Corel and Microsoft deviate in other ways as well: Microsoft’s founding chairman, Bill Gates, has a stated goal of seeing a computer on every desk and in every home— equipped with his firm’s software products. But Cowpland’s ambitions are more modest—and less computer-obsessed. Born in England, Cowpland is 12 years older than Gates and he did not grow up inside the industry as Gates did. While Gates was first paid for writing software while he was still in high school, Cowpland studied mechanical and electrical engineering at university. And he was working for Bell Canada’s research division at about the same time that Gates was dreaming about how widespread computer use would eventually become.

Even now, Cowpland appears to regard computers pragmatically as useful tools rather than a personal obsession. Although he uses Corel products to design his own presentations and slide shows, he says that he does not spend a lot of time surfing the Internet. “It’s too slow,” he said. “It’s good at doing a very wide search very slowly, which is not that helpful for me.”

Cowpland does, however, share at least one personal interest with Gates: They are both close to completing the construction of massive houses. Gates is building a $45-million, 42,000square-foot home on the shores of Lake Washington in Seattle. The property will have a 600-foot pool, a movie theatre, a manmade stream and underground parking for 28 cars. Meanwhile, Cowpland’s controversial 20,000-square-foot mansion in Ottawa’s stately Rockcliffe Park neighborhood features two squash courts, five bedrooms and a 10-car underground garage. Some neighbors complained that the house was too large for the neighborhood, but Cowpland says that he needs a big house so that he and his second wife, Marilyn, can indulge their athletic interests. “The reason why the house is so big is that it has things like the squash courts and room for PingPong and snooker,” he said. ‘We wanted to be able to have people over to the house to play sports, not just chitchat all the time.” Even for a fast-talker like Cowpland, talk is never cheap.

B. D.

THE FLIGHT OF THE HUMMINGBIRD

HUMMINGBIRD: Fred Sorkin PRODUCT: computer network software 1994 REVENUES: $33 million

pgrading the sophisticated design of F-18 fighters, the supersonic jets flown by Canada’s air force, requires the work of a team of engineers using powerful mainframe computers. But technical supervisors of Los Angeles-based Northrop Grumman Corp., which manufactures the aircraft, were attempting to monitor the progress of that high-flying project on desktop personal computers—and the two systems could not communicate effectively. In fact, it took engineers 31/2 frustrating hours just to get their PCs through the most basic tests on the F-18 project. Then, North York, Ont.-based Hummingbird Communications Ltd. sold Northrop Grumman a software package known as an Xserver, which knits together UNIXbased computer systems and personal computer programs. Now, it takes Northrop managers only 18 minutes for their desktop PCs to run a full range of tests on the big mainframe.

Since 1987, Hummingbird has specialized in the business of getting computers to talk to one another. That year, company founder Fred Sorkin began adapting X-server software technology, developed at the Massachusetts Institute of Technology for large companies or government agencies that owned a variety of incompatible computers, for use by smaller ventures. The first two years were lean, and Sorkin kept Hummingbird, and its six original employees, aloft with revenue of $1 million a year from various computer consulting contracts. In 1989, the company finally made its first major sales to Ontario Hydro and Statistics Canada—and it has never looked back. Sorkin recalls: ‘We were starving. Then, we moved $5,000 of software in one month, and we were jumping up and down with joy.”

The celebrations have continued as Hummingbird has grown steadily. It recorded sales of $33 million and a profit of $11.4 million in 1994, and investment industry analysts are forecasting $55 million in revenues and profits of about $17 million this year. For employees who bought shares at $16 each when Hummingbird went public in 1993, there is also cause for rejoicing: Hummingbird stock traded at $40 late last week. Says Sorkin: “It is a source of real joy for me to see staff with new cars and cottages.” Sorkin’s own stake in Hummingbird is worth $84 million at current market prices. But he insists that this wealth has made little material difference in a life filled with 80-hour work weeks, constant business travel and only the occasional game of tennis. “I live in the same house, drive the same car and have no ambition of owning a Rolls-Royce,” Sorkin told Maclean’s.

Even by the measure of Canadian high-technology circles, Sorkin holds one of the more impressive résumés in the business. Now 57, he was born in Lithuania and earned a PhD in computer science from Moscow University, and two masters degrees—in mathematics and engineering— from Lithuanian schools, before coming to Canada in 1976. An aunt in Montreal sponsored his immigration and without her intervention, Sorkin says, he was considering a move to Israel. He adds: “While it might be easier to run this kind of business in the United States, I like it here and am forever grateful to Canada.”

From 1979 to 1981, Sorkin was the director of electronics development for Micom, the information-systems subsidiary of multinational electronics giant Phillips NV in Montreal. In the early 1980s, he ran the office-products division of Mitel Corp. and made powerful friends along the way: among them, former Mitel head and Corel Corp. chief executive Michael Cowpland, who is now on the Hummingbird board of directors. Despite his professional and financial success, however, Sorkin continues to sport shoulder-length hair. And he is front and centre—with a thick cigar in hand—in office photographs of recent sales conventions.

To keep his firm’s operations humming,

Sorkin is pushing his 40-person research and development team to expand its range of computer networking products. At the moment, the R and D team is in the final stages of building an Xserver that works with Microsoft’s long-anticipated Windows 95 computer operating system, which is expected to be released in late August.

Currently, a single package of Hummingbird’s software costs $680, although prices drop sharply for customers buying in bulk. And such major corporations as Northrop routinely buy 450 units at a time.

About 70 per cent of Hummingbird’s sales are in the United States—just over five per cent of revenues come from Canada.

The company now controls about 40 per cent of the X-server market, and Sorkin says he would like to hold 50 per cent within three years. By then, he estimates, the sector will be worth more than $400 million—it is currently worth about $120 million.

According to Sorkin, more acquisitions may soon be in the cards. In March, Hummingbird bought Raleigh, N.C.-based computer network designer Beame & Whiteside Software for $16 million, a move that added additional networking tools to Hummingbird’s inventory and’ increased the company’s profile with American investors, an important factor for a company that listed its shares on the New York City-based NASDAQ exchange last year. Although the company has $50 million in cash in the bank and no debt on its books, Sorkin says he may take advantage of the market’s strong appetite for high-technology stocks by issuing additional shares. Clearly, this Hummingbird is spreading its wings.

ANDREW WILLIS

LEARNING THE FAX OF LIFE

DELRINA: Dennis Bennie, Mark Skapinker, Bert Amato PRODUCT: computerized business forms including fax software 1994 REVENUES: $133 million

The staff at Toronto-based Delrina Corp. has always had attitude to burn. Under the leadership of a hard-driving trio of immigrants and a California-based sales and marketing whiz, Delrina’s team of computer programmers gained notoriety with a screen-saver program in which a shotguntoting penguin does battle with a flock of flying toasters—a parody of a more popular program sold by Berkeley Systems Inc. of Berkeley, Calif. When the U.S. company challenged Delrina’s right to use the flying toaster image, the dispute happily generated

Delrina

valuable global publicity for the Canadian firm’s products. Delrina also designed software which allowed people to send and receive faxes from their personal computers, called the program WinFax, and sold 12 million copies worldwide. In fact, the company was probably its own best customer, unleashing a constant barrage of electronic press releases touting the company’s latest projects and product upgrades.

But some of that attitude turned against Delrina’s management last week, when 750 surprised employees suddenly learned that their seven-year-old company would be folding its operations into Symantec Corp. of Cupertino, Calif., in a share-exchange deal valued at $568 million. The staff at Delrina’s Toronto head office openly expressed dismay at the prospect of losing up to 65 jobs, as well as some of their cherished independence.

But according to the company’s founding chairman, Dennis Bennie, t, Delrina’s distinct attitude will be unaffected by the merger. Just hours after the agreement with Symantec was signed, Bennie told Maclean’s, “The ability of Delrina to create and innovate is enhanced by this deal. Symantec has shown real talent in managing acquisitions, and we will continue to do research and development in Toronto.”

But Bennie added that software is not an industry for either the faint of heart or the weak: sales of Delrina’s fax programs have slowed to a trickle in recent months as computer users began to anticipate the imminent arrival of Microsoft’s new Windows 95 operating system, which has built-in fax capability. He predicts continuing consolidation in the software industry, and he acknowledges that the need for a broader range of products helped to drive Delrina, with sales last year of $133 million, into the arms of Symantec, which had 1994 sales of $458.5 million.

For his part, Symantec chief executive Gordon Eubanks says that he is inspired by the challenge of tying Delrina—with its 60-per-cent share of the electronic business forms market and its 70-per-cent share of the fax software market—to his firm’s product line, which is focussed on document handling and protection. Eubanks says, “There’s a tremendous integration of telephones and computers coming. We see huge opportunities for software that capitalizes on this. When you look at the people doing this, Delrina is at the top of a short list.”

For now, Bennie and several other senior managers plan to stay around and develop more software. Bennie, a lean, 43-year-old marathon runner, skier and golfer whose marble-encrusted North Toronto home is just blocks from the tony Rosedale Valley Golf Course, will join the Symantec board. He will be accompanied there by Delrina’s president, Mark Skapinker, 40. As a result of the merger deal, each of them will soon own more than $20 million of Symantec stock. Chief technology officer Bert Amato is also staying on at Delrina, but the fourth founding member of the team—San Jose, Calif.-based sales chief, Lou Ryan—will likely leave the firm.

Joining forces with Symantec is just the latest step in a journey that started in Johannesburg for Bennie and Skapinker, and in Zimbabwe for Amato. The three did not meet until they reached Toronto. Then Amato, who had worked at IBM, and Skapinker brought a software idea to Bennie, who was then president of another software company, Ingram Distribution Inc. Eventually, the three joined forces. Now, upstart Delrina and its executives are playing in the big leagues, and Bennie says, “I anticipate fantastic opportunities to build a more powerful company, without some of the distractions that dog smaller firms.” And in California, Delrina’s attitude may just find a natural home.

A. W.

A NEW BRIDGE TO A HIGH-TECH FORTUNE

NEWBRIDGE NETWORKS: Terence Matthews PRODUCT: communications networking software

1994 REVENUES: $552 million

Terence Matthews has always liked to tinker. As a child, he tinkered with cars in his father’s garage in the Welsh town of Newbridge. Now, the Ottawa-based billionaire tinkers with telephone systems at a nine-year-old company named Newbridge Networks Corp. When time permits, he visits his property in Wales. At 52, Matthews has amassed two fortunes in as many decades. Now, he is on the verge of once again profiting handsomely from the newest generation of communications software.

Already among the top two companies with high-technology products that allow phone companies to ship data, voice and video signals, Newbridge also is a pioneer in the communications specialty known as asynchronous transfer mode (ATM). That means that the company’s product can bundle any electronic information and move it quickly and reliably, the way containers can be humped from a ship to a truck to a train. Last year was the first that Newbridge sold ATM products—and it moved about $60 million worth.

Over the next two years, investment analysts Andrew Waitman and Tom Valdis of the Toronto-based securities dealer Eagle & Partners Inc. forecast that Newbridge’s ATM sales could top $470 million. They also regard the debt-free company, which had 2,955 employees and sales of $552 million and profits of $158 million in 1994, as capable of expanding to $1.2 billion in sales and a $250-million profit by 1996.

Still, according to the rules, Newbridge should never have even made it out of the starting gate. Company spokesman John Lawlor concedes: ‘We were actually a late entry into networking, and should never have been able to make up ground. But what we provided from the start was a total solution to a company’s communications needs, something no competitor was doing.”

Matthews’s high-tech adventure in Canada began in 1969, when he and his wife, Ann, then living in Wales, visited Ottawa on a vacation to North America. They never left. An engineer by training, he took a job in Ottawa marketing silicon chips for Microsystems International, a branch of Northern Telecom. He made his first millions with Michael Cowpland when the two founded Mitel Corp. with a $5,000 loan and a technology that converted rotary dial phones to touch-tone lines. After a bruising ride on the stock market that culminated in a corporate buyout by British Telecom, Matthews left Mitel in 1986 with about $40 million in cash and founded Newbridge Networks. Along the way, he also accumulated the trappings of success: vacation homes in Ontario’s Thousand Islands region and in Florida, and properties in Wales and London. Matthews recently earned 14th place on The Sunday Times’ list of the 500 richest Britons—three spots above Queen Elizabeth II. But then, the Queen never had to work her way to the top.

A. W.