Intergraph: A Company in Transformation

Later in the day, I spoke with Intergraph's President of the Security, Government, and Infrastructure (SG&I) division, Preetha Pulusani about the specific focus she is bring to the newly reorganized geospatial division that she leads.Some of her comments are included here as well.

Intergraph and its Peers
Over the past year, I have questioned Intergraph's direction and base many of my opinions on the quarterly financial reports.I expected the company to grow at a pace comparable to that of its competitors.In particular, Autodesk and MapInfo have demonstrated strong financial growth over the last year.Autodesk reported a 30% increase in revenues for fiscal 2004 and its stock split two for one in November of last year.In April, MapInfo reported that it has had eight consecutive quarters of year-over-year increases in both operating income and operating margin.It has demonstrated expertise in acquisitions, as well.By comparison, Intergraph's year over year earnings growth looks weak at 4.8% for fiscal 2004.Wise and Pulusani revealed another perspective on these numbers.

When Wise took over as CEO in July 2003 Intergraph's stock was doing pretty well (See also the interview I conducted in November 2003).In January 2001, the stock was trading around $5 and hit $22 when Wise landed in Huntsville.As I write, the stock is over $34 revealing a more than 50% growth in two years.Any CEO of a tech company would love to boast that performance over the same period given the modest gains of the NASDAQ market where Intergraph trades.

Wise made it clear that he thought Directions Magazine may be missing a story about how the company arrived at its present status and to provide his perspective."Intergraph is a business transformation, value creation story, bar none, meaning almost everything we do is a transformation, said Wise."Now, history says it is a bad bet to bet against Intergraph over time...we should have never been able to exit the hardware business; we should have never been able to get up off the mat when the stock was $3; we should have never been able beat Intel; we should have never been able to have a global business that we have; we were dead when we were $3 (per share); we were dead when the stock price was at $10; we were dead when we were at $20; we were dead when we were at $30...and people still think we're dead."

Wise is not being defensive.He is describing how the company has weathered the criticism of the financial analysts.The financial results Intergraph has posted indicates that Wall Street is indeed patient and that the expectations Wise has set have been on target.But although these expectations may have been realistic, additional change is still needed and reorganization is underway.

Reorg Redux?
Intergraph is consolidating its divisions of public safety, mapping, and utilities, a move tried once before in the mid 90's but with limited success.Its objective this time is to re-focus its energies on very specific markets.In the new Security, Government and Infrastructure (SG&I) division, headed by Pulusani, the focus leans to homeland security and military applications.This time around Wise is attempting to make certain that both the core expertise in sales personnel and core competencies in software technology are driven to deliver marketable products.However, after two years as CEO he still faces significant challenges:
1.Margins are still slim;
2.Profit growth is small; and
3.Reorganizations take time to have an affect on the market

With those facts in mind, I wanted to know how he arrived at his decision to use the IP settlement money.Why did Wise and his board of directors use so much capital on repurchasing stock and not look to a strategy of acquisition to secure expertise in vertical markets?

"First thing I'd say is that they are not mutually exclusive," said Wise."We are investing in new areas that we'll take the sheet off of shortly...The reason why you buy back your own shares is that you think that's an important and high use of capital.You buy back your stock, not because it's a signal that you don't have anything else to do with it, but that you can buy your stock cheaper today than what it's really worth...A stock buy back is a bullish signal that the future will be better than today.Now, one nuance is very important to that.We also bought back, and it's not by mistake, a lot of shares in advance of announcing our restructuring.And so you get this leveraging effect of fewer slices of the pizza and greater earnings power in the company."

New Division Focused on Security, Government, and Infrastructure
Intergraph has a core of excellent software but has been challenged by ESRI in the traditional GIS markets.To more effectively market these strengths, Wise is recombining divisions that he thought could work together, and give the company a sharper focus on very specific vertical industries.

"One of the things that we haven't done very well for many years, is that we've developed a bunch of stuff without testing it with a market, whether they had interest in it or buying it in the past.We've had some instincts of what we thought they want to buy, but it wasn't validated. We hadn't had a sophisticated, what I'm going to refer to as a product management function, which is a market facing, data collection that sits between sales and development that says this is what the market wants, this is what our customers say, this is what our competitor's customer's say, and so we take all this data input as market intelligence."

That said, Intergraph faces an enormous challenge in addressing a bevy of direct competitors that sell into the same markets, some of which are nearly saturated and some where the switching costs are high, like government and utilities.I asked Wise about the fact that not only was growth at Intergraph slow, but that he has stated to analysts that the company was "not growing as fast as the markets it served." I also wanted to know how he reconciled the fact that companies, like Autodesk, that serve the same markets are growing more rapidly than Intergraph and in addition, seek the same government procurements, which also tend to have long sales cycles.Plus, Intergraph hopes to accelerate its growth but intends to stay in the same slow growth markets.

"We've never been delusional and never told anyone that we fancy ourselves as a 15% grower, said Wise."Last year we were a 5% grower; we'll try to get to 7% or 8% and the impact on us is astronomical.Would we like to grow faster than that? Sure, but were not asking anyone to take a bet on Intergraph because we're dressing ourselves up to be a 20% grower."

The recent reorganization, however, narrows Intergraph's market prospects for geospatial technology much further than the past, with a different understanding of where they can compete and win.Already strong in military markets and with a long history in public safety, Intergraph wants to emphasize products that offer solutions in "security" situations as well as in the government and infrastructure sectors.

"It's not by happenstance that the 'security,' 'government,' 'infrastructure' words are in that order.Part of our strategic plan is that we believe that we have a unique capability to lead a market that we think is real, that's important and that has high value and use in the security marketplaces; that's federal intelligence, that's public safety, that a fusion of many things.And so the word 'security' first implies a strategic intent of the corporation, said Wise."

Products vs.Solutions - A Change in Selling Strategy?
But Intergraph has altered, some might say confused, customers in the past with its message.Are they competing with products or "solutions" and does it make a difference? The former name for the division headed by Ms.Pulusani was called "Intergraph Mapping and Geospatial Solutions." But now, the emphasis is back, and perhaps always was, on products.It's not a trivial distinction because it ripples through the organization from software development to sales to customers.Customers need something to buy.Are they buying GeoMedia Professional, or a customized implementation that uses Intergraph's geospatial technology suite?

"I would say these focuses will be product led," Wise commented."Our products will create services opportunities, not inverse.It's the same model relative to what SAP has when they sell supply chain management or whatever their vertical application is and big, big services carry with it.The reason why the customer wants to deal with you is not because of the services folks but because you have a product that can solve your problem." Ms.Pulusani elaborated on this."With software products we have higher margins, so we have to go with products.But what do we sell? We do, in fact, sell solutions to some of the more complex problems our users have. That's what we sell.Now what we deliver is a combination of products and services.Around the world, that's our model today."

This is a much more unified message than what customers heard in the past and it is one where Intergraph has a unique competitive advantage. No company can deliver the expertise in public safety, utilities, mapping and geospatial analysis that will address an enterprise solution for a city government or military application.Other, large consulting organizations like IBM Global Services could cobble together vendors to create a technology solution, but only Intergraph has the years of experience of working all angles.Intergraph is in a position to either prime large contracts or work as a technology provider to others.It is one that needs to be exploited while attention is still focused on homeland security and network centric warfare (see article by Kevin Coleman).

"Markets mature; customer's needs change; things kind of evolve and come together; and we really don't know of anyone else in the market that can provide the public safety solution as well as the infrastructure management solution, in combination," said Pulusani.

Steps Forward
It has taken Intergraph some time to work through its financial, legal, and technology challenges.Wise believes that his company's story is one of transformation and value.The company survived through several tumultuous years and the ship seems to have been righted - you can not look at the balance sheet any other way and to do so would be to deny Intergraph its share of praise.

Going forward is not without its challenges.Growth still needs be 1-2% higher than it is today and the entire geospatial technology sector faces the onslaught of companies like Oracle and Microsoft, perhaps even Google, with more marketing might than they have.Mapping technology is ubiquitous and the main mapping software providers seem to have been caught flat-footed by the consumer applications now available through the internet.Though the consumer space is truly not the market for them, they should have been the providers of technology to the companies that do address this market.

"I think what is says is that companies, whether geospatial or not, have to continue to reinvent themselves or they die," said Pulusani.Intergraph seems to have done that.Wise has overseen the repurchase of 40% of its shares, using $635 million dollars from IP legal settlements and has $280 million in cash remaining.What is does next to market its products and use its cash reserves may be a tipping point for the company.