Micromuse: Coming of age in a time of turmoil

Micromuse is no beast, but it could be. The fault management and performance analysis company from San Francisco has grown successfully through acquisition. Most recently, the company, which went public in 1998, announced the $64 million acquisition of RiverSoft Technologies, a network management provider that, according to the definition above, never arrived.

RiverSoft's respected network discovery and mapping capabilities, however, got noticed during its five-year run as an independent software vendor, attracting investment from Hewlett-Packard as well (more on that later).

Micromuse also has grown on its own merit. Launched the same year that another revisionist group, the federal government, gave us the Telecommunications Act of 1996, Micromuse quickly became the de facto standard in fault management with its flagship product Netcool. It also commands significant mindshare within the service provider community.

But sometimes — and the current economic climate in the telecom sector could turn the fall of 2002 (no pun intended) into one of those times — even when a company does everything right, it's still not enough. As Peter Giglio, vice president and senior analyst of GKM, said about OSS sector consolidation, “a lot of good OSS start-ups will be left at the altar.”

Micromuse is just one example of a company struggling to go from start-up to stardom during the worst business climate our industry has ever seen (barring the 1930s.) The odds are good, but the odds makers are taking few bets on anyone these days. Here's why Micromuse Chairman and CEO Greg Brown and company say they'll make it.

Brown said that although this recent third quarter was the most challenging his company has seen, “It was also successful in that we continue to gain market share, generate healthy cash, grow deferred revenue and invest in technology.”

Even after acquiring RiverSoft, Micromuse is still sitting pretty with $180 million in cash. The company racked up 41 new customers in its most recent quarter. Roughly 16 of them were Tier 1 carriers, according to Brown. That 60% of the new customers were large enterprises supports analysts' assertions that Micromuse is increasing its focus on the growing and more stable enterprise market.

However, 77% of its revenue is derived from service providers, and Brown is quick to downplay a change in strategy and is adamant about conveying where his focus is fixed.

“We are not interested in conveniently and opportunistically knee-jerking from one sector to another. That's disingenuous and not credible,” Brown said.

But that doesn't mean his company won't be going after those dollars. “There are ways to take our [targeted] platform and re-deploy its respective implementation into the infrastructure requirements of an enterprise that looks and smells an awful lot like some service providers,” Brown said.

In a report released just last month, analyst firm Gerard Klauer Mattison said the enterprise will prove to be a “fertile OSS field,” and that unlike the telecom OSS market that is shopping for customer-facing solutions, the enterprise market is looking for more network-facing systems.

“Enterprises deem their infrastructure assets part and parcel of the way they get business done,” said Katrinka McCallum, chief operating officer at Micromuse. “Netcool started out as a manager of managers in the service provider world, and that story is repeating itself with large enterprises.”

Even with the addition of 41 new customers, Micromuse continues to see revenues decline (down to $35 million from $63.3 million last year) and has lowered its expectation for next quarter, citing the general health of the telecom sector. Many orders from service providers were deferred, and one large partial contract termination hit the company hard. Micromuse's stock, which exceeded $25 per share one year ago, was down to $2.98 as of Aug. 5.

Brown looks to what he calls a “meaningful mouthful of differentiation” that will keep his company viable as it works through this down cycle. In no particular order, Brown cites a worldwide presence with a satisfied, highly referenceable customer base, a well-known brand, blue chip customers and partners, excellent sales and distribution, and a diversified portfolio.

It's the latter that analysts say Micromuse needs to get more serious about. “Micromuse's greatest challenge is they need to get beyond fault management and move into other areas like service assurance,” said Patrick Kelly, a senior analyst at RHK.

Kelly praised Micromuse's sales and marketing unit and distribution channels. “These are major strengths for Micromuse,” he said. “With more products in their portfolio, they could become an even stronger player in this market.”

Others agree. “When you think of fault management, the first company you think of is Micromuse. It's the de facto standard,” said Karl Whitelock, program manager for competitive OSS strategies at Stratecast Partners. “But people are starting to think of [this space] as service assurance, and fault management is only one piece of that.”

Brown answered his critics this way: “In a very quiet way, we have been quite effective in building performance management capability through our service monitor class of products,” he said. While Micromuse has made progress in the performance area, he said, some additional steps will be considered.

While one of those steps could be to partner with other vendors, it's safe to say that acquiring one is always an option. And despite market conditions, Brown says the time is right to buy. “This is a better market to consider acquisition opportunities because of the increased clarity of who is a player and who isn't in a down market. And it is much easier to evaluate a company than it was 12 to 18 months ago.”

RHK's Kelly believes Micromuse may have missed the boat on acquisitions by squandering the market capitalization it enjoyed a year and a half ago. “They could have been making the necessary technology buys to not only grow market share, but to grow the company,” he said. “They can't do that today.”

McCallum begged to differ, saying that's just what the company did with the RiverSoft acquisition.

Given the paucity of RiverSoft's customer base, the ultimate success of the acquisition remains to be seen, but Micromuse did pick up some much needed technology. RiverSoft's discovery engine spans different technology domains, including frame relay, ATM and MPLS, which Micromuse lacked. “That's what service providers are asking for,” McCallum said.

The acquisition also beefed up Netcool's root cause analysis capabilities, which Whitelock said were not thoroughly embedded in the product. And it gives Micromuse mapping capabilities, which could help it better address the enterprise market.

“A lot of enterprise customers want to see things from a mapped perspective,” McCallum said. “Topology maps are less relevant in a service provider world where scalability makes it hard to fit everything on a map.”

Arguably, the most notable technology boost Micromuse gets from RiverSoft is the company's NMOS technology. However, there could be a snag. Kelly, who called the acquisition mediocre at best, said Hewlett-Packard bought both an equity stake in RiverSoft and a source code license in November 2000, giving HP a competitive edge if it commoditized NMOS' discovery technology.

Brown sees the HP threat in a different light. “We look at the HP agreement with RiverSoft as a positive,” he said. “It's one more vote potentially in standardizing RiverSoft's discovery layer in the marketplace.”

At least one Micromuse customer agreed. “Micromuse has a good framework that allows us to discover any device a customer has or can potentially get and normalize it so we can monitor it from our NOC without having to learn a bunch of different element managers,” said Samuel Hopkins, senior design engineer in Marconi Services' R&D division.

Hopkins said Marconi uses Netcool's OMNIbus, Impact and Visionary products to provide fault management and root cause analysis for its managed network services customers. “We looked at five or six different network management packages including HP but chose Micromuse despite the fact that it was kind of pricey.”

There was a time in the heyday of software start-ups when partnerships were a yardstick by which to measure early success. “It was the thud factor of your partner book that people brought to trade shows,” McCallum said.

But partnerships did not always correlate to real business.“The alliance partners we engage with are customer-driven, so we're not doing science projects on the side,” Brown said. “We're doing customer revenue-generating initiatives.”

Micromuse recently inked deals Telcordia and Sun Microsystems. While at least one analyst speculated that Telcordia needed Micromuse more than the other way around, a quick customer win with either of those could be the difference between reaching stardom or becoming an acquisition target itself.

Some analyst have even speculated that Telcordia's parent company SAIC might be interested in acquiring Micromuse. Telcordia is struggling to maintain its stardom, and new CEO Matthew Desch will likely make some major changes. Having Micromuse in his pocket wouldn't hurt.

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