Midrange Stuff, OS/400 Edition

With the downturn in high-tech spending in all the major economies of the world, just about every IT vendor, large or small, has had to reexamine its business units and honestly assess which ones are working--usually meaning which ones are making profits--and which are not. As a side effect, the harsh economy forces companies to define their core competencies and get back to basics in delivering products that focus on them. That's exactly what's happening across the IBM midrange market, and with iSeries connectivity vendor Better On-line Solutions.

B.O.S. was founded 12 years ago by Israel Gal, the company's current chief executive. Gal was the twinax product manager for Intelligent Information Systems, an Israeli company that owned twinax terminal maker Decision Data and later sold it to NLynx Technologies, in March 1999. While at Intelligent Information Systems, Gal came up with some add-on products based on the company's terminals--such as a cash register extensions to the machine. B.O.S. was born as a spinoff of Intelligent Information Systems, where Gal's company would build customized terminal solutions for AS/400 customers in Israel. After the Gulf War, Gal wanted to expand beyond Israeli, which had a decent-sized AS/400 marketplace but was obviously only a small slice of that worldwide market, and he also wanted to move beyond products that were dependent on terminals, which were often in short supply. That's when B.O.S. made its move to create its own twinax terminal emulation software and feature cards, putting it on course to grow into one of the larger connectivity vendors in the AS/400 and iSeries market.

Over the past decade, that original twinax emulation product has given B.O.S. the fuel to create a broad line of connectivity products for OS/400 shops. Today, B.O.S. still sells its DOS and Windows BOSaNOVA 5250 emulation software, and according to Gal it is still making enhancements in this software, because its customers are still using it. B.O.S. also sells 5250 emulation cards for PCs for both ISA and PCI slots--again, because in many environments (particularly on factory floors, where electronic noise is so high that Ethernet does not work reliably) the twinax connectivity developed by IBM for the System/3X and AS/400, and cloned by vendors like B.O.S., is the best way to link users to servers for the least amount of money. In March 1999, B.O.S. introduced the e-Twinax Controller, a remote terminal controller that allows remote offices using twinax devices to link to central AS/400s using the Internet as a connection. Another core B.O.S. product--and one that many iSeries resellers use as a value-add that allows them to sell hardware--is Jadvantage, a graphical, Java-based 5250e emulation program that allows users to access OS/400 applications using a Microsoft Internet Explorer browser; Jadvantage also supports printing to SCS printers attached to local OS/400 servers or over remote links.

B.O.S. has moved into areas outside of the IBM midrange in recent years, but the company has undergone a change in management recently that will see B.O.S. focus on its midrange connectivity products while leveraging its networking experience to expand into other fields, such as IP telephony.

In October 1997, B.O.S. purchased a 26 percent stake in Surf Communications Solutions, a maker of software-based modems, which are used in PCs, PDAs, and various other electronic devices. B.O.S. increased its stake in Surf over the next year, but Surf has also sought other outside investors, and the result is that B.O.S. still owns about 24.7 percent of Surf. In May 1998, B.O.S. acquired a training, network services, and integration company called Pacific Information Systems, which helped drive its sales in 1998 to $27 million, in 1999 to $65 million, and in 2000 to $85 million. In 2001, the downturn in the IT sector pushed sales down to $59 million. As 2001 came to a close, B.O.S. reorganized its divisions, and in January 2002, Avi Wertheim, one of the investors who was involved in a private placement of $9.3 million in B.O.S., in May 2000, was elected to the position of chairman of the board at BOS and would invest $2 million in the company through the acquisition of 1 million shares of B.O.S. stock, plus an option to acquire 1 million more shares at a price of $3. (B.O.S.'s stock is traded on the Nasdaq and Tel Aviv exchanges). Moti Weiss was named chief executive at B.O.S., and Gal became president.

Sometime shortly after that, the management of B.O.S. had two different opinions about where to take the company. The high-tech spending slump was a problem, and Pacific Information Systems was not contributing to the bottom line at B.O.S. In May 2002, when B.O.S. announced its first quarter financial results, the company announced that it would sell the Pacific Information Systems unit. Wertheim was subsequently removed as chairman of the board, and the people within B.O.S. who had opted to concentrate on the core IBM midrange market and leverage the company's networking skills toward expanding only in IP telephony are now running the company. Gal is now chief executive again.

The Pacific Information Systems unit is still being supported by B.O.S. and will generate somewhere between $20 million and $30 million in sales in 2002. But B.O.S. is still looking to sell Pacific Information Systems and no longer includes its financial results in its quarterly statements. Pacific Information Systems is being accounted for as a discontinued operation (much like IBM is doing with the hard disk drive unit that it is selling to rival Hitachi). Gal says that sales of the core IBM midrange hardware and software that B.O.S. sells are running at slightly more than $10 million a year, and are growing.

As it now stands, B.O.S. has about 55 employees in Israel, who work mostly in research and development. The company has another 20 people stationed in the United Kingdom and France, and another 12 people in the United States, who work on sales and tech support. About 65 percent of the company's sales come from the United States, with the remainder split roughly evenly between Europe and Israel. Israel is also where B.O.S. does a lot of its beta testing, and has for the past decade, and for interesting reasons. First, Israel is a small country, which means engineers can drive to customer sites and directly work with customers as they are using new products. It would be very expensive to offer the same level of hands-on engineering in a country as large as the United States. Moreover, says Gal, Israeli customers are willing to suffer with a new beta product, so long as they are able to help steer the product, and having found such a willing and useful group of hardware and software testers, B.O.S. is not going to change this practice unless it has to. With that said, B.O.S. had to go outside of Israel to test some configurations of its e-Twinax controller because the complex networking environments that it was looking for did not exist in relatively small Israeli OS/400 shops.

B.O.S. does not sell its products directly, but only through a reseller channel, and Gal is vehement in his support of channel-based sales. "I totally believe that this is the best way for a company like B.O.S. to work," says Gal. "Direct sales, even for a U.S.-based company, is very expensive. In the long run, this is the best way. We have to have partners who can evaluate the needs of the users. We will never, ever sell direct. Even when we have an opportunity to sell directly, we pass it on to a partner."

B.O.S. won't say what its product plans are just yet, but Gal was on his way to a three-day engineering and marketing summit in the United Kingdom when he spoke with us for this story. He said that the company planned to enhance its products--some would get new features, some would be redone--and that the company was particularly interested in enhancing the e-Twinax controller and Jadvantage products. Gal also hinted that B.O.S. was cooking up some new products, but he didn't want to allude to them until after the product specs were hammered out by his development and marketing teams.