In Formation: Q&A with Infor Chairman Jim Schaper
February 19, 2007 Timothy Prickett Morgan
In Formation: Q&A with Infor Chairman Jim Schaper
Because servers and operating systems are the backbone of the data centers of the world, IT Jungle spends a lot of time talking to the vendors of these products. But ultimately, if these products are working correctly in the data center, end users do not even know they exist. (This is obviously an idealized situation, given that operating systems are cranky and servers sometimes fail.) What end users think of as “the computer” for their company is actually the application software that runs on top of it, whether it was built in-house by company programmers, bought off the shelf from a third party, or is comprised of a mix of the two.
As the chairman and chief executive officer of Infor, the third largest application software provider for SMB and large enterprises in the world in terms of revenue and the largest in terms of installed base, Jim Schaper is in many ways closer to end users than IBM, Hewlett-Packard, Sun Microsystems, Microsoft, Oracle , and other data center infrastructure providers. And the view of the IT market from the catbird seat at Infor, which has been pumped up by private equity and which has amassed a huge portfolio of software–from the former MAPICS, SSA, Baan, Geac, and countless other formerly independent firms–and which has over 70,000 customers who generate $2.1 billion in sales for the company, is a bit different, too.
Not only that, but because Schaper is an operating partner in Golden Gate Capital, the private equity firm that has funded most of Infor’s acquisitions, he has a deep understanding of the current wave of consolidation in the IT market in general and in the i5/OS and OS/400 market in particular.
That’s why I asked Schaper to take some time out of his busy schedule to talk to me about what is going on out there in the midrange application software market, and I am happy that he decided to do it.
Timothy Prickett Morgan: Before we get into the intricacies of the application software market, tell my readers who you are. How did you end up running the company that is now Infor?
Jim Schaper: [Laughter] Well, it is an interesting story, actually. In November 2000, I was selling an Internet company, called Primis, that I had run to an insurance company called LandAmerica. I was not an insurance kinda guy, so I was going to leave. And by pure happenstance, the founding partner of Golden Gate called me. I have known them for a number of years from a previous company I worked at, and the partner told me that Golden Gate was chasing its first deal, and because I knew that company well because I ran a part of its at one time, Golden Gate asked me to join them and do due diligence on this deal. As part of the arrangement, if they did the acquisition, they would move the company to Atlanta, where I lived, and if they didn’t get the deal, they would find something else for me to do.
We didn’t get the company, by the way. So we then started looking at a number of other opportunities, and started looking at markets. The ERP and supply chain software market is one that we naturally gravitated to. Golden Gate had a background in it, and I grew up in the software business. We started looking first at the market dynamics and then we looked at potential acquisition candidates.
The very first one that we made was a process manufacturing ERP and supply chain company that was divested as part of a public company, called SCT, and we bought that. SCT was later sold to SunGard, and was later taken private. The two products that were sold by Infor were Adage on the ERP side and Figure on the supply chain side. This business generated about $35 million to $40 million annually, and from that point forward, our relationship with our owners–who remain our investors and owners today–grew and we have taking it the company up to about $2.1 billion in annual sales over the course of four and a half years.
TPM: How many acquisitions have you done? Do you even know? [Laughter.] It was a whirlwind of deals.
JS: [Laughter] Yeah, I got a pretty good idea. I could even give them to you in chronological order, but I won’t. We have done 23 deals, and they range in size from no revenue–which in that case was purely a technology acquisition–to SSA, which was our largest and which was approaching $800 million in sales.
TPM: Obviously, there has been a lot of merger and acquisition activity in the application software market in recent years. I don’t know if it is heating up or cooling down–we’ll figure that out in a minute. But larger public companies are eating each other, smaller rivals are merging, private equity firms are coming in to create conglomerates like your own. What’s going on here? What is the reason why ERP software and its related supply chain management and customer relationship management software, is suddenly attractive when you couldn’t get Wall Street to invest in these software companies even in the heyday of the Y2K and ERP booms at the end of the 1990s? There seems to be a lot more activity today than a decade ago.
JS: There’s no question about that. Let’s first talk about the macroeconomics on this particular market. Ten years ago, prior to Y2K, there was not the access to private equity capital that there is today. That private equity capital is a derivative of the stock market over the course of the last five or six years not having the same rate of return for investors that it had previously. So money that was potentially going into the public stock market in many cases is now going into private equity because the returns are significantly higher. There are pension funds, retirement funds, state funds, and so forth becoming larger and larger participants in the private equity world as limited partners in these larger funds.
And so the fund size is getting increasingly larger. Historically, if a fund had $1 billion at a private equity firm, that was a big fund. Now, if you are not raising between $15 billion and $20 billion funds, which are the megafunds, you are not a big player. So just the access to private equity capital has changed dramatically in the past decade.
The second aspect of this phenomenon is not limited to software, but relates to technology in general: the attractiveness of the debt markets. In the early days of Infor, the only debt capital that we could have access to was what I called private debt–it was expensive, it was very scarce, and there were very few lenders. So the level of debt multiple on cash flow or earnings before taxes, interest, and depreciation was significantly lower than what it is today. Now you have all of the large banks sponsoring high-yield debt offerings that are much larger to help fund these huge buyouts in the technology area.
So the two macroeconomic factors I see driving consolidation in our industry are access to private equity, which is initially driven by the lack of returns on Wall Street for a while. And now, even with Wall Street rebounded, the private equity returns are pretty good, which means the funds are going to get larger, which in turn means the deals are going to get larger. Secondarily, the debt markets have become more knowledgeable and comfortable in lending against maintenance streams that are to a certain extent very similar to fixed assets.
TPM: It’s funny to me, since these are the very things that would have made them unattractive as initial public offerings a decade ago.
JS: That is correct. If you then look at what occurred in the enterprise application market after Y2K–for heaven’s sake, no one was buying anything. People were trying to survive in a maturing market, which this is–and that means consolidation is inevitable. You can look at the airline industry, the trash hauling business, agriculture, the list goes on. As a market matures, consolidation is inevitable. And this one in the ERP space is inevitable and it is in full swing. And that was driven by the low multiples and the sub-scale public companies and, frankly, the buyers who became very scarce during the downturn in the economy. So consequently, you had far too many software companies far too few customers and delivering, in many cases, very similar technologies.
These are the key drivers. And Wall Street now recognizes that consolidation is not bad for customers. That it does not mean gloom and doom for the products that get acquired. On the contrary, I think it has a positive impact on the customers as well as those buying technology. It means fewer choices, but in many cases, the longevity of the vendor and the security of those longer term investments–because the lifetime of these applications is far greater than I think many people thought they would be–means that those customer investments are more secure today than they might have been among 25 sub-scale vendors that could not afford to invest in the products.
TPM: Many of them tried to expand into other markets and platforms to try to get the growth that they needed. That’s what nearly killed SSA–twice. Not to single SSA out. This happened to company after company. In the OS/400 market, companies tried to branch out into Unix and then Windows, only to be deflected or buried under their software development efforts.
JS: Sure. There was some stumbling, and there were some big bets made on rewrites of products, which was not inconsistent with what other people had done. But we have been a beneficiary of this. Some of our greatest growth now is the reinvigoration of the MAPICS iSeries platform because we are investing in it, and we expect the same thing out of the SSA BPCS base because we are investing in that.
These platforms are lasting longer, customers don’t want to swap them out. You know that as well as I do. And so, we are the beneficiary of some of those decisions that seemed right at the time, in terms of going in a different direction, but are clearly not, in Infor’s opinion, the right move to make today. This is working out pretty well for us and for our customers.
TPM: With all of the different product lines you have, how do you integrate these packages? What is your integration goal? How far can you push this? I am interested in what kind of tools you plan to use, just for the sake of a technical discussion. Not that I want to get all that technical. But what is more interesting to me is that Infor, as a company, is facing the same integration issues that many midrange customers face, who have cherry-picked and developed applications, operating systems, and platforms over the years. These companies want to integrate, make it look seamless and protect their legacy investments–just like Infor does.
JS: I am glad that you don’t want to dig too deeply into the technology, because I am the wrong guy for that conversation, which would be very short.
From a very high level, what you do is services oriented architecture, or SOA. There are phases that we will roll out, and some people will argue that the initial phases of SOA in our products or in those from others are really detailed in integration.
We look at our applications in three distinct categories. Our ERP applications, which are primarily targeted at manufacturing and distribution; our strategic solutions, which are being sold integrated with our ERP apps but also as standalone, business-specific applications like asset management, SCM, CRM, warehouse management, transportation and logistics, and so forth. These are sold alongside SAP, Oracle, Microsoft, whoever. And then we have our financial suite, which are standalone financial applications that are primarily targeted at companies that are larger in nature but who want to decentralize the view of their financial operations but who want to consolidate at a central location. Or they are smaller companies that are looking for best-in-class financial applications.
Let’s focus on how Infor will ultimately and seamless tie together our strategic solutions with our ERP solutions for manufacturers and distributors. We will use SOA, and our SOA strategy is transparent by platform–so it is going to encompass the iSeries, Windows, Unix, Linux, and anything else that we may so choose to sell–and there is a three-year roadmap on our SOA rollout, just as there is with our other products and platforms. Some of that has been done, and our first implementation was done on the iSeries, in fact.
Let me tell you what we are not going to do, because that is just as import as what we are going to do. As long as I am involved, you will not see Infor make a fundamental, strategic decision that we are going to collapse all of our application platforms into one. That is not going to happen. It is not what our customers want, it is not economically feasible for them or for us, and frankly it is not in our best interests or theirs.
What they want and what we want is the ability to seamlessly integrate using what I would call a light SOA applications that is transparent and low cost, which allows them to stay within the Infor family of products or, for a nominal charge, allows them to move outside our SOA infrastructure for integration of Infor applications with applications from other suppliers.
TPM: How much of the Infor business is license revenue and how much of it is maintenance and services? Which server and operating system platforms pull in what amount of money?
JS: Our revenue break is as follows. Almost 50 percent of our annual revenue comes from maintenance, and that allows us to do what we are doing. The other two revenue streams–services and software license sales–are split almost identically. So about 25 percent each.
TPM: What about platforms? I assume the i5/OS and OS/400 platform is a big piece because of MAPICS and SSA, Bann drives Unix, and you have Windows as well.
JS: I don’t have the revenue breakdown numbers in front of me, but I would venture to say that the iSeries is not the majority of our sales, but it is clearly a large contributor. We have around 16,000 active iSeries customers today–and active to us means they are on a maintenance contract and utilizing our products. There are a number of other customers that are using the products but who are self-supporting, and we don’t know how many such customers there are. We have 70,000 customers, and about 16,000 of them are on the iSeries, but you have to remember that many of them are larger than in our other platforms. Suffice it to say, it is a big part of our business.
TPM: What is your expectation in terms of growing Infor through organic growth and acquisitions, and how are you going to accomplish your goals?
JS: We expect organic growth that is not inconsistent with the market. We would expect our license revenues to grow annually in the teens, and maintenance to grow at a historical rate of about 5 percent. We expect services to be somewhat flat, because we have a lot of active projects going on to drive down the cost of implementation and ownership down for our applications. A big part of that is taking cycles out of the implementation, and so I expect services revenues to flatten. That makes Infor grow at the high single-digit range organically.
Now, there are areas of the company that are growing much more rapidly than others. Our strategic solutions, because they are both being sold as an extension of ERP as well as on a standalone basis into our competitors’ installed bases, are growing at a disproportionately high organic rate than other parts of the Infor business–anywhere from 20 percent on the low end as much as more than 100 percent, which is what our CRM business is doing right now. But those strategic solutions make up about a third of the company.
In terms of non-organic growth, we will continue to make acquisitions. I can’t obviously share who they are or when they will be done, or the size they will be. But acquisitions is a strategic component of our historical and our long-term plan because our goals are lofty when it comes to long-term growth. We will do acquisitions are long as they are strategic, they are accretive to earnings, and they fit into our business model.