Back in July 1997, when Rational completed a 6 month long acquisition binge, buying Pure Atria, SQA, Requisite, and Performance Awareness, investors marked down the applications development tools vendor as a decidedly suspect ‘show me’ stock. Today, Rational has not only proved itself technically capable of tying together a sizable product portfolio, but it seems to have proven its business case to Wall Street in the process.
Rational stock has finally recovered to trade at levels only previously seen in December 1997 – pre-SQA and, more importantly, pre-Pure Atria, the so-called disastrous acquisition which had the most detrimental effect on its share price. The recovery is in part due to the strong set of third quarter figures the company announced earlier in the month and partly due to the launch of Rational Suite 1.0, its re-assembling of software tools into a suite format, formally launched last week.
Wall Street is now rewarding Rational for being the first to deliver a suite of application development tools in a market it regards to be very under populated. The net effect has been a dramatic upturn in its stock price. Rational stock climbed to a 52-week high of $32.88 on January 19, tripling in value from the $10.50 low it saw just three and a half months ago.
Armed with a re-vamped product portfolio and three quarters of solid results that met analyst estimates, Rational is bullish and has ambitious plans for future growth. Building the equivalent of Microsoft Office for our space is, and will continue to be, our priority. It’s what customers want. We now have the ability to offer everything from point products to a suite, which is something we’ve only really ever been able to dream about before. Our expanded product portfolio will enable us to grow the market by at least a factor of five to ten, Rational’s CEO, Paul Levy, told investors on a third quarter earnings call.
Software development is a team game, yet most tools are built for individual use. Rational contends that a software suite for the cross-functional project team is the essential missing piece of the jigsaw. In introducing Rational Suite 1.0, the company claims it will be able to improve individual productivity with a set of best-of-breed point tools and, in addition, bring about cross- functional productivity gains across the wider project team using a common underlying architecture.
Dubbed Team Integration Architecture, the architecture tightly integrates updated versions of ten Rational products, including Rational Rose, TeamTest and RequisitePro. Rational Suite, which is earmarked to go into general availability towards mid-February is available in four editions – Rational Suite AnalystStudio, DevelopmentStudio, TestStudio and Enterprise. Each is aimed at specific groups within the corporate software project team.
Rational says it has tested out its market theories using a series of focus groups, involving dozens of customers including Fidelity and Rockwell International. It seems the company was able to validate its chief assumption about market demand that commercial software developers are not just looking for a nesting of development tools that dovetail neatly together. They want a product suite that helps optimize access to the tools for individuals working as part of the project team. These may be Unix-based systems architects, database administrators and developers, or they might be analysts, quality assurance professionals, performance engineers, or application developers with preferences for Windows-based tools.
By using automated workflow to ensure clear communication and unification of the project team, coupled with tight integration of tools to optimize productivity of individual players, Rational reckons it has simplified application development and lowered the cost of ownership to boot. Running as a common strand throughout Rational Suite 1.0 is its new Unify offering. This is a platform for shared requirements management (using its RequisitePro and RequisitePro web products), change request management (built on the use of the ClearQuest tool), and common automated reporting and messaging (based around Rational SoDA) that makes for what it calls a ‘unified process’ across the project team.
Atop of this common unifying platform sit the three development kits optimized for use by individuals with key roles on a software team: Rational Suite AnalystStudio, DevelopmentStudio, and TestStudio. Each edition contains the Team Unifying Platform, the Team Integration Architecture, and a unique collection of Rational’s tools chosen specifically for a particular role. So AnalystStudio takes in Rational Rose, along with the Unifying product set; Development Studio contains an Enterprise edition of Rose along with Purify, PureCoverage and Quantify; while the TestStudio offering adds Robot and testFactory to the Purify, PureCoverage and Quantify tools. An Enterprise option offers the complete set. To ensure compatibility across all the tools that go to make up Rational Suite 1.0, Rational says it has to move to synchronized annual releases for all product upgrades. Delivered on a single CD, the first becomes available in February 2000.
Perhaps the biggest pull for corporate development teams is the promise of re-use which is more likely to occur using a suite like Rational Suite 1.0, than if a team was using a set of unrelated tools, each suited to only one of the various development or project ‘domains’. Whether an individual is concerned about requirements specifications or change control, modeling or testing, as long as they are using one of the Suite 1.0 toolsets the software never loses sight of all the different development domains that need to be managed as a single project, even when that project is been worked on by heterogeneous teams using Unix, Windows 95 and/or an NT platform. Rational Synchronizer, a new and critical part of Rational Suite 1.0, is said to maintain consistency throughout the project lifecycle by promoting the sharing of project artifacts across domains. This eliminates redundancy between domains by allowing individuals to share common artifacts, possibly helping jump start new projects and reducing errors in the process.
But delivering products is one thing, educating and developing its sales organization to accelerate its mass adoption is another. Although Rational is now seeing more big ticket deals, 20% of third quarter revenues came for its 10 largest customers; its highest number yet – the bulk of its business still comes from sub $10,000 sales. And it is an issue Rational knows it has to address. To sell suites we need to direct our attention further up an organization and that means we must focus on increasing our direct sales capacity, Levy told analysts. Alongside an increase in sales staff, Rational also plans to increase marketing activity.
The company told ComputerWire that in line with revenues for the nine months ended December 31, 1998 of $286m, it’s expecting an annual revenue of around $400m for fiscal 1998, including some $150m from its 500 staff in Europe. Diluted earnings per share for the third quarter and nine months ended December 31, 1998, including the impact of a reduction in merger and integration costs following the company’s July 1997 merger with Pure Atria, were $0.20 and $0.42, respectively.
That’s an improvement on March 1998 earnings of $.039, but there’s still some way to go to hit the EPS of $0.60 that analysts are looking for come March 1999, though many are now saying that expectation is way too low. With the arrival of Rational Suite 1.0 many expect to see a considerable upside to earnings estimates.
