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Business Objects gets the last laugh

After navigating his company past the shoals, co-founder Bernard Liautaud is making some naysayers eat their words.

Like many high-tech executives who lived through the Internet bubble, Bernard Liautaud knows that the good times can be awfully good and the bad times can be awfully--well, just awful.

So awful, in fact, that the company Liautaud helms, Business Objects, saw its stock price plummet from $50 to $5 as sales dried up. To make matters worse, a tricky product transition had gone terribly wrong, and customers voted with their wallets. All in all, it didn't bode well.

These days the naysayers are long gone, and Wall Street has turned into Business Objects' amen corner. Recent financial results tell the story: In its last quarter, the company more than doubled earnings, and it increased guidance for the current quarter. The company is now on track to surpass the $1 billion mark for annual revenue.

Liautaud co-founded Business Objects in 1990. Four years later he took the company public on the Nasdaq, where it became the first French software maker listed in the United States.

The company's niche is business intelligence, a segment of the software market that receives relatively little notice compared with the attention lavished on the Microsofts, Googles and Oracles of the industry. But with IT budgets remaining under lock and key, analysts say this is one area that can still command serious attention from purchasing agents. Why? Because companies like Business Objects can say they have a way help a business make better decisions--with the applications the business already bought and installed.

On the eve of Business Objects' 15th anniversary, Liautaud spoke with CNET about changes in the software business and his status as one of the few French entrepreneurs to make it big in Silicon Valley.

Q: You're coming up on the 15-year anniversary of the company in a business that's had its share of ups and downs. Were there times along the way when you thought you weren't going to make it?
Liautaud: There were definitely those times. In 1996, we went through an architectural change and completely rewrote our entire product suite. It was a tough transition. We made the move to a new Windows platform and came up with a great product--but none of the customers were ready. Sales went down and the stock went from $50 to $5. A number of people then said Business Objects was not relevant. But we focused on what the issues were. We changed our software development, moved our center of gravity from Paris to California, and re-established relationships with many partners here--and things improved significantly.

You're one of the few French software entrepreneurs to succeed in this country. Do you have any thoughts as to why there aren't more successful software ventures coming out of Europe?

The European market is harder to penetrate because it's not a homogeneous market.
Liautaud: There's not that many who have succeeded. That's due to several issues. One is that the European market is harder to penetrate because it's not a homogeneous market.

Even with the existence of the EU?
Liautaud: Yes. You do business in France and it's not the same as doing business in the U.K. or Italy or Germany. That creates a bigger hurdle for companies as they develop themselves. There's also a little bit of a vicious circle going on. Because you don't have that many (local tech) companies, you have to develop the talent pool, whereas if you're starting a company in Silicon Valley, everyone knows where they can find the right people.

In a Goldman Sachs survey I read, 79 percent of the respondents said they expected to buy business-intelligence tools or applications in the next year. Has there been a change in the mind of IT about these tools?
Liautaud: IT has viewed business intelligence as a key priority for quite a while. The trend is there because you have a number of companies nearing the end of their implementation of ERP and sales force automation and looking around and asking, "We've done all this work but still don't have good insights into the business." And that's the next step.

We think there's a huge issue in companies today. They have trouble managing their information. They have huge overloads of data, and because they don't use it properly, they make lots of bad decisions because they make it on gut feel, and not on the data. Our mission is to ban ignorance: We want to enable the intelligent enterprise.

Your Q2 numbers beat estimates. But the competition is heating up. Do you think your segment of the business likely will get more intense come the fall?
Liautaud: In all markets that become more visible with more growth--competition should be expected. In the past year or so, we've really taken a leap forward to become the clear No. 1 in the space. Now, there are larger vendors, like Microsoft or SAP, who would like to have a slice of that pie.

OK. Let's talk about Microsoft. They've had business-intelligence tools in SQL Server for a while, though with limited results. But now they're upgrading SQL Server 2005, and going after the small and medium-sized markets. You've been able to fend Microsoft off until now. But what do you need to do to avoid getting nailed? I don't need to tell you Microsoft's a pretty big company.
Liautaud: I am always very serious about any competition from Microsoft, but I believe we will still succeed and be the leader in the segment. Customers want solutions that are independent from other apps. Microsoft being a company that drives one database--SQL Server--doesn't have the independent attribute that's so key to business.

The other thing is that (IT) wants solutions that scale with their business...and Microsoft's not very good at that. They're relatively late while we've been here for years.

But even if Microsoft fails to dominate this market, won't that still put added pressure on pure-play vendors such as yourself?
Liautaud: I think they can have some impact on the (small and midsize business) market. But the market is expanding rapidly and we have very strong play in the enterprise...I also see that as a potential opportunity because they bundle our products now. If they're making more noises about business intelligence, that just pushes our product to more places.

If they're making more noises about business intelligence, that just pushes our product to more places.

After you close the SRC deal next month, what do you expect to come out of the acquisition over the course of the next year?
Liautaud: It is strategic question for us. The deal propels us into new territory--financial planning, budgeting and the whole spectrum of enterprise performance management. This completes our product portfolio so we can come to the customer and say we cover all their requirements.

Do you expect you'll need to substantially increase the size of your company's sales force?
Liautaud: Not necessarily substantially. We have about 560 salespeople right now.

When you did the Crystal deal a couple of years back--I think for $1.2 billion--some folks said you might be biting off too much.
Liautaud: True. There were a lot of skeptics--and that's normal because there are a lot of failures in enterprise acquisitions. But we brought together two successful companies that were highly complementary and it made for a great outcome.

I'm extremely happy with the acquisition. Two years ago, the stock was 18 and now it's 32. Our combined trailing revenue at the time was about $720 million; this last year it was $925 million, and we're expecting to grow this year. Also, two years ago we were No. 2 in the space and now we're the clear No. 1.

Do you feel a sense of vindication?
Liautaud: Absolutely.

What's the hardest part about pulling off a successful merger? How do you keep the integration issues from tripping you up?
Liautaud: One of the hardest things is to create a common culture. We really embraced what Crystal had done. It was two-thirds of our size and it was really important for us to embrace the other's strength and culture. The other thing was to give a path to customers to move to the new platform and not leave any of them behind. The third point was to create a product portfolio that takes the strength of both products and that's what we've done.

What was toughest choice you had to make?
Liautaud: Technology choices and infrastructure. We had to take out some parts of the business that we had worked on for a long time because Crystal had some better ones. But these were the right choices and today have we have a platform that's very scalable.

What with stock prices going up, valuations aren't as cheap as they were six months ago. As you look around the market over the next six months, is it going to be a buyer's or seller's market?
Liautaud: Clearly, we believe in our future as an independent organization. Business intelligence is an important category in itself...Along with that, we believe acquisitions will be a weapon in our arsenal and we'll look for ways to fill the gaps in.

What do you say to convince IT managers who don't expect to increase their budgets all that much that they should buy your software?
Liautaud: It's not about increasing their IT budget. It's about allocating the budget in areas where they can get a higher return. There will be a lot of money going forward to spend on business intelligence because it provides them with much faster and stronger returns. IDC found that the median return is 400 percent in less than a year. With that kind of return, IT managers are going to take a look at it.

At LinuxWorld, Business Objects said XI server software would now support Red Hat Enterprise Linux and Novell Suse Linux Enterprise Server. Several other non-Linux companies also made support declarations. Was that just coincidence or is it a reflection of a change in the rate of acceptance with enterprise-class customers?
Liautaud: There's clearly a trend of enterprise customers moving to Linux. It's been growing several years but IT has come to the point where they're looking at it as a base platform and they want the (business intelligence) part of it. They want the best cost of ownership. So for us, Linux is starting to become increasingly important.