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Micromuse thrives as a niche player

While its competitors offer general-purpose network management software, Micromuse has found success by focusing on particular functions instead of an over-arching package.

Micromuse is living a start-up's dream.

While Computer Associates, Hewlett-Packard's OpenView, and Tivoli offer general-purpose network management software, Micromuse has found success by focusing on particular functions instead of an over-arching package.

The San Francisco-based firm targets telecommunications carriers and Internet service providers with software that monitors the health of their networks. The software scans network devices, for example, ensuring that services--including email, Internet, and phone access--don't go down.

Now, some 18 months after its initial public offering and with big-name customers including AT&T, British Telecom, and America Online, the firm's stock price is riding high in the $50 range. In fact, three Wall Street analyst firms recently upgraded the company's stock to either "buy" or "strong buy."

"This company is in hyper-growth stage," said analyst Elisabeth Rainge, of International Data Corporation.

The market to ensure that business services are delivered over a network is expected to grow from $190 million in revenue in 1998 to $515 million in 2003, said analyst Paul Rodriguez, of C.E. Unterberg Towbin.

A slew of small firms, such as Concord Communications, Avesta, and Conduct Software Technologies, are fighting for market share, analysts say. INS and Hewlett-Packard's OpenView Customer Views and FireHunter software also compete.

But analysts say Micromuse is in good position to capitalize because of its niche in the service provider market. While Concord focuses on reporting tools, Micromuse focuses on monitoring the network, Rodriguez said.

"Their customer base is made up of financially strong and stable clients who are experiencing tremendous demand for their services," he said. "There's not really too much competition for Micromuse. They really have first-mover advantage."

Fighting for funding
With analysts so gung-ho on Micromuse, it's a wonder the company struggled to find venture capital funding in 1997.

Ten years ago, Micromuse started out as a systems integrator, selling Sun Microsystem and HP's network management products to telcos when one of their customers--British Telecom--told them they needed specialized software to give them an up-to-the-second view of the network.

Micromuse engineers filled the need in 1994 by building software called NetCool. It features probes--or little software agents--that are sent out across the network to collect data; an object-oriented database that stores the information; and a gateway that links the database with a particular application, such as a database.

The product--which integrates with HP, Tivoli, and CA products--spits out detailed reports that warn network administrators of potential problem spots. Users can view the email system or the entire backbone of the network. It's easy to use--companies can deploy the product in a matter of days, Micromuse executives say.

"It gives customers a crystal-clear, real-time view of what's going on and presents that information in an easy-to-understand format to the user through our graphical user interface," said Greg Brown, Micromuse's new chairman and CEO. "NetCool correlates and sorts the most important information to the user."

After building NetCool, the company decided to switch gears and become a software firm. But it couldn't find venture capital funding in the United Kingdom, so the company relocated to San Francisco in 1997, where it found investors.

Reaping the rewards
Micromuse's revenue and profits are climbing as fast as its stock price. In the second quarter ended March 31, the company made a profit of $2 million, or 12 cents a share, compared with a net loss of $1 million, or 12 cents a share, in the year-ago quarter. Revenues were $12.6 million, a 104 percent increase from the previous year's $6.4 million.

Micromuse executives believe they will thrive as a result of deregulation in the telecommunications market. They all want to provide many of the same services--and in the highly competitive market, they can't afford services to go down, said Mike Taylor, Micromuse's vice president of corporate finance.

"The new entrants in the U.S. telecom market provide a phenomenal opportunity," Taylor said. "If you're a traditional telco, you're interested in a universal voice service, wireless, cable, an ISP division."

Analyst Stephen Elliot, of Dataquest, agrees. "There's a lot of green fields in the service provider space."

Recent partnerships with Cisco Systems and Lucent Technologies, which are reselling Micromuse's software, will help the bottom line, analysts say. For the 1999 fiscal year, Rodriguez predicts the company will amass $52.9 million in revenue and earn 31 cents per share. Next year, he projects revenue of $78.4 million and earnings of 59 cents per share.

But Rainge, the IDC analyst, said the company is too dependent on large deals, which may affect future quarterly earnings. "The risk is if a couple of deals slip, they can always miss a quarter," she said.

Rainge also believes that Micromuse needs to expand its family of software products because many more companies in the future will try to go after Micromuse's niche market.

"The more visibility these guys get and the more they show fantastic growth, competitors will figure out a way to get in and they'll start getting pricing pressure, but that hasn't happened yet," she said. "They would do well to develop a secondary product line."

Dataquest's Elliot suggests the company may want to move into systems management software and try to tackle the enterprise market.

But while enterprise customers make up a quarter of its revenue, Micromuse executives say they will continue to focus its efforts on the telco and ISP markets.

The company will soon introduce NetCool Impact, a reporting tool that pages users that a network problem has occurred, what applications are affected, and where to fix the problem.

The company is considering all options, including "trending" software that examines previous data and can predict future problems on the network, executives said.

"We're not resting on our laurels," said Brown, who joined Micromuse in February after being a top-level executive at Ameritech.

Elliot believes Micromuse should purchase other companies that could enhance its product offering. "Their stock is gold now. They need to make the right acquisitions and keep their customers happy and just position themselves for future growth," he said. "It's a great problem to have."