If Oracle Corp.’s recent move to compete with Quest Software Inc. worries executives at the Irvine software maker, you can’t tell.
“Oracle doesn’t have much to gain by competing with us,” said Vincent “Vinny” Smith, Quest’s chief executive. “Their software is kind of slow and it fails occasionally. It’s just not a lucrative business opportunity for them.”
Quest has come into its own selling software that manages large corporate databases,primarily those that run Redwood Shores-based Oracle’s software. The 14-year-old company boasts that its database management software helps customers get the most bang for their buck on technology investments.
Users interact with Quest’s software via a slick graphical interface, similar to the Windows operating system. With the software, companies can easily manage things such as ordering and payroll systems.
And, Quest contends, its software is easier to use and has more features than Oracle’s management tools.
Oracle wasn’t always a competitor. Quest, Orange County’s third-largest software maker by sales, got its start making products that worked almost exclusively with Oracle’s hugely popular database software. Until recently, nearly all of Quest’s revenue came from sales to companies using Oracle software.
“When we were small, we didn’t have Oracle’s attention,” said David Doyle, Quest president and founder. “They were like, ‘Who are you guys? You’re a small company down in Irvine.'”
These days, the folks at Oracle aren’t asking who Quest is. Oracle, probably Quest’s best partner, this year started offering software tools similar to the ones Quest sells. And with the money Oracle makes licensing its complex database software, it simply bundles the tools.
Oracle’s engineering teams have shared fewer development secrets with Quest because “some of our products do compete with some of the products at Oracle,” Doyle said.
Even though Quest claims it hasn’t lost a customer yet to Oracle’s new tools, the company has done what any right-minded software make might do: a year ago it started selling products for database software from Oracle’s nemesis, Microsoft Corp.
“We had to diversify,” Doyle said. “We can’t get all our revenue from one company.”
Since last year, Quest has maintained its research and development as a percentage of sales at 22%,effectively doubling the dollar amount.
A lot of the spending has gone toward making software tools that work with Microsoft’s database software as well as adding more features to Quest’s Oracle-based product.
And Quest has taken other steps to stay on top of its game: the company made 10 acquisitions in the past year and a half. While Quest concedes that many of the acquisitions were small,some as tiny as 20 people,they’ve provided Quest with badly needed footholds in developing new software for Microsoft products, executives say.
“We went in the fast lane for those acquisitions because they were going to give us super strong people to develop the products we needed,” Doyle said.
Among the assets Quest acquired in the past year are engineers versed in writing code for IBM Corp.’s DB2 database product,another alternative to Oracle’s database software. Quest last month plunged into selling software based on IBM’s database,the company’s third product line.
“It’s going to be a three-database world,” Doyle said. “And the IBM guys really like the products we’ve made for them. We’ve built them from scratch.”
The company’s strategy seems to be bearing some fruit. Quest’s sales grew by more than 120% to $63 million in the first quarter vs. a year ago. On top of that, the company improved its cash on hand by $10 million to $35 million.
Still, with Quest investing huge amounts of money on research and hiring, the company’s operating expenses in the most recently reported quarter more than doubled to $67 million from $32 million a year ago.
Analysts say Oracle’s bid to offer its own database management tools is a threat to Quest. And even if the company doesn’t seem overly concerned about Oracle’s move, Quest executives warned investors of the risk in a recent Securities and Exchange Commission filing.
“We expect that Oracle’s commitment to and presence in the database management product market will increase in the future and therefore substantially increase competitive pressures,” the company said. “We believe that Oracle will continue to incorporate database management technology into its server software offerings, possibly at no additional cost to its users. We believe that Oracle will also continue to enhance its database management technology. As a result, we may not be able to compete effectively with Oracle in the future, which could materially adversely affect our business, operating results and financial condition.”
Quest executives are quick to stress that the company has a good relationship with Oracle, and that the company will release new product upgrades for its Oracle-based software within the next six months.
Analysts agree.
“Management is confident and we would agree that, given the critical nature of high-availability solutions, customers will continue to invest in high-end solutions such as Quest’s products, which we believe will offer much greater functionality than Oracle’s offering,” BancBoston Robertson Stephens analyst Dane Lewis wrote in a recent report.
Investors have begun to put money back into Quest’s stock, which had sunk to a low of 14 in April, down from nearly 100 in February 2000. Last week, Quest shares were trading around 30, giving the company a market value of around $3 billion, the highest of OC software makers.
Quest won’t depend on Oracle the way it has in the past, executives say. Along with new features for its Oracle software, Quest plans to strike more deals with software companies to make tools for their products, like it did last month with Siebel Systems Inc., a provider of e-commerce software.
“Siebel’s customers can really cut costs by using our products,” Smith said.
Along with new products, Quest plans to expand its global business. While 17% of the company’s sales come from outside North America, Quest predicts the portion will increase in the coming year when the economy comes back,particularly in Europe, where the company earlier focused on expansion efforts.
“We’re going to have a big quarter in Europe,” Smith said.
Quest executives tell analysts sales are projected to grow 70% from 2001,a much slower pace than the 133% annual growth from a year ago.
“You do get used to very high growth,” Smith said. “But as you get bigger, it’s impossible to keep growing at the same rate.” n
