Software Firm Seeking to Even Out Revenues : ISSCO’s Sales During the Fourth Quarter Were About 35% of Annual Total Last 2 Years

For years, Integrated Software Systems Corp. has ridden a fourth-quarter sales wave that helped push the Sorrento Valley computer software graphics products company to revenue and earning heights.

That late but welcome surge was generated by ISSCO customers who delayed purchases until year’s end, when corporate discretionary budgets were in place.

Last month, however, company officials cut prices on some products that could spread revenues out into the rest of the year.

More important, the cuts could help ISSCO weather an industrywide sales slump, and make ISSCO products “the industry standard,” predicted Meldon Gafner, the firm’s newly promoted president.

“Their earnings have always been lumped together toward the end of the year,” observed Gary Smaby, a senior technology analyst with Piper Jaffray Hopwood Inc. in San Francisco. “Wish lists get filled at the end of the year and the person holding the purse strings decides how many (requests get filled).”

Last year, for example, 35% of ISSCO’s annual revenue of $33.6 million came during the fourth quarter. In 1983, fourth-quarter sales accounted for 36% of ISSCO’s $24.2 million in annual sales.

“We’ve always been a fourth-quarter company,” acknowledged Gafner, who has ridden the sales wave during each of his five years with ISSCO. “Maybe everyone gets their ISSCO (products) for Christmas.”

On July 18, ISSCO published price lists that feature volume pricing intended to boost the number of purchases made by its corporate customers. The volume discounts are aimed at customers who buy TELL-A-GRAF and DISSPLA, the company’s two main products. The software programs, which generally operate on mainframe computers, allow business managers, engineers and scientists to convert data into bar, line and pie charts, as well as tables, maps and planning charts.

The programs have always been relatively expensive because ISSCO bases the cost of its programs on the power of a company’s computer. Consequently, ISSCO’s price structure ranged between $9,500 for smaller computers to $250,000 for the largest computers.

TELL-A-GRAPH and DISSPLA, for example, were previously only available at a cost of $9,500 to $76,300. The volume-related discounts for owners of certain 32-bit microcomputers reduced those prices to a range of $1,800 to $3,600.

Software Rentals

ISSCO has also restructured its software program rental fees to make the products more attractive. That approach is revolutionary for ISSCO, which has stayed away from volume pricing during its 15-year existence.

“It’s not (really) a commodity pricing plan, because ‘commodity’ implies that other products can be plugged in in place of ISSCO’s, and that’s not the case,” Smaby said. “But it is a different pricing structure.”

The lower prices should give ISSCO an expanded customer base as more companies purchase the 32-bit computer work stations that will be coming onto the market during the next 12 to 18 months, Smaby said.

That is Gafner’s strategy. Although he acknowledged that ISSCO’s sales have been slowed by the computer industry slowdown, he quickly added that “when they start buying (computers) again, we’ll have a really neat future.”

“People want to work locally (on a computer in their office) and we’re committed to helping them work locally,” Gafner said. “But we’re expecting them to forget (personal computer) software and go for our stuff.”

Recent Changes

In the past, underpowered personal computers were overwhelmed by ISSCO’s complicated and wide-ranging software. Consequently, the bulk of ISSCO’s sales have been to larger corporations that use high-powered mainframes and mini-computers. Only recently have computer hardware manufacturers begun turning out microcomputers powerful to drive ISSCO’s software.

As companies purchase the powerful microcomputers, Gafner said, ISSCO’s comparatively high-priced products will approach the lower costs of personal computer graphics programs. That narrowed price difference, Gafner added, “will make it easier for someone to choose between personal computer software and the very high quality (graphics) that a mainframe program produces.”

ISSCO’s strategy is guided by its top managers’ belief that 85% of software and hardware purchases are governed by corporate data processing departments. Since corporate data is likely to continue being stored in mainframe computers, Gafner said, those data processing departments will likely push corporations toward work stations that link up with the mainframe rather than with personal computers that stand alone.

However, Gafner acknowledged, ISSCO’s officers “had many heated discussions” about buying a company that would give ISSCO a graphics software product for the personal computer market.

Marketing Decision

“From ISSCO’s standpoint, staying out of that (personal computer) market was probably the right decision because I haven’t seen anything yet for a personal computer that does a real good job,” said David Ackmann, a senior consultant with Monsanto Co. in St. Louis, who regularly uses ISSCO software. “For what they run on, a mainframe, I don’t know of anything that’s better. I’m always looking for a better product, but I don’t see anything better right now.”

ISSCO’s pricing strategy will pay dividends when “people get these powerful, 32-bit work stations in their offices,” said Jack Russell, supervisor of computer graphics for General Motors in New York. “If they can put (a powerful microcomputer) in the office and hang four users off of it, then you’re getting down to the personal computer price levels” that won’t scare away companies that have limited budgets but still need high-quality graphics.

“I want to put my best stuff up there on the screen during board meetings and especially for (executives) who are out on road shows,” said Jack Russell, supervisor of computer graphics for General Motors in New York. “I don’t want to send my bosses out with lower-quality graphics because that’s not how I earn my paycheck.”

Even without those potential microcomputer customers, ISSCO still has plenty of room for product expansion. “We’re adding more updated bits and pieces to our product line so we can meet the various users’ needs,” Gafner said.

ISSCO will likely use most of its $26 million in cash on hand to acquire graphics software companies that occupy specialized niches. “I think (the graphics industry) is very much in its infancy,” Gafner said. “The key to remember is that, until 1979, IBM was telling people that they didn’t need graphics. We helped data processing people jump through hoops and make graphics possible. We’re constantly reviewing the applications where graphics can play a role in business.”

Although ISSCO won’t be able to ignore the near-term consequences of the general computer industry slowdown, the company remains bullish on its future. It has not advised analysts who follow the company to cut back on sales and earnings projections.

“There’s no doubt that, over the longer term, more work stations inside a given corporate account will give ISSCO more opportunity to get sales increases,” Smaby said. “But there is a direct correlation between the amount of hardware purchased and the amount of software purchased.”

ISSCO’s strengths, Ackmann and Smaby agreed, are its leadership position in actual installations at Fortune 1,000 companies, and a range of products that other software houses simply can’t duplicate.

“That’s a long-term investment, not something you can simply manufacture,” Smaby said.