The Wall Street Transcript Interviews CEO

The Wall Street Transcript Interviews Al Higginson, Hubspan’s CEO

TWST: May we start with a brief overview of Hubspan?

Mr. Higginson: We’re a Seattle-based company; we’re about six years old. We’re in a category generally referred to these days as software-as-a-service where one company actually hosts software for other companies. Hubspan is in a subcategory that I would call integration-as-a-service. We help companies that collaborate outside the firewall with other companies, for example, in areas such as supply chain, demand chain, design collaboration, financial transactions, anything going on between companies and systems that requires security, a translation, a protocol, a set of business rules. We do those activities outside the firewall as a service for other companies. We have about 8,000 companies on our network right now in about 34 countries and have been pretty successful to date.

TWST: When was your product launched and how have the offerings progressed since then?

Mr. Higginson: Our first service was introduced about 4.5 years ago. We don’t really think of it as a product. It’s progressed since that time, because every company we add to our network enhances the value of the service. So, any work we do for other companies, any work we do to enhance the service whether it’s our software, whether it’s some open source code that we add, whether it’s the advantage of having other companies on the network, brings value to everybody on the network. So, when you have integration-as-a-service, you get the advantage of not only integrating your company with your trading partners or your collaboration partners, but you get the advantages Hubspan brings to every company on the network. So, you get this network effect that really fuels growth. So, our service and the facilitating software we run has grown and improved dramatically over the last 4.5 years, and we’ve been able to bring that value to everybody on the network.

TWST: Do you have diversification across industry verticals?

Mr. Higginson: Yes, we do. We have a pretty broad diversification across verticals. You will see some concentration in aerospace, retail, biotechnology, and distribution, but we’re pretty broad across industries because the same problem exists in all industries. It’s “How do I integrate with my partners?” Some industries are moving faster than others in this area, which we call getting closer to your customer. Think of it not as supply chain integration but as impacting the demand chain. As an example, take an organization where there’s a high volume of purchase transactions, a diverse set of customers and suppliers and the need for real-time transactions-where the company needs to look at its inventory and price and availability and automatically get back to a customer with that information and allow the customer to order a product through their SAP system which connects with the company’s Oracle system or whatever it is. We’re seeing some enterprises move faster in this real-time customer integration than others, but in general, we have a very broad base across industries.

TWST: Could you comment on the pace of new customer additions and its impact on your transaction rate?

Mr. Higginson: Let me break this down into a couple of categories. We’re growing between 30% and 40% a year consistently right now, and we’re adding customers at a fairly good clip. But more importantly, as we add customers, we also add companies to the network. So, the network is growing much faster than 30%, 40% a year. Our transaction volume is both a function of new companies joining and current customers using the network for other than what they originally signed up for. In another words, once they sign up to the service, they start adding more and more trading partners. That’s more than doubled every year. So, what we’re seeing is a great increase in the volume going through our network. We have some very good people that run our operations.

We do have data centers; we’ve got Quest here in Seattle and MCI in Chicago, and we have redundant servers and backup, storage area networks (SANs), Oracle databases, and we’re very tight in our SLAs because this is a mission-critical service, and you just cannot afford to lose even one transaction. So, it’s been a challenge for us, but it’s certainly doable. I think the reason it’s doable for us is because if you were to look at the software that we use for providing this service, we base as much of it as we can around open source, and I am sure you are aware of the strength of open source these days. Companies develop proprietary software, and before you know it 10,000 people are working on a piece of middleware, for example. So, we’ve been able to capitalize on a lot of open source technology that’s out there and write our applications on top of the open source and then bring all of that to our whole network of customers. So, that’s allowed us to run this business in a very cost effective way. We don’t have to go out and license middleware or toolsets in order to continue to grow this business, because the key to being integration-as-a-service is how you scale something very cost-effectively using a secure multi-tenant architecture. Those are the keys and, we’ve been able to do it because we’ve built a highly scalable platform with cost effective technology that we completely control.

TWST: So the current picture appears to be rosy. How do you view the pricing environment?

Mr. Higginson: Let me explain how we do our pricing. We do not price on transaction or volume or cost or whatever is going through our system. If you think about it, if you were inside a company as a CIO running a service like this, it’s not the transaction volume that’s expensive, it’s managing this diverse community outside your firewall. The community continues to change; they continue to change their systems; they continue to change their software; you end up trading with different people, adding customers, adding suppliers, as dealing with security rules as they change outside the firewall. The complexity lies in managing all this, and it does not increase in a linear fashion. As it grows, the complexity goes up in a geometric fashion. We charge based on the number of trading partners or partners that you want to collaborate with outside your firewall because we are managing that community for you. We handle everything for you outside the firewall, so that you don’t have to do anything inside your company. You’re not required to install any software; you’re not required to do anything except tell us who you want to collaborate with and show us what your system is. So, we charge for that, and we’ve seen great acceptance of that model so far. People don’t like to pay for transactions anymore. They don’t like to pay per character; they don’t like to pay for the value that’s going through the network. They pay you for managing this diverse community for them and that’s how we charge and we haven’t seen a lot of price pressure on that yet. This pricing method provides the best ROI for our customers and does not penalize them for running high transaction or revenue volumes through their connections.

TWST: As you transact globally, do you see the need for additional data centers outside the U.S?

Mr. Higginson: No, we give deliver on SLAs to companies around the world and we haven’t had a problem. We have companies in Europe responding to trading partners in seconds. We leverage the power of the Internet.

TWST: Could you lay out the scenario for the next two to three years?

Mr. Higginson: Let me tell you about the three things we do. We do customer integration, which enables companies to get closer to their customers. For example, I have one customer whose revenue increased $20 million in the first quarter because his customers can now use their online ordering systems to order from them. That’s pretty great. It’s an interesting differentiator, because it makes doing business with a supplier so much easier. Our customers report around a 25% increase in revenue with their integrated buyers. We continue to sell in that area and I think that’s going to grow. The next area we focus on is B2B Consolidation Integration. Bigger companies have a diverse set of integration platforms. One customer has over 30 different integration platforms inside their company servicing applications such as SAP, Baan, and homegrown stuff. They’re trying figure out “How do I present a single unified front to my partners outside the firewall?” We can do that, we can take all of that, we can handle it, we can present it, the single unified front, to a particular trading partner out there, so the partner is not having to deal with 30 different systems. Yet we can bring the transaction back in and get it into the right system in that company. We handle all of the legacy integration and also provide a path to the future so that our customers can take advantage of newer and higher-performing protocols. We allow our customers to connect with their trading partners as each one prefers. For example, our customer may prefer to transact with EDI while his partners may prefer XML. We buffer the differences and provide information in the format and structure that each can readily consume and use. I think that area is going to continue to grow, especially for larger companies that want to provide a common data set of services to partners. The next area that I think is really going to grow over time is providing integration-as-a-service to application developers. Many of these new applications require more and more data integration with other applications, especially outside the firewall. You’re not stuck inside the firewall. That’s true for collaboration with engineering drawings, supply chain, demand chain, logistics-even the emerging RFID market. Think about the different areas such as healthcare-and we are doing some work here-where you can apply RFID. We’re also working with providers tracking military equipment right now, but RFID technology is all basically the same. Regardless of the application surrounding it, all the companies involved in developing applications are going to have to communicate with each other. How is that going to happen? That’s where a service like Hubspan is valuable. We call it “community on demand.” In two to three years, I see this being the fastest-growing field for us, in addition to our customer and B2B Integration Consolidation.

TWST: Are your solutions applicable to government transactions?

Mr. Higginson: Yes. I can’t tell you who, but we have a customer right now who is doing Department of Defense transactions, yes.

TWST: What might be of major concern to you?

Mr. Higginson: Some of the challenges we have looking ahead are continuing to manage our growth, because the one thing you need to do is always service your customers. This is going to sound very trite, but you are only as good as your last transaction. No matter how many millions of transactions you run, you’re only as good as last one. So, we want to be very sure of ourselves as we grow and very cautious as we grow. In our business, there is no such thing as, “Wait till the next release comes out. We will fix your problems.” That doesn’t work. You can’t shut down companies’ revenue or supply chain or whatever. So, we’re going to be very careful about how we grow. We’re going to be very careful with the application developers we work with. We’ve got to find ways to continue to add new technology to our platform, which then everybody on the network can take advantage of. We’ll even continue to look at acquisitions where something can be brought in to help that diverse community.

TWST: How fierce is the competition and what sets you apart?

Mr. Higginson: The competition we see today is two-fold. The first is companies continuing to think they want to do this in-house, and let me tell you a reason for that. If I were to talk to you and explain why you should outsource a service and how cost-effective it is and how we share a technology, you’d absolutely say, “Yes, that makes a lot of sense.” And you would say, “It was crazy for me to license technology and try and host this and hire a bunch of people, build the team, and do this myself in-house when it’s readily available.” However, then you start thinking, “Boy, this is really a mission-critical service. This is not something that if it doesn’t work, I can figure a way around it. This has to work.” And so, we’re still seeing people say, “Oh, boy! It makes a lot of sense, Al, but should I still do this in-house?” So, companies trying to do-I think of it as EAI outside the firewall-tends to be our number one competition. The second level of competition that I see sometimes is the old traditional EDI Value-Added Networks (VANs), and integration-as-as-service is certainly a field they would like to move into. And so, we see them starting to form some of their own service groups to try and compete in this field. Finally, there used to be some startups but I don’t think they exist anymore. So those are the ones I see. In the future, my vision is that there probably will be a handful of these kinds of service networks that will be secure enough and scalable enough and cost effective enough that Hubspan will interface with them. And I am not really sure where that will come from. Obviously, what’s got to be going through your head is IBM Global Services or EDS or Perot or some entity like that that would run this kind of service. Or maybe a maybe a telco. I haven’t seen that yet, I think it’s a little too new, but my goal at Hubspan is to make sure we earn the right to compete when the big guys look at integration-as-as service and enter the field.

TWST: How do you view the portfolio of opportunities for acquisitions?

Mr. Higginson: I’ve probably looked at 20 or 30 companies for acquisition, and two things happened, which is why we haven’t acquired one yet. One is very simple; people put too high a valuation on their companies today. And so, from a financial standpoint, it just doesn’t make sense. And the second has been the meshing of technologies was going to be too awkward, and we don’t want to do anything to jeopardize our current network. So, it hasn’t been a strong enough value-add from a technical standpoint to do it. But we are continuing to look.

TWST: Could you introduce us to two or three key members of your management team and comment on your own expertise?

Mr. Higginson: Let me talk about our founder, Andrew Dent. He is our Chief Technology Officer. He was at Microsoft, and he was the chief architect for MS Market, which is still in use today. It is a supply chain application that Microsoft uses inside Microsoft. After he left Microsoft, he founded a company called 7Software, a supply chain application. He sold that to Concur, and then Concur went public. He left Concur a year or so after it went public. He and his team, they’ve been together for a while, sat down and-this is a true story-sat down in his basement and decided what to do next. And they had thought about this from the standpoint of being inside companies, inside IT departments, and their basic attitude was “This is a real problem to solve; I wish I could have called somebody to take care of this. I have other things to do inside my IT department.” And they actually started Hubspan that way and built the company. Let me talk about the company. We built Hubspan maybe a little in reverse from the way companies are normally built. Rather than raise a lot of money, invest in sales and marketing, and then hope the product works some day, Andrew and his team raised very little money. We got the technology working, got operations working, got client services working, and spent very little on sales and marketing-and we did that with only about $10 million raised-until we got ourselves up to profitability. Then we went on, decided “Now is the time to invest in sales and marketing,” and we went on raised some more money-another $30 million-which is being invested in sales and marketing. That’s how serious we are about making sure the service works and we are taking care of our current customers. So, Andrew is our CTO. Trisha Gross is our senior vice president of client services, has in-depth experience in consulting in this field with companies like Lawson Products, and is just very, very experienced in this field and has been with us almost six years now. We have Scott Ewell who runs our operations, and you can imagine how key that is to us. His background is Microsoft in QA, development, and operations. He was a pretty senior consultant at InfoSys before we recruited him. The two other key people in our team are Peter Hurtubise. Peter is our senior VP of marketing and business development. Peter has been in cross-enterprise integration most of his career and founded a consulting company. He has done consulting for investment firms interested in this space, and we were able to recruit him to head up our marketing and business development. And Mike Maynard, the last person we hired, is senior VP of sales, and he is a very experienced, seasoned enterprise salesperson who we were able to bring on board.

TWST: Has your pace of business expansion precluded the need to raise additional capital?

Mr. Higginson: Yes, that is right. We didn’t-we are not going to raise any more money. We’ve got plenty of money right now. The money that I am spending, I am spending in marketing and business development and in building up my sales team. But I am pretty conservative. We wouldn’t have bet our sales team unless we knew that the service worked and that we could sell it. Now we can bring in professional salespeople and start building out that group. But business has been going very well for us; we are quite pleased with it. If you were to look inside our company, you would see us running the company much as if we were a public company very, very close to getting SAS 70 approval. The procedures we have and the disciplines we have are required by the many Fortune 500s that we sell to. And also you want to teach people how to be a disciplined public company early on, and so we put in those disciplines early. All that helps us now with our sales and how we treat our customers and the respect we can get from our customers, especially with a the mission-critical service. It helps us as we prepare some day to be a public company.

TWST: Since your operations emulate that of a public company, are you able to share your financials with us?

Mr. Higginson: Nice try, no. We keep those private right now. I am sorry I just can’t share those with you.

TWST: What would be the appropriate time for an IPO?

Mr. Higginson: The appropriate time would not be for probably about two years yet. I’ve taken a number of companies public, and I sit on the board of a very large public company. These days not only do you need to teach people the discipline that it requires to be a public company, but you’ve got to get big enough, you’ve got get enough mass, and you’ve got to get strategic enough. You’ve got to make sure those disciplines are well in place before you do an IPO. And so, it will probably take us another couple of years to get ourselves to that stage. During the dot.com boom, we probably have done it at this stage, but that’s not true today. I don’t even think our company is ready for it. I think it would be too much of a distraction for us. We need to get bigger as company.

TWST: When you sit face to face with a potential investment banker, what points would you highlight to underwrite your issues?

Mr. Higginson: What I highlight with them is our growth, what we call MRR-monthly recurring revenue-that’s recurring revenue business. I talk about the size of our committed backlog, which is contracts that have been signed, because all of our customers sign long-term contracts. I talk about the growth of our current customers because this is growth not only by selling new customers, but as the community grows, current customers start paying more. So, our current customers grow along with the base growing. And I talk about the beginnings we are seeing with some of our partnerships, the number of application developers, for example.. And if you think about it, you have your current customers growing, you are growing your base, and you can accelerate that base by working with application developers and being the infrastructure for them. Now you have a very compelling story to tell investors, and I would tell them this is what I want you to watch over the next couple of years. Those three things play out, and then of course, we have the gross margins and the disciplines and the financials.

TWST: What other points would you like to touch upon?

Mr. Higginson: I think in summary, it’s a market that is going to prove to be very, very, very big. It makes a lot of sense; it’s just getting people to understand they have to trust somebody outside the firewall to handle this integration. I think the other point is that applications are changing these days, they’re requiring more and more interfaces outside the firewall for data, and how do you achieve that in a very secure and cost-effective manner. And I think the fact that we have a very large and diverse customer base and we already have a global network in place with complete control of our technology, I think we have as good a chance as anybody of being successful as this market emerges.

TWST: Thank you.

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