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Shannon Henry
Shannon Henry
(The Post)
The Download
The Download Live Transcripts
Tech Thursday

WebMethods Cuts Outlook, Staff (July 7, 2001)
WebMethods Deal Defies Downturn (Mar. 12, 2001)

E-mail Washtech

Shannon Henry's The Download Live
Discussion with webMethods CEO Phillip Merrick

Thursday, July 19, 2001; 10 a.m. EDT

Shannon Henry, Washington Post reporter and author of "The Download" column, will host webMethods CEO Phillip Merrick in a special one-hour discussion on Thursday, July 19.

The broader technology slowdown has taken its toll webMethods. The company recently cut its staff by 15% -- a move made only months after the company's leadership confidently predicted that layoffs would not be necessary.

Phillip Merrick
Phillip Merrick
(Courtesy webMethods)
But the news isn't all grim for webMethods. The company has been successful in marketing itself to major customers, including General Motors, Hewlett-Packard and Ford Motor. Most recently, webMethods signed a deal to sell its software to Covisint, the leading Internet exchange for auto supplies.

Shannon Henry and Merrick will discuss webMethods strategy for succeeding in a down economy, and will offer insight on the region's overall technology community.

About Shannon

Shannon Henry has been covering the local technology scene since 1995, documenting the success and failures of local tech companies, and the culture and ideas of local business personalities. She began as the telecommunications and Internet reporter for Washington Technology, which was later acquired by The Washington Post Co. Under the Post's umbrella, Henry became founding editor of TechCapital magazine, which focused on tech business and finance. Three years ago, Henry shifted gears to write the weekly Download column and other stories about the region.

Shannon is on book leave now writing about Washington's technology culture. If she meets all her deadlines, the book will be published somewhere around 2002 by Simon & Schuster/Free Press.

The edited transcript follows.

Editor's Note: Washingtonpost.com moderators retain editorial control over Live Online discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions.

Shannon Henry: Hi Phillip, thanks so much for joining us this morning from California. Hope you've had a chance to have some coffee! Let's get right into it....Webmethods was one of the last high-profile local tech companies to make layoffs (160 people, or about 15 percent of the workforce, for those of you who missed the story). Why did you wait? Should you have done it sooner? And what was the breaking point that helped you make that decision? How much of that decision is based on bottom line savings and how much on what the market likes to see? It seems a company's stock often gets a bump up after layoff news.

Phillip Merrick:
Thanks Shannon.

We worked hard to avoid layoffs, but unfortunately the
pressure of the downturn in the economy was too great.
I don't think we did it too soon or too late. We did
this because we have to be responsible and run the
business profitably. I don't know that the bump in
our stock was from Wall St. cheering the layoff. I
think it was because they saw strength in our balance
sheet (cash, etc.) and some great customer acquisitions
like Bank of America, 3M, Covisint and others.

Washington, D.C.: One of the complaints about the tech bust I hear often is that too many companies were told to get too big, too fast. Was that the case with webMethods?

Phillip Merrick: I don't know that we were "told" to grow too fast. Our
market exploded and we struggled to keep up with the
growth -- up to 40 or 50% per quarter. It is true that
we had to hire to meet that growth, and then earlier
this year the growth dropped off dramatically as large
corporations reined in IT spending. So we had to adjust.
But I don't think webMethod is a part of the bust; we're
still a major leader in our market, doing several hundred
million a year in revenues.

Mclean, VA: Virginia has a gubernatorial election this year. A lot of technology workers and leaders in the area complain that Richmond ignores our needs, esp. in the transportation and education areas.

Without coming out and asking how you're voting, can you tell us what criteria you might be using in gauging the two major party candidates? And how important do you think this election is to the region's future?

Phillip Merrick:
I can claim neutrality here since I'm Australian and
don't get to vote ;-)

I do think though that whoever wins the election should
be a candidate who recognizes both the strength and
the concerns of the tech industry in Northern Virginia.

Arlington, VA: Sir, your company has only cut 15% of its workforce while others have cut more. Will there be more layoffs?

Phillip Merrick:
It's definitely not in our plans to layoff more. We
took this action based on what we believe the outlook
to be -- but we need to watch the economy carefully.

Silver Spring, MD: Did you and your peers at other N.Va. tech companies foresee how deep and sudden the downturn would be? It seems that a lot of execs. continued their rosy scenario planning last summer -- just when it was becoming apparent that the boom was truly at an end.

Phillip Merrick:
I'm not sure that in Internet and enterprise software
you could foresee that a downturn was coming. We sell
to large corporations worldwide, and they continued
spending heavily all the way up to the end of 2000. In fact,
we had qtr-on-qtr growth of 30% in the last quarter
of last year. We forecast about 10% growth for the
first quarter, and thought that was fairly conservative.

Shannon Henry: What lessons have you learned from the drastic changes in Washington's technology community--the fall of PSINet and Teligent, the sale of Proxicom and Network Solutions and the AOL-TW merger? What does it mean for your company that the list of local tech companies is dwindling, whether they are going out of business or being bought by out-of-town firms?

Phillip Merrick:
We've built a leading world-class software company based
in Northern Virginia. We have a strong belief that we
can and should remain independent. I don't want to
dwell on other companies' failures, but at webMethods
we have always had a strong and viable business plan.
Right now we have over $200 million in cash, no debt,
and we've already shown profitability. We'd like to
if we can "show the way" and remain a strong independent
company headquartered in the area.

Shannon Henry: When you started Webmethods, you were an early expert on XML. Are there other new technologies or languages you are using now or looking at that may be as groundbreaking? And is XML as important to your business and the industry as it once was?

Phillip Merrick:
We remain a leader in XML-based integration between
companies (often called B2Bi, or B2B integration).
But we have done a lot in the last few years to
grow our platform and our business. We are now
a vendor of a wide-range of integration software
products. We do a lot of integration inside
companies now, between the big applications like
SAP and Siebel and i2 that run these businesses.
So we have a lot invested in messaging technologies
like publish/subscribe, and in mainframe integration
technology, and even things like EDI. Some of this
we developed ourselves, some we brought into the
company through acquisition -- like our acquisition
of Active Software in Silicon Valley last year.
We're quite excited about what is happening with
web services technology with new standards like
SOAP, UDDI and WSDL. In fact, we helped co-develop
some of these standards with companies like Microsoft
and Hewlett-Packard.

Shannon Henry: What advice would you give to new entrepreneurs these days? And are there any young companies you have invested in personally or support for their business plan?

Phillip Merrick:
Wait three years before starting out. No, only kidding ;-)

Actually it is a GREAT time to start a business, provided
you can get some capital to get started. But you don't
need a whole lot. And in the current environment, all
the things that were scarce during the bubble aren't
scarce any more -- people, office space, etc. While
companies may not be buying, that really makes it a
good time to be heads down, developing great products
that can come to market when the economy turns up again.
Plus you don't need to spend lots of cash on marketing
-- there's not anything like the noise there once was,
so rising above it is easier.

I don't comment on my personal investing, but I can
tell you about some companies that webMethods has
invested in as a company -- ADX for b2b between
a large company and its smaller suppliers, Slam Dunk
Networks for guaranteed message delivery, and CrossGain,
which was acquired this last week by BEA.

Arlington, VA: Did the company receive an investment, or a deal, as part of Jerry Jasinowski taking a seat on the board?

Phillip Merrick:
Not at all. We think Jerry brings some great experience
and a strong business point of view to our board. At
the same time Jerry sees a lot of value in what we are
doing, particularly with large manufacturers like Dell,
Lucent, Eastman Chemical, International Paper and others.

Washington, D.C.: Your wife left the company to start the WebMethods Foundation, which sounds like it has admirable goals. How does the Foundation further the Company's corporate goals and do shareholders indirectly contribute to it (i.e., does the company contribute to the Foundation from our profits?)

Shannon Henry: We're getting several philanthropy questions, Phillip. Others would like to know if you have had to scale back charitable goals because of the market conditions. There's lots of this going around. I know some philanthropists have had to cancel plans and others have ended up giving stock that is now virtually worthless. How do you manage this? Only give cash?

Phillip Merrick:
First of all, the Foundation is an independent entity
from webMethods, Inc. webMethods has made several
small contributions and provides office space, etc.
But the vast majority of its resources come from
donations from webMethods founders, early investors
and employees.

On the general question of "are we scaling back", the
answer is definitely not. It's in tougher economic times
that the kind of financial support our Foundation can
give to non-profits serving the poor etc. is really
needed. We will be giving away at least one million
dollars over the next two years, and that is already
allocated and won't go away.

Washington, D.C.: I remember reading an article in newsweek a couple of years back saying how a lot of companies are hiring Australians for upper management because they're perceived by Americans as being "the fun, trustworthy sort;" I assume after Crocodile Dundee. Were you also appointed the CEO position in this manner, or did you help build web methods from the ground up?

Shannon Henry: This is pretty funny...could you also tell us briefly how you got the idea to start the company? I love that story.

Phillip Merrick:
Of course Australians are fun and trustworthy! But
nobody would trust me to run their company so I
had to go start my own ;-) I think there is something
to this though -- there are quite a few Australian
CEOs -- Douglas Daft at Coca-Cola, Rupert Murdoch at
News Corp.

My wife and I started the company literally in the
basement of our Burke townhouse five years ago. It
took a long time to get venture funding and at one
point we got down to $31 in the bank after maxing
out our credit cards, getting investment money from
friends and family and so on. So it was fairly tough
in the beginning. One thing that still amazes me is
that we built a 1000-ish person company doing $200M/year
on only $9 million in venture capital before we hit
cash-flow positive. I hope that encourages some
entrepreneurs in the current environment -- you just
don't need tons and tons of VC to make it.

Arlington, VA: What is the status of webMethods' relationship with BEA Systems? Are you considering being acquired by BEA or anyone else?

Phillip Merrick:
We are not considering being acquired by BEA or anyone
else. As I mentioned earlier, we think our market
and market position gives us the ability to be a
strong company in our own right.

but we do have a good and growing partnership with
webMethods and we are starting to do some good things
together. I talked to Bill Coleman (CEO of BEA)
yesterday and we had a good chuckle about the
acquisition rumors.

Arlington, VA: WebMethods grabbing Biznow from MicroStrategy made me think: a company like WEBM really could draft a "dream team" of execs from other failing companies. Are you discussing this possibility with anyone?

Shannon Henry: Mark, you spelled your own name wrong! Just kidding ;-) This is an interesting question, though. It's once again an employers market. Are you planning big new hires and are you seeing many former top execs on the market? One tech exec recently said to me that it's kind of a relief, actually, to not have to do somersaults and fork over top dollar and perks like wine cellars anymore.

Phillip Merrick:
I don't think that came from Mark but he is after all
a marketer ;-) Seriously, I personally feel we already
have a dream team of execs. It's a great team with
lots of cohesion -- we've got a general counsel from
AOL who did the Netscape and ICQ acquisitions. Our CTO
came from Sun originally where he developed the CORBA
technology and spec. We have three people who have
been CEOs of significant companies on the team. So
we are I think in great shape and that has been a
big part of our success to date.

But this does raise an interesting point. The hiring
environment is so much better right now. Although anyone
wanting a wine cellar and a fat signing bonus from us
was always shown the door ;-)

Shannon Henry: Will you tell the Tim Berners-Lee part of the story too?

Phillip Merrick:
Oh yeah. We bumped into Tim Berners Lee at a conference
early on. He pointed us at XML when it was a fledgling
effort. Almost like the bit in the graduate when
the guy says "plastics" ;-)

Falls Church, Va.: Have you noticed the European slowdown? How much has the slowdown in Europe affected your company?

Phillip Merrick:
The slowdown has definitely hit Europe, although not
quite as hard as in the US right now. Our business
last quarter actually grew in Europe, but not as
much as we were looking for. Asia Pacific region
continued to show a lot of growth, but it's possible
that the slowdown will affect that region also.

Columbus, OH: What will be the winning combination that allows you to beat rivals Vitria, Tibco, and SeeBeyond? What will make webMethods win?

Phillip Merrick:
The winning combination will be the best integration
software platform, combined with the best partnerships
and the best team. Wait a minute, we already have that ;-)

We already sell more integration software than Vitria
or SeeBeyond, and Tibco sells other stuff besides so
we are strong against them and gaining further ground.

Just in the last few months we have beaten out all these
rivals in important deals like Bank of America, 3M,
Covisint, International Paper just to name a few.

I can't overstress the importance of our partnerships.
SAP, i2, JD Edwards, Broadvision and others all ship
our technology as part of their software products. So
that gives us a great advantage in the market.

Beltsville, MD: What is your view of Vignette's aquisition of OnDisplay? From my view it appears to have been a very costly wash - the technology wasn't there, nor was there any significant client base to be brought to Vignette? Why do you think Peter's made such a move?

Phillip Merrick:
Personally I'd agree with your assessment. I've wondered
why they did that too. Not sure I have a good answer.

Arlington, VA: Your company sells applications that make customers' operations more efficient. Isn't that any easy sell to make in a down market? How is webMethods marketing itself differently now than six months or a year ago?

Phillip Merrick:
It's an easier sell than most any other kind of software
right now. However, the current environment is tough
and customers are taking their time, delaying decisions
and going through extra approvals and due diligence.

Alexandria, VA: I keep reading about webMethods signing new customers all the time. Are the deal sizes -- dollar amounts -- getting smaller even though you're signing more and more customers?

Phillip Merrick:
Deal sizes have stayed about the same, maybe slightly
higher. The issue is getting these deals to close on
the kind of timetable we and our shareholders would like.

Shannon Henry: What's keeping you up at night? Name the biggest challenges facing the company now.

Phillip Merrick:
It used to be my two year-old son that kept me up
at night. But he's doing much better so I can't
say that any more. The biggest challenge facing
our company (or any company) is staying heads
down, focusing on the things we do best -- building
great software that solves real business problems
for our customers -- and not getting distracted
by the outside environment. I think our team is
doing a great job of responding to that challenge.

Arlington, VA: MicroSoft recently noted that they will stop supporting Java on their XP platform.

What platform providers do you have agreements with to bolster XML adoption in their platforms? Thanks.

Phillip Merrick:
We are no longer just XML-based. But in any event we
have agreements with i2, SAP, JD Edwards, Broadvision
and others where they ship our integration technology
with their applications and/or platform. Thanks.

Shannon Henry: Thanks, Phillip. This was fun. And thnx for all the great questions. We'll be watching....Bye.

Shannon Henry:

That was our last question today. Thanks to everyone who joined the discussion.

Stay tuned to Live Online:

Marc Fisher's Potomac Confidential at Noon EDT
Got Plans? at 1 p.m. EDT
Dirda on Books at 2 p.m. EDT
Sen. Sam Brownback (R-Kan.) at 3 p.m. EDT

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