When the millennium computer bug first hit the headlines in 1995, hundreds of solution companies appeared almost overnight from all over the world. They expected quick riches.
But now, just two days from the year 2000--once predicted to be the technological equivalent of Armageddon--it is clear that Y2K was not the business bonanza people expected it to be.
Just as doomsayers have watered down their scary scenarios for the century changeover, so, too, have investors tempered their enthusiasm about companies that billed themselves as year 2000 computer experts. Many now see the company founders as misguided entrepreneurs or even greedy opportunists rather than saviors.
Several consulting companies and software tool makers have gone bankrupt. Data Dimensions Inc. of Bellevue, Wash., and Viasoft Inc. of Phoenix--which sold shares to the public--closed yesterday at $2.62 1/2 and $5.34 3/8 after hitting highs of $39 and $64.75 in late 1997.
Another company, Peritus Software Services Inc. of Westborough, Mass., fired hundreds of employees last spring and was sued by investors who said it had misrepresented how well it was doing following the acquisition of another company with a Y2K fix. The complaint was subsequently dismissed but Peritus, once a stock market sensation, never regained investors' good graces and is now literally a penny stock. In February, its stock was delisted by the Nasdaq Stock Exchange.
"Investors tend to be very bottom-line oriented, and when some of the companies were showing profits, their stock prices were jacked up," said Kazim Isfahani, an analyst with Giga Information Group Inc. "But as soon as their long-term strategy bottomed out, Wall Street gave them a kick in the pants."
Ronald Giordano, chief executive of Peritus, said he is now maneuvering the company into the more general field of building tools to manage software projects--and far away from its Y2K associations.
"I wish we had gotten into Y2K a bit more selectively. If we had recognized it would not be as large as we thought, we would have made better decisions," he said in a recent interview.
The dismal prices of Y2K "pure play" stocks stand in sharp contrast to the dazzling performance of several other technology companies, whose share prices doubled or tripled this year.
Analysts say part of the problem with Y2K companies is that they overestimated the revenue from fixing Y2K problems, a business that peaked in the fall of 1998, much earlier than many companies had expected. Many large companies ended up fixing their problems in-house rather than using outside consultants. And those companies that did go outside for expertise headed to large consulting firms rather than Y2K boutique operations.
Peter de Jager, a Toronto consultant who wrote a story about the year 2000 computer problem in a 1993 issue of Computerworld, said investors in Y2K companies suffered from unrealistic expectations.
"Many people thought they would come up with the silver bullet, the tool that would make it go away--and that of course didn't happen. But the speculators didn't believe that it couldn't be done and some of the share prices went much higher than they ever should have," he said.
Many people trace the scramble to claim a piece of the Y2K market to a 1995 report issued by Stamford, Conn.-based GartnerGroup, a technology research firm. The report estimated it would cost the United States $300 billion to $600 billion to fix computer programs that read two-digit "00" dates as 1900 instead of 2000 in the trillions of lines of code that make up systems controlling everything from airplane traffic to banking transactions.
Hundreds of companies molded themselves into Y2K experts and set up alarming Web sites--complete with clocks counting down the seconds to the dreaded date. Universities started adding COBOL, the Greek of the computer world, back into their curricula as many of the old "legacy" computer systems used that language. Legions of aging programmers--many of the same ones who had created the problem in the 1970s--came out of retirement to help fix the glitches. Buses flashing signs advertising Y2K consultancies buzzed around the District and other major cities.
Stephanie Moore, an analyst with Giga, remembered: "People thought 'Oh, boy! If I start a Y2K company or invest in one, I'll get some percentage of that.' The fact is that many business fixed problems by themselves. And so these consulting companies didn't get as big of a piece as they thought they would and the pie wasn't as large as they thought it would be."
Mac Slingerlend is chief executive of Ciber Inc. of Englewood, Colo., a company that once relied heavily on Y2K business but managed to diversify. He compares companies that put all or almost all of their resources into fixing Y2K problems to "Two Man Millennium Inc."
"It was two guys who started a company to sell the Y2K problem. That was their whole business model," he said. "Here today, gone tomorrow."
Ciber successfully avoided being pigeonholed as a Y2K company by loudly calling itself an "e-business" expert.
Today, the GartnerGroup prediction is widely criticized as exaggeration. The Department of Commerce now estimates the costs were closer to $100 billion. Gartner researchers, in the meantime, have backtracked and said the large numbers actually represent worldwide expenses.
Lou Marcoccio, a research director at Gartner, said at a news conference Tuesday that the firm still stands by the estimates. "I don't think it was hype and that it was uncalled-for hype," he said when asked about the predictions of catastrophe just a few years ago. "I think it was needed. It aided in getting governments and businesses to move."
If 1997 and 1998 can be described as the Golden Age of Y2K fixes, these past 12 months have been the dark ages. Y2K business dropped sharply at the beginning of the year and has been almost nonexistent in the fourth quarter, analysts say.
Shares of Information Analysis Inc. of Fairfax plunged from around $19 in January to less than $1 this week. In the company's third-quarter earnings report released in November, chief executive Sandor Rosenberg took the upbeat view that the company's little Y2K business in those months signified "that our transition away from Y2K is succeeding."
In October, MatriDigm, owned by Zitel Corp. of Fremont, Calif., filed for bankruptcy. Analysts estimate more than a dozen other American companies as well as British and Canadian firms suffered similar fates.
In November, the Securities and Exchange Commission filed suit against Denver-based Accelr8 and three of its executives for allegedly misrepresenting the capabilities of its software to fix year 2000 bugs. The executives were also accused of submitting false financial reports. Accelr8 officials have denied the charges and called the complaint "a difference of opinion" with the SEC.
Companies that once bragged about being "Y2K specialists" are now scrambling to remake themselves as e-commerce specialists, computer security specialists, or any other kind of specialist.
Jim McLendon, a vice president at Data Dimension--which at one point got more than 90 percent of its business from Y2K contracts and has now stripped almost every mention of Y2K off its Web site and other promotional materials--says the company hopes to focus on a broader range of consulting services in the coming year. Its core business will include integrating new online sites with older databases and on its software testing business, McLendon said.
To be sure, several consulting giants, such as Keane Inc. of Boston--whose revenue topped $1 billion for the first time last year--and Electronic Data Systems of Plano, Tex., raked in lots of money on Y2K business.
Robert Dornan, a senior vice president at Federal Sources Inc., a market research firm in McLean, said many government contracts went to larger companies able to offer the promise of a long-term relationship. "The more you had in your bag of tricks, the more attractive you were. If all you had was Y2K remediation, you didn't have enough," he said.
That isn't to say that large consulting companies that did a lot of Y2K work haven't seen a decline in their revenues. They have. Revenue at Keane, for instance, fell from $285.5 million in the third quarter of 1998 to $255.6 million for the same period this year. But analysts say these companies racked up new customers as a result of their Y2K business and are well positioned for the future--unlike the companies that, in the words of one analyst, "put all their eggs in the Y2K basket."
William R. Loomis at Legg Mason Inc., the Baltimore-based brokerage firm, says other, non-Y2K firms have suffered, as many clients have put themselves in a "wait-and-see" mode until the new year passes.
That lull has lasted longer than even the most pessimistic companies expected.
International Business Machines' stock plunged in October when it reported that its revenue would come in lower than expected because of sluggish sales of servers.
Inside the offices of Andersen Consulting, one of the rare service companies that purposely stayed out of the Y2K business, thousands of consultants remained "unstaffed" for many months this year as clients imposed a freeze on information technology spending as they tried to resolve their year 2000 problems.
"It's a free vacation," shrugged Tzing, a San Francisco-based consultant who recently quit to join a start-up after being "in between" jobs for four months. "But I would really like to get paid for doing something instead of nothing."
Like Andersen, many computer service companies had gone on a hiring binge in the past few years in anticipation of Internet and Y2K business, adding tens of thousands of young computer consultants to their ranks.
Still, while many Y2K companies have recently turned around and laid off many of their new hires, more diversified firms are absorbing the cost of holding onto consultants who are doing nothing. Barry Ingram, chief technology officer for Electronic Data Systems' government industry group, said the investment is worth it, especially given the popularly lamented tech worker shortage in the United States. EDS managers are gradually shutting down their "millennium centers," and retraining workers in newer technologies in anticipation of better business in the new year, he said.
Data Dimension's McLendon sighed: "We'll be glad when we get past this date change for sure."
Staff researcher Richard Drezen contributed to this report.