Vocus thrives with software services

The Baltimore Sun

Ever since Vocus Inc. changed its business model to selling software services over the Internet in 1999 -- instead of selling the software -- the Lanham company has been thriving.

It had the second-hottest stock in Maryland last year, along with its second full year of profit. Its income rose 126 percent and revenue increased 44 percent, according to numbers released yesterday. And chief executive Rick Rudman said new subscribers doubled last year, as he raised 2008 sales guidance up to $75 million.

The company's industry sector -- which is known as SaaS or "software as a service" -- is being hailed by analysts as the soon-to-be preferred method for dozens of business applications.

Such predictions have helped boost the 16-year-old company's profile and those of others like it. But some analysts aren't yet sold on the SaaS hype.

"SaaS companies have grown at a nice clip, but you have to be cautious of these predictions that we're on the cusp of a breakthrough where software as a service will dominate every sector. They've been saying that for the last seven or eight years," said Tony Byrne, who founded tech analysis company CMS Watch in Olney.

Though venture capital investment in traditional software has waned during the past few years, interest in SaaS companies has been strong, analysts said. That's largely because SaaS firms have lower costs than traditional software companies because of their virtual nature. But some customers worry about relying on a Web-based provider and not having a backup if there's a computer glitch.

SaaS businesses typically provide outsourced services and support through the Web, allowing users to pay as they go, rather than having to buy software and then develop staff to manage it.

The applications are sometimes free, with clients paying for software assistance or various upgrades (think Yahoo e-mail on the consumer side). Others are subscription-based, like Vocus' main product, which helps public relations teams manage contacts and communications.

One of the best-known SaaS companies is San Francisco's Salesforce.com, which specializes in "customer relations management." It was founded in 1999 by a former Oracle executive. Analysts polled by Bloomberg News expect it to have sales of about $740 million in its fiscal 2007, which ended last month.

Such numbers "are forcing companies like Microsoft and IBM and Oracle to come up with SaaS-based solutions themselves," Byrne acknowledged, but he added that the SaaS sector is for the most part, made up of "bit players."

Others see a bigger future.

"Most surveys suggest [SaaS is] the faster growing segment of software. In our view, the segment is moving from early adopter to at least mainstream awareness," said Richard Baldry, an analyst with Canaccord Adams in Boston. "Over the next three to five years, we believe it will be the preferred method of delivering [specialized business] operations."

In 2006, the SaaS market earned sales of about $6 billion, but technology analysts Gartner Inc. expects that figure to triple within three years. Still, that's a fraction of the roughly $200 billion business software industry.

Vocus started out as a more traditional technology company, selling software for government relations in 1992 and adding the public relations focus five years later. In 1999, Vocus workers launched their first SaaS product -- they were early pioneers according to their prospectus filing with the Securities and Exchange Commission -- and that's when things started to turn. For the past 34 quarters -- eight-plus years -- Vocus revenue has grown.

The company's 2,400 customers, who pay an average of about $25,000 per year for subscription access, now include BMW, Southwest Airlines and Coca-Cola, along with smaller organizations and nonprofits.

The company went public in late 2005. Last year its share price rose 106 percent to a high of $37.30 Dec. 10. Yesterday, shares closed down 31 cents to $29.47, having fallen last month as the economy faltered. Analysts said SaaS companies can likely better weather a recession than others, however, because of their lower overhead.

After the market closed yesterday, Vocus announced that its income for the fourth quarter of 2007, which ended Dec. 31, rose about 10 percent to $525,000 compared with the corresponding quarter a year earlier. Income for the year more than doubled to roughly $1 million. Revenue for the quarter increased 35 percent to $16.3 million, and for the year, it rose 44 percent to $58.1 million.

Vocus added 700 subscribers last year Rudman said in a conference call to discuss the results.


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