Search Product and Company Update
Wow! Growth Continues in 3Q2008
By Susan E. Aldrich, Sr. VP and Sr. Consultant, December 4, 2008

NETTING IT OUT

This report recaps results at the companies on our search vendor watch list. Customer appetite for search technology was fairly strong in the face of slowing world economies. Our clients continue to seek our help with findability, site search, intranet and portal search, and content management.

The vendors covered in our last recap report did spectacularly well during 2007. They have done approximately as well this half, at least those that were willing to participate, producing roughly the same number of customers as they did during the second half of 2007. Considering that the U.S. is in a recession, this is an impressive performance.

Fewer companies bragged about revenue growth during this recap period, and average deal sizes in several instances were down. It seems fair to conclude that the customer acquisition came at the expense of margins for many of the vendors on this list. Two vendors signaled clear exception to that trend: Autonomy and empolis both claimed an increase in average deal size; empolis’s being by far the most significant increase due to a pair of multi-million euro deals.

Hiring continues, but at a slower pace.

The days of 20+ percent headcount growth are gone, at least for now. As of November, all but two of the vendors have jobs listed on their sites, but the quantity of postings signals replacement rather than expansion.

Management changes also slowed, with only Endeca, Fredhopper, Mark Logic, Omniture, and SLI Systems bringing new VPs on board. Two companies achieved additional funding, Endeca and NearbyNow. One company, Mercado, notably did not. In October it went into receivership, and its assets were acquired by Omniture.

My best guess for the difficult economic year to come is that very targeted solutions will be the only successful offerings. Top on that list is ecommerce search, followed by anything that makes sales teams more effective (mobile search, CRM search), and cover-your-backside applications (governance and e-discovery). Recession is not infrastructure time, so platform bids will have a tough time.

SEARCH: FIRST-HALF CALENDAR YEAR 2008

A Current Snapshot for Search Vendors

We’ve compiled a review of first-half activity from 17 of the search vendors on our watch list. Our review includes customer wins and repeat business with existing customers as reported by each of the vendors, product announcements, structural changes, and financial results where available. Autonomy, IBM, Google, Microsoft, and Omniture are public companies and provide audited results. None of the revenue results from the other vendors presented in this report have third-party verification. Our snapshot also highlights trends and key events. For trends, we look at continuing improvements in the products and growth in customer bases, as well as hiring. For key events, we identify those occurrences that could have a significant impact on search technologies, applications, and the market landscape. For example, an acquisition is a key event, as are new players and services emerging into the market.

Recap of Suppliers and Products

We have a somewhat shorter list this time around, as several companies continued to decline the pleasure of participating. I could cynically assume they have only bad news, but I don’t think that’s the case. Most who decline just don’t like to share: the scrutiny is counter to their culture. Sharing customer numbers is a bit like sharing your age and your weight. If you love publicity and are built like a TV star, you’re happy to do it. If you don’t really love publicity, and/or you are built more like a character actor…

Mitch Kramer contributed the commentary on InQuira in this report.

Our watch list of companies supplying the leading search technologies, and a summary of 1H 2008 results, is presented in Table A.

Summary of Company Results for 1H 2008
Please download the PDF to see the table.
Table A. This table summarizes the results for 17 vendors on our private company watch list.

Trend: World Economy Spirals Down the Toilet

I’ve been watching the economy all year, astounded each week that business continued as usual up through third quarter. Not just limped along, which would have been more than I hoped, but seemingly raced. Search, ecommerce platforms, and customer service, the latter two areas covered by Mitch Kramer, did very well. Huh. As the fourth quarter begins, activity is finally slowing. We can only guess where the bottom of this recession will be. Will 2001 look soft by comparison? Or was 2001 exceptionally hard on technology because of the unique circumstances of Y2K and ecommerce spending, so this downturn will be less painful by comparison? Will oxygen return to technology spending 12 months from now, or will recovery be delayed into 2010 or 11? I think I’ll go back to bed. Wake me in a year.

I prefer to think in terms of these two scenarios: First, that while technology spending in general is down, ecommerce-related spending is flat or rising. Ecommerce is the only area of growing revenues for most companies, and they can’t afford to starve that growth. Also, the timing seems to be right; companies have been replacing their ecommerce platforms in 2008 and continue to consume our research to support ecommerce technology decisions—even in November 2008. Along with those budgets go expenditures to make the sales force more effective and responsive (especially if quite a few have been let go), such as mobile and CRM search. And, second, companies can’t afford to ignore compliance and discovery, especially with so much finger pointing over who got us in this mess, anyway? So vendors offering compliance and e-discovery solutions should also fare well in 2009. I don’t think it will be a great year for generalized search platforms.

Trend: Customer Growth Moderates

Customer growth during the first half was almost flat compared to second half of 2007. Only Mark Logic had significantly greater customer acquisition during the half, roughly three times the new customers as compared to 2H 2007. Three companies had the same or very nearly the same acquisition numbers, four had somewhat accelerated customer acquisition, and five gained fewer customers. We have no comparative numbers for two companies.

Trend: Consolidation

I hate consolidation. It’s exciting news, but, when the dust settles, there are fewer people to talk to. Fortunately, in search, there still is no dearth of newcomers to track, and you will see them show up eventually in this report.

There were three notable search vendor consolidation events this year: Microsoft completed the acquisition of FAST, and Omniture complete the acquisition of Visual Sciences. The third event is not yet complete: Omniture announced in October that it is acquiring some of Mercado’s technology and other assets. Mercado’s planned funding infusion did not happen in the third quarter, when the financial markets finally reacted—and overreacted—to deteriorating conditions. Without funding, Mercado had to close and sell its assets. Bad news for Mercado customers, employees, and investors. Good news for Omniture, which now has really great merchandising and a couple hundred new customers.

Trend: Product Activity Unchanged

Product activity is about as usual. Four vendors released new versions (Temis, Google, Mercado, Coveo), six had point releases (Autonomy, Celebros, empolis, Fredhopper, IBM, Microsoft), two had new merchandiser consoles (Endeca and SLI Systems), and four had new offerings (Autonomy, Coveo, Mark Logic, Microsoft). Three had no releases (Avail Intelligence, Omniture, InQuira) during the half.

Trends: Hiring Binge Is Over

For the past few years, hiring requisitions hovered around 20 percent of the existing staff for companies we watch. Today, that number stands at less than 10 percent. During the half, companies’ headcount grew by about 60 people, excluding Google, Microsoft, and IBM, which is by far the slowest hiring in the past three years. The majority of search companies are still hiring, but at a rate more appropriate to tuning the skills mix rather than expanding the workforce. Indeed, Google seems to be cutting staff in the hundreds, a small percentage but a big change for a company that has been hiring so aggressively since its inception.

Trend: International Expansion

International expansion has serious cold feet. With the much stronger dollar, it is now more expensive for European companies to tackle the US; and, with the economic recession, the incentives are smaller. I think we’ll see cross-continental activity at a standstill for 2009, and international teams recently put in place may be scaled back. It takes muscle to succeed in new markets, and companies are likely to be conserving their resources in the coming tough times.

This report continues...