Mercury Interactive goes after wallet share

Earlier this week I attended a dinner, accompanied by a fine Jordan 2001 Cabernet Sauvignon, hosted by Mercury Interactive President and COO Tony Zingale and CMO Christopher Lochhead. The company has made its mark in business technology optimization (BTO)—getting the most out of complex IT systems and aligning them with business goals. The majority of the Fortune 100 use Mercury for testing, delivering and managing applications across heterogeneous environments.

The company is on a roll, growing revenue 35 percent in 2004 to more than $685 million. Today, the company reported revenue of $198.8 million for the first quarter of 2005, an increase of 27 percent compared from the first quarter of 2004. Yankee Group is forecasting a 21 percent compound annual growth rate for the BTO market to $6 billion through 2007. Indeed, the growth potential for areas like automating application testing and IT governance is huge.

Zingale has a billion in his sights, but plans to get there via more acquisitions (Mercury acquired Kintana in 2003 for $267.5 million and the Appilog for about $49 million in 2004). “We have a short list of companies to bring into the Mercury portfolio, and we are committed to our vision as a stand alone company,” Zingale said.

In the meantime, Mercury is going after "wallet share." IT budgets are not growing much, so the way to grow organically is by getting more of the IT spend (wallet share) from existing customers, marketing whiz Christopher Lochhead said. In fact, most of the large deals inked recently (19 million-dollar plus deals in Q1) were with existing customers, company CEO Amnon Landan said during the earnings call.

Based on the success of its testing and delivery platforms, Zingale said that Mercury has "permission to go to CIOs and IT executives" with compliance products, which he said are influencing the biggest deals.  Lochhead called compliance a "gift that keeps on giving." The auditors are getting fat (and many of them contributed to the existence of regulations like Sarbanes-Oxley) on compliance, Lochhead noted, and taking the costs out of compliance and automating business process changes is low hanging fruit for Mercury.

Lochhead thinks Mercury could get to 10 to 20 percent of customer wallet share, but Zingale backed off, saying that realistically nobody takes 20 percent of the budget. Enterprises don't like to be indentured too much to a single vendor, but at the same time they want to reduce the number of vendors. Lochhead expects that over the next five to ten years the big spending drivers that could flow to Mercury will be automating business processes and other IT tasks at the interdepartmental level and across businesses, which he said are both still fairly siloed today.

Mercury's quest to join the billion dollar club by going after share of wallet and acquistions has surely attracted the attention of competitors and consolidators like IBM, Oracle and HP, as well as partners like Accenture. How long before Mercury, which was founded in 1989, loses its independence?