SAS Steps out to IPO?

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From: Rohit Khare (
Date: Sun Sep 24 2000 - 15:22:27 PDT

[SUGI cons are really.... interesting... events. May have to go next
year. -- RK (for whom SAS has been a household world since childhood

SAS steps out of stealth mode
September 09, 2000 12:00 AM PT
by Catherine Liden Traugot
RALEIGH, N.C. -- For years, Jim Goodnight, the founder and CEO of SAS
Institute steered clear of the limelight while building the world's
largest privately held software company.

That's about to change.

The 24-year-old company, based in Cary, N.C., with $1 billion in
annual revenues and an unbroken streak of profitability dating to its
founding, is planning its first public offering next year -- an event
locals thought its quiet founder, a former statistics professor,
would never undertake.

Even his employees acknowledge Goodnight's reticence. "Jim doesn't
like to talk much," says Andre Boisvert, hired earlier this year as
vice president of business development and coach to SAS management on
what going public is all about. "He knows part of his privacy will go

Goodnight seems ready. He's even got a few wisecracks down to explain
why, after all these years, he's putting out a public offering. "My
sales people are getting offers of double their salaries and stock
options -- and those are the bad ones," says the North Carolina
native. Until this year, the sales staff was on the same pay plan as
the rest of the professionals -- a salary and yearly bonus; they now
get quarterly bonuses tied directly to sales.

Goodnight says his chief reason for issuing stock is to retain and
reward loyal employees and, essentially, create a branding event and
provide currency for purchasing companies. The company has no debt.

Who uses it

SAS (pronounced sass), the world's largest privately held software
company, develops data warehousing and decision support software. The
U.S. Census Bureau uses it to analyze the census data. Companies use
the customer relationship management software to figure out who is
buying what products and services. The Miami Herald uses the
data-mining software for its computer-assisted investigative
projects, two of which have won the paper Pulitzer Prizes for
outstanding journalism. A British Internet bank uses SAS to figure
out which marketing campaigns produce the most profitable customers.

A potent force within Fortune 500 companies (about 98 percent use SAS
software), SAS has met some resistance from small and mid-sized
companies buying their first major data-mining software. "We hear,
'Oh, I know SAS, that's a stats package I used in college.' They
don't understand that we've grown at double-digit rates for 24
years," says Goodnight. It irks him that competitors like Micro
Strategy (MSTR), Oracle (ORCL) and Siebel (SEBL) are constantly in
the headlines. "We would be much more visible if we were public."

Analysts who follow the sector agree with Goodnight's assessment on
the publicity matter. "When you're private there is no real vehicle
to get word out except word-of-mouth," says Peter Urban, who follows
the data mining and data warehousing for AMR Research. Industry
analysts generally praise SAS' products, pointing to, in particular,
newer products like CFOVision and HRVision, which are decision-making
analytical tools.

The timing of the IPO is still in the air. Goodnight conceded he's
having a harder time getting to the standard 17 percent profit margin
this year. To keep from losing staff (SAS' turnover rate is typically
4 percent a year, well below the estimated technology industry
average of 20 percent), personnel costs are up 23 percent
year-to-date. "We've had to adjust salaries to stay competitive," he
says. "We fell behind."

Getting ducks in a row

But the process is definitely in place. Once part of the SAS ledger
sheet, non-software holdings in Midway Airlines (MDWY), LeBleu
bottled water and acres of prime Triangle real estate have been moved
into a separate company, Reedy Creek Properties, owned by Goodnight
and his co-founder John Sall. Accounting systems are being unified.

Boisvert says the executives are starting to talk about what it means
to be a public company, learning how to make the company's profit
stream predictable from quarter to quarter, "and what to do when an
analyst calls."

What Goodnight says he has no intention of changing is the company's
reputation as a sane, even cushy, place to work. With 3,500 employees
in Cary and a total of 7,500 worldwide, SAS has made plenty of "Best
Place to Work" lists with more than lip service paid to the 35-hour
workweek (the campus gates are locked at 6 p.m.). The company has
heavily subsidized on-site day care, a well-equipped gym, live music
in the company cafeteria and M&Ms in every candy jar on Wednesdays.

That reputation shouldn't be a problem when the company goes public,
says Goodnight. "I think we're the only private company on many of
those top 10 lists."

But it obviously concerns Boisvert. One of the few people in SAS ever
to be hired in at the level of vice president, Boisvert briefly
worked as a vice president of Oracle (ORCL) -- kingdom of the 18-hour
workday. Boisvert wonders whether SAS' workplace reputation will
cause concern on Wall Street.

"We have to get away from this image that 'Here's a great place to go
into semi-retirement." Leaning forward, Boisvert almost whispers as
he notes that plenty of the software developers work from home after
hours and, just recently, executives held a meeting that didn't break
up till 8 p.m.

Boisvert's concerns may be legitimate. Off the record, some local
executives say they don't want to hire SAS programmers for fear that
they won't get the hang of burning the midnight oil while others
derisively refer to SAS as the "sandbox."

Workplace culture
Jeffrey Pfeffer thinks SAS shouldn't be concerned about the sniping.
He believes the company's current workplace style will ultimately
rule the day. A management professor at Stanford University, Pfeffer
includes a chapter on SAS in his book "Hidden Value -- How Great
Companies Achieve Extraordinary Results With Ordinary People."

He and co-author Charles O'Reilly III share a thesis that chasing
after hot talent is less important than creating a climate that
nurtures talent -- and that the nurturing will do more than just ease
the HR department burden. He conservatively estimates that SAS' low
turnover rate saves $70 million a year in HR expenses. Moreover,
Pfeffer thinks it is a huge reason for SAS' steady revenue growth.

SAS doesn't sell its software; it leases it on a yearly basis. At a
minimum of $50,000 for 50 seat licenses, it's not cheap. Yet, 98
percent of seat licenses are renewed -- and roughly 70 percent lease
more software the following year. Pfeffer thinks one reason is
because "the user can actually talk to the developer that wrote the
code. It's a different business model, one based on relationships.
Most software customers treat [the developers] with contempt. You go
to a SAS user's convention and say anything bad about SAS and they
(the customers) will kill you."

How will that translate once SAS shares are traded on Wall Street?
"It means the stock won't go up rapidly. but it won't go down
rapidly," says Pfeffer.

That's the kind of approach Goodnight seems to taking toward the IPO.
"It's not going to be a great tech event stock of the year," he says.
It's not going to go from $15 to $85. We plan to grow at 20 percent a
year, but we can't grow much more than 20 percent a year."

It is perhaps the reason Goodnight is keen on getting a whopping $22
billion valuation for the company. Looking strictly at revenue and
earnings, that number appears in line with valuations (from a
price-to-earnings ratio) as companies like Siebel (SEBL) or Oracle.
But Goodnight's acknowledgment that he doesn't believe SAS can grow
more than 20 percent a year puts that figure in question.

"That is a pretty hefty valuation," said Melissa Eisenstat, an
analyst with CIBC World Markets. Siebel's three-year revenue growth
was 119 percent; Oracle, (a more established company) was 21.5

When asked again about it, Goodnight hedges a little on "just 20
percent". The company's e-commerce software area is growing faster.
One interesting sign: In 1999, 15 percent of revenue growth came from
sales to new customers. In 2000, it's estimated that 35 percent of
revenue growth will come from new customers, many of those looking
for e-business products.

Sherlund on campus

That number intrigues Rick Sherlund, Goldman Sachs' (GS) software
analyst. Sherlund is not a totally unbiased observer. His company
will likely underwrite the SAS public offering. But Sherlund and his
colleagues are the only Wall Street analysts to visit the SAS campus.
In fact, when they visited a few years ago - in suits -- and sat down
to lunch with Goodnight in the company cafeteria (there is no
executive dining room) the buzz generated local press speculation
that SAS was going public.

"They're positioning the company for accelerated growth," says
Sherlund, who acknowledges that in discussions with the company it is
obvious there is some fence-straddling on moving into the
fast-changing e-business environment. "It's an academic place."

If Wall Street isn't sold on SAS getting with the New Economy, it'll
love their business model. By leasing their products and offering a
long history of high renewal rates, analysts like Sherlund won't be
guessing about revenue. "It'll be easier to do an earnings forecast,"
Sherlund said.

In any event, Goodnight won't initially have to worry about an angry
investor takeover of his company. He's letting out only 20 percent,
with 5 percent purchased for use in employee bonuses.

His way

While he acknowledges part of his staff is nervous about going public
and the others "are seeing dollar signs," the 37th richest man (worth
an estimated $4.5 billion) in the United States doesn't expect the
event to change his life. He'll still collect the rocks that line his
office shelves, sit down at his computer to write some code and
continue bemoan Buick's decision to stop making his favorite car, the

And while other software execs mutter that there is no way SAS can
make it with its laidback workplace culture, he'll do it his way.

"I think right now a lot of software companies are surviving because
the system is awash in money," says Pfeffer. "When the market demands
quality and efficiency a lot of these organizations will disappear."
Catherine Liden Traugot is a freelance writer based in Raleigh, N.C.
Reach her at If you would like to submit a

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