Janusz Filipiak:
While most Polish software giants have focused on the home market, Kraków-based software house ComArch shifted its sights internationally, helping to cushion the blow from the local IT industry slowdown. Janusz Filipiak, ComArch's chairman and chief executive officer who cofounded the company in the early 1990s, spoke with the WBJ's Roseanne Gerin about the firm's strategic shift abroad as well as its plans to become a systems integrator in Poland. The following is an edited version of their conversation.
Q: ComArch's strategy is to increase its presence in foreign markets, but so far your efforts in the United States and Germany have been limited since you've only been able to land small contracts there. Do you still think it was a good move? A: Yes, it's not a choice, it's a must. We are a software house (dealing) with proprietary software, and now the Polish market is saturated with our software. On the Polish market, we can deliver as a systems integrator, integrating our software and third-party software. But (regarding) our products, we must go international, otherwise we would not be able to pay (our) costs. We started to speak about being active internationally in 2000, and 2001 was the first year of our international activity. Now we have several projects in Germany, the U.S. and two projects in the Middle East. We are not putting a huge amount of money in(to) those markets (because) we want to grow organically and employ people one by one. So, I think it's a good start. Last year our international business was 7% of our revenue.
Q: What percentage of your revenue do you expect from export sales this year? A: It's difficult to say. We don't give that figure. We are in several tenders now. It should grow.
Q: Why did ComArch want to open offices in Frankfurt and Washington, D.C., given the heavy competition in the German and U.S. markets? A: We are convinced after an initial period of international activity that we have very good products at competitive prices. This is proven by the awards that we've received at international fairs. And the products (have) started to be appreciated in international markets. We attract a lot of attention, (but) we have a problem with branding. It's strange for people in the U.S. and Germany to (see) a Polish company. Nobody in the U.S. expects that Poland can deliver software. They expect that we can deliver engineers, but not organized teams of products. Also, we are present in the Middle East, but we cannot be present only (there) because even in the Middle East people expect to get products with international recognition from companies in Germany and the U.S.
Q: What are you doing in foreign countries to break down the brand barrier of being a Polish IT company? A: Our strategy is to have a very strong presence at international exhibitions, fairs and conferences each month. This is a way to get recognition because our product is aimed at a well-defined market of telecommunications specialists, (and) we want to establish our brand among such people.
Q: ComArch has earmarked zł. 10 million ($2.5 million) to strengthen its global sales. How will the money be spent? A: We had a $10 million bond issue recently, and of that $2.5 million will be used to strengthen our international presence. Maybe not all money will be spent this year, but it will be spent according to need. There is always the option of buying a small company in Germany or the U.S. We have a lot of offers, and many people want to sell us companies. But it's not our favorite way of doing things. We prefer organic growth. We are not in a hurry to do that, but otherwise we will invest in our subsidiaries.
Q: Do you find the same bias against a Polish IT company operating in the Middle East that you might find in Germany or the United States? A: Fortunately not. During communism, Poland delivered a lot of services to various countries in the Middle East, like Kuwait, but not Iraq because it is legally prohibited to export any IT to Iraq. But in those gulf countries, many Polish people deliver services, and there are thousands of people with reputations and recognition. That's why when we considered the Middle East as a strategic region, we were coming back to that region. During communism in the 1980s, we (also) had a lot of students from those countries, so there are many people in companies who can speak Polish. Maybe the picture is an overstatement, but we are not strange people in the Middle East.
Q: Does the shift to export markets mean that ComArch will increasingly look to push sales abroad rather than in Poland? A: By all means, no. We must be present on the Polish market because (in) a couple of years the majority of our revenue will come from the Polish market. But instead of selling vertically - which we have done so far to the telecommunications market and to the banking (sector) - we want to be a systems integrator and we have defined a strategy for that. And regarding this bond issue, we said in the prospectus that a significant part of the money would be allocated for that purpose. ComArch started as a company specializing in some niche products and now we are undergoing a change to be more like a nationwide systems integrator. It's an important part of our strategy.
Q: Was the strategy shift an acknowledgement that ComArch can no longer compete with big domestic players for the limited number of large IT contracts being offered? A: The Polish (IT) market in general is very small. It has always been small. The turnover of Oracle Poland, IBM or Hewlett-Packard in Poland is $50 million-$100 million. In Western countries one contract can (account for) the total (revenue) of such companies in Poland. So the Polish market is still very small, and a large portion of the market is selling hardware and very basic services. The market is not very well developed. We have several companies (here) that are competing very strongly for very limited money. I'm not saying now that the situation in Western countries in recession is any easier, but in a way our offer is more competitive price-wise.
Q: Your company's strategy in the early years was to produce proprietary software products. Will you keep that strategy or will you look to buy products from other IT companies and act as a reseller? A: The IT industry is changing. Now we are speaking more in terms of components, so whenever we deal with applications, we are not writing all the components ourselves. To a larger extent we are using components purchased from other countries, but it's a general tendency in other countries. So in a way we're starting to be a software integrator. We do not have the stupid ambition of writing all code ourselves, but whenever it is practical and cost-effective, we use components of other companies, and we're establishing a lot of partnerships in that area.
Q: The telecommunications sector has been your most important revenue generator, but recently you lost a billings systems contract for your biggest customer, Telekomunikacja Polska (TPSA). How will this affect your revenue this year? A: At the beginning, TPSA was our main and sometimes only customer, and for nine years now we've been working to reduce the number of contracts from TPSA. But as of last year, we can no longer say that TPSA is our (core) customer. It doesn't generate the main part of our revenue, (which) comes from many customers. We have several hundred contracts a year. It's difficult to say how we will be affected. What I can say for this year is that we will have an operating profit and positive net results. Of course, it's always a problem if we lose a project, but it's not a situation where we depend on TPSA as a customer.
Q: According to your annual report of 2001, TPSA accounted for 26.3% of ComArch's customer-generated revenue. Isn't that a lot? A: It wasn't only billing, it was network management and other contracts. The amount of revenue we had from billing was not very high because we implemented the billing system, (and) the contract was finished in 1999. Since then we've only (performed) maintenance. You cannot get such a huge amount of money from maintenance. In 2000, we had very small revenue from TPSA, and still we survived with positive results. This proves we are not dependent on TPSA.
Q: Your other traditional strength has been software for the financial services sector, but domestic competitors such as ComputerLand and Softbank are larger and stronger and may not view ComArch as a serious competitor. Can you still compete with these firms for financial service contracts? A: Their opinion that we are not a strong competitor is a kind of public relations propaganda. If you look at our financial results without such big turnover, we have a net profit that is not much smaller than ComputerLand's or Softbank's. The other answer is that in the Polish banking industry we are not going to have many large tenders (unless) Powszechna Kasa Oszczędności Bank Polski (PKO BP) decides to announce a large tender. But most (banks) purchased large IT systems in the past couple of years, so we don't expect many contracts in that area. We are dominating the market for leasing software, and we are quite successful in exporting that software. So service is our approach to the banking sector in Poland.
Q: Industry professionals say that ComArch could be an acquisition target for a larger company. What do you say? A: It cannot be excluded, but we are not planning to sell the company, and we don't have any talks to sell the company at this stage.
Q: Part of ComArch's strategy is to acquire smaller companies this year. How many do you plan to buy? A: Not more than two (software companies). One we are in the process of buying (and) it should be finalized in July or August. Maybe we will find one other company, but definitely not more, because we purchased (enterprise resource planning software producer) CDN (in May 2000). It's a very painful process of consolidating those companies with the corporation.
