Xata’s Growth Vehicle
Jay Coughlan was ready to get back in the game. A little over a year after resigning as Lawson Software’s CEO in June 2005, Coughlan was looking for a Minnesota technology firm in need of fresh leadership.
Coughlan says that he left Lawson after the St. Paul–based business software firm acquired Intentia International AB, a Sweden-based enterprise software vendor, because continuing as CEO would have meant spending at least half his time in Scandinavia. “Although you could say I left a lot of money on the table, I had some family issues to deal with,” Coughlan says. Nine months later, his family was back in sync and it was time to find a job. “My wife was starting to say, ‘You’re bugging me, get back to work,’” Coughlan recalls with a laugh. “The pendulum had swung from, ‘You’re not home enough’ to ‘You’re home too much.’”
His criteria for a new employer were few but specific. “I was looking for an industry that was getting impacted by something that was forcing it to make changes,” says Coughlan, who describes himself as “a growth type of guy—more focused on the income statement than the balance sheet.” At the same time, he sought a private company that had a more predictable revenue stream than Lawson, “where every quarter was the proverbial fourth-quarter touchdown pass with time running out.”
A few months after starting his search, Coughlan’s network led him to a company he’d never heard of.
Founder William Flies had started Burnsville-based Xata (pronounced ZAY-ta) in his basement in 1985 after developing a device that electronically captures operational data on board trucks. Fleet operators use this data to monitor and manage fuel and truck usage, along with other operating expenses. The company’s name reflected Flies’ focus on transactional data—that is, continually changing information due to predictable business “events” (like, say, mileage per gallon).
Here’s what Coughlan saw under the hood: Xata’s revenue streams were limited, the company’s strategic plan needed retooling, and the trucking industry was under intense financial and regulatory pressure. What’s more, Xata hadn’t been profitable since 2000. On the other hand, in 2004, it released XataNet, its first software-as-a-service (or SaaS) product. XataNet, which provides fleet managers with around-the-clock, on-demand access to vehicle data through a fee-based subscription service over a Web browser, represented the recurring revenue stream Coughlan was seeking.
Xata met all of Coughlan’s criteria except one: It was a public company. Still, it was the kind of challenge that intrigued him. He crossed “privately held” off his list.
In October 2006, Coughlan became Xata’s CEO. It didn’t take long for him to discover that Xata’s challenges were bigger than he expected.
Good Idea, Outmoded Model
Xata’s fleet management software operates via an on-board computer, automatically recording and monitoring the movement and location of each truck as well as the vehicle’s fuel economy, the operator’s driving behavior, and compliance with regulations regarding hours of driving and state-line crossings. This information is sent to Xata’s secure servers, where fleet managers can access it with an Internet browser. Drivers log in and out of the system at the beginning and end of their trips; except for confirming deliveries and providing information on fuel purchases in some versions of the software, they don’t need to enter any information themselves.
The data are sent wirelessly to the trucking company on a real-time basis. The kinds of data that Xata’s system records are essential for legal reasons as well as efficiency improvements: Federal regulations require that truckers not drive too many hours; and fuel taxes can vary from state to state.
On becoming CEO, Coughlan set up meetings with Xata customers so he could hear firsthand what they needed. Fleet owners consistently cited regulatory compliance, driver data (such as how long they idle their vehicles and time spent at stops), and fuel costs as their chief concerns. To Coughlan, it seemed clear that what his customers wanted was more information—in other words, more capabilities from their software.
Therein lay the problem. Xata had positioned itself as a hardware company. It provided the onboard information devices that were installed in trucks to track fleet data, as well as the software that ran the devices. Given Coughlan’s software background, he decided to give this model a cold, hard look.
Although Xata had begun selling a software-as-a-service product—which trucking firms could use as needed, rather than paying an upfront fee—it was still committed to selling its own hardware along with this new software. “It didn’t take a rocket scientist to see that where we were losing most of our money was in the hardware end of the business,” Coughlan recalls.
|Refocusing Xata on software has kept income flat (so far), while sales have revved up.|
Xata also lacked the infrastructure to execute the software-as-a-service model in the marketplace. “Xata had not been successful in changing the company to mirror the new product that it was delivering,” notes Mark Ties, who joined Xata as CFO a year and a half before Coughlan’s arrival. “It failed to equate its concept to business processes, business strategy, sales strategy, and the development of field and engineering organizations.” What was in place was a flawed strategy, he adds, that was “dependent on selling the hardware in order to sell the software.”
Xata, Coughlan says, “didn’t have clear direction, and there wasn’t a lot of excitement. Many people were working hard, but I’d call them firefighters, because all their effort was put into fixing the product at the customer site.” What Xata needed was additional software developers, and a system for regularly developing and adding more and more functionality and quality to its software—software that could be used by any make of onboard computer. “We also didn’t have any sales pipeline process that allowed us to say with any confidence not only what the current quarter looked like, but what the next three or four quarters looked like,” he adds.
Coughlan saw that for all its strengths, Xata needed more changes than he’d first believed: “I said to the board members, ‘This smooth-running company you told me about is more of a turnaround than it is a smooth-running company.’”
Once Coughlan got up to speed, most of the executive management team was replaced; some hardware engineers also exited. (The number of employees has since grown from 103 to 181.) David Gagne, whom Coughlan brought over from Lawson to run Xata’s field operations, recruited other Lawson vets to help build the software side of the business.
Not everything at Xata needed to be reconfigured. “We had a good board of directors, and Mark Ties was a strong CFO,” Coughlan says. “We had some pretty good back-office processes because of Mark, but even that was done with multiple systems.” Under Coughlan, Xata simplified its back office under one enterprise resource planning system.
Focusing on the software-as-a-service model meant adding not only capabilities but also services. Coughlan’s initial discussions with Xata’s customers told him that services weren’t just a helpful adjunct—they were urgently needed. “One of the things I noticed when I was going out to see customers was that they weren’t using all the application functionality that we were offering,” he says. Even at Lawson, Coughlan says, “if you went back 10 years ago, customers weren’t using the software correctly. A whole business was built around that called ‘consulting.’”
So Xata set up its own services division to assist XataNet users with implementation, training, maintenance, and custom report development. “We [were] just selling customers stuff, not getting them to use it,” Coughlan says. “We needed to help them learn how to use it so they could get our true ROI. Not only did adding services help us in the marketplace from a competitive point of view, it added another revenue line.”
One year after Coughlan took the reins, revenues were flat, usually a cause for alarm at a public company. What’s more, net income had declined. Coughlan reassured shareholders by pointing out that his first year was all about building a new foundation. “I didn’t panic because I knew the revenue would come, long term,” Coughlan says.
It has. For the fiscal year ending September 30, 2008, Xata’s revenue came in at $53.7 million, up 75 percent from the previous year. The next quarter brought even more good news: Sales jumped 91 percent, from $7.7 million to $14.6 million. Nonsoftware-related sales remained flat as a percentage of total revenue. “As long as our customers want us to sell hardware to them, we’ll sell it to them,” Coughlan says. “But it’s not the emphasis.”
Perhaps just as important to the company’s success as fixing its business model was rebooting its culture. “Before Jay arrived, Xata was an entrepreneurial type of culture, meaning there was never a bad idea,” Ties says. “Jay and the management team brought in a real focused business-strategy culture. The employees know what our strategy is, they can articulate what our strategy is, they know what they contribute to the success of that strategy, and they know how their success parlays into the company’s success.”
Putting It All Together
The buzzword in the fleet optimization industry these days is consolidation. “If you’re a CIO of a large fleet of trucks, what you don’t need is a bunch of $20 million or $30 million companies coming in and each selling you a point solution that you’ve got to put together,” Coughlan says. “You want somebody to provide a total, integrated solution. It’s like the [enterprise resource planning software] industry, which consolidated over the last 15 years. The same thing will happen in this space, with two or three players doing the consolidating. We hope to be one of them.”
The biggest player, with 57 percent of the market, is the fleet management division within Qualcomm, the San Diego–based wireless telecommunications research and development giant. Xata is the biggest of the little guys, with 16 percent. Xata, however, ranks number one in the private-fleet segment: 34 of the top 100 private fleets in the U.S. use a Xata solution. Private fleets are typically cost centers within larger companies. For-hire, the other chief industry space, comprises third-party trucking companies.
Coughlan believes that Xata is well positioned to grab more market share. Fleet management is just one revenue center within Qualcomm, whose focus is on the much larger telecom world. “We’re more of a software company, so we’ll provide a ton more information to a fleet owner,” Coughlan says. Most Qualcomm customers, he believes, bought its products “because they were really the only option. Today, I think we’re becoming a very real alternative to Qualcomm.”
Xata’s consolidation strategy involves strategic acquisitions and leveraging partnerships, particularly those that allow it to expand in the for-hire space. In February 2008, Xata acquired GeoLogic Solutions, a Virginia-based software provider to more than 35,000 trucks across North America. GeoLogic’s signature product, MobileMax, provides communication between truckers and dispatchers. The partnership broadens Xata’s platform in the for-hire segment of the trucking industry.
In February 2009, Xata moved closer to its goal of providing a turnkey solution—providing all of the functionality to a customer instead of simply a piece of the total system—when it began partnering with New Jersey–based ALK Technologies to add navigation functionality to XataNet and MobileMax. ALK’s CoPilot Truck program provides turn-by-turn directions, voice prompts, and graphical maps in order to help truck drivers complete their routes more efficiently.
“Adding on-board navigation was a big milestone,” says Tom Flies, Xata’s senior vice president of product management and the son of the company’s founder, William Flies (who retired in 2003). “Trucks have certain restrictions because of their size and weight, so they can’t take the same routes as normal passenger vehicles can.”
Xata added 62 new XataNet customers in fiscal year 2008 (which ended September 30). Its fleet management systems can now be found on 66,000 trucks throughout North America, including those of CVS Pharmacy, International Paper, Sysco, and U.S. Foodservice. “Some of the vertical segments we serve, like food and petroleum, will remain strong throughout these tough times,” Coughlan says. The company believes its value proposition is compelling in a down market, since its products can help trucking firms operate more efficiently.
All that said, Xata still isn’t profitable. For the quarter ending December 31, the company posted a net loss of $672,000. The same period the year before, it had a loss of $1.01 million.
Nonetheless, Xata appears to be on the move under Coughlan. “We changed everything—our logo, our colors, the way we present and sell the product,” Flies says. “It really comes back to focusing not only on the company but on the brand as well.”
“The reality is,” Coughlan says, “we’re a growth company in a space that’s going to allow us to grow.”