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The Quarterdeck public offering.

In an industry that worships celebrity status almost as much as Hollywood does, Quarterdeck Office Systems has shown an almost perverse fondness for obscurity. Quarterdeck's multitasking and memory management products--DESqview and QEMM--provide capabilities that verge on black magic to the average DOS user; among corporate customers, Quarterdeck has struggled for years to establish itself as more than a nonstandard" alternative to windows and OS/2.

And now this industry dark horse is about to go public--with a valuation of $182 million, equal to almost seven times the company's 1990 sales and 22.5 times 1990 earnings.

Clearly, Quarterdeck's underwriters believe that even obscure companies can command premium prices on Wall Street these days. After looking over the prospectus, we're inclined to agree: Quarterdeck really is hot. Therese Myers and Gary Pope, the company's co-founders, may act like industry wallflowers, but they've figured out exactly what it takes to build a very healthy software company.

The most obvious evidence of Quarterdeck's strength is its robust bottom line. Founded in 1982, the company has seen a dramatic escalation of sales and earnings over the last five years:
 1986 1987 1988 1989 1990
Net sales (000) $1,620 $2,297 $3,969 $8,521 $26,304
 Direct costs 63 172 592 954 2,670
 Development 555 37 182 840 512
 Selling, G&A 810 1,730 3,076 5,032 12,602
Operating income 192 358 119 1,695 10,520
Net earnings 174 346 117 1,579 7,632
* Fiscal years end 9/30.

Because of capitalized R&D expenses ($462,000 in 1990) and tax-loss benefits, these numbers don't exactly mirror the company's recent performance. But Quarterdeck's 40% operating profit isn't an accounting fiction: In fact, the company has generated enough real cash to self-fund its growth since 1986 and currently has $9,750,000 in liquid assets.

But there's more to the Quarterdeck story than just a fat bottom line. This is, after all, a small company that competes head-to-head with an industry giant, microsoft, in a market that tends to fuss a good deal about compatibility issues and under-the-hood technology. In fact, Quarterdeck is about to face one of its toughest challenges next month, when Microsoft ships a new DOS 5.0 version that will incorporate some of the same task-switching and memory management features that were once available only to DESQview users.

How does Quarterdeck avoid being trampled by bigger rivals? In effect, the company has adopted a classic high-end strategy: Rather than attempt to dominate commodity markets, Quarterdeck has consistently focused most of its marketing and development efforts on power users and early adopters--customers who tend to seek out little-known, high-performance tools. Quarterdeck's low profile isn't a liability in this segment of the market; in fact, the typical Quarterdeck customer probably enjoys being part of the software equivalent of a private club. Quarterdeck's ads describe DESQview as "the power user's secret.") If DOS 5.0 has any effect on Quarterdeck's sales, it may actually expand the number of power users who want more than a mass-market solution. To be sure, this kind of high-end strategy can be risky. Often, companies like Quarterdeck simply run out of fresh ideas, and their customers drift back to the mainstream. Myers and Pope seem to be sensitive to this problem; they're already working on efforts to extend the life of Quarterdeck's high-end franchise by developing products for MIT's workstation-based X Window System. The potential of the X Window market is still an open question, and the transition could be more difficult than Wall Street prefers. But this is a company that seems to thrive in esoteric niches, so we suspect Quarterdeck's product line won't run out of steam for at least another few generations. Therese Myers, president, Quarterdeck Office Systems, 1901 Main St., Santa Monica, Calif. 90405; 213/392-9851.
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Copyright 1991, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:Quarterdeck Office Systems
Date:May 8, 1991
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