Cheyenne Software, Inc.

3 Expressway Plaza
Roslyn Heights, New York 11577
U.S.A.
(516) 484-5110
Fax: (516) 484-1853

Public Company
Incorporated: 1983
Employees: 500
Sales: $97.74 million
Stock Exchanges: American
SICs: 7372 Prepackaged Software

Cheyennes Software, Inc. is engaged in the development, marketing, and support of software products for use in microcomputers. It is a leading U.S. provider of software for Local Area Network (LAN) systems, which link microcomputers and peripherals and allow them to share information. Following a rocky start, Cheyenne realized rampant growth during the late 1980s and early 1990s.

Cheyenne Software’s history may be traced to 1983 and the New York investor Barry Rubenstein. Rubenstein, then in his late 30s, was having problems with a computer system that he had purchased at a local computer store. When he returned to the shop to complain, he met Frank Mena, a salesman at the store who also worked as a computer programmer. “We got to talking, and talking got to much more talking,” Rubenstein recalled in the August 13, 1990 Newsday. “He said he wanted to get into his own business,” Rubenstein noted.

Intrigued by the conversation, Rubenstein set about trying to come up with a solid business plan and money to back it. The well-connected Rubenstein was in a good position to find the start-up capital—at the time, he was working as an investment banker in New York for Prescott, Ball & Turben Inc., a Cleveland-based brokerage firm. Rubenstein contacted several potential investors and was able to round up $2.7 million in seed money. He and several friends and investors then started Cheyenne Software in 1983. Their plan was to develop and sell software for the emerging LAN market.

Cheyenne officially opened its doors for business in 1984. Rubenstein became chairperson of the newly formed Cheyenne and friend Eli Oxenhorn was named president. A software industry veteran, Oxenhorn had served as head of software operations at Warner Communications for nine years and was eager to get involved in a start-up. Oxenhorn handled strategy and day-to-day operations, while Rubenstein concentrated primarily on finances and helping, in any way possible, to get the venture off the ground.

Cheyenne’s first several years were largely spent in trying to develop marketable software products and to identify new opportunities. The first proprietary software program developed by the company was NetBack, which didn’t actually reach the market until 1989. NetBack was a network utility (software program that supports a computer network) designed to back up, or copy and store, data. As Cheyenne worked to develop that and other LAN software products, the company continued to show annual losses throughout the mid-1980s, pouring millions of dollars into research and development.

In an effort to generate cash for its software development efforts, Oxenhorn decided to diversify into the booming microcomputer distribution business. To that end, during 1987 and 1988, Cheyenne completed the acquisitions of F.A. Computer Technologies, Inc. and Gates Distribution Company, both of which were engaged in the distribution of microcomputers, networking software, and computer peripheral equipment. Cheyenne combined them to form Gates/FA Distributing Inc., which Cheyenne took public in a 1989 stock offering. The move was also viewed as a potential complement to Cheyenne’s software efforts, because Gates/FA would give Cheyenne a new marketing and distribution channel for its software.

About the same time that Cheyenne was assembling its Gates/ FA subsidiary, the company suffered a setback involving some of the investors who had originally funded the venture. In 1987, Barron ’s, a major business periodical, published a lengthy article in which it lambasted Cheyenne’s leading shareholders for playing “central roles” in transactions it called “highly questionable.” Barron’s based the piece on a 1986 report created by the President’s Commission on Organized Crime. The report did, in fact, implicate major players related to Cheyenne in some shady dealings. At issue were the financial dealings of two of Cheyenne’s top investors: Jackie Presser and Fred Dolin.

Jackie Presser, the head of the Teamsters Union, was awaiting trial at the time for a racketeering case. Fred Dolin happened to be the son of Nate Dolin, a Cleveland businessman who had recently lost an injunction by the Securities and Exchange Commission (SEC) against his company, Fortune Enterprises. The SEC effectively said that Nate Dolin was corrupt and that his company was a sham. Although neither Fred Dolin nor Presser ever had any direct involvement in Cheyenne—no one at Cheyenne had even met either man—the Barron’s article implied that they were helping manage it. They did own a combined 13 percent share of Cheyenne, however, and the bad press was a setback for the struggling Cheyenne.

Nevertheless, Cheyenne continued to work toward its goal of becoming a major player in the emerging LAN industry, and the going was relatively slow. Although sales had surged following its buyout of Gates and F.A. Computer, profits remained elusive. In 1988 (fiscal year ended June 30), the company had sales of $55 million, but still lost money. And, although revenues rose to nearly $100 million the following year, Cheyenne continued to show losses. Furthermore, only $600,000 of its 1989 sales was attributable to software sales, the year in which NetBack was introduced, while the remainder came from the Gates/FA subsidiary. In fact, by 1989, after more than five years in business, Cheyenne had lost more than $7 million.

Cheyenne’s financial performance during the 1980s may have appeared dismal to the casual observer. However, the company actually achieved significant gains during the period which were about to bear fruit. Indeed, throughout the decade Cheyenne had invested millions into developing top-of-the-line LAN support software. Cheyenne’s staff, which numbered 30 in 1988 and grew to 40 in 1989, had labored in an old-fashioned, wood-and-brick building on the outskirts of Roslyn, New York. Finally, the group was ready to begin marketing two major proprietary programs that would add to its sole NetBack offering: Arcserve and Monitrix.

Cheyenne introduced both Arcserve and Monitrix in 1990, following the release of NetBack. Arcserve was a program used to back up other software programs and to ensure that data in the network system could not be lost. One of the Arcserve’s chief functions was to automatically copy all of the information in the system so that mishaps, such as power failures and equipment malfunction, would not destroy or erase it. Monitrix was a system administration utility, which could be used to track, analyze, and report statistical information on the network. For example, data about a company’s clients could be gathered from its network and output into customized reports.

Cheyenne was only one of many competitors vying for LAN software market share. Nevertheless, its products were immediately recognized by the marketplace as superior to many existing applications. Sales were brisk. In 1990, in fact, Cheyenne’s software sales rose nearly 200 percent to $1.7 million, mostly as a result of Arcserve and Monitrix shipments. That figure still represented a relatively small portion of Cheyenne’s total $168 million in 1990 sales, but management was convinced that the company was on the brink of huge gains from its software. They were right. Although Cheyenne posted a $2 million loss in 1990, the company boasted big profits throughout the remainder of early 1990s.

Oxenhorn was still running Cheyenne going into the early 1990s, while Rubenstein had left in 1987. But the man who received the most credit for Cheyenne’s success during the early 1990s was software programmer ReiJane Huai. A native of Taiwan, Huai had already become known for his abilities in math and science before coming to the United States in 1984. He received his Masters in computer science from The State University of New York at Stony Brook in 1985. Huai immediately joined Cheyenne before serving a brief tenure with the acclaimed AT&T’s Bell Laboratories. After his stint at Bell, the 25-year-old Huai returned to Cheyenne, where his talents were quickly recognized, and he assumed the lead role in Cheyenne’s research and development arm. Besides being highly intelligent and capable, Huai was a self-described workaholic. “I work all the time,” he explained in the Newsday article, adding that “this career is my life.”

After five years of hard work, including many 16-hour days, Huai and his coworkers were finally able to enjoy the fruits of their labor during the early 1990s. Although NetBack had realized only moderate success, sales of Monitrix increased between 1991 and 1993. Shipments of Arcserve, moreover, exploded throughout the period, and that program became Cheyenne’s flagship product. As software revenues soared, Cheyenne altered its business strategy. It began selling off its interests in Gates/FA in 1992, and by 1994 had effectively jettisoned the distributor. Although that move reduced Cheyenne’s revenues, it didn’t hamper profits. In fact, Cheyenne announced its first profit in 1991 of $3.3 million. Net income in 1992, moreover, sailed to nearly $8.2 million.

Although Cheyenne’s prosperity following the introduction of its key software products was largely the result of its top-notch development and marketing efforts, it was also partially a consequence of timing. Indeed, during the late 1980s and early 1990s the computer networking industry grew dramatically. Companies were increasingly finding that they could network several microcomputers and peripherals together with a server, or main processor, to achieve the same computing environment previously created by mainframe computing systems. In addition to LANs, WANs (wide area networks) increased in popularity during the early 1990s, offering an entirely new realm of opportunity for companies like Cheyenne; similar to LANs, WANs tied together geographically separated groups of microcomputers.

In addition to Arcserve and Monitrix, Cheyenne introduced a string of new products during the early 1990s and continued to develop more. In 1992, Cheyenne began selling InnocuLAN and FAXserve. InnocuLAN was a software program designed to protect Novell networks—Novell was a popular networking system—against a host of different computer viruses (code designed to destroy data). FAXserve, on the other hand, allowed the network file server to send and receive facsimiles more easily than traditional fax systems. In addition to those new offerings, Cheyenne brought out an improved version of its core program, Arcserve, early in 1993. Cheyenne also purchased Applied Programming Technologies, Inc., an imaging company, hoping to parlay that purchase into new software products aimed at the imaging market.

Just as important to Cheyenne’s success as new products during the early 1990s was the company’s new marketing strategy. In the past, Cheyenne had marketed its software through “strategic partners” who paid royalties to Cheyenne for every program they sold to a third party. During the early 1990s, however, Cheyenne began to focus on selling its products to original equipment manufacturers (OEMs). For example, Cheyenne reached agreements with such hardware manufacturers as IBM and Hewlett-Packard to sell its software alongwith their computers, tape drives, storage devices, and other equipment. Such agreements vastly boosted Cheyenne’s market reach at a relatively negligible marketing cost.

In 1990, Cheyenne entered into a major agreement with Tecmar, a producer of tape drives, and followed that contract with an arrangement in 1991 with Intel, a manufacturer of semiconductors. Subsequent OEM agreements were made with industry giants Hewlett-Packard, IBM, Compaq, Computer Associates, and nearly 15 other companies. By 1993, sales through OEMs were making up about 25 percent of company revenues. By that time, however, OEM gains were being rapidly overshadowed by Cheyenne’s success at selling its software through independent distributors. Under those arrangements, Cheyenne agreed to let the distributors sell its products and provided technical training to the distributors, who also shared promotional costs. This distributor channel was particularly effective in reaching Cheyenne’s growing European customer base in the mid-1990s.

As Cheyenne began to gain momentum going into the mid-1990s, it continued to release and develop new products. The company brought out a series of new ARCserve products tailored specifically for different market segments, such as Macintosh and Windows users. And it also introduced some completely new products. NOSS (Network Object Storage System), for example, was a program designed to help network administrators facilitate optical storage of corporate records, databases, spreadsheets, and other types of documents. Similarly, Optical Storage Manager was a high-tech storage system that integrated both magnetic and optical (laser) storage technologies to cut storage costs without reducing performance.

As Cheyenne rolled out new products, expanded overseas, and opened new marketing channels, company sales more than doubled in 1993 (fiscal year ended June 30) to $56.7 million, a significant increase after the falling revenues experienced following the sale of most of the Gates/FA subsidiary. More importantly, Cheyenne’s net income reached a record $20.7 million, reflecting an increase of about 150 percent of 1992 profits. In 1994, moreover, revenues rose to $97.7 million as income jumped to an impressive $32.5 million. Enthused investors sent Cheyenne’s stock price soaring. 1994 gains were largely a result of European expansion; European shipments increased from $4.2 million in 1991 to nearly $34 million in 1992. Cheyenne’s sales were also surging in Canada and Asia.

In a move reflecting Huai’s impact at Cheyenne, Oxenhorn stepped aside as president and chief executive of Cheyenne late in 1993, and Huai assumed both titles. Under his direction, Cheyenne continued to focus on improving its stance in the fastgrowing LAN industry. However, Huai also revealed his intent to introduce a new dynamic to Cheyenne’s strategy. “The main direction I’d like to see the company move in is communications,” Huai stated in the February 28, 1994 LI Business News. “Research and design on communications products [for computers] are going to be an important part of our future,” Huai noted. Supporting that claim was the company’s creation of Cheyenne Communications, a separate subsidiary created to explore opportunities related to computer communications software.

When Huai took the helm, Cheyenne was facing a string of challenges. The company had received some complaints of bugs in its Arcserve software, as well as criticism of its technical support by users that were having difficulty. In addition, some shareholders had filed lawsuits alleging that the company had failed to make legally required security disclosures. In response, the SEC began an informal inquiry into the company’s stock volatility—the stock price had dropped from a high of $30 at the start of 1994, to $15 after reports of high inventory, and then to $6 one day after the company announced disappointing fourth quarter results in mid-1994.

Nevertheless, Cheyenne continued to post profit gains going into 1995 and to expand its operations. For example, Cheyenne Communications purchased Bit Software, Inc., a leading communications software firm. In December 1994, Cheyenne bought NETstor, Inc., a manufacturer of network memory storage products and related goods. Going into the mid-1990s, several factors suggested sustained expansion at Cheyenne, including: the growth of WANs and Cheyenne’s related efforts in communications software; Cheyenne’s pending acquisitions; new product introductions and programs still under development; and global growth of the networking industry.