Success story: 31 March 08
Research and development underpins Endace’s success

Constant innovation and a global mindset have propelled New Zealand company Endace into its position as a world leader in network traffic monitoring, latency measurement and application acceleration solutions.

The company’s Data Acquisition and Generation, or DAG® technology provides the means to ensure integrity, security and performance of networks from the edge to the core for users and applications, regardless of transmission speed, loading or interface type. Endace customers use DAG technology to capture, inspect, report and analyse 100 per cent of traffic carried on their networks.

Endace initially provided the core card of a monitoring system but has now moved up the value chain to provide a total solution, delivering a range of optimised, manageable and secure platforms and appliances that can capture packets on networks up to a rate of 40 Gigabits per second (40Gbps). While component cards sell for between US$5,000 and US$6,000, appliances can fetch up to US$250,000, delivering much greater returns.

The Foundation? has invested around $1.8 million in Endace since 2002, through its Technology New Zealand suite of investments. The investments helped Endace develop parts of its original core card for monitoring systems, extend that technology for use in open source systems and, most recently, to develop the NinjaProbe™ family of appliances.

Endace NinjaProbe™ appliances and NinjaBox® platforms allow all activity on high speed networks to be captured, time stamped, examined and flagged for analysis, deletion, encryption or collection as evidence – without interfering with or affecting the flow of traffic. Exploding demand for increased network security, performance measurement and regulatory compliance are the three key drivers of rapid growth at Endace.

The development of the Endace NinjaProbe and NinjaBox product families gives the company access to a worldwide market for network security and performance judged to be over US$1 billion, ten times the size of the market for the monitoring card alone.

Research and development (R&D) is central to Endace’s business. CEO Mike Riley estimates around 38 percent of total operating expenditure goes into R&D and 25 of the 40 staff working at the company’s R&D operation in Hamilton are focused on creating new intellectual property.

Mr Riley says the Foundation investment has made a significant difference to the company both in terms of actual dollars and technical stretch.

“These investments are about the government subsidising risk,” says Mr Riley. “Your application only succeeds if you can meet the risk criteria so it encouraged us to push the boundaries and take a bigger step than we might otherwise have done.

“The process of applying for investment also forces you to focus and ensure your business model is not only rigorous but achievable.”

Endace’s competitive edge comes from the inbuilt flexibility of its DAG technology and its superior performance on the biggest volume and fastest networks in the world, where data security and ultra-low latency is paramount. In October, 2007, Endace acquired United States company Applied Watch Technologies to position itself as a major force in network security. The acquisition brought together award winning technology and a team of seasoned security specialists with proven successes in the deployment, management and tuning of open source security software, with Endace’s expertise in the field of application acceleration and traffic monitoring solutions.

Some of the world’s leading financial institutions, government agencies and telecommunications providers are among Endace’s customers. In March, 2008, Endace entered into a joint marketing and supply agreement with Reuters, a leading supplier of market data feeds to financial markets. Endace technology is integrated into the product Reuters Latency Monitor (RLM), enabling Reuters customers to measure the exact amount of network delay between the origination of market data and its delivery to their trading applications.

Offshore Growth Strategies

Endace has followed a strategy of forming partnerships in key markets with independent software vendors (ISVs) and systems integrators, working together to deliver seamless solutions to the targeted customer base.

“We don’t want to assemble computers or carry the vast amount of inventory that would be needed to ensure we can develop systems to meet each customer’s needs, so instead collaborate with companies that do that as their core business.”

Mr Riley says the recent move into selling the entire monitoring system is pivotal for growth as it means the Endace brand is no longer buried in the product. “It also earns more and means our customers don’t have to master the learning curve involved in installing our technology.”

Rather than finding venture capital in New Zealand to support growth, Endace became the first New Zealand company to list on the AIM (alternative investment market) of the London Stock Exchange in 2005. Mr Riley says the decision has allowed the company’s to remain New Zealand based while operating globally.

“We made a decision not to look for venture capital funding in New Zealand but to tap into more significant resources offshore.”

“That overseas experience is a key to our success. We have always exported 98 per cent of what we make so have been a global business from day one. It’s not scary to go offshore for us – it’s essential and that mindset has helped us succeed.

“In a business sense there is no logical reason for Endace to be based in New Zealand but we are determined to do so - we want to pay taxes here. A farmer can’t up and leave New Zealand but a high tech company can so it’s important to give them reasons to stay. Government risk sharing in R&D is one of those.”

Returns to the Economy

Endace says the returns to New Zealand from its activities, both in terms of jobs created and revenues channeled back into the economy, are significant.
The company estimates it has paid a total of NZ$11.1 million in tax since 2003. Of that, NZ$5.9 million has been in PAYE on staff salaries and NZ$5.2 million in company tax. Endace estimates it has also created more than 120 jobs in the high tech sector.

“In addition to building a skill base through that job creation, including a drive to bring highly skilled Kiwis home, there is further economic spin off from the salaries we pay to staff being spent in New Zealand.”

Mike Riley says it makes sense for government investment to be targeted at high performing and fast growing New Zealand companies.

“Even though we are in a better position now to completely fund our own R&D having government investment continues to encourage us to take risk and keep innovating. The returns to New Zealand as a whole are greater if top performers are receiving that investment – you get a bigger bang for your buck.”

Endace was commercialised out of the University of Waikato in 2002. The company has enjoyed strong export growth in recent years and its current market value is approximately NZ$110M.

It has offices in the United Kingdom (UK), the United States (US) and Singapore and sells its products in over 30 countries, with the US accounting for around 60 percent of sales. Research and development staff are based mainly in Hamilton and the company has a head office and growing development team in Auckland.

The company won many awards in 2007 including a Technology Commendation Award from the Foundation for Research, Science and Technology, the ICT? Exporter of the Year title at the New Zealand Export Awards, the Supreme Award at the New Zealand Hi-Tech Awards and the Emerging Enterprise Award at the Deloitte/Management Magazine Top 200 Awards.

www.endace.com