Sageworks CSE Discusses Building a Business on Artificial Intelligence

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ABSTRACT

People don’t look at raw numbers and immediately make qualitative assessments. Professionals need more than digits and decimals to do their job well. Sageworks’ patented expert system translates financial statement numbers into plain language assessments to help businesses make better decisions and better understand their financial information.

Mark Woodwell, Chief Software Engineer at Sageworks will discuss how the company’s patented A.I. was conceived and developed in order to achieve its mission of helping businesses make better decisions.

Speaker: Mark Woodwell, Chief Software Engineer at Sageworks
Topic: Building a Business on Artificial Intelligence

TRANSCRIPT

Thank you again Fidelity for sponsoring this. This is a great series, and this is in fact again the thirty fifth one right? So, it’s been going on for some time. So, today our speaker is Mr. Mark Woodwell, Chief Software Engineer at Sageworks. And he is the key member of the Sageworks Executive Leadership Team and he has been in the company since 2004. He is responsible for architecture design, implementation, maintenance, and expansion of Sageworks software products. And if you’re not familiar with Sageworks, Sageworks, Mark will tell you, but it has to do with money. That’s a hint. And in addition to that, Mark, is leading configuration and tuning of the company’s transactional impact backup databases and systems and is involved in ongoing hiring and training of new employees. But, we’re also very proud to have him here because he’s one of our own. He graduated in 2002, 2003 with a Masters. And so for him it’s a, at the top of the class for him it’s a homecoming. So, please help me welcome Mark.

Alright. Well, it’s indeed a pleasure to be here and come back to Centennial Campus. I actually have a lot of history here. While I was attending classes at State I interned with ABB and was also one of the early tenants in the Venture II Building. A couple of colleagues and I took a semester off to try to start our own business. Although the venture didn’t work out, I wouldn’t change the experience that I gained through that for anything in the world. So, it’s good to be back. It’s great to be employed. And glad to see that the entrepreneurial environment is something that’s still being encouraged here. So, these seminars being a tremendous example of that. This idea that everything can and should be questioned and improved is something that’s been a core value at Sageworks and has also really helped us succeed. So, my goal tonight is to give you all an overview of Sageworks. And we’re going to get to the expert system that we’ve built and how all of that empowers us to do financial analysis. But we’re going to start really with the who. So, who is it that we’re serving? And then move into the how. And that’s like the how we serve them and that’s with our technology. It’s a story that’s full of risks, innovation, and dedication. So, one thing that really stands out to me is the conviction that our CEO had in starting this company. He had a really clear vision of both the who and the how. So, who he wanted to serve with the technology and how he wanted to do it. And this was something that really helped him to persist in the midst of a lot of setbacks to forge a company that I’m proud to be a part of and that I’m the leading provider of private company, financial information in the United States.

My hope for you all tonight is that the story of Sageworks would inspire you to pursue excellence in your academic career as you find and refine a similar passion. For me the time I spent here was invaluable in figuring out the type of programming that I really enjoyed, and it really gave me a lot of direction. So, it’s really important in the workforce is knowing who you are and what you love, makes you more effective, passionate, and a loyal employee or business owner. So, without further ado I’ll go ahead and jump into the presentation.

So, we’re going to start out with Sageworks today. So, financial analysis and data provider are the two primary solutions that Sageworks offers. So, I want to talk a little bit about what each of those means. So, when we talk about financial analysis what we’re talking about is bringing meaning to financial data. So, there’s a difference distinction between data, which is just the raw numbers and information which is an interpretation of those numbers that allows you to give like kind of actionable advice to whoever it is that those numbers are talking about. So, for us we’re talking about businesses. And you know a simple example might be one of the things that characterizes a business is the sales numbers for that business. So, how much money are they bringing in? So, if you look at that and say oh the sales number went up. That must be good. That’s not always necessarily true. So, if your sales go up and your expenses go up even more than that, so your profits go down, it’s actually worse for the company. The company’s in a worse position. So, analysis is where we’re looking at, not just one piece of data, but several pieces of data together. And we’re able to give some intelligent conclusions about them. So, that’s what we do in our patented expert system technology we’ll get into tonight, does that for businesses. The second thing is data provider. So, we also provide summarized financial data at an industry specific level. And since Sageworks is uniquely positioned to be collecting that data about private companies, we’re able to offer insight into the private sector that really no one else has. Well public companies are required to publish their financial statements. There’s no such requirement for the private sector. So, that’s something else that gives us sort of a unique benchmark and enables us to give something back to our customers as well. So, as far as the customers themselves we service accountants and financial institutions. So, banks, those are our two primary markets. We’re also reaching out to CFO’s and business owners. Business owners was the initial sort of vision of the company, which we’ll get into in a moment. We’re also mentioned in the press a number of different places specifically for the industry data that I mentioned. And you know we’ve been published in the (unintelligible) Technology Best 500.

So, starting Sageworks, this is really the story of how Sageworks got started. And this is where we get to the goo. And this is something that I think is really important and oftentimes missed for us as developers. So, asking who are we serving is something that’s always a really critical, critical question to ask. And I’ve seen especially as I’ve been in the workforce the scope of the role of software developer has kind of expanded to where having knowledge in the business area is something that’s really critically valued. So, it’s not just being able to write programs, but it’s also being able to figure out you know how those programs should work, how they should be expected to change over time, and really having insight into the business problems that the organization is facing. So, a couple of things that it helps you to do is suggest technologies. So, the business owner, whoever you’re working for, may or may not know what technologies could help out to solve business problems. And used developers are uniquely positioned to be able to give them that information. Also to ask informed questions. So, like you know why are we building this? Is it really worthwhile, and how are we going to serve the customers something that they really need? Then also avoiding unnecessary work. So, there may be features that you know don’t really make sense in the context of business problems that you can avoid building in if you know the space in which you’re operating very well.

A little bit more technical, it’ll help you know what parts of your program should be table driven, so you know what types of the program should be automated versus kind of pervosely written out. And you know a company value that we have that kind of overlaps with this is we want to measure a lot of times and cut once. So, you’re really helping the business owners count the cost of the things that they’re building.

Another great part about knowing the who is it provides motivation. So, one thing that we’ve seen at Sageworks is people are really motivated by serving, by helping people. Even for developers it’s important because we’re oftentimes really passionate about the designs or the programming languages that we work with. But sometimes these designs have to change to suit business needs. So, it’s you know important to be in touch with the customer and you know have that passion driving you as well. It’s also deeply satisfying to see someone use something that you built and catered to them.

Just a quick story for me when I was working with Sageworks. They kept asking us for special print function on one of the programs that we built. I was like you know I don’t want to build that. You know it’s not sexy. It’s not exciting. And then I went and met with the customer and he said I love your products. I love your reports, but I can’t use it because it doesn’t print well. So, getting to go back and actually build that and have some conviction about you know this is really helping people in a place where they need it.

So the company value we’ve cut there is if we screw everything else up and serve customers we win. The last thing knowing your customers really well does is it establishes culture. So, if we’re all really focused on serving rather than being served, customers and prospects are sensitive to this and they’ll respond to it. So, we’ve seen that at Sageworks in terms of sales, referrals, and also renewals. And for the on the business side, if they don’t need a product we shouldn’t sell it to them. So, that’s something that’s kind of counter to you know the typical business mindset which is to just sell everyone everything, but we also want to be selling people stuff that they actually need. And on the product side we also are trying to be really in touch with our customers. Do we know a lot of focus groups, and only building what they want? So, that’s just something that you know has really guided us in an organization and I wanted to share.

So, who is our market? Our market is business owners. Starting at the top you can see as our CEO Brian Hamilton spends some time consulting with small businesses and he really found a need there. So, what he saw was the small business owners, they knew a lot about running their business. Like they were really good at that, but they weren’t necessarily as good at understanding their financial statements. And as an investment banker, he had a unique insight into how these financial statements you know understanding them could help a business owner make better decisions and ultimately lead to more profits for them. So, that’s, that was sort of the vision is to give them that understanding and to develop an expert system and artificial intelligence technology that would model the analysis that Brian was doing for the business owners that he worked with.

So, we identified the need and we’ll discuss in a few minutes. We built the product. So, we’re done right? And that’s where we had a problem. Sageworks quickly developed, discovered another problem, which was how do we get these products that we build into the hands of the business owners. So, it was hard to reach them with the web-based product offering that required them to enter in their financial statements. Some of the challenges were just discomfort with the web in general. Distance from the financial statements or the effort to reach you know a bunch of different business owners individually. So, we tried several markets and finally landed on accountants who worked directly with the business owners and we found that that was, that was a great way to get the product into the hands of those who needed it. And you’ll see down at the bottom it mentions two markets, so eventually we did branch out into the thank you market. You know really the accounting market is where we got our start and where our expert system has been most heavily used.

So, the expert system itself as we mentioned at the beginning Sageworks is in business to take financial statements and translate them into information. So, the way that we do this is using our expert system which uses multifactor analysis. It basically means just considering multiple pieces of information together. You know as we talked about in the beginning both you know sales and profits together to make a determination about how the company’s really doing is a simple example to interpret and provide actionable advice on data. The system really is expandable. So, we’ve been able to expand the system our self by adding additional analytics and depth to our analysis, adaptable, so being able to adapt the system and use it not only for this quantitative analysis of financial data, but also qualitative analysis. We built a product for Citibank where they answered a bunch of survey questions. We were able to give them advice on you know how to change the way that a business is interacting with its customers, and unique. So, the way in which we perform this analysis results in an evaluation that’s truly unique and distinct to each financial situation in each business that we look at. So, this is sort of an overview. The five steps to generating a report using our expert system, and I’m going to go through them one by one.

So, the first one is data acquisition. So, without numbers we can’t provide the analysis. And the numbers that we’re going to be collecting are income statement and balance sheet information on each business that we’re analyzing. So, just as kind of a quick primer on financial statements the income statement which you see on the left there is basically the cash flows that are coming in and out of the business. You can think of this roughly as the paycheck that you get at the end of the month. So, it’s basically counting you know the money coming in, some of the expenses, and then you’ll see profits at the bottom. Whereas a balance sheet provides sort of a different type of information, a different picture of the company. So, that’s your assets, and liabilities, cash. You can think of that loosely as sort of your bank account and also any you know any liabilities any loans that you might have. So, on the left of the income statement is cash flows and then on the right balance sheet is kind of your financial position. So, that’s the data that we look at. And so the next step to expert analysis is relationship analysis. So, we need this because we can’t analyze the numbers directly because they’re all relative. So, five thousand dollars in sales may be good or bad depending on what the sales numbers were last month, what our expenses are, how many employees we have, so on and so forth. For this reason we’ll apply formulas to the financial numbers. There’s really two main types of formulas that we look at. We look at ratios which enable us to analyze this period’s results and also rates of change which enable us to compare the last period to the current period and see how things have progressed over time. So, the next thing that we’ll do is actually benchmark and score those formula results. So, now that we have the formula values we have to score them as good or bad. For our purposes, another factor that plays into scoring is the industry. Some different industries may have different benchmarks and also the sales range. So, these are both kind of variables that might determine you know whether a certain rise in the profits of sales are good or bad.

The next is section assembly. Now this is where we really get to the multi-factor, multi-variable analysis. It’s at the kind of the heart of the (unintelligible) expert system. So, we combine the ratios to construct what we call key strings. So, these are strings of text composed of numerical formulas and alphabetical scores. Each key string is going to represent a unique set of financial conditions and we have a corresponding paragraph for each. So, this is where the multifactor analysis comes in, is we’re able to look at multiple pieces of data, multiple formulas at the same time. And once we have this key string, we can key into our text database and retrieve this corresponding block of text which is used to build the report. So, as an example you’ll see up on the board sales percent changes of formula. It’s the number ten. And n is kind of the alphanumeric score that we give to that formula if the sales had stayed the same. Next is change in assets. So, that’s our formula fourteen and D meaning they decrease. And then employees. So, the number of employees has increased significantly, that’s F. So, we keep those three pieces of information together. We form a string that we use to go and reach into our text database and we’ll pull out a paragraph that’s uniquely written corresponding to that specific company’s financial situation.

And so the next step is report assembly. So, you can see here we have a paragraph describing a particular situation that I just mentioned. But there’s also different types of key strings. So, we’ve got six different sections in the report, six different financial area that we’ll analyze at a minimum. So, those are liquidity, profitability sales borrowing assets at employees for each company. Each section has a different key string ranging from looking at just three factors as we saw in the sales example, all the way up to seven factors in our liquidity section, each with three or four possible scores. So, in the case of the liquidity section, this translates for us into over 5,000 possible financial situations. So, writing out all of that text is one of the things that makes the expert system unique and also one of the things that took the longest time to develop. So, Brian took all of the expertise that he gave working with business owners and he really put that into all of these blocks of text that are in our expert system in the database that no one else, you know no one else really has that, that type and depth of analysis. So, that’s the thing that really distinguishes us in the marketplace.

So, as you can see just reading over briefly you can see there’s commentary on sales, and then down at the bottom we’ll also talk a little bit about profitability as well. So, sort of the implications of not just the sales number but also some of the other factors that are being looked at in the expert system. So, that’s a brief overview of the way that this report comes together.

And now that we have the report, as you mentioned in the beginning, who are we going to give it to? So, one of the primary applications for us is delivering this report to accounting firms. So, in addition to providing the accountants with the financial analysis that they take to business owners who they work with and handle the financial statements for, we also automate some auditing functionality so we increase the value of the product for them taking our reports really from what’s a nice to have to a really need to have, because all you know accounts are required to do these auditing steps.

Another application for us has been delivering the product directly to CFO’s and business owners. So, we found that it’s been a valuable product offering for them in making decisions about how to plan their business. That’s, that’s another one that we’re going sort of more directly to the intended audience of our products. Brian often says it sounds kind of hokey, but we really are interested in you know in having a positive impact on the economy. And so by helping business owners that’s really our intended outcome.

And then finally we also serve as financial institutions. So, we work heavily with banks and it’s one of the markets that we’ve reached out to to get over the last five to ten years. It’s actually been really, really great for us because in the increased regulatory environment that’s come about after the financial collapse banks are actually looking for more automated solutions. And so they’re more open to softwares to help automate what they do. Some areas that we look at for them have been you know we’ll offer them the narrative analysis that helps when they’re making decisions about credit analysis. So, whether or not to give a business a loan you know this narrative will help the banker look at the business and see kind of how they’re doing. But we also help them do risk ratings on their loans, manage and monitor loans, perform stress testing on their portfolios, automate the calculation of the reserve which is a number like how much money does the bank keep kind of back in case something happens, in case loans end up going bad. So, that’s, that’s essentially what we do for banks.

So, one of the amazing by-products of all of this analysis that we do is our repository of private industry data. So, I mentioned that a bit at the beginning. So, what we’re able to do is as we’re doing the report generation process, I mentioned we’re distilling the financial numbers that are coming into Sageworks down into formulas and formula scores that we then use to build the report. So, we actually take those formulas and we aggregate them and we’re able to store that in a database so industry specific information so we can give insights into the private sector really that no one else can. So, we’ll group the data and allow it to be sorted and filtered by industry, by geographic region, by sales range, and also of course by date. So, we’re able to track those trends over time. We provide this data essentially to our customers as is and you know there have been several different applications that have been interesting for us to explore. One of them has been venture capitalists can better evaluate private companies. We also include this data in our report. So, we use it to essentially make this system smarter. So, we can tune our benchmarks based on the information that we’re gathering from private companies to make the analysis that we do a little bit better. We also include the data in our reports so customers can look at it and see how they’re lining up and where they might want to seek some improvement.

We’ve also looked at you know different applications and you can imagine having this insight into the private sector could possibly give you some ability to make insights into the stock market of if you find an industry in which the private sector sort of leads the public sector. So, we’ll see like profits went up in the construction industry. That might mean something for you know stocks of those publicly held companies. And it may not have hit yet in the public market. So, that’s something else that we’ve looked at and haven’t yet, haven’t yet really capitalized on. But the possibilities for the private company industry data is really something that we’re really excited about at Sageworks.

So, I think we’re about at thirty minutes. Wanted to stop and give you all an opportunity to ask some questions, anything that you’d like me to go into more depth on.

Question being asked.

Yeah. That’s a great point. So, we actually do have something you know a disclaimer about that before they actually run the reports and use the product. And what we found is that they gain more than they lose in terms of being able to see the aggregate ratios themselves and offer them to their clients. Another thing that we will do is we identify all of the data. So, we actually, we’re not, you know we’re not permitted to use the names of the companies, but we just aggregate it sort of at the industry level. So, the companies themselves you know sign over the financial statements to the accountants and then the accountants are really you know careful. A lot of them not even entering in the name of the company that they’re analyzing, you know using, using pseudonyms, Company A, Company B those types of things. But yeah that was definitely something we were really careful and concerned about as we were building the products.

Question being asked.

Yeah. Yeah that, yeah that type of reverse engineering isn’t, isn’t something we’ve looked too closely at. I think a lot of the reason is the text itself is I guess really, really distinct and not as much related in a formulaic way to the key string if that makes sense so that the key string is sort of describing the numerical description of the company and then the text is kind of separated from it in that it’s giving a sort of verbal or narrative description. So, I’m not sure if that’s something that would be impossible for us. And I mean honestly it’s sort of a strengthen that you can’t, you can’t look at the end report and be able to go back, to be able to go back to where it came from. So, we have something that’s a little bit deeper than oh the paragraph has sales went up inside of it and therefore I can go back to something else, because you know we’re adding more I guess we’re getting out more than we put in, is sort of the short answer to the question.

Oh the private company financial statements that we aggregate, Jackie probably correct me on this but I think we’re over seven hundred thousand financial statements. So yeah, so we’re right around the million and I know that’s spread across all of the different NAICS codes, so some thirteen hundred detail level industries that we examine.

Question being asked.

We’re about a hundred employees and we have locations in Raleigh, and then also a New York office.

Question being asked.

That’s a good question. So, one of the applications that we’ve been exploring is actually taking this private company data, using it to provide a numerical score for a business. So, basically provide a probability of default. So, again working and staying in the financial sector. We want to be able to answer the question like just sort of one, you know in one word like is this business going to be able to pay back this loan. So, you know one of the other systems that we’ve developed recently is taking the private company financial data that we’ve aggregated and using that to benchmark a business and say like you know based on a quick snapshot of the financials is this business going to be able to repay this loan. So, what we’ve done there is we’ve actually looked at a history of default data, and we’ve done some regression analysis on that default data and tried to predict like okay what are you know what are the different factors that predict default. And so how can we look at you know just a couple of different formulas for a company and predict whether or not that company is going to be able to, to pay back a loan. And so what that gives us the ability to do is to give us like a numerical score sort of a credit rating to the businesses that we’re looking at to doing that for privately owned companies is, is something that we’ve done and you know been able to apply both the industry data and some of our technologies to.

Question being asked.

Yeah that’s a good question. We, we don’t generally do right now at least any due diligence on, on the banks that we’re working with. I actually thought the question was going in a different direction at first which is you know is the numbers that come over from the bank getting into our systems like exactly in the same way? And that’s, you know that’s another one of our biggest challenges. So, we have a whole branch of the company that’s devoted to integration which is making sure that you know the numbers to the penny match inside of Sageworks what they say at the bank. So, that’s essentially the way that we, that we help banks. They’ll send us all of their financial information. We import it into our database for use within, within our own applications. But yeah as far as, as far as reviewing and scrutinizing their numbers I think they, they use us as sort of an application provider to generate the documents that they give to regulators. And so if they, you know if they’re cooking their books, I don’t know they may or may not be filling in some numbers in our applications that aren’t accurate, what we do is we set them up with sort of a template to where you know here’s a standardized way that you should be, make doing this calculation. And so it’s, it actually helps them to defend a little bit you know a little bit more strongly the calculations that they’re making because they fit into this sort of standardized approach that Sageworks offers. But yeah I don’t think we’ve had an instance where, where we’ve been able to spot something like that that our customers are doing, because we’re not, you know we’re not looking at their financials from that, from that lens. It does, it does kind of remind you though of something we haven’t been able to highlight with our expert system. We also have an application to analyze public companies. And I don’t know how many of you are if you all are familiar with the Enron scandal that, that happened. And basically what we did was we pointed our expert system at their financial statements. And it was kind of eerie. It had a sentence in there that said it looks like some money may be going outside of the operating cycle and you may want to look at this. So, it’s interesting that tools do have the ability to sort of spot that type of you know those types of errors.

Question being asked.

No. There’s really no lower balance. We do stratify the benchmarks in the way that we do the analysis based on sales ranges. So we’ll you know divide companies up into less than, I don’t know it’s less than 100,000 less than 500,000 in revenue. And so that anyone below that mark they can use the system. But that’s that’s really one of the neat features about the system is since it’s you know doing these evaluations based on formulas and benchmarks we’re not going to be you know restricted to any numerical you know any kind of numerical limits.

Question being asked.

Yeah so we we’re actually a Microsoft shop. When I first joined Sageworks everything was written in DD6 and Comp. And then about five or six years ago we were able to re-write everything into asp.net and so we’re all into asp.net c sharp now. And then the database that we work with is Sequel Server 2008. So, it’s been really helpful for us just because you know one of the key things is making our system useful to a lot of the customers and a lot of them are working with older versions of Windows and you know they need ability to export into Word and Excel. So, working with Microsoft stack has enabled us to bring in some third party software providers you know that have allowed us to integrate our solutions in different directions. So, providing like easy export to those different platforms.

Question being asked.

Yes we do have a, we have a projection tool that we use. But as far as going back and following up to see if the predictions that that tool makes are accurate I don’t know that we do. It’s not; it’s not so much predicted as it is a report card though. So, it’s like, it’s like we’re basically telling you the state of your, of your finances today. And the projection stuff, it’s just going to depend on the assumptions that the end user’s making within the context of that particular tool. But as far as like going to the business and asking them you know does this analysis suit your financial situation or does this analysis make sense for your financial situation. That’s something you know that we’re kind of relying on to expertise Brian and you know the experience that he’s had in the back, in the back end developing the product. So, the core of the system hasn’t really changed since that, that point in time which was about ten years ago. So, that, that’s kind of something that’s our bread and butter and that we stand on. And we haven’t yeah we haven’t gotten too much feedback that says you know the system’s giving me sort of errant assumptions or conclusions. So, that’s not something that we’ve especially dealt with in particular.

Question being asked.

Yeah. So, we’ve done that a few times. We’ve like the construction industry is one example. We actually looked at you know whether our data would be able to reliably predict trends you know in those sectors. But we did find like a correspondence where you know where Sageworks data led that particular financial sector in a couple of different instances. But it’s not something we’ve really monetized or capitalized on. We use it within the context of our applications to allow some of our customers to do financial projections. So, a lot of the accountants that use our software they want to sit with their business owners and say you know what’s, what are things going to look like for you next year. Let’s you know let’s enter some assumptions in and get a projection that we can work with. And so we use, you know we use the data to do that. But as far as, as far as any investing applications it’s not something that we have created yet, but it’s definitely something that we’ve looked into and studied and would be interested in doing more work with.

Question being asked.

Yeah. So, another thing that’s we can do within the public company evaluation tool is we can go and look at the company and do an analysis on them and see like whether their shares are over-priced or underpriced. We’ve actually got a separate section in our public company analysis tool that’ll speak to that a little bit. So, it’ll basically project the cash flows of the company, use those cash flows to value the company and then say like you know based on that, based on you know the value of the company and the shares outstanding is this share price something that’s accurate? We give some comments (unintelligible) there. So, one of the, you know one of the press appearances Brian was on shortly after Facebook’s IQ came out, he was saying how you know it looked like the shares may have been over valued a bit. And then of course you know we saw how that, how that played out.

Question being asked.

Yeah. A lot of that happens organically. One of the things that’s really unique about Sageworks is we do still have that kind of entrepreneurial side to the company. So, a couple of ways that‘s played out for us has been we’ve, we’ve actually recently started a new company up in New York where we’re looking to connect borrowers and lenders together using the probability of default scoring that I had mentioned. We’re trying to connect borrowers and lenders together and automate that process. So, instead of having a bank in the middle we would be electronically connecting borrowers and lenders and brokering transactions that way. So, that’s, that’s one of our recent ventures. But a lot of that stuff happens organically, so it comes from being close to the customers and really listening to them in focus groups. What might be like you know a good market a next kind of logical extension of the company and a new direction that we could go?

Question being asked.

I’m not sure. I mean in theory you know it seems like you definitely could, but I don’t know all of you know there’s different liabilities involved there.

Question being asked.

It differs depending on the market. So, in the accounting space we’ve got you know some of the, some of the accounting packages that we’ve competed against in the past, Creative Solutions, was one. And there was a, there was a point at which they had offered to buy out the company. Also, you know sort of QuickBooks but not really. They don’t, they don’t especially do the type of analysis that we do. But one of the things that’s really differentiated us is being a web- based application provider, so we can you know publish changes to our applications very quickly. And one of the things that we’re really proud of is that we release updates to all of our products roughly every two months or so. So, that’s give us a real competitive advantage. And also you know as I mentioned the industry data, it’s something else that’s kept us sort of on the cutting edge. On the banking side, some of the core system providers offer competing functionality, so you look at like Moody’s and (unintelligible) are two examples. But again the core systems do you know slightly more or different things than Sageworks. And so a lot of times it’s, they do one thing really well, and we do one thing rally well and it’s just a matter of you know the customers choosing whether their version of our applications is good enough.

Question being asked.

Yeah, so. That’s a great question. So, all of our systems, all of our servers are housed in an offsite secure location and we work with Windstream Posted Solutions in that. So, we’ve got servers here and well in Cary and then also our production servers over in Charlotte. All of the data that’s coming to and from the banks is encrypted before, before it leave the bank and then decrypt it once it gets over to Sageworks. In addition, it’s also transmitted over https, so we’ve got you know kind of an added layer of security there as well. The data in our backups for our database is all encrypted. And so the only thing that’s not encrypted is going to be the hot live version of the data. And that’s standard practice. And even within that we’ve got encrypted passwords so there’s you know no real way to look even if you had access to the database to look in and see another user’s password for that. We also have a couple of different intrusion detection systems set up so we’re proactively blocking any; you know any attacks that are coming in against our sites and servers.

Any other questions? Alright well thank you all so much for this opportunity. It’s been a pleasure for me to have an opportunity to talk about Sageworks. Working in a small company is really something that’s kept me growing both personally and professionally in something I’d highly recommend. They dynamic nature of a growing company allows you to explore a lot of different roles, continue a learning process that I think really is one of the core passions of all developers. It’s also been a pleasure to come here and give something back to the university that I received so much from. In addition to attending school here after joining Sageworks we’ve been able to hire and benefit from a lot of talented developers who come out of this program. So, if you are a developer and you’re interested, I’d love to connect and exchange contact information. We’re not actively hiring right now, but you know as things progress and you know they surely have gone this way over the past ten years that we’ll be looking for developers again really soon. So, and those of you who are in the program here, you’re really surrounded by a talented group of professors and students. The specialized training, networking, and internships available through this institution will prepare you well for your career. And I’d encourage each of you to pursue these while you’re here. So, I’m certainly someone who’s benefited from the program at State and also hope that this talk’s been helpful for you. So, thanks a lot.

[/highlight]business problems that you can avoid building in if you know the space in which you’re operating very well.

A little bit more technical, it’ll help you know what parts of your program should be table driven, so you know what types of the program should be automated versus kind of pervosely written out. And you know a company value that we have that kind of overlaps with this is we want to measure a lot of times and cut once. So, you’re really helping the business owners count the cost of the things that they’re building.

Another great part about knowing the who is it provides motivation. So, one thing that we’ve seen at Sageworks is people are really motivated by serving, by helping people. Even for developers it’s important because we’re oftentimes really passionate about the designs or the programming languages that we work with. But sometimes these designs have to change to suit business needs. So, it’s you know important to be in touch with the customer and you know have that passion driving you as well. It’s also deeply satisfying to see someone use something that you built and catered to them.

Just a quick story for me when I was working with Sageworks. They kept asking us for special print function on one of the programs that we built. I was like you know I don’t want to build that. You know it’s not sexy. It’s not exciting. And then I went and met with the customer and he said I love your products. I love your reports, but I can’t use it because it doesn’t print well. So, getting to go back and actually build that and have some conviction about you know this is really helping people in a place where they need it.

So the company value we’ve cut there is if we screw everything else up and serve customers we win. The last thing knowing your customers really well does is it establishes culture. So, if we’re all really focused on serving rather than being served, customers and prospects are sensitive to this and they’ll respond to it. So, we’ve seen that at Sageworks in terms of sales, referrals, and also renewals. And for the on the business side, if they don’t need a product we shouldn’t sell it to them. So, that’s something that’s kind of counter to you know the typical business mindset which is to just sell everyone everything, but we also want to be selling people stuff that they actually need. And on the product side we also are trying to be really in touch with our customers. Do we know a lot of focus groups, and only building what they want? So, that’s just something that you know has really guided us in an organization and I wanted to share.

So, who is our market? Our market is business owners. Starting at the top you can see as our CEO Brian Hamilton spends some time consulting with small businesses and he really found a need there. So, what he saw was the small business owners, they knew a lot about running their business. Like they were really good at that, but they weren’t necessarily as good at understanding their financial statements. And as an investment banker, he had a unique insight into how these financial statements you know understanding them could help a business owner make better decisions and ultimately lead to more profits for them. So, that’s, that was sort of the vision is to give them that understanding and to develop an expert system and artificial intelligence technology that would model the analysis that Brian was doing for the business owners that he worked with.

So, we identified the need and we’ll discuss in a few minutes. We built the product. So, we’re done right? And that’s where we had a problem. Sageworks quickly developed, discovered another problem, which was how do we get these products that we build into the hands of the business owners. So, it was hard to reach them with the web-based product offering that required them to enter in their financial statements. Some of the challenges were just discomfort with the web in general. Distance from the financial statements or the effort to reach you know a bunch of different business owners individually. So, we tried several markets and finally landed on accountants who worked directly with the business owners and we found that that was, that was a great way to get the product into the hands of those who needed it. And you’ll see down at the bottom it mentions two markets, so eventually we did branch out into the thank you market. You know really the accounting market is where we got our start and where our expert system has been most heavily used.

So, the expert system itself as we mentioned at the beginning Sageworks is in business to take financial statements and translate them into information. So, the way that we do this is using our expert system which uses multifactor analysis. It basically means just considering multiple pieces of information together. You know as we talked about in the beginning both you know sales and profits together to make a determination about how the company’s really doing is a simple example to interpret and provide actionable advice on data. The system really is expandable. So, we’ve been able to expand the system our self by adding additional analytics and depth to our analysis, adaptable, so being able to adapt the system and use it not only for this quantitative analysis of financial data, but also qualitative analysis. We built a product for Citibank where they answered a bunch of survey questions. We were able to give them advice on you know how to change the way that a business is interacting with its customers, and unique. So, the way in which we perform this analysis results in an evaluation that’s truly unique and distinct to each financial situation in each business that we look at. So, this is sort of an overview. The five steps to generating a report using our expert system, and I’m going to go through them one by one.

So, the first one is data acquisition. So, without numbers we can’t provide the analysis. And the numbers that we’re going to be collecting are income statement and balance sheet information on each business that we’re analyzing. So, just as kind of a quick primer on financial statements the income statement which you see on the left there is basically the cash flows that are coming in and out of the business. You can think of this roughly as the paycheck that you get at the end of the month. So, it’s basically counting you know the money coming in, some of the expenses, and then you’ll see profits at the bottom. Whereas a balance sheet provides sort of a different type of information, a different picture of the company. So, that’s your assets, and liabilities, cash. You can think of that loosely as sort of your bank account and also any you know any liabilities any loans that you might have. So, on the left of the income statement is cash flows and then on the right balance sheet is kind of your financial position. So, that’s the data that we look at. And so the next step to expert analysis is relationship analysis. So, we need this because we can’t analyze the numbers directly because they’re all relative. So, five thousand dollars in sales may be good or bad depending on what the sales numbers were last month, what our expenses are, how many employees we have, so on and so forth. For this reason we’ll apply formulas to the financial numbers. There’s really two main types of formulas that we look at. We look at ratios which enable us to analyze this period’s results and also rates of change which enable us to compare the last period to the current period and see how things have progressed over time. So, the next thing that we’ll do is actually benchmark and score those formula results. So, now that we have the formula values we have to score them as good or bad. For our purposes, another factor that plays into scoring is the industry. Some different industries may have different benchmarks and also the sales range. So, these are both kind of variables that might determine you know whether a certain rise in the profits of sales are good or bad.

The next is section assembly. Now this is where we really get to the multi-factor, multi-variable analysis. It’s at the kind of the heart of the (unintelligible) expert system. So, we combine the ratios to construct what we call key strings. So, these are strings of text composed of numerical formulas and alphabetical scores. Each key string is going to represent a unique set of financial conditions and we have a corresponding paragraph for each. So, this is where the multifactor analysis comes in, is we’re able to look at multiple pieces of data, multiple formulas at the same time. And once we have this key string, we can key into our text database and retrieve this corresponding block of text which is used to build the report. So, as an example you’ll see up on the board sales percent changes of formula. It’s the number ten. And n is kind of the alphanumeric score that we give to that formula if the sales had stayed the same. Next is change in assets. So, that’s our formula fourteen and D meaning they decrease. And then employees. So, the number of employees has increased significantly, that’s F. So, we keep those three pieces of information together. We form a string that we use to go and reach into our text database and we’ll pull out a paragraph that’s uniquely written corresponding to that specific company’s financial situation.

And so the next step is report assembly. So, you can see here we have a paragraph describing a particular situation that I just mentioned. But there’s also different types of key strings. So, we’ve got six different sections in the report, six different financial area that we’ll analyze at a minimum. So, those are liquidity, profitability sales borrowing assets at employees for each company. Each section has a different key string ranging from looking at just three factors as we saw in the sales example, all the way up to seven factors in our liquidity section, each with three or four possible scores. So, in the case of the liquidity section, this translates for us into over 5,000 possible financial situations. So, writing out all of that text is one of the things that makes the expert system unique and also one of the things that took the longest time to develop. So, Brian took all of the expertise that he gave working with business owners and he really put that into all of these blocks of text that are in our expert system in the database that no one else, you know no one else really has that, that type and depth of analysis. So, that’s the thing that really distinguishes us in the marketplace.

So, as you can see just reading over briefly you can see there’s commentary on sales, and then down at the bottom we’ll also talk a little bit about profitability as well. So, sort of the implications of not just the sales number but also some of the other factors that are being looked at in the expert system. So, that’s a brief overview of the way that this report comes together.

And now that we have the report, as you mentioned in the beginning, who are we going to give it to? So, one of the primary applications for us is delivering this report to accounting firms. So, in addition to providing the accountants with the financial analysis that they take to business owners who they work with and handle the financial statements for, we also automate some auditing functionality so we increase the value of the product for them taking our reports really from what’s a nice to have to a really need to have, because all you know accounts are required to do these auditing steps.

Another application for us has been delivering the product directly to CFO’s and business owners. So, we found that it’s been a valuable product offering for them in making decisions about how to plan their business. That’s, that’s another one that we’re going sort of more directly to the intended audience of our products. Brian often says it sounds kind of hokey, but we really are interested in you know in having a positive impact on the economy. And so by helping business owners that’s really our intended outcome.

And then finally we also serve as financial institutions. So, we work heavily with banks and it’s one of the markets that we’ve reached out to to get over the last five to ten years. It’s actually been really, really great for us because in the increased regulatory environment that’s come about after the financial collapse banks are actually looking for more automated solutions. And so they’re more open to softwares to help automate what they do. Some areas that we look at for them have been you know we’ll offer them the narrative analysis that helps when they’re making decisions about credit analysis. So, whether or not to give a business a loan you know this narrative will help the banker look at the business and see kind of how they’re doing. But we also help them do risk ratings on their loans, manage and monitor loans, perform stress testing on their portfolios, automate the calculation of the reserve which is a number like how much money does the bank keep kind of back in case something happens, in case loans end up going bad. So, that’s, that’s essentially what we do for banks.

So, one of the amazing by-products of all of this analysis that we do is our repository of private industry data. So, I mentioned that a bit at the beginning. So, what we’re able to do is as we’re doing the report generation process, I mentioned we’re distilling the financial numbers that are coming into Sageworks down into formulas and formula scores that we then use to build the report. So, we actually take those formulas and we aggregate them and we’re able to store that in a database so industry specific information so we can give insights into the private sector really that no one else can. So, we’ll group the data and allow it to be sorted and filtered by industry, by geographic region, by sales range, and also of course by date. So, we’re able to track those trends over time. We provide this data essentially to our customers as is and you know there have been several different applications that have been interesting for us to explore. One of them has been venture capitalists can better evaluate private companies. We also include this data in our report. So, we use it to essentially make this system smarter. So, we can tune our benchmarks based on the information that we’re gathering from private companies to make the analysis that we do a little bit better. We also include the data in our reports so customers can look at it and see how they’re lining up and where they might want to seek some improvement.

We’ve also looked at you know different applications and you can imagine having this insight into the private sector could possibly give you some ability to make insights into the stock market of if you find an industry in which the private sector sort of leads the public sector. So, we’ll see like profits went up in the construction industry. That might mean something for you know stocks of those publicly held companies. And it may not have hit yet in the public market. So, that’s something else that we’ve looked at and haven’t yet, haven’t yet really capitalized on. But the possibilities for the private company industry data is really something that we’re really excited about at Sageworks.

So, I think we’re about at thirty minutes. Wanted to stop and give you all an opportunity to ask some questions, anything that you’d like me to go into more depth on.

Question being asked.

Yeah. That’s a great point. So, we actually do have something you know a disclaimer about that before they actually run the reports and use the product. And what we found is that they gain more than they lose in terms of being able to see the aggregate ratios themselves and offer them to their clients. Another thing that we will do is we identify all of the data. So, we actually, we’re not, you know we’re not permitted to use the names of the companies, but we just aggregate it sort of at the industry level. So, the companies themselves you know sign over the financial statements to the accountants and then the accountants are really you know careful. A lot of them not even entering in the name of the company that they’re analyzing, you know using, using pseudonyms, Company A, Company B those types of things. But yeah that was definitely something we were really careful and concerned about as we were building the products.

Question being asked.

Yeah. Yeah that, yeah that type of reverse engineering isn’t, isn’t something we’ve looked too closely at. I think a lot of the reason is the text itself is I guess really, really distinct and not as much related in a formulaic way to the key string if that makes sense so that the key string is sort of describing the numerical description of the company and then the text is kind of separated from it in that it’s giving a sort of verbal or narrative description. So, I’m not sure if that’s something that would be impossible for us. And I mean honestly it’s sort of a strengthen that you can’t, you can’t look at the end report and be able to go back, to be able to go back to where it came from. So, we have something that’s a little bit deeper than oh the paragraph has sales went up inside of it and therefore I can go back to something else, because you know we’re adding more I guess we’re getting out more than we put in, is sort of the short answer to the question.

Oh the private company financial statements that we aggregate, Jackie probably correct me on this but I think we’re over seven hundred thousand financial statements. So yeah, so we’re right around the million and I know that’s spread across all of the different NAICS codes, so some thirteen hundred detail level industries that we examine.

Question being asked.

We’re about a hundred employees and we have locations in Raleigh, and then also a New York office.

Question being asked.

That’s a good question. So, one of the applications that we’ve been exploring is actually taking this private company data, using it to provide a numerical score for a business. So, basically provide a probability of default. So, again working and staying in the financial sector. We want to be able to answer the question like just sort of one, you know in one word like is this business going to be able to pay back this loan. So, you know one of the other systems that we’ve developed recently is taking the private company financial data that we’ve aggregated and using that to benchmark a business and say like you know based on a quick snapshot of the financials is this business going to be able to repay this loan. So, what we’ve done there is we’ve actually looked at a history of default data, and we’ve done some regression analysis on that default data and tried to predict like okay what are you know what are the different factors that predict default. And so how can we look at you know just a couple of different formulas for a company and predict whether or not that company is going to be able to, to pay back a loan. And so what that gives us the ability to do is to give us like a numerical score sort of a credit rating to the businesses that we’re looking at to doing that for privately owned companies is, is something that we’ve done and you know been able to apply both the industry data and some of our technologies to.

Question being asked.

Yeah that’s a good question. We, we don’t generally do right now at least any due diligence on, on the banks that we’re working with. I actually thought the question was going in a different direction at first which is you know is the numbers that come over from the bank getting into our systems like exactly in the same way? And that’s, you know that’s another one of our biggest challenges. So, we have a whole branch of the company that’s devoted to integration which is making sure that you know the numbers to the penny match inside of Sageworks what they say at the bank. So, that’s essentially the way that we, that we help banks. They’ll send us all of their financial information. We import it into our database for use within, within our own applications. But yeah as far as, as far as reviewing and scrutinizing their numbers I think they, they use us as sort of an application provider to generate the documents that they give to regulators. And so if they, you know if they’re cooking their books, I don’t know they may or may not be filling in some numbers in our applications that aren’t accurate, what we do is we set them up with sort of a template to where you know here’s a standardized way that you should be, make doing this calculation. And so it’s, it actually helps them to defend a little bit you know a little bit more strongly the calculations that they’re making because they fit into this sort of standardized approach that Sageworks offers. But yeah I don’t think we’ve had an instance where, where we’ve been able to spot something like that that our customers are doing, because we’re not, you know we’re not looking at their financials from that, from that lens. It does, it does kind of remind you though of something we haven’t been able to highlight with our expert system. We also have an application to analyze public companies. And I don’t know how many of you are if you all are familiar with the Enron scandal that, that happened. And basically what we did was we pointed our expert system at their financial statements. And it was kind of eerie. It had a sentence in there that said it looks like some money may be going outside of the operating cycle and you may want to look at this. So, it’s interesting that tools do have the ability to sort of spot that type of you know those types of errors.

Question being asked.

No. There’s really no lower balance. We do stratify the benchmarks in the way that we do the analysis based on sales ranges. So we’ll you know divide companies up into less than, I don’t know it’s less than 100,000 less than 500,000 in revenue. And so that anyone below that mark they can use the system. But that’s that’s really one of the neat features about the system is since it’s you know doing these evaluations based on formulas and benchmarks we’re not going to be you know restricted to any numerical you know any kind of numerical limits.

Question being asked.

Yeah so we we’re actually a Microsoft shop. When I first joined Sageworks everything was written in DD6 and Comp. And then about five or six years ago we were able to re-write everything into asp.net and so we’re all into asp.net c sharp now. And then the database that we work with is Sequel Server 2008. So, it’s been really helpful for us just because you know one of the key things is making our system useful to a lot of the customers and a lot of them are working with older versions of Windows and you know they need ability to export into Word and Excel. So, working with Microsoft stack has enabled us to bring in some third party software providers you know that have allowed us to integrate our solutions in different directions. So, providing like easy export to those different platforms.

Question being asked.

Yes we do have a, we have a projection tool that we use. But as far as going back and following up to see if the predictions that that tool makes are accurate I don’t know that we do. It’s not; it’s not so much predicted as it is a report card though. So, it’s like, it’s like we’re basically telling you the state of your, of your finances today. And the projection stuff, it’s just going to depend on the assumptions that the end user’s making within the context of that particular tool. But as far as like going to the business and asking them you know does this analysis suit your financial situation or does this analysis make sense for your financial situation. That’s something you know that we’re kind of relying on to expertise Brian and you know the experience that he’s had in the back, in the back end developing the product. So, the core of the system hasn’t really changed since that, that point in time which was about ten years ago. So, that, that’s kind of something that’s our bread and butter and that we stand on. And we haven’t yeah we haven’t gotten too much feedback that says you know the system’s giving me sort of errant assumptions or conclusions. So, that’s not something that we’ve especially dealt with in particular.

Question being asked.

Yeah. So, we’ve done that a few times. We’ve like the construction industry is one example. We actually looked at you know whether our data would be able to reliably predict trends you know in those sectors. But we did find like a correspondence where you know where Sageworks data led that particular financial sector in a couple of different instances. But it’s not something we’ve really monetized or capitalized on. We use it within the context of our applications to allow some of our customers to do financial projections. So, a lot of the accountants that use our software they want to sit with their business owners and say you know what’s, what are things going to look like for you next year. Let’s you know let’s enter some assumptions in and get a projection that we can work with. And so we use, you know we use the data to do that. But as far as, as far as any investing applications it’s not something that we have created yet, but it’s definitely something that we’ve looked into and studied and would be interested in doing more work with.

Question being asked.

Yeah. So, another thing that’s we can do within the public company evaluation tool is we can go and look at the company and do an analysis on them and see like whether their shares are over-priced or underpriced. We’ve actually got a separate section in our public company analysis tool that’ll speak to that a little bit. So, it’ll basically project the cash flows of the company, use those cash flows to value the company and then say like you know based on that, based on you know the value of the company and the shares outstanding is this share price something that’s accurate? We give some comments (unintelligible) there. So, one of the, you know one of the press appearances Brian was on shortly after Facebook’s IQ came out, he was saying how you know it looked like the shares may have been over valued a bit. And then of course you know we saw how that, how that played out.

Question being asked.

Yeah. A lot of that happens organically. One of the things that’s really unique about Sageworks is we do still have that kind of entrepreneurial side to the company. So, a couple of ways that‘s played out for us has been we’ve, we’ve actually recently started a new company up in New York where we’re looking to connect borrowers and lenders together using the probability of default scoring that I had mentioned. We’re trying to connect borrowers and lenders together and automate that process. So, instead of having a bank in the middle we would be electronically connecting borrowers and lenders and brokering transactions that way. So, that’s, that’s one of our recent ventures. But a lot of that stuff happens organically, so it comes from being close to the customers and really listening to them in focus groups. What might be like you know a good market a next kind of logical extension of the company and a new direction that we could go?

Question being asked.

I’m not sure. I mean in theory you know it seems like you definitely could, but I don’t know all of you know there’s different liabilities involved there.

Question being asked.

It differs depending on the market. So, in the accounting space we’ve got you know some of the, some of the accounting packages that we’ve competed against in the past, Creative Solutions, was one. And there was a, there was a point at which they had offered to buy out the company. Also, you know sort of QuickBooks but not really. They don’t, they don’t especially do the type of analysis that we do. But one of the things that’s really differentiated us is being a web- based application provider, so we can you know publish changes to our applications very quickly. And one of the things that we’re really proud of is that we release updates to all of our products roughly every two months or so. So, that’s give us a real competitive advantage. And also you know as I mentioned the industry data, it’s something else that’s kept us sort of on the cutting edge. On the banking side, some of the core system providers offer competing functionality, so you look at like Moody’s and (unintelligible) are two examples. But again the core systems do you know slightly more or different things than Sageworks. And so a lot of times it’s, they do one thing really well, and we do one thing rally well and it’s just a matter of you know the customers choosing whether their version of our applications is good enough.

Question being asked.

Yeah, so. That’s a great question. So, all of our systems, all of our servers are housed in an offsite secure location and we work with Windstream Posted Solutions in that. So, we’ve got servers here and well in Cary and then also our production servers over in Charlotte. All of the data that’s coming to and from the banks is encrypted before, before it leave the bank and then decrypt it once it gets over to Sageworks. In addition, it’s also transmitted over https, so we’ve got you know kind of an added layer of security there as well. The data in our backups for our database is all encrypted. And so the only thing that’s not encrypted is going to be the hot live version of the data. And that’s standard practice. And even within that we’ve got encrypted passwords so there’s you know no real way to look even if you had access to the database to look in and see another user’s password for that. We also have a couple of different intrusion detection systems set up so we’re proactively blocking any; you know any attacks that are coming in against our sites and servers.

Any other questions? Alright well thank you all so much for this opportunity. It’s been a pleasure for me to have an opportunity to talk about Sageworks. Working in a small company is really something that’s kept me growing both personally and professionally in something I’d highly recommend. They dynamic nature of a growing company allows you to explore a lot of different roles, continue a learning process that I think really is one of the core passions of all developers. It’s also been a pleasure to come here and give something back to the university that I received so much from. In addition to attending school here after joining Sageworks we’ve been able to hire and benefit from a lot of talented developers who come out of this program. So, if you are a developer and you’re interested, I’d love to connect and exchange contact information. We’re not actively hiring right now, but you know as things progress and you know they surely have gone this way over the past ten years that we’ll be looking for developers again really soon. So, and those of you who are in the program here, you’re really surrounded by a talented group of professors and students. The specialized training, networking, and internships available through this institution will prepare you well for your career. And I’d encourage each of you to pursue these while you’re here. So, I’m certainly someone who’s benefited from the program at State and also hope that this talk’s been helpful for you. So, thanks a lot.

 

(Source: NCState)

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