Mercury Interactive's aim is to become one of the top five software vendors in the world within the next 10 years.On one hand, this goal seems ambitious, given that Mercury's 2003 revenue barely broke $500 million whereas PeopleSoft, No. 5 on the list of biggest software companies, tallied more than $2 billion in revenue in 2003.On the other hand, Mercury is on the rise, with revenue growth of 27% year over year for the past five years, a $41.5 million profit last year and $1.2 billion in the bank that could be used for acquisitions or other efforts designed to expand the company."It's not a two- or three-year proposition," says Jason Maynard, a software analyst with Merrill Lynch. "But [Mercury] saw a synergy between testing and management, and saw the opportunity to evolve its product into a broader market."Mercury, which initially made a name for itself among application developers with its quality assurance tools, says it will attain its growth goal by expanding into all aspects of application management, ensuring peak performance without requiring companies to overhaul their networks. Its offerings include LoadRunner testing programs, Topaz management products and a suite of IT governance software it acquired in 2003.IT governance is still a developing market of which Mercury is hoping to win a large share, says Jasmine Noel, a principal at Ptak, Noel & Associates. Start-ups such as newScale and Centrata compete today with Mercury's IT governance products, but service desk providers such as Remedy (part of BMC Software), Computer Associates, HP and Peregrine Systems will be looking to tackle IT governance in their efforts to align business and IT in their product lines.As for its application management tools, Mercury also runs into BMC and CA there, but industry watchers say the two larger vendors have yet to prove their mettle outside of the mainframe environment. Another competitor is Compuware, which matches up well on the product front but has seen its financials wane of late. In the area of application testing, Compuware trails Mercury, which is the "gorilla" in that market, Noel says. Winning customers in the application management market, though, will be a challenge for Mercury."The service\/application performance management arena is much more fierce because every management vendor on the planet wants a piece of that market," Noel says. "To add fuel to the fire, distributed performance-monitoring features are becoming a necessary part of application testing, and that is Mercury's potential weakness."Management heavyweight IBM also is an increasingly direct competitor in light of its purchase of Rational and its application life-cycle management tools and amidst speculation Big Blue will look for ways to integrate those tools with its Tivoli management offerings. Yet Mercury's approach differs a bit from the established management players."Mercury has one advantage in that it already approaches management from a top-down approach," says Theresa Lanowitz, a research director at Gartner. That means Mercury focuses on optimizing application code and performance, and relating that to business objectives - rather than monitoring the underlying infrastructure. Mercury says it intends to leave deep-dive network and infrastructure monitoring to CA, HP and IBM Tivoli.Another differentiator for Mercury is that its software is agentless, meaning its software doesn't need to be distributed across every managed system. Although Mercury is not the only company offering agentless monitoring, a majority of management products require multiple agents be configured and distributed, a time-consuming process for network managers.Mercury is evolving its products through a mix of internal developments, partnerships with companies such as BEA Systems and IBM, and through acquisitions. The company last year bought out three companies for nearly $250 million, most of which went toward acquiring Kintana, a vendor of IT governance and business service management software. Mercury also bought Performant, a maker of testing and tuning technology for Java 2 Platform Enterprise Edition applications, and Allerez, a supplier of reporting and analytics technology. More deals this year aren't out of the question either, company officials say.The company has steadily upped its research-and-development investments over the past few years, spending about $40 million in 2001, $42 million in 2002 and about $56 million in 2003. While the company does not break out R&D investment based on separate technologies, Mercury is focusing its efforts on improving diagnostics capabilities, automation of tests creation, and aspects of data integration\/correlation across different domains, according to Boaz Chalamish, general manager and vice president of R&D.Mercury is working to add technology in the areas of IT governance and application management, and will continue to maintain its application-delivery products. He says his group of about 540 employees also contributes to purchase decisions."R&D is very much involved in our merger-and-acquisition activities. In some areas, R&D is the driver," Chalamish says.Overseeing Mercury's growth is David Murphy, who joined the company in January 2003 as vice president of corporate development. Murphy previously served as CEO of application analysis vendor Asera and as president of IBM Tivoli. He is one of a group of executives (including Vice President of Americas Sales Jay Larson, formerly with Network Associates, Oracle and Siebel Systems; and Oracle veteran Harry Gould, Mercury's vice president of alliances) hired in recent years to give the company the experienced leaders it needs as it seeks to grow and attract bigger customers."We are selling to a C-level executive now," Murphy says. "In the past, we talked to engineers. It's a different sale, and we need our sales team to know how to approach that.""The biggest challenge for Mercury is managing growth. They need to expand from a tech-centric company to a company that understands the pain points for large companies and their overall business," Merrill Lynch's Maynard says. "Mercury needs to have executives in place that have the battle scars of taking a company from $500 million to $2 billion."In an effort to get into more customer accounts, Mercury has reworked its software-licensing model to emphasize subscriptions (the company also offers perpetual licensing and hosted delivery).A Merrill Lynch report shows that Mercury's subscription revenue increased from 3% to 20% of total company revenue over the past three years. In the fourth quarter of 2003, subscription-based licenses accounted for about half of Mercury's new orders.Murphy says flexible pricing lets new customers get started without making a huge capital investment and makes it easier for current customers to test new products without making a long-term commitment.Royal Caribbean & Celebrity Cruises in Miami, which has used Mercury offerings such as its hosted Web testing service and Topaz application management tools, takes advantage of the vendor's assorted pricing options."A lot of our work is done on a project-by-project basis, and it's very tangible to track the cost of software with term [subscription] licensing," says Gregory Martin, Royal Caribbean's manager of integration.Martin says he is optimistic Mercury will continue to grow. As it does, Martin says he would like to see Mercury deliver more tools that address the process and people sides of application management.