Robert L. North sees through the dust that bankers are kicking up with their data warehousing projects.

While much of the industry rushes to complete construction of the data bases that are seen as essential to understanding customers and parsing their profitability, the president and chief executive officer of HNC Software Inc. is already on to the next thing.

The hard part is getting his customers up to HNC's speed. Once there, he trusts they would recognize and reward HNC for crafting the keys they need to unlock the secrets of the data kingdom.

"This company has a history of introducing products just on the edge of the industry's being ready to accept them," Mr. North said in a recent interview, ever confident that the pattern is going to repeat.

Lags can happen when the technology in question has its roots in the Defense Advanced Research Projects Agency, byproducts of mathematicians' and computer scientists' efforts to keep the Russian bear at bay.

A prime example of post-Cold War technology transfer, HNC was founded in 1986 by Robert Hecht-Nielsen and Todd Gutschow, who worked in neurocomputing at the defense contractor TRW Inc. Mr. North, a Stanford- educated electrical engineer who spent 21 years in the defense industry and managed a 5,000-employee group at TRW, joined within a few months.

The San Diego company's initial emphasis was on hardware coprocessors and software tool kits. In 1990 the strategy shifted toward business- decision support systems, which turned into a relative gold mine.

It is an enduring company joke that one of the first demonstrations of its prowess was a broom balancer-a mechanical hand programmed to keep an upright broomstick from crashing down. More to the commercial point, HNC originated the term data mining, as evidenced in a 1991 brochure.

The old mystique may not be helping HNC on today's stock market. Its share price seems stuck in the high $30s-not bad considering an initial offering price of $7 in 1995, but it has not partaken of the most recent high-tech boom. The challenge may lie in the title of a recent report on the company by Richard Zandi of Salomon Smith Barney: "This Is Rocket Science."

It is, literally, artificial intelligence, which spawns software that uncannily predicts performances and behaviors. Airlines can use these technologies for managing passenger loads, retailers for inventory management, Internet search engines for targeting advertising, financial institutions for profiling customers and managing risks.

HNC's Falcon neural network system for combating credit card fraud was one product that began way ahead of the curve, Mr. North said. Though the neural, or brain-like, pattern recognition capabilities were proven in military and academic circles, they took time to cross over into the private sector.

Now almost six years old, Falcon is into version 4.0, keeping a watchful eye on some 240 million card accounts and winning acclaim for keeping a lid on fraud losses.

ProfitMax, the cardholder profitability management system, was similarly "ahead of its time" in 1996, the CEO said. Today the system is in heavy demand as a bankruptcy predictor. ProfitMax's circulation is widening through an alliance HNC announced last year with Equifax Inc. There is likely to be more in that deal on the data warehousing front, and more to be gained from strategic alliances with First Data Corp., Oracle Corp., and others.

HNC has enough such success stories to have generated $113.7 million of revenue and $17.6 million of net income last year, up 59% and 48%, respectively. It does about one-third of its business in each of three sectors: financial, retailing, and health care.

In the 1998 first quarter, revenue jumped 46%, to $35.1 million, and operating income 32%, to $6.7 million. The net was off by about half, to $2 million, because of $3.9 million of acquisition-related costs. Mr. Zandi of Salomon Smith Barney said he sees plenty of cause for optimism in the company's mix of internal and acquired growth and ability to avoid the pitfalls of fast-growing young software companies as it addresses markets with "no shortages of inefficient transaction processes."

HNC faces competitors in discrete parts of its business-such as Fair, Isaac & Co., PeopleSoft Inc., Brightware Inc.-but none matches its entire portfolio.

The next big leap, which still may be news to warehousing grunts, could be in the technology category HNC calls context vector analysis, emanating from its Aptex Software subsidiary. This could be the customer knowledge dimension-actually, 300 dimensions in HNC's SelectSystem-missing from the current state of data-mining art.

"Pulling all customer information together is not that new," Mr. North said. On-line analytical processing tools are widely available and some banks are becoming proficient with them.

"What is missing is the ability to incorporate transaction data" into the warehouses, he said. "People at corporate offices who are analyzing trends can't use the data warehouse for real-time solutions."

The idea behind SelectSystem is to throw the existing mountain of information together with all forms and aspects of customer interaction, including by mail, telephone, or the Internet.

"You don't just store it away but condense it into a 300-dimensional contextual vector," Mr. North said. "That is a representation of the customer's personality that can be traced through lifestyle changes." A bank might, for example, be able to see the many complex elements in that personality, at a given stage of life, and respond with an effective product offer or piece of advice.

As marketing to the "segment of one" became almost a cliche, the ability to analyze and use textual inputs-the words in customer interactions as well as numbers and symbols-was a critical, missing element. This is where contextual vector analysis comes in, an innovation that stems from the intelligence community's methods of studying vast volumes of published material on a given subject or country.

"When you come into an Internet site, they know nothing about you," Mr. North said. "But as you make inquiries, they learn about you. You are what you do. That determines the serving of ads, and that can improve the click- through rate by 200% to 300% at sites like Infoseek. When you return to Infoseek, they can use that vector to track lifestyle changes."

Mr. North said one catalogue marketer was able to improve behavioral predictability 100-fold through textual analysis. Text entries go a long way in putting customers in groups or clusters, an important step toward truly personalized marketing.

"Customer life-cycle and multi-source or multi-dimensional data is where the industry is going," Mr. North said. Real-time capturing of data and interactions that define "exact facets of personality is where the banking and financial services industries are heading."

Banks may be hobbled as long as their "vertical silo" structures prevent them from getting the most out of the technology. But "many of the successful people will want to pull their information together," Mr. North said.

Major financial institutions are already HNC loyalists. The 325 customers served by HNC's 750 employees include 22 of the top 25 U.S. banks-and nonbanks like Advanta, Cendant, and Charles Schwab-and HNC stands ready to cross-sell as the silos fall.

"The most successful players leverage all the data and every customer contact they have," said customer Mike Eichorst, vice president of data base mining and predictive modeling, Chase Manhattan Bank. "We don't throw anything away any more."

"We always considered HNC to be the gold standard" in neural software, Mr. Eichorst said.

Mr. Zandi of Salomon Smith Barney said HNC is well positioned as a provider of problem-solving tools to markets with a growing appetite for them, including the emerging Internet sphere. He sees an "execution challenge" and wonders about the lack of a clear successor to Mr. North, who is 62, supervises the heads of autonomous divisions, and is searching for new chiefs in the financial and health care areas.

Mr. North may have begun to address the question last year by hiring John Mutch, a former venture capitalist and Microsoft Corp. marketing executive. Mr. Mutch, 41, was promoted last month to senior vice president of corporate marketing and business development. Mr. North said Mr. Mutch's priorities include "to help HNC drive marketing practices into our business units, develop powerful strategic alliances and acquisitions, and complete our corporate positioning project."

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