Epicor Conducts Its Own ROI Acquisition Rationale

Event Summary

A true mid-market incumbent vendor, Epicor Software Corporation (NASDAQ: EPIC), has not had much upbeat news for the last several years following on its progenitors' (i.e., Platinum Corporation and Dataworks) merger in 1998 and subsequent name change from Platinum into Epicor in 1999. Nevertheless Epicor has seemingly at long last achieved a turnaround both in terms of its financial performance and of its strategy clarity. It has also recently reverted to its acquisition streak starting with the Clarus acquisition at the end of 2002 (see Epicor Picks Clarus' Bargain At The Software Flea Market).

The analysts-based "jury" is still deliberating on whether Epicor learned some hard lessons from its cumbersome inception through mergers that had initially resulted in unrelated, diverse products; all in the face of the overall weakness of the ERP market during 1999/2000. During this period Epicor suffered from a sharp revenue decline, disconcerted user base, and dismal financial results. Given the "once bitten, twice shy" adage, one should imagine Epicor has carefully thought out the rationale for the recent acquisitions, so that they are not a knee-jerk me too' impulse owing to the ongoing consolidation craze in the market.

Attempting differentiation, Epicor pledges to continue to invest in its products and to grow both organically and through acquisitions, in order to assemble the right mix of back-office, front-office, and collaborative e-business functions, delivered under a single-point accountability (i.e., "one-stop shop") approach that is desired by its target market. While in the past, Epicor would integrate with partner products for best-of-breed solutions to accommodate these requirements, it has lately been expanding the boundaries of traditional ERP by building fully integrated applications that are based on the same technology and toolsets, and possibly delivered all from a single vendor.

To that end, on July 9, Epicor announced that it has completed the acquisition of ROI Systems, a privately held competing ERP provider of manufacturing software solutions for approximately $20.7 million in an all cash transaction. And, on July 15, in a fashion similar to its fierce competitors, Microsoft Business Solutions and Best Software, who occasionally acquire their independent software vendor (ISV) partners for a compelling value-added product, Epicor announced the acquisition of a strategic suite of warehouse management solutions (WMS) from TDC Solutions, a long-time, successful ISV partner of Epicor focused on the wholesale distribution industry.

This is Part One of a three-part note.

Part Two will discuss the Market Impact.

Part Three will cover Challenges and make User Recommendations.

ROI Systems Acquisition

Epicor believes the acquisition of ROI Systems brings to it not only a highly experienced team, but also a strong customer base that extends its position as a provider of extended enterprise solutions for mid-market manufacturers. To date, Epicor has delivered its solutions to over 15,000 customers worldwide, and with the addition of the modest ROI customer base, Epicor's manufacturing customer community now includes over 6,500 customers, implemented in more than 35 countries.

The company anticipates the acquisition to be accretive to earnings in the fourth quarter 2003 and for the year 2004. Concurrent with the closing, Epicor claims to have already completed a workforce reduction related to the acquisition that combines the best practices of the teams and leverages industry expertise to derive planned cost efficiencies of over 20% for the combined manufacturing group on a quarterly basis going forward. Costs associated with the acquisition will be reflected in third quarter 2003 operations, while the vendor provided revised guidance for the second half of 2003 and an outlook for 2004 revenue and earnings estimates when it reported its financial Q2 2003 results on July 23.

For a protractedly languishing company, reporting facts like that quarterly license revenues grew year over year for the first time since 1999, that this was the seventh quarter of positive cash flow from operations and the third consecutive quarter of operating profitability, that it added over 100 new customer name accounts during quarter, and so on, should bear a great importance and vindication to the long-embattled but persistent management.

Total revenues for the quarter were $36.7 million, merely flat compared to $36.8 million for Q2 2002, but a 7% increase over Q1 2003 total revenues of $34.3 million. Software license revenue totaled $9.5 million, a 2% increase compared to $9.3 million a year ago and up approximately 22% over Q1 2003 license revenues of $7.8 million (see Figure 1). Net income for the second quarter 2003, which includes $1.5 million in amortization of capitalized software development costs and acquired intangible assets, was $1.3 million. Net income also includes a restructuring charge of $1.2 million for a change in tenant sublease income related to one of the company's facilities. This net income result compares to a net loss for Q2 2002 of $987,000 and net income of $2.4 million or in Q1 2003. Further, Epicor ended the quarter with cash and cash equivalents of $45.2 million -- an increase of $4.8 million or over 12% from Q1 2003, and, as mentioned earlier, this was the seventh consecutive quarter in which the company generated positive cash from operating activities.

Following the company's performance in the first half of 2003 and the completion of the ROI Systems acquisition, the company has provided updated guidance for the second half of 2003. Epicor anticipates achieving revenues of $39 million in Q3 2003 and $42 million in Q4 2003. The company expects to post $0.01 earnings per diluted share in the third quarter including charges associated with the acquisition of ROI Systems and $0.07 earnings per diluted share in the fourth quarter. With this upwardly revised guidance, fiscal year 2003 revenues are anticipated to be $153 million with expected earnings per diluted share of $0.15. Previous guidance provided earlier this January by the company was $135 million in revenues and $0.12 earnings per diluted share. For fiscal year 2004, the company's current outlook provides for revenues in the range of $170 to $173 million and earnings in the range of $0.40 to $0.42 earnings per diluted share reflecting improved sales visibility, continued market leadership with the delivery of its new Web services products and improved execution across its operations.

ROI Systems, on its hand, has enjoyed significant success with established industry expertise and strong customer satisfaction in a number of manufacturing verticals including consumer packaged goods (CPG), medical devices and equipment, and transportation products. For 2002, ROI reported profitability on over $20 million in annual revenues, and despite the difficult economy, reported the best sales quarter in its history for last quarter of 2002 (see ROI Systems Defies The Odds Through Delighted Customers).

Epicor and ROI claim to provide a strongly aligned culture, customer focus, and technology vision that should benefit the combined companies' customer, employee and shareholder constituents. The combined company anticipates numerous synergies from this acquisition including technology skill sets, operating efficiencies, cross-selling opportunities, and facilities consolidation of the ROI and the Epicor Manufacturing Solutions Group offices, both currently located in Minneapolis, MN, while Epicor's worldwide HQ is in Irvine, CA. Epicor hopes to leverage ROI's strong presence in its key vertical markets, as well as other specialized, non-overlapping verticals, to create new sales opportunities that complement Epicor's current market strengths in discrete, make-to-order (MTO) manufacturing, distribution, hospitality and services-oriented industries.

Epicor also pledges to continue to develop and support the ROI Systems' MANAGE 2000 product line, which release 7.1 is currently scheduled for limited release late in 2003. Epicor has successfully executed on its strategy to deliver its customer relationship management (CRM), supplier relationship management (SRM), e-business and other extended enterprise applications across its installed base of customers and it expects to achieve similar success with the availability of these applications to ROI customers.

With the latest releases of both the Vantage and Vista products, Epicor executed on a critical milestone of its manufacturing product roadmap -- incorporating a single application framework across the two solutions through the alliance with Progress Software Corporation. Further, however, in early 2004, Epicor plans to introduce its .NET manufacturing solution code named Project Sonoma, which will feature an n-tier architecture that has been architected from the ground up to support Microsoft .NET platform and Web services. The platform will supposedly deliver unrivalled flexibility and performance for both developers and customers, and allow for the development of applications based on Web services that have either a smart client or browser-based user interface (UI). The solution aims at enabling all (both existing and future) Epicor's manufacturing customers adopt Web services, on their own timeframe, while protecting the existing technology investment.

TDC Solutions Acquisition

Last but not least, on July 15, in a fashion similar to its fierce competitors, Microsoft Business Solutions and Best Software, Epicor announced the acquisition of a strategic suite of warehouse management solutions (WMS) from TDC Solutions, a long-time, successful independent software vendor (ISV) partner of Epicor focused on the wholesale distribution industry. Terms of the transaction were not disclosed.

Working together the past five years, Epicor and TDC have developed a strong solution for the distribution industry. TDC's warehouse solutions, marketed under an OEM arrangement as Epicor eWarehouse Data Collection Suite, Epicor eWarehouse Management and Fulfillment Suite, were developed specifically for and are deeply integrated with the e by Epicor suite. Together, these solutions form the Epicor for Distribution suite, a set of integrated business applications tailored to meet the requirements of the wholesale distribution industry. The enhancement of a focused vertical solution for distribution through TDC products and key staff will further strengthen Epicor's established industry presence.

This concludes Part One of a three-part note.

Part Two will discuss the Market Impact.

Part Three will cover Challenges and make User Recommendations.

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