Epicor Delivers On Milestones, But Its Situation Remains Bleak

Epicor Delivers On Milestones, But Its Situation Remains Bleak
P.J. Jakovljevic - December 5, 2000

Event Summary

On November 21, Epicor Software Corporation (NASDAQ: EPIC), a leading mid-market supplier of enterprise applications, introduced the immediate availability of Epicor eManufacturing, the next generation of its former Vantage manufacturing solution. Designed to support the e-business needs of growing mid-market companies, the new product features enhanced database support and now works with both Progress and Microsoft SQL Server databases. Epicor eManufacturing also incorporates Epicor eCommerce Storefront, to bring manufacturers a more complete solution for e-commerce and global business.

In addition to increased platform support and front office integration, Epicor has added a number of enhancements to extend the international functionality of Epicor eManufacturing, including enhanced support for European taxes and multi-currency price lists. Epicor eManufacturing offers added functionality to support some key vertical industries, including additional project capabilities for capital equipment manufacturers.

"Midmarket companies demand products that are specifically designed with their needs in mind, including expanded platform support, international support and eCommerce tools," said Mollie Hunter, vice president of product marketing for Epicor. "With Epicor eManufacturing, we're introducing a solid product that serves the broadest range of manufacturers to date. Not only will Epicor continue to support its strong base of existing Vantage customers using the Progress-based software, but the addition of a SQL Server version enables Epicor to extend its brand to an even wider community of mid-market manufacturers."

However, the product launch seems to have, in a great part, taken a toll on the company's financial performance. On October 31, Epicor announced results for its third quarter ended September 30, 2000. Total revenues for the third quarter were $51.9 million compared with $63.2 million for the third quarter of 1999. Net loss for the third quarter of 2000 was $12.3 million, compared with a net loss of $9.7 million for the same period last year (See Figure 1). The net loss for the third quarter of 2000 includes charges totaling approximately $6.4 million, related primarily to the write down of certain capitalized software development costs to estimated recoverable values. Exclusive of these charges, net loss for the third quarter of 2000 would have been $5.9 million. The company's total cost and expenses for the third quarter, excluding unusual charges, are 19% lower than the third quarter of 1999, indicating that the company has streamlined its operations to maximize its opportunity for future profitable growth.

Figure 1.

The company believes that the weakness in demand for new software licenses is due to several factors experienced across the technology and software applications sectors, including seasonal slowness during the summer months, currency fluctuations, extended sales cycles as customers continue to transition to the purchase of integrated and comprehensive eBusiness suites and the focusing of sales resources on its new suite-based strategy. Software license revenues were also impacted by the company's transition to an exclusive reseller channel during the third quarter. The company expects that many of these market conditions could continue to affect demand for eBusiness and enterprise applications for the balance of the year.

The company also announced that it was restating its previously reported financial results for the first and second quarters of 2000 solely for the purpose of increasing the allowances related to the company's aged accounts receivable. The revised net loss for the period ended March 31, 2000 is $14.2 million, while the revised net loss for the period ended June 30, 2000 is $8.8 million (for more information, see Epicor Continues To Bleed).

Market Impact

2000 seems to be possibly worse for Epicor than its harrowing 1999. In addition to the slowdown reasons cited by the company's management, which have also affected most of its competitors, Epicor's situation has been particularly aggravated by protracted indigestion from the acquisition of DataWorks Corporation, a mid-range manufacturing ERP supplier which with a history of acquisitions of its own, had a diverse set of products for different markets and/or company sizes.

While the acquisition has made Epicor one of the largest mid-market ERP vendors, the company has also been burdened with a long list of diverse products to be incorporated into a clear product strategy. Unlike most vendors in the ERP space, Epicor maintains multiple manufacturing and non-manufacturing products, targeted at a variety of vertical markets. Continuation of an unfocused, multi-product and multi-technology strategy in markets with diverse dynamics continues to multiply sales, R&D, and service & support costs - jeopardizing the likelihood its products could stand a chance of long-term success in their respective niches. Epicor seems to have undertaken too much at once. The challenge of Web-enabling and integrating its front-office suite to all its back-office suites, and delivery of vertical solutions, seems colossal at this stage. The strategy of some of its competitors like Great Plains and Navision, which have decided to deliver their capabilities in manageable chunks, seems to have paid off even though their offerings are narrower than Epicor's.

Further, Epicor's requirement of exclusivity for its resellers has caused its indirect channel to dwindle and has reduced its ability to attract new resellers. While exclusivity might create deeper commitment and expertise in its reseller channel in the long term, we believe that the timing of the initiative was poor. As a result, new license revenues have been constantly declining, in contrast to many significant competitors, which have been maintaining immaculate relationships with their respective channels. Epicor's losses (See Figure 1) are a direct result of these challenges, and we believe the next 12 months will be the company's make-or-break period.

On a somewhat brighter note, Epicor remains a prominent mid-market leader due to its focus and understanding of the mid-market. It has established very good global infrastructure and product capabilities, as well as a vertical focus for some industries. The current hardships have apparently not affected its service & support delivery or its customers' satisfaction levels. As a matter of fact, Epicor offers an implementation guarantee regarding time duration and fixed costs. Finally, the long awaited delivery of its main manufacturing product should significantly relieve the company's R&D burden. This also promotes it as one of the first mid-market vendors with natively provided integrated back and front offices.

User Recommendations

While Epicor's financial situation has significantly deteriorated during the last 15 months, the company should not yet be written off. Users are advised to follow the company's new product introductions and keep a close eye on its future performance. Also important will be to watch how well it will maintain its indirect channel, how well it will target the right e-business issues for mid-market enterprises and demonstrate the touted benefits to the prospect or customer in order to increase the new licenses growth.

More comprehensive recommendations for both current and potential Epicor users can be found in Epicor Software Corp.: How Far From Being 'One-Stop' Shop?

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