Epicor Picks Clarus' Bargain At The Software Flea Market

Event Summary

On October 23, Epicor Software Corporation (NASDAQ: EPIC), one of leading providers of integrated enterprise, e-Business and collaborative commerce software solutions solely for the mid-market, announced its financial results for the third quarter ended September 30, 2002. Total revenues for the quarter were $34.0 million, a 14% drop compared to $39.4 million for Q3 2001, while software license revenue totaled $6.8 million, a sizable 23% drop compared to $8.8 million a year ago (see Figure 1). However, net loss for the quarter, which includes $1.8 million in amortization of capitalized software development costs and acquired intangible assets, was $1.4 million, which is less than a third of a net loss in Q3 2001 of $4.5 million which included $1.5 million for the gain on the sale of a product line and $2.2 million in amortization of capitalized software development costs and acquired intangible assets.

Figure 1.

Epicor ended Q3 2002 with cash and cash equivalents of $28.9 million, as this was the fourth consecutive quarter in which the company generated positive cash from operating activities. Still, as the continued economic slowdown and severely constrained enterprise software spending environment does not appear to be improving any time soon, the company has recently taken decisive actions to further reduce its cost and expense structure going into 2003 with targeted savings of approximately $3.0 to $4.0 million per quarter. These actions include a reduction in workforce of approximately 15% and the consolidation of facilities. Epicor believes these actions will allow it to continue its focus without materially impacting its ability to deliver enhanced product functionality and new technology platforms, as well as maintaining its high standards of product quality and customer satisfaction. With these actions the company expects to achieve profitability in the first quarter of 2003, as it expects to incur charges in the range of $3.0 to $5.0 million in the fourth quarter 2002, while it anticipates revenues for Q4 2002 to be flat to slightly higher than those in Q3 2002.

A week earlier, on October 17, Epicor signed a definitive agreement with Clarus Corporation (NASDAQ: CLRS), a provider of buy-side e-Business applications to the mid-market, to acquire substantially all of its core products, including procurement, sourcing, settlement and analytics written on Microsoft platforms, in an all-cash transaction for a purchase price of $1 million. The transaction is expected to close in Q4 2002, subject to Clarus shareholder approval. Epicor will provide service and support to the majority of Clarus' installed base of procurement customers, and it has been engaged in reselling Clarus' procurement product for more than two years. Epicor believes the acquisition should enable it to leverage its experience in procurement and sourcing, its integration expertise, as well as its .NET architecture to deliver an expanded suite of supplier relationship management (SRM) capabilities as part of its enterprise suite offering or as stand-alone offering.

During the quarter, in September, the company shipped the market's first CRM.NET product and has been successful with a number of early adopters as well as new customers, including its first customer, The Boeing Company. Unveiled earlier this year (see Epicor Claims The Forefront Of CRM.NET-ification) Clientele Customer Support 8.0 is the first application in the Clientele CRM.NET Suite available to customers. The company is scheduled to release a number of new products on the .NET platform over the next several quarters, including CRM.NET Portal and its enterprise services solution on the .NET platform for project-driven organizations. Clientele Customer Support 8.0 is available immediately in North America, the UK and Australia, as well as select countries in the Asia Pacific region. Existing customers on maintenance will receive the upgrade software at no charge. Standard List Pricing starts at $1500 per user with quantity discounts available.

Despite the challenging environment for attracting new account sales, Epicor reportedly added over 110 new customers in the quarter and has added over 350 new customers year-to-date. It has also launched a number of new business development initiatives to further relationships with vertically focused value-added resellers (VARs) and to expand its international reseller distribution, and its lead generation programs will focus on specific targeted verticals and specific customer size and will continue to leverage co-marketing efforts with partners and industry trade groups. Epicor reportedly continues to invest in its sales, service and support organizations which have undergone significant training on a series of new products as well as value vision methodology training to improve its success in the current economic environment.

This is Part One of a two-part analysis of the acquisition of Clarus by Epicor.

Part Two will discuss the Challenges and make User Recommendations.

Clarus Background

As a preamble, if it weren't for the inevitable ifs and buts', the acquisition would be logical for various reasons. Clarus would be yet another software vendor that has experienced a dreadful rise-and-fall trajectory. Originally a mid-market enterprise resource planning (ERP) vendor, Clarus' prime was in remote' 1998, when its revenues reached an all-time high of $41.6 million.

But the arguably hasty sell-off of its financial and human resources software to Geac Computer Systems early in 2000, followed then by a risky all-out dive into e-procurement and Internet exchange realms have apparently not paid off. The strategy had a short-lived immediate success though, with its stock price reaching an all-time high of $144 per share in March 2000 (see With New Clothes and Hairdo, Clarus Asks for Pin Money). Since then, however, the vendor has only seen its revenue and its stock price nose-dive, with 2001 revenue of $17 million and a current stock price of just hovering over $5. For the quarters ending June 30, 2002, and September 30, 2002, Clarus reported revenue of only $1 million and of less than $2 million respectively, with grim prospects on any future revenue levels.

Clarus has been nevertheless regarded as a best-of-breed indirect materials e-procurement application provider that has not only garnered notable expense management and Private Trading Exchange (PTX) applications, but has also espoused a reverse auction, e-settlement, content management, and expense processing capabilities to round out its suite towards a decent supplier relationship management (SRM) suite, a recently emerged new category of enterprise applications (see Clarus - Sprinting or Going the Distance?). From a product perspective, Clarus had also added to its portfolio an Internet marketplace platform, Clarus eMarket, and Clarus Content Services for content management.

In May 2000, the company entered the e-sourcing market through the acquisition of iSold.com, an auction and dynamic pricing vendor, while the acquisition of Ireland-based SAI/Rodeo Technologies has added support for the payment and settlement process. Clarus has also partnered with TPN Register for content management, webMethods for its Clarus Fusion integration toolkit, and with Silver Oak Partners for strategic sourcing expertise for both direct and indirect goods and materials and for expense segmentation and reporting.

In an attempt to increase and make its revenues more predictable, the company had even introduced an ongoing, usage-based revenue model, spreading out revenue from each customer over a protracted period of time. It had also tried to extend its indirect sales channels (albeit at the expense of negligible direct sales force, which has proven to be critically counterproductive revenue-wise), in addition to its partnerships with infrastructure and integration partners Microsoft, Compaq, and Deloitte & Touche, and to partnerships with enterprise applications vendors like Epicor, Ross Systems, Microsoft Great Plains (Microsoft Great Plains Procures eProcure At Last), Manugistics and Commerce One, all throughout 2000/2001.

Unfortunately, few if any of these initiatives have generated the traction needed to reverse the company's sagging revenues bundled with overwhelming costs. Possibly the mortal blow happened when UK-based independent trading exchange BarclaysB2B ,one of Clarus' biggest customers, recently decided to close its operations. Last summer, the company closed its operations in the UK and Canada, concluding an ongoing downsizing of operations in the past year. Clarus has since been operating with approximately a few dozens of staff from its Suwannee, GA headquarters and a skeleton customer support staff at its facility in Ireland, with a vast majority of them only engaged in servicing existing disconcerted customers.

Due to the above adverse events, Clarus ended up in a peculiar situation of its net assets being greater than its market capitalization, prompting an influential group of shareholders to demand that the remaining asset value be delivered back to them. The other faction of the Clarus board has been proposing the sale of the company as a going concern, still without a clear indication from the board which direction the company will take after the above sell-off.

Epicor Background

On the other hand, Epicor had long grappled with shuffling the many brand names/products that have emerged during last few years from now proverbial merger of its ancestors, former Platinum Software and DataWorks. Epicor seems to have nonetheless somewhat successfully refocused on its core areas following the turmoil of the merger and steep revenue decline due to other relevant factors (i.e., enduring sluggish economy and product divestitures) in addition to the above-mentioned internal tumult. The acquisition initially made Epicor one of the largest mid-market ERP vendors (with ~$250 million in 1999) and the company thereby gained some strong products and a large customer base in a number of new markets, especially in the realm of manufacturing, distribution and supply chain management (SCM). Nevertheless, the burden of an unfocused, multi-product and multi-technology (Microsoft, Oracle, Progress Software, etc.) strategy in markets with diverse dynamics also multiplied sales, R&D, and service & support costs, while many of these products could not have sustained long-term success in their respective target markets.

However, the divestiture of certain secondary and focus-diverting product lines (see Latest Development on Epicor's Trying The Divestiture Tack) has therefore allowed Epicor to lately concentrate on developing applications and functions based on Microsoft's .NET technology framework and SQL Server database. Consequently, it is more likely Epicor will succeed in integrating its internally developed applications by concurrently expanding its Web services and collaborative commerce capabilities.

With its solid cash position and current development work in progress for contemporary Internet-based, 'software as a service' enterprise and collaborative commerce applications, and given its intentions to continue to sell both directly and indirectly with accredited VARs within certain vertical segments, a return to better days does not seem as a far-fetched possibility for Epicor. Attempting differentiation, Epicor will continue to invest in its products in order to assemble the right mix of back-office, front-office, and collaborative e-Business functions, delivered under a single-point accountability (one-stop shop) approach that is desired by its target market.

Epicor's Strategy

To that end, Clarus' acquisition for a little dent in Epicor's purse makes sense, given Epicor has resold in an OEM fashion the Clarus eProcurement product as part of its application suite from February 2001. Epicor will have thereby proven itself successful at selling and implementing the Clarus solution, and the experience with the eProcurement product will have given Epicor a deep understanding of the Clarus products from a selling, service and support perspective. Epicor was consequently among the first vendors to offer Web-based e-procurement at an affordable price for the mid-market and, with this acquisition, Epicor should soon offer an expanded set of SRM solutions, including e-procurement, e-settlement and e-sourcing, as viable add-ons to an overall applications suite for the mid-market segment.

Epicor's and Clarus' products seem to be very complementary in terms of their technology, their mid-market fit, and the business value that they deliver. Both Epicor and Clarus have recently focused their development efforts on Microsoft technology and, specifically, on the Microsoft .NET platform lately. Like Epicor's products, Clarus' products provide advanced functionality, but have been designed keeping the challenges of a mid-size company in mind (i.e. limited IT budgets and limited IT staffing resources).

As an example, Clarus' applications do aim at enabling companies to streamline their operations and significantly lower costs associated with e-procurement. Clarus eProcurement is a slick e-procurement product for small to medium enterprises (SME) rather than an overkill application with unneeded, complex functionality demanded by trading exchanges. Clarus' Microsoft-centric product architecture, the support for many languages and alliances with trading exchanges that do not charge transaction fees should be additional attraction for the intended customers.

Further, the product could reduce significantly the costs of goods and services by enabling supplier performance analysis and tracking and cost analysis and directing purchasing to more profitable sources. It also enables search capabilities internally and externally to both online marketplaces and directly to suppliers for more strategic product selection and pricing. Integration with an online marketplace enables organizations to conduct auctions, reverse auctions and comparison shop, ensuring a competitive price.

Clarus features an architecture that can be configured to mirror almost any organization's operating structure, by using strong mapping capabilities for unlimited levels of approval. Purchase orders can be routed according to price, category, job classification or a number of other attributes. Moreover, with mid-market companies focusing on increasing efficiency and lowering costs more than ever, Clarus eSourcing, which provides a complete auctioning, bidding and weighed RFQ solution, becomes a pivotal component of a solid SRM solution.

Additionally, Epicor has a large customer base that can provide valuable input into future direction of these products, in addition to cross- and up-sell opportunities for the vendor. The company should also benefit from an additional revenue stream from several dozens Clarus' customers and from some ancillary Clarus applications, like a business intelligence (BI) module and an e-learning application to boot. There are significant opportunities for Clarus' international expansion owing to Epicor's strong international presence in the EMEA, Latin America and the Asia Pacific regions.

This concludes Part One of a two-part analysis of the acquisition of Clarus by Epicor.

Part Two will discuss the Challenges and make User Recommendations.

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