Epicor Shows Resilience When It Needs It The Most

Epicor Shows Resilience When It Needs It The Most
P.J. Jakovljevic - August 30, 2001

Event Summary

On August 1, Epicor Software Corporation (NASDAQ: EPIC), one of leading providers of integrated enterprise and e-Business software solutions solely for the mid-market, reported its financial results for the second quarter ended June 30, 2001. Total revenues for the quarter were $46.3 million, a 19.5% decline compared to $57.5 million for Q2 2000. Software license revenue totaled $13.3 million, a 35% drop compared to $20.4 million a year ago, while service and maintenance revenue dropped 11% to $32.1 million compared to $36.2 million in the same period a year ago (See Figure 1). However, one should note that the results were better than the company and financial analysts projected for software license revenue for Q2 2001, despite the uncertainty surrounding demand in the software market and general economic conditions. The software results were that much more impressive, given the sale of its Impresa and Platinum for Windows divisions (see Latest Development on Epicor's Trying The Divestiture Tack).

Figure 1.

More importantly, this was the first profitable quarter after the streak of seven consecutive losing quarters. Net income for Q2 2001, which includes restructuring and other charges, and gains related to sales of the product lines, was $554,000, compared to a net loss of $8.8 million in Q2 of 2000. Although before the charges and gains the company incurred a net loss of $2.2 million, Epicor continued its initiatives to improve efficiency and increase productivity subsequent to the workforce and facilities reduction taken early in the second quarter, resulting in significant operating results improvement over the prior quarter. Further, its balance sheet as of June 30, 2001 showed cash and cash equivalents increase of $6.1 million from Q1 2001, partly owing to the decrease of accounts receivable, deferred revenue and days sales outstanding (DSO).

"Despite the economic weakness experienced throughout the technology industry, we are pleased by the sequential increase in software license revenue over last quarter; and, we believe that last quarter was the low point for our software license sales," said George Klaus, Chairman, CEO and President. "We are also pleased that during the quarter, we generated $6.1 million in cash flow from all sources and showed a profit of $0.01 diluted earnings per share on a net basis. Although we saw indications of improved market demand for our solutions, we maintain our cautiously optimistic outlook for the second half of 2001. We expect license revenues for the third quarter to be flat compared to this past quarter, and slightly higher in the fourth quarter 2001. In response to current enterprise software demand, we will continue to supplement our sales and marketing programs to successfully leverage sales opportunities into our large installed base of over 15,000 customers. We remain on track to return to positive cash flow from operations in the third quarter and operating profitability in the fourth quarter 2001."

Market Impact

Like many of its enterprise application peers in the mid-market, Epicor has recently been compelled to make tough decisions pertinent to its product lines and organizational issues. In addition to the economic slowdown reasons often cited by many struggling vendors' executives and to the non-cited fierce competition from Tier 1 vendors, Epicor's situation has been aggravated by the need to rationalize functional overlap and diverse products and/or technologies inherited with the acquisition of DataWorks Corporation in 1998, a mid-range manufacturing ERP supplier which had had a history of acquisitions of its own.

The acquisition initially made Epicor one of the largest mid-market ERP vendors and it 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. However; the burden of an unfocused, multi-product and multi-technology (Microsoft, Oracle, Progress Software, etc.) strategy in markets with diverse dynamics initially bloated sales, R&D, and service & support costs, while diminishing the likelihood these products could stand a chance of long-term success in their respective target markets.

The latest results bear extremely important psychological importance in addition to always crucial financial stability. The market should appreciate the fact that Epicor will continue to invest in its products in order to assemble the right mix of back-office, front-office, and e-Business functions, delivered under a single-point accountability (one-stop shop) approach that is desired by its target market. The management should get some vindication for sticking out the brave decisions it has taken in terms of product and technology directions.

The divestiture of the above-mentioned secondary product lines allows Epicor to now concentrate solely 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 and expanding its Web services and collaborative commerce capabilities. It appears that no more product divestitures and/or rationalizations are in the offing either.

The iSolutions group, which includes the Avante, DataFlo, ManFact and InfoFlo products and the eManufacturing group, which includes the Vantage and Vista products remain strategic to Epicor and will continually be enhanced both with core ERP functionality and with extended-ERP components such as enterprise portals and Web storefronts. The release of the Web-enabled eFrontOffice product and its integration to back office solutions including eBackOffice, eManufacturing (Vantage) and iSolutions (Avante) products, speak in that regard. Other recent new products include eCentre, Epicor's managed services option for delivering software, eProject, which provides a complete solution for Professional Services Automation (PSA) and Integrated Services Management (ISM), and ePortal 4.0, which provides browser-based access to Epicor's ERP and CRM applications, third-party systems, and Web content.

Epicor thereby remains a prominent mid-market leader. In addition to its focus and understanding of the mid-market, the company has established a solid global infrastructure and product capabilities, as well as a vertical focus for some industries. Epicor has already delivered multiple vertical solutions including Software and Computer Services, Professional Services and Capital Equipment, which gives it head start over many of its peers. The delivery of additional vertical solutions throughout 2001 also remains intact. The protracted hardships have reportedly not affected its service & support delivery or its customers' satisfaction levels either. Epicor has also pruned its channel partners to several dozen exclusive partners in North America, with early indications of an increase of the average contract price tag.

However, the company will have to keep on posting positive results in the future, particularly by continuing to improve its revenue stream - the belt-tightening exercise can do only so much. Although Epicor offers an implementation guarantee regarding time duration and fixed costs, it might not be good enough without improved financial viability. Its bigger and/or more viable competitors will heavily exploit that to deter potential clients from committing to Epicor. In any case, the long awaited porting of Epicor's flagship products onto Microsoft SQL Server as well as continued focus on Microsoft-centric technologies should significantly relieve the company's R&D burden and improve its general competitiveness. At the end of the day, Epicor may prove that fortune favors the bold.

User Recommendations

Epicor's ability to enhance its products should be boosted by its latest results. Although the company has long struggled, its management's strong determination on executing product and technology strategies deserves commendation. Current users are advised to follow Epicor's new product introductions and keep a close eye on its future performance. The positive sign is the company's more manageable and narrower focus, as demonstrated by its most recent results. Mid-market companies within Epicor's industries of focus (e.g., capital equipment, metal fabrication, and electronics sectors) and companies with a need for a single-source functionality beyond core ERP scope, should benefit from including Epicor in the short list of potential candidates for the enterprise applications selection.

More comprehensive recommendations for both current and potential Epicor users can be found in Epicor Software Corp.: Completing Painstaking "e"Volution.

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