Epicor To Try The Divestiture Tack, Too

Epicor To Try The Divestiture Tack, Too
P.J. Jakovljevic - June 1, 2001

Event Summary

On May 2, Epicor Software Corporation (NASDAQ: EPIC), one of leading providers of integrated enterprise and eBusiness software solutions for the mid-market, reported its financial results for the first quarter ended March 31, 2001. The company's license revenue plummeted over 40% to $12.3 million, while service revenue fell 3% to $33.9 million, generating total revenue of $46.9 million a 17% decline compared to $56.6 million for the Q1 2000. Net loss for Q1 2001 was $22.1 million, compared with a net loss for the same period last year of $14.2 million. The net loss for the first quarter 2001 includes various adjustments made to asset values, primarily accounts receivable and capitalized software development costs, to better reflect the current economic environment and geographical market conditions.

Figure 1.

The company also announced that it has completed the sale of its Impresa for MRO division to Avexus, Inc., a software and services company catering to the maintenance, repair, and overhaul (MRO) ERP marketplace for highly engineered assets. Terms and conditions of the divestiture were not disclosed. Epicor believes the sale of this division is in line with the company's expanding focus on collaborative commerce and integrated eBusiness solutions for the mid-market, and that it reflects the company's commitment to its core competencies, increasing shareholder value and enhancing its long-term growth outlook. Epicor pledges to continue to invest in its future while increasing operating efficiencies and improving service levels including leveraging its offshore development facilities. In addition, the company continues to invest in the deployment of new technologies predominantly based on Microsoft's .NET platform.

Epicor also said that as a result of it undergoing various strategic initiatives to reduce its costs, including employee and facility reductions, it will experience a restructuring charge of $6 to $7 million in the second quarter of 2001. Epicor expects its actions to reduce ongoing quarterly costs and expenses by roughly $6 million to $7 million. As a result of the sale of its Impresa division, as well as the uncertainty surrounding demand in the software market and general economic conditions, the company has reduced its revenue forecasts for 2001 and now expects revenues for the year to decrease approximately 14% from 2000 revenues to less than $190 million level. The company, nonetheless, expects to achieve profitability in Q4 2001.

"While the actions we have taken to reduce our cost structure in response to market conditions were difficult, we believe that we have positioned Epicor for success even in these uncertain times," said George Klaus, CEO and chairman. "As we continue to strive to meet our goals, the divestiture of the Impresa division reflects the company's strategy to focus on its core integrated applications suite, which we believe will drive sustained profitable growth for our shareholders. We would like to thank the management and employees of the Impresa division for their dedication and anticipate that Avexus will create promising new opportunities as they continue to build their business and support their loyal customer base."

Market Impact

Epicor's free fall with a steep loss of market share continues. The company struggled throughout 2000, with revenues declining 15% and with a huge net loss of $40.7 million. Now, Epicor expects that once again revenue will fall 14% for the year, although with a dose of stifled optimism and slim profit expectations for 2001. In addition to the economic slowdown reasons cited by the company and to the non-cited fierce competition from Tier 1 vendors, which have also affected most of its brethren, Epicor's situation has been particularly exacerbated 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 brought a diverse set of products into the marriage.

Although the acquisition has initially made Epicor one of the largest mid-market ERP vendors, the burden of an unfocused, multi-product and multi-technology (Microsoft, Progress Software, etc.) strategy in markets with diverse dynamics has snowballed sales, R&D, and service & support costs, while diminishing the likelihood these products could stand a chance of long-term success in their respective niches. Epicor has finally admitted it has undertaken too much at once.

The challenge of Web-enabling and integrating its front-office suite to all the diverse back-office suites that run on different platforms, and the delivery of vertical solutions, is simply impossible under current circumstances. Therefore, the divestiture of this non-core product line should both present a financial shot in the arm and should sharpen the company's strategic focus to provide a single point provider for some mid-market enterprises. The similar tack has all but helped Ross Systems turn its business around (see Is Ross Systems Up To A Hat Trick? and Ross Systems Closes Ranks For A (Possible) Turnaround ).

Look for more divestiture attempts from Epicor (e.g., Avante and Vista product lines) so that the company remains focused only on further developing its Microsoft-centric flagship products comprised within its e by Epicor product suite. This might help Epicor remain 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. The current hardships have reportedly not affected its service & support delivery or its customers' satisfaction levels.

Although Epicor offers an implementation guarantee regarding time duration and fixed costs, it might not be good enough without improved financial viability. The bigger and/or more viable competitors will heavily exploit that to deter potential clients from partnering with Epicor. In any case, the long awaited delivery of Epicor's main manufacturing and distribution products as well as porting of all core products onto Microsoft SQL Server database should significantly relieve the company's R&D burden and might improve its general competitiveness.

User Recommendations

While Epicor is just one of a plethora of mid-market vendors reporting dwindling revenues, it is one of those that is hurting the most. 2001 will be very challenging for the company. Users are advised to follow Epicor's new product introductions and keep a close eye on its future performance. While Epicor's solid balance sheet should be further boosted by the recent sale of its Impresa division, its cash resources are not infinite.

The positive sign is the company's more manageable and narrower focus though. But, the "catch 22" for current and potential users is to discern Epicor's corporate strategy viability within the product line/industry in question. Users will benefit from approaching the company and informing themselves about what the company plans for future service & support (or divestiture and/or product stabilization?) of its individual products are and what would the ramifications of migrating (or not) to its new product (or to other vendors') offering be. Users should vigorously question Epicor on its future options and investigate alternative solutions now to fully understand their situation and options. Companies considering a new enterprise solution should be wary of the Epicor's non-core offerings (e.g., Vista, Avante, etc.), until the company more clearly states its future plans.

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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