Fourth Shift Tightens Belt To Weather The Drought

Fourth Shift Tightens Belt To Weather The Drought
P.J. Jakovljevic - November 14, 2000

Event Summary

On October 17, Fourth Shift Corporation (NASDAQ: FSFT), an application software vendor for small-to-medium enterprises (SME), reported operating profit of $115,000 for the third quarter ended September 30, 2000. After non-operating expenses this resulted in a $.01 loss. Compare this to an operating loss of $3.6 million in the previous quarter and to a net profit of $0.4 million a year ago. Total revenue for the quarter was $14.9 million compared to $16.5 million a year ago (~10% revenue decrease).

"Third quarter results represent substantial performance improvement over last quarter, principally due to expense control," said M. M. Stuckey, Chairman and CEO, "but market growth has not yet resumed. Looking forward, we are encouraged by the market's early reaction to our new B2B, e-commerce Customer Center, a customer-facing Internet portal fully integrated with Fourth Shift's ERP backbone system. This Customer Center should be attractive to both our customer base as well as new prospects."

Market Impact

The CEO's terse statement reveals that the company is in a survival mode. The Y2K-caused malaise does not seem to be letting up any time soon. The improvement over the last quarter is merely attributable to a well-exercised rigid cost curbing exercise; the picture becomes more depressing when the comparison is made to a year ago. The license revenue declined a hefty 24%, while the service and support revenue dropped 5% (See Figure 1). However, while it is unnerving that the revenue pipeline seems to be drying up, the company has been managing to curb cash burning much better than most of its peers. Furthermore, it continues to deliver attractive, innovative products for its target market.

Figure 1.

We previously expressed our views regarding Fourth Shift's new product strategy called Complete Care and its new website - a portal where manufacturing companies can benchmark themselves against comparable companies contained in an online database of more than 150,000 firms - that is co-sponsored by Grant Thornton, a leading accounting and management consulting firm (for more information, see Is Fourth Shift Succeeding in Providing 'Complete Customer Care'?).

The company recently released two more attractive offerings:

  • Your Customer Center, a web-based order entry and tracking system that is integrated with the Fourth Shift Complete Care suite of ERP applications (ERP).

  • A remote, web-based training initiative.

Both initiatives should provide inexpensive benefits to cost-weary smaller manufacturing enterprises.

However, the company continues to rely primarily on its strong direct sales force, which we consider a cost ineffective sales approach within the SME market segment. Fourth Shift has yet to demonstrate substantial progress in developing an indirect channel to supplement its strong direct sales force. Without it, we believe the company's growth will be insufficient and it will remain marginally profitable.

User Recommendations

The time has come for Tier 2 and Tier 3 vendors to feel the Y2K-caused pinch, while their bigger brethren seem to have gotten past it. We believe that the smaller vendors are now in for a rough time as they continue to expand their products, refine their marketing message and defend their turf from each other and from ever more intruding bigger vendors, while coping with much scarcer resources. A big shakeout among the mid-market vendors should be expected within the next 6-12 months. It is unclear how many vendors will survive the shrinking market intact and avoid either bankruptcy or consolidation. Fourth Shift may well be one of those that survive the shakeout. Moreover, the depth, breadth and innovativeness of its offerings to the SME market are attractive at first sight and deserve due attention.

More comprehensive recommendations for both current and potential Fourth Shift users can be found in Fourth Shift Corporation: Working Overtime To Provide Complete Customer Care.

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