Frontstep (Nee Symix Systems) A Step Closer To A Turnaround

Frontstep (Nee Symix Systems) A Step Closer To A Turnaround
P.J. Jakovljevic - February 26, 2001

Event Summary

On January 24, Frontstep, Inc. (NASDAQ: FSTP), a leading provider of business systems for mid-sized distributors and manufacturers, announced financial results for the second quarter and six months ended December 31, 2000. Revenue from new license fees was $17.2 million, up 11% from the same quarter last year. Total revenue was $34.1 million, up 22% from the Q1 2001. However, compared to the same quarter last year, total revenue was essentially flat on lower service revenue. As expected, the company reported a loss for the quarter. The net loss was $957,000, compared to net income of $288,000, for the same quarter last year (See Figure 1).

Figure 1.

"New license revenue is one of the best indicators of the strength of our business," said Stephen A. Sasser, president and chief executive officer of Frontstep. "New license revenue rose sharply in the second quarter, indicating that our investments in new products and channels are paying off. The growth in new license revenue is even more remarkable - up 20 percent from last year's second quarter and up 45 percent from this year's first quarter - when adjusted for divested products and fluctuations in currency exchange rates. Service revenue is expected to rebound in the second half as we implement new orders. Our progress with new license revenue, combined with the associated growth in service revenue, is expected to result in an improving revenue picture moving forward."

"We significantly reduced our loss in the second quarter as planned, while continuing to invest in product and channel development. We are on track to report an even smaller loss in the third quarter and return to profitability in the fourth quarter ending in June," continued Sasser. "This was an exciting quarter in terms of new customers and business partners. We won more new customer orders this quarter than in any of the previous six quarters. We also signed on six new Frontstep partners. And it was the first quarter under our new name - Frontstep. We now offer collaborative, network-centric solutions to allow companies to streamline and automate their business processes, including - most notably - processes that involve customers, sales and channel partners, and suppliers. Our customers are looking for ways to leverage information technology to improve their competitive profile, and we are delivering the solutions and expertise to allow them to do precisely that."

Market Impact

Frontstep seems to be on the road to recovery. This has been a crunching time for smaller applications vendors and Frontstep (formerly Symix Systems) has had its share of difficulties. 2000 was undeniably the year of drastic business model change for the company. The name change was more than mere a name change - it reflected the company's shift of focus from being a leading mid-market ERP vendor to fully leveraging the Internet in the suite of applications it provides to manufacturers, distributors and trading exchanges.

The company has also revised the channel, delivery methods and pricing strategies in order to improve traction of its entire product portfolio. Through its division, the brightwhite services group, Frontstep will provide the e-business design and deployment services as required by customers. Having a combined product mix will allow Frontstep to provide its target market with an e-business strategy and the applications to embody it. Also, the company has made substantial progress in developing an indirect channel to supplement its strong direct sales force, as mentioned in the above PR. Without it, we believe the company's growth would be insufficient. This is particularly true in light of Tier 1 vendors learning the importance of resellers in the lower end of the market (for more information, see SAP Claims Big Gains In The Low-End Battleground, and PeopleSoft Joins The Hunt For SMEs).

We believe the company has articulated an e-commerce vision that should have an appeal to its mid-market users. Frontstep is offering its core transaction back-office systems, the Symix Systems ERP applications (SyteLine, SyteCentre, and SyteDistribution), then customer relationship management (CRM) functional modules purchased from Profit Solutions (for more information, see Symix Expands Its Product Offering While Remaining Profitable), and supply chain functionality from its much older purchase of Pritsker and DAI. Frontstep is also delivering its Active Link backbone to provide end-users with the ability to connect suppliers and customers to its core transaction system.

While Frontstep has been promoting the concept of an integrated solution, including both ERP and e-business components, the company is also pursuing stand-alone sales of its e-business offerings, both to manufacturing companies using a different back-end system, and (to a lesser degree) to organizations outside of the manufacturing industry. The openness and interconnectivity are among the most important factors of competitiveness within the enterprise applications market nowadays. The broad scope and flexibility of its product offering as well as the size of the existing Symix ERP customer base should provide Frontstep with recurring revenue and possible profitability during the impending mid-market shakeout. The company had no choice but to extend its traction in the crowded mid-market ERP market segment and to fill the gaps and/or diversify its product portfolio.

While Frontstep had initially taken serious knocks as manifested through its recent poor financial performance, its 'bite the bullet' strategy seems to be paying off, as seen in increased license revenue. Frontstep has been figuring out how to facilitate adoption of e-business by the manufacturing and distributing industry. Manufacturers and distributors have traditionally not been early technology adopters, although they should benefit from e-business and front office functionality. Mid-market companies increasingly have been looking for a single source that can cover their core back office system and extend the existing applications to both customers and suppliers. This would maximize their investment and reduce the complexities of integrating disparate applications. Frontstep seems to have positioned itself well as it already possesses most of the required components.

Nevertheless, the company still faces challenges. Its recent name change to Frontstep will require a strong marketing initiative to inform potential and existing clients about the company. Furthermore, its development initiatives have all but dried up its cash reserves; that will present a serious constraint to any unfinished work of integration of the newly released e-business applications with a slew of its traditional back-office products, which is inevitable if it wishes to mine its large customer base.

User Recommendations

While it is unclear how many smaller vendors will survive the shrinking and more crowded mid-market intact, potential and current Frontstep users should not be overly anxious about the company's viability and the leading position within its target market. The company has broadened its product lines and seems to have responded to recent market trends. More important will be how well it will manage the name change and brand recognition, how well it will target the right e-business issues for the manufacturing and distribution mid-market and demonstrate benefits to the prospect or customer, and how it can continue improving its momentum.

More comprehensive recommendations for both current and potential Frontstep (Symix) users can be found in Symix Systems Front-Steps Into Greener e-Commerce Pastures.

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