Software Leasing Trend Slams Baan Earnings

Event Summary

On October 21, Baan Co. reported a net loss of $25 million, or 12 cents per share, as well as significantly lower year-on-year revenue for the third quarter ended Sept. 30. Although the business software vendor was able to reduce its third-quarter loss compared with the $40 million in red ink it posted for the corresponding quarter in 1998, revenue fell by roughly 27% to $143 million, down from $195 million in last year's third quarter. Baan cited the market's move toward leasing rather than buying software as one reason for its sagging revenue. The shift toward leasing has an impact on revenue over the short term, but will build customer loyalty and produce an ongoing revenue stream, Baan said in a statement. Baan named Boeing Co. and KPN NV as two major companies this year who have decided to license Baan's software on a subscription basis. Licensing revenue for the third quarter totaled $36 million, while maintenance and service revenue reached $107 million, Baan said. The company said it expects the rest of 1999 to be "a difficult year for the enterprise applications market." Tough market conditions have already been reflected in worse than expected results from business software vendors such as PeopleSoft Inc. and SAP AG. Baan, however, is also battling internal woes. It has reported losses for five consecutive quarters and has undertaken a major restructuring designed to stem losses and clean up its financial practices.

Market Impact

Baan has been struggling for almost two years to recover from a downward spiral as it battled to integrate a number of disparate products it acquired from various sources. It is the Company's fifth consecutive quarterly loss (See Chart). The timing of this report comes at a very bad time for Baan, which seemed to be regaining some market confidence. The Company delivered a fully integrated extended ERP product suite, and went on a very aggressive $25M marketing campaign including next month's BaanWorld conference in Vienna, Austria.

Baan management offered some reassuring statements. The first is that the Company cut its last year's third-quarter loss of $40M nearly in half. Secondly, Baan has a number of new deals for the next quarter, including a five-year contract to sell its complete new suite of products to Boeing, Baan's long-time ally and biggest customer. Baan management also said that the loss is partly due to a new subscription-based pricing model that went into effect during the last quarter. Instead of an up-front, all-at-once cost, Baan now charges customers a per-user, per-month fee for the rights to use its products, with the idea of creating a recurring revenue stream and alleviating customers having to pay huge amounts of money all at once.

Our belief is that it will take much more than speculating about the future, in order to restore the confidence-depleted ERP market, particularly in the USA. Returning to profitability, primarily by increasing its license revenues, is of utmost importance for Baan. We predict that to occur in 3Q 2000 at the earliest (60% probability).

User Recommendations

Although Baan's cash position is better today compared to the corresponding period of fiscal 1998, we advise any organization evaluating Baan to consider existing functionality only, and be able to provide the majority of product support in-house or through a 3rd party, until the Company exhibits consistently profitable performance.

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