Way To Go, Ross Systems!

Way To Go, Ross Systems!
P.J. Jakovljevic - October 23, 2001

Event Summary

On September 17, Ross Systems, Inc. (NASDAQ: ROSS), a provider of ERP and e-business solutions for mid-market process manufacturers, announced a profit of $0.4 million for its fourth fiscal quarter, which ended June 30, 2001. The results represent a $5.5 million improvement over the prior year's quarter (See Figure 1). Nonetheless, total revenues for the quarter at $11.3 million declined 31% from $16.4 million in the prior year's quarter, while total revenue for the year at $49.5 million declined 38% from $80.0 million in the prior year (See Figure 2). The net loss for the year was $0.8 million, significantly less compared to a net loss of $9.7 million in the prior year.

More importantly, earnings before interest, taxes, depreciation and amortization (EBITDA) of $1.7 million for the quarter improved over EBITDA of ($4.9) in the prior year's quarter, while EBITDA of $3.1 million for the year improved over EBITDA of ($10.1) million in the prior year. The quarter and full-year results reflect the sale of the company's HR/Payroll product line on February 28, 2001, and include a related non-recurring gain of $2.4 million for the year.

Operating cash flow was positive for the year at $11.3 million and increased from $10.2 million in the prior year. Net cash and cash equivalents increased to $5.7 million from $2.0 million in the prior year. Long-term debt, $2.6 million in the prior year, was eliminated. Deferred revenues for the year declined to $12.7 million from $18.0 million in the prior year and reflect the sale of the company's HR/Payroll product line in February.

Possibly encouraging news it that the license revenue of $2.8.million, while 30% less compared to a $4.0 million a year ago, increased 18% from $2.4 million in the previous quarter. Service & maintenance revenue continues to decline though from the previous quarter as a result of the sale of the HR/Payroll product line.

Ross believes revenue declines attributable to rationalization of distribution channels in Europe, as well as reductions in low-margin, third party product and services, were offset by the company's successful expense reduction and restructuring program. The sale of the company's HR /Payroll product line permits the company to further focus its resources on its main market verticals, while continuing to provide the same product function to its customers as a distributor. The cash received from the product line sale of $5.1 million, in addition to a $2 million equity issuance on June 29, 2001, when combined with the company's positive cash flows have significantly strengthened the balance sheet.

"We are pleased with the progress the company has made during the past year," said Pat Tinley, Ross' Chairman and CEO. "The company took the necessary steps to focus and streamline its operations, and the positive results of those actions are clearly reflected by three consecutive quarters of improved license revenue and operating profit. Our healthy cash flow during the year also allowed us to continue a strong investment in product development and customer service."

The Company claims to have experienced improved sales in its core process manufacturing business in both North America and Europe. Ross' European operations continued at profitable levels as an additional 13 new accounts were signed as a result of Ross' direct sales organization in Europe. Support from Ross' large installed base of customers remained strong and accounted for 70% of the direct license fees.

"Our product offering has never been stronger," stated Eric Musser, Ross' Chief Technology Officer. "We are delivering on the promise of a fully collaborative ERP system for our customers. With the introduction of iRenaissance.connect and iRenaissance.commerce, our customers are able to gain significant competitive advantage by strengthening customer ties and improving supply chain efficiency."

Market Impact

Hats off to Ross' management for making it back from the near-dead state. It has done an outstanding job of curbing expenses and has divested most of non-core competency businesses so that there are not many options left to generate cash other than by increased top line through new deals. It appears that Ross has been improving in this regard too. While the company's declining annual revenue is far from being impressive (See Figure 2), the license revenue increase in the last three quarters is encouraging (See Figure 1) and it may be boosted in the future by Ross' recent profitable quarterly performances. New customers had every reason to be very concerned about the financial future of the company and clearly, Ross' management convinced them that Ross was here to stay.

Figure 1.

Figure 2.

Although Ross has long scored top marks on functionality and service within its three target mid-market process industry markets - continuous, batch and mixed mode - abreast of or even ahead of SCT Corporation, SAP, Oracle, Baan/Marcam, J.D. Edwards, Intentia, Aspen Technology, SSA GT, Geac/JBA, Ramco Systems, etc., it has concurrently suffered from poor financial performance, which has in turn cast a shadow on its product enhancements capability.

Ross' iRenaissance suite covers an entire range of processes from material sourcing, through the manufacturing and the product delivery. It has very strong attribute matching/tracking, dynamic recipe adjustment, heat traceability, 'catch weights', potency and many other process industry mandated functionality. Its advanced planning and scheduling (APS) offering includes demand planning and finite capacity scheduling (in alliances with Preactor and Prescient Systems). The company also offers business intelligence (BI) through the alliance with Business Objects and some native CRM functionality. Further, the iRenaissance portal provides browser-based tools giving access to applications and data.

Technically, Ross' seems to be catching up with its competitors too given a hefty R&D investment despite reduced revenues. Ross' has finally delivered the long needed product development initiatives:

  • iRennaisance.connect, the Ross' XML-based web and back-office integration tool. Current developments include the evolution of a Java and XML web strategy, covering sales and customer management, electronic proof of delivery, invoicing, procurement and forecasting, with customer account status, order history and other web self-service capabilities.

  • The latest release of Gembase, its application development tool provides enhanced performance on Microsoft's SQL Server database. This should allow customers from the higher-end of the market a choice to effectively deploy on either the SQL Server or Oracle database.

On services, Ross offers knowledge management-based business process re-engineering (BPR) and mapping tools called strategic applications management (SAM), that provide procedure and process templates. Ross has also embarked on a number of initiatives attractive to small-to-medium enterprises (SMEs) such as a hosted service and cut down 'shrink wrapped' rapid implementation services named 'Ross Lite' or 'Ross in the Box'.

Consequently, the company remains in the race for a piece of the prosperous process manufacturing market. Better financial performance and the long awaited delivery of above technological enhancements along with Ross' strong process manufacturing functionality, a sharp vertical focus and good multi-national capabilities, could restore its almost lost visibility in the market. However, look for the global process manufacturing market to remain a fierce battlefield. As the gauntlet has been thrown, by e.g., SCT's integration with ecFoods, a trade exchange for raw materials, Ross should swiftly and strongly articulate its more comprehensive CRM and digital marketplace strategy. As the delivery of it will hinge on available resources (read new revenue), Ross' future will be trying and interesting to follow.

User Recommendations

Ross Systems' improved financial situation should be an encouragement both to the market in general and to its existing customers. The latest moves indicate that the company should not be written off as it still has a strong functional fit for some process manufacturing industries. Companies with up to $500 million in revenues within the food and beverage, the pharmaceutical, and the chemical industries, should evaluate Ross Systems.

Users are advised to follow the company's new product introductions and keep a close eye on its future performance, though. Also important will be to watch how well the company maintains its global channel, how well it targets the right e-business issues for mid-market process manufacturing enterprises and how it leverages the latest positive news in order to increase the new revenue growth.

More comprehensive recommendations for both current and potential Ross' users can be found in Ross Systems, Inc.: In Process of Renaissance.

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