EXE Technologies Begins Life In The Public Eye

Vendor Genesis

A supply chain execution vendor specializing in warehouse management and Internet fulfillment, EXE Technologies emerged from the merger of Neptune Systems, Inc. and Dallas Systems, Inc. in mid 1997. Dallas Systems had built its WMS around the needs of retail and wholesale distribution companies while Neptune brought expertise in third party logistics (3PL) to the combination. Dallas Systems' EXceed was offered on IBM mainframe and Unix, while Neptune Systems' solutions were supported on client/server Unix and Windows platforms as well as OS/390. At the completion of the merger, EXE instantly became one of the largest WMS vendors in the supply chain execution market. Its broad range of supported platforms gave EXE the ability to provide WMS solutions for companies of virtually any size.

Since the merger, EXE has concentrated its development resources on Neptune's NT-based WMS product, which utilizes an open N-tier architecture. The enhanced product, EXceed eFS (eFulfillment System), is a multi-platform, multi-language software solution for e-commerce fulfillment and warehouse management environments including: retail, grocery and wholesale firms; manufacturing firms; third-party logistics and outsourced e-commerce providers. The suite contains two extensions: eFS Fulfill and eFS Collaborate. eFS Fulfill combines Exceed WMS with transportation management functions such as shipping and receiving for multiple transport modes including air, ship and rail. eFS Collaborate provides suppliers and customers the ability to share information to support collaborative planning forecasting and replenishment (CPFR) activities.

EXE is a premier solution provider for Microsoft in the supply chain execution industry. EXE has implemented over 250 warehouse installations using Microsoft technology, including Windows NT and SQL Server. EXE has collaborated with Microsoft on the deployment of its EXceed warehouse management application on SQL 7.0, Windows 2000, and site server products. EXE also has a worldwide database reseller agreement with Oracle Corporation, in which it offers a certified interface to Oracle's applications.

Vendor Strategy and Trajectory

In spite of its promising genesis, EXE failed to grow its business significantly in the two years following the merger. Total revenue more than tripled from 1997 to 1998 but sagged significantly from 1998 to 1999, in which the company grew by just 6% to $96.8 million. As a cost-cutting measure during the Y2K-induced lull in its customers' buying activity, EXE restructured its operations in August 1999 and reduced its total headcount by 130 people or 18%.

Though it continues to support mainframe and Unix installations among its 300+ customer license base, EXE has begun to focus heavily on its Windows NT/2000 platforms and reputedly was the first supply chain execution vendor to be fully certified on Windows 2000. At of the end of fiscal 1999, EXE derived 26% of its total revenue from the sale of new software licenses and upgrades, 66% from services and maintenance, and the remainder, 8%, from the resale of software and hardware components it uses to complement its solutions. In the first two quarters of 2000, software licenses have grown considerably as a percentage and the company relies more and more on consulting partners for providing implementation support and maintenance to its clients.

EXE is focusing research and development dollars on initiatives to offer a more packaged solution environment and will target a 1:1 ratio of licenses to services, a goal it may achieve in 2000 (70% probability). EXE markets its EXceed fulfillment and collaboration solutions primarily to true dot-com retailers, although this has created skepticism among some members of the investment community since the decline of dot-coms in favor of brick-and-click players.

Citing poor market conditions, EXE cancelled an IPO in 1998. With an entirely new team of underwriters on board, EXE recently downsized its IPO expectations from generating $111 million to $53 million. With the close of the second quarter of calendar 2000, EXE's position in the SCE market is in doubt as other players, such as Manhattan Associates, continue to gain market share. Based solely on license revenues, however, EXE is the clear leader with $25.4 million in license revenue for FY1999 and over $30 million for the first half of 2000. Undaunted by its negative bottom line, EXE resurrected its plans for an IPO this year, proceeds of which will be used to fund operations and make strategic acquisitions in an effort to capitalize on its newfound growth.

ANALYSIS

Vendor Strengths

• Strong, comprehensive WMS functionality over almost every platform: EXE's current product line is the culmination of decades of development effort, employing feedback from customers and members of its Industry Advisory Board (IAB). Its multiple platform expertise gives it an edge over other vendors in providing integration services on client implementations.
  
  
• Global presence: EXE derives 64% of its revenues from North America, 20% from EMEA, and 16% from the Pacific Rim. No other WMS vendor enjoys a customer base so evenly distributed over the globe. Its area of fastest revenue growth is Asia with a compound annual growth rate of 86% since 1997. Geographic diversification better insulates EXE against local economic downturns.

Vendor Challenges

• Lack of profitability and flat revenues: In spite of EXE's lead in the SCE market, a position determined by total revenue, the company has posted large losses in the last three years (see Fig. 1). Short term, this will make investors hesitant to add the company's stock to their portfolios, which will in turn hamper EXE's efforts to raise capital through public funding. Some investment banks and institutional investors view the company's emphasis on the dot-com B2C market with trepidation given the recent bust in the B2B and B2C software markets.
  
  

Figure 1.

• Undersized internal research and development staff: As of March 1, 2000, EXE maintained a development staff of 37, representing just 7% of its total workforce. This is roughly half the average for the SCE software industry (~15 %) and a third of the larger supply chain management software market. Much of the reduction stems from the company's restructuring steps in 1999 and, while reducing the number of R&D resources may have yielded short-term cost savings, it can ultimately bring about a loss in technological leadership. EXE has enlisted the aid of outsourced development and implementation services through Hindustan Computers Limited and Span Systems Corporation but these are an insufficient substitute for in-house resources.
  
  
• Raising capital to make acquisitions: EXE believes the best way to grow market share is through acquisitions. It feels that it is easier to acquire a complementary software vendor and assimilate than to develop functionality in-house. Making large strategic acquisitions will be difficult unless the required capital can be raised in the stock market.

BOTTOM LINE

Vendor Predictions

• Good potential for growth: In spite of its lack of profitability, EXE's experience and leadership in the WMS and fulfillment markets increase its chances for becoming profitable sometime over the next 1-3 years (70% probability). Success is contingent upon maintaining a favorable market perception among end users, competing effectively against other players like Manhattan Associates, Provia, and Industri-Matematik.
  
  
• Acquisition by a larger vendor: EXE's WMS and fulfillment product would be complementary additions to i2 Technologies' core supply chain planning applications. Acquisition by i2 within the next 12-24 months (40% probability) would allow it to offer one-stop shopping for supply chain planning and execution software.
  
  
• In spite of EXE's strong position in the WMS and fulfillment markets, further growth will be difficult without an infusion of capital. The company has chosen to address this need through its recent IPO. Though the stock market has been dangerous for software companies in recent months, we expect that EXE will benefit from its public offering in the longer term (70% probability).

Vendor Recommendations

• Recast marketing message to target brick-and-mortar retailers: EXE needs to communicate clearly its willingness to provide solutions for both dot-com and brick-and-click retailers, a message that has become obscured in its zeal to capture its share of the pure-play Internet retail segment.
  
  
• Rationalize product lines: Although its multiple platforms enable EXE to offer solutions for a broad range of enterprises, it should begin to rationalize components of each platform in order to avoid confusion during the sales process.
  
  
• Expand channel partner network: i2 Technologies and Osprey, a small services firm specializing in migrating companies to e-commerce, represent EXE's only official channel partners. EXE should consider expanding this network as well as establishing additional strategic alliances with systems integrators, consulting firms and complementary software vendors to help perpetuate revenue growth.

User Recommendations

Users in the retail, wholesale distribution, manufacturing, and third party logistics (3PL) businesses should give EXE a prominent position on short lists, especially those using an N-tier architecture supported by Windows NT/2000. Mainframe users should look elsewhere for WMS and fulfillment capabilities unless they are prepared to migrate to NT or Unix. Users may want to include the Unix version of EXceed in selections over the short term (12 months), but should not be surprised to see EXE scale down its enhancements of this product in favor of NT.