Has Market Been Too Harsh On Great Plains?

Event Summary

As published in the company's press release from June 27, Great Plains Software, Inc., a leading mid-market provider of back-office and e-business solutions, announced financial results for the fiscal quarter and fiscal year ended May 31, 2000. Great Plains' fourth quarter revenues increased 48% over the same period last fiscal year. Revenues for the fourth quarter of fiscal 2000 were $59.6 million, a record level for the company, compared to $40.1 million for the fourth quarter of fiscal 1999 (See Figure 1). Net income and diluted earnings per share for the fourth fiscal quarter, excluding the effect of amortization of acquired intangibles, were $1.6 million and 9 cents per share, respectively, compared to $4.6 million and 29 cents per share, respectively, for the fourth quarter of fiscal 1999.

Figure 1.

Revenues for the fiscal year ended May 31, 2000, increased 44% to $194.9 million compared to $134.9 million for the fiscal year ended May 31, 1999 (See Figure 2). Operating income for fiscal 2000, excluding the effect of amortization of acquired intangibles was $16.7 million compared to $18.8 million in fiscal 1999. Net income and diluted earnings per share for fiscal 2000, excluding the effect of amortization of acquired intangibles, were $13.3 million and 80 cents per share, respectively, compared to $13.4 million and 90 cents per share, respectively, for fiscal 1999.

Figure 2.

Including the effect of amortization of acquired intangibles resulted in a net loss of $2.6 million and a diluted loss per share of 15 cents for the fourth fiscal quarter ended May 31, 2000, compared to net income and diluted earnings per share of $4.4 million and 28 cents per share, respectively, for the same period last fiscal year. Net income and diluted earnings per share for the fiscal year ended May 31, 2000, including the effect of amortization of acquired intangibles, were $5.4 million and 32 cents per share, respectively, compared to net income and diluted earnings per share of $12.8 million and 86 cents per share, respectively, for the same period last fiscal year.

During the quarter Great Plains made significant investments in building its Customer Relationship Management (eCRM) business and increasing its resources focused on e-business solutions. Going forward, Great Plains claims it will continue to make investments across e-business and eCRM while driving additional profitability from its back office business through leveraging synergies across recent acquisitions, moving more of its business processes on-line and through a restructuring process.

Great Plains plans to realize savings from, among other things, greater use of its e-support solution for customers and partners, greater leverage of marketing, research and development, and administrative investments across its business units, wider use of computer-based training alternatives for partners, and reducing its workforce by approximately seven percent. The company expects to report a non-recurring charge for the quarter ending August 31, 2000, between $3.0 and $5.0 million to cover costs related to the restructuring implemented during the quarter.

The following are the major highlights that were announced or occurred during Great Plains' fourth fiscal quarter:

• On June 9th, 2000, Great Plains acquired Solomon Software, its long time direct competitor. With the acquisition finalized, Great Plains now has more than 130,000 customers, 2,000 team members and a worldwide network of 2,000 channel partners.
  
  
• Great Plains acquired FRx Software Corporation, possibly the standard for mid-market financial reporting. As a result of the merger, Great Plains and FRx plan to expand their Web-centric analytic applications to include additional e-reporting and business intelligence applications.
  
  
• Great Plains selected webMethods, Inc. to provide integration capabilities that will allow business documents to be seamlessly exchanged over the Internet between companies within Great Plains' interconnected business community. In addition to selecting webMethods to provide transaction integration capabilities, Great Plains has partnered with AppNet to provide web development expertise.
  
  
• More than 200 partners were authorized for Great Plains Siebel Front Office bringing the total to more than 450 authorized reselling partners.

Market Impact

Over the last 2 years, Great Plains has made a great noise and established itself as a small-to-medium enterprises (SME) market leader while consistently remaining profitable (See Figures 1 & 2). Earlier in its fiscal 2000, Great Plains took full advantage of its favorable market capitalization to extend both its foothold in the SME ERP market segment and fill the gaps within its product offerings and geographical coverage.

We believe that the company struck a good balance in extending its offering through both acquisition and partnering with best-of-breed vendors. It now derives almost 20% of revenue outside of the US market and has a potential of reaching $300 million in revenues in fiscal 2001. Further, it has been impressive in selecting partners and integrating disparate products. We are not aware of any other vendor offering such tightly integrated out-of-box Siebel functionality with its back-office applications (except for Solomon IV, which Siebel integration will only happen in the future).

Nevertheless, we believe that the company will have to take a deep breath, conduct a thorough soul searching and carefully devise its future moves. Rampant additional acquisitions may lead to an unmanageable product portfolio and wear thin corporate financial and human resources, independently of the current crippled market valuation and reduced acquisition leverage. Exorbitant costs of training its staff in Siebel applications as well as for in-house major product enhancements and cross trainings are major contributors to significantly lower bottom line in Q4, besides unavoidable one-time acquisition charges.

While there may be a reason for concern due to a tainted profitability track and announced impending restructuring, there is no real cause for serious users' concern. Great Plains continues to grow healthily, while heavily investing in R&D and still remaining profitable, which is generally not the case with its major competitors.

The combination of Great Plains and Solomon Software has a potential of a juggernaut within the SME market, with a formidable combination of customers and channel partners. The acquisition brings the combined company to more than 130,000 customers worldwide. The following factors should contribute to the synergy of this merger: products technology compatibility (Microsoft-centric), the companies' similar market segment focus and a similar service & support business model (with 10%-15% of their affiliate partners already specializing in distributing both products).

Great Plains offers fully integrated front office/back office business applications for the mid-market. Its flagship product, eEnterprise, provides integrated modules for financial, distribution, enterprise reporting, manufacturing, payroll, human resources, service management, electronic commerce, and Internet self-service. Great Plains' Dynamics product provides similar functionality for the lower-end of the market.

Additionally, Great Plains offers a number of legacy products, like Great Plains Accounting product as well as various industry solutions. Solomon, on the other hand, offers a range of similar applications, also on a Microsoft-based architecture. Solomon IV, its flagship product, contains over 50 modules for financials, project management, manufacturing, systems management, distribution, e-Business, and relationship management.

While the merger has been completed impressively smoothly (with almost zero attrition), the downside of it was that it did not expand combined product functionality per se. Great Plains therefore had to internally develop enhancements for its multi-site manufacturing and distribution functionality, field service, and multi-national capabilities (support for 8 languages, etc.) to name but a few. Its major release of eEnterprise, 6.0, is slated for September and will feature the above-mentioned functionality. The company has just announced the partnership with Logility in order to strengthen its supply chain collaboration capabilities, which will bring another products integration need.

Yet, the greatest challenge for Great Plains and its affiliate channel will be the management of dual flagship product lines. It will be difficult to support existing customers and existing products, while juggling competitive product lines.

Since the product lines seem to remain separate for at least two more years, it will add additional development costs, as well as provide a challenge in explaining the position of the different products. The company will have to revise its sales strategy of how to optimize the sales of two product lines with very much overlapping functionality and avoid a likely internal competition. Not to mention the need of showing 'one face' to customers. One way to resolve this is by slating eEnterprise, Solomon and Dynamics product lines for different market segments, either by company size or vertical industries. Consequently, Great Plains can expect growing pains in merging disparate product lines and training and possibly specializing its large affiliate channel.

User Recommendations

Existing Great Plains/Solomon customers should certainly consider the new offering and carefully determine their needs and/or time framework for a migration/update, bearing in mind problems typical with major product releases.

As for potential users, we generally recommend including Great Plains and Solomon in a long list of an enterprise application selection to the lower-end of the mid-market companies (with $2M-$250M in revenue), which are staunch users of Microsoft technology and have significant financial accounting, project management, distribution, and service requirements, while currently not needing complex manufacturing functionality. Great Plains should be included on any package selection short list within the SME market where electronic business, distribution, services and accounting modules are the main pillars of an enterprise application.

However, since we expect growing pains in merging disparate product lines within the current affiliate channel, potential clients should conduct a preliminary research on industry expertise and reference sites of a regional Great Plains affiliate service provider when the Great Plains/Solomon product is selected. They should also familiarize themselves with products' strengths/weaknesses within certain vertical industries. Great Plains/Solomon distributors generally offer vertical solutions on an opportunity-by-opportunity basis only.

As for the newly added and/or announced functionality through partnerships, users are advised to ask for firm assurances on the availability and future upgrades timeframes, and more detailed scope of combined product functionality.