Event
Summary
On August 1, Epicor Software Corporation (NASDAQ:
EPIC), one of leading providers of integrated enterprise and e-Business
software solutions solely for the mid-market, reported its financial results
for the second quarter ended June 30, 2001. Total revenues for the quarter
were $46.3 million, a 19.5% decline compared to $57.5 million for Q2 2000.
Software license revenue totaled $13.3 million, a 35% drop compared to
$20.4 million a year ago, while service and maintenance revenue dropped
11% to $32.1 million compared to $36.2 million in the same period a year
ago (See Figure 1). However, one should note that the results were better
than the company and financial analysts projected for software license
revenue for Q2 2001, despite the uncertainty surrounding demand in the
software market and general economic conditions. The software results
were that much more impressive, given the sale of its Impresa and Platinum
for Windows divisions (see Latest
Development on Epicor's Trying The Divestiture Tack).
Figure
1.
More
importantly, this was the first profitable quarter after the streak of
seven consecutive losing quarters. Net income for Q2 2001, which includes
restructuring and other charges, and gains related to sales of the product
lines, was $554,000, compared to a net loss of $8.8 million in Q2 of 2000.
Although before the charges and gains the company incurred a net loss
of $2.2 million, Epicor continued its initiatives to improve efficiency
and increase productivity subsequent to the workforce and facilities reduction
taken early in the second quarter, resulting in significant operating
results improvement over the prior quarter. Further, its balance sheet
as of June 30, 2001 showed cash and cash equivalents increase of $6.1
million from Q1 2001, partly owing to the decrease of accounts receivable,
deferred revenue and days sales outstanding (DSO).
"Despite
the economic weakness experienced throughout the technology industry,
we are pleased by the sequential increase in software license revenue
over last quarter; and, we believe that last quarter was the low point
for our software license sales," said George Klaus, Chairman, CEO and
President. "We are also pleased that during the quarter, we generated
$6.1 million in cash flow from all sources and showed a profit of $0.01
diluted earnings per share on a net basis. Although we saw indications
of improved market demand for our solutions, we maintain our cautiously
optimistic outlook for the second half of 2001. We expect license revenues
for the third quarter to be flat compared to this past quarter, and slightly
higher in the fourth quarter 2001. In response to current enterprise software
demand, we will continue to supplement our sales and marketing programs
to successfully leverage sales opportunities into our large installed
base of over 15,000 customers. We remain on track to return to positive
cash flow from operations in the third quarter and operating profitability
in the fourth quarter 2001."
Market
Impact
Like
many of its enterprise application peers in the mid-market, Epicor has
recently been compelled to make tough decisions pertinent to its product
lines and organizational issues. In addition to the economic slowdown
reasons often cited by many struggling vendors' executives and to the
non-cited fierce competition from Tier 1 vendors, Epicor's situation has
been aggravated by the need to rationalize functional overlap and diverse
products and/or technologies inherited with the acquisition of DataWorks
Corporation in 1998, a mid-range manufacturing ERP supplier which
had had a history of acquisitions of its own.
The
acquisition initially made Epicor one of the largest mid-market ERP vendors
and it gained some strong products and a large customer base in a number
of new markets, especially in the realm of manufacturing, distribution
and supply chain management. However; the burden of an unfocused, multi-product
and multi-technology (Microsoft, Oracle, Progress
Software, etc.) strategy in markets with diverse dynamics initially
bloated sales, R&D, and service & support costs, while diminishing the
likelihood these products could stand a chance of long-term success in
their respective target markets.
The
latest results bear extremely important psychological importance in addition
to always crucial financial stability. The market should appreciate the
fact that Epicor will continue to invest in its products in order to assemble
the right mix of back-office, front-office, and e-Business functions,
delivered under a single-point accountability (one-stop shop) approach
that is desired by its target market. The management should get some vindication
for sticking out the brave decisions it has taken in terms of product
and technology directions.
The
divestiture of the above-mentioned secondary product lines allows Epicor
to now concentrate solely on developing applications and functions based
on Microsoft's .NET technology framework and SQL Server database. Consequently,
it is more likely Epicor will succeed in integrating its internally developed
applications and expanding its Web services and collaborative commerce
capabilities. It appears that no more product divestitures and/or rationalizations
are in the offing either.
The
iSolutions group, which includes the Avante, DataFlo,
ManFact and InfoFlo products and the eManufacturing
group, which includes the Vantage and Vista products remain
strategic to Epicor and will continually be enhanced both with core ERP
functionality and with extended-ERP components such as enterprise portals
and Web storefronts. The release of the Web-enabled eFrontOffice
product and its integration to back office solutions including eBackOffice,
eManufacturing (Vantage) and iSolutions (Avante) products, speak in that
regard. Other recent new products include eCentre, Epicor's managed
services option for delivering software, eProject, which provides a complete
solution for Professional Services Automation (PSA) and Integrated Services
Management (ISM), and ePortal 4.0, which provides browser-based
access to Epicor's ERP and CRM applications, third-party systems, and
Web content.
Epicor
thereby remains a prominent mid-market leader. In addition to its focus
and understanding of the mid-market, the company has established a solid
global infrastructure and product capabilities, as well as a vertical
focus for some industries. Epicor has already delivered multiple vertical
solutions including Software and Computer Services, Professional Services
and Capital Equipment, which gives it head start over many of its peers.
The delivery of additional vertical solutions throughout 2001 also remains
intact. The protracted hardships have reportedly not affected its service
& support delivery or its customers' satisfaction levels either. Epicor
has also pruned its channel partners to several dozen exclusive partners
in North America, with early indications of an increase of the average
contract price tag.
However,
the company will have to keep on posting positive results in the future,
particularly by continuing to improve its revenue stream - the belt-tightening
exercise can do only so much. Although Epicor offers an implementation
guarantee regarding time duration and fixed costs, it might not be good
enough without improved financial viability. Its bigger and/or more viable
competitors will heavily exploit that to deter potential clients from
committing to Epicor. In any case, the long awaited porting of Epicor's
flagship products onto Microsoft SQL Server as well as continued focus
on Microsoft-centric technologies should significantly relieve the company's
R&D burden and improve its general competitiveness. At the end of the
day, Epicor may prove that fortune favors the bold.
User
Recommendations
Epicor's ability to enhance its products should be boosted by its latest
results. Although the company has long struggled, its management's strong
determination on executing product and technology strategies deserves
commendation. Current users are advised to follow Epicor's new product
introductions and keep a close eye on its future performance. The positive
sign is the company's more manageable and narrower focus, as demonstrated
by its most recent results. Mid-market companies within Epicor's industries
of focus (e.g., capital equipment, metal fabrication, and electronics
sectors) and companies with a need for a single-source functionality beyond
core ERP scope, should benefit from including Epicor in the short list
of potential candidates for the enterprise applications selection.
More
comprehensive recommendations for both current and potential Epicor users
can be found in Epicor
Software Corp.: Completing Painstaking "e"Volution.