Event
Summary
On October 17, Fourth Shift Corporation (NASDAQ: FSFT), an application
software vendor for small-to-medium enterprises (SME), reported operating
profit of $115,000 for the third quarter ended September 30, 2000. After
non-operating expenses this resulted in a $.01 loss. Compare this to an
operating loss of $3.6 million in the previous quarter and to a net profit
of $0.4 million a year ago. Total revenue for the quarter was $14.9 million
compared to $16.5 million a year ago (~10% revenue decrease).
"Third
quarter results represent substantial performance improvement over last
quarter, principally due to expense control," said M. M. Stuckey, Chairman
and CEO, "but market growth has not yet resumed. Looking forward, we are
encouraged by the market's early reaction to our new B2B, e-commerce Customer
Center, a customer-facing Internet portal fully integrated with Fourth
Shift's ERP backbone system. This Customer Center should be attractive
to both our customer base as well as new prospects."
Market
Impact
The CEO's terse statement reveals that the company is in a survival mode.
The Y2K-caused malaise does not seem to be letting up any time soon. The
improvement over the last quarter is merely attributable to a well-exercised
rigid cost curbing exercise; the picture becomes more depressing when
the comparison is made to a year ago. The license revenue declined a hefty
24%, while the service and support revenue dropped 5% (See Figure 1).
However, while it is unnerving that the revenue pipeline seems to be drying
up, the company has been managing to curb cash burning much better than
most of its peers. Furthermore, it continues to deliver attractive, innovative
products for its target market.
Figure
1.
We
previously expressed our views regarding Fourth Shift's new product strategy
called Complete Care and its new website BenchmarkReport.com - a portal
where manufacturing companies can benchmark themselves against comparable
companies contained in an online database of more than 150,000 firms -
that is co-sponsored by Grant Thornton, a leading accounting and management
consulting firm (for more information, see Is
Fourth Shift Succeeding in Providing 'Complete Customer Care'?).
The
company recently released two more attractive offerings:
- Your
Customer Center, a web-based order entry and tracking system that is
integrated with the Fourth Shift Complete Care suite of ERP applications
(ERP).
- A remote,
web-based training initiative.
Both initiatives
should provide inexpensive benefits to cost-weary smaller manufacturing
enterprises.
However,
the company continues to rely primarily on its strong direct sales force,
which we consider a cost ineffective sales approach within the SME market
segment. Fourth Shift has yet to demonstrate substantial progress in developing
an indirect channel to supplement its strong direct sales force. Without
it, we believe the company's growth will be insufficient and it will remain
marginally profitable.
User
Recommendations
The time has come for Tier 2 and Tier 3 vendors to feel the Y2K-caused
pinch, while their bigger brethren seem to have gotten past it. We believe
that the smaller vendors are now in for a rough time as they continue
to expand their products, refine their marketing message and defend their
turf from each other and from ever more intruding bigger vendors, while
coping with much scarcer resources. A big shakeout among the mid-market
vendors should be expected within the next 6-12 months. It is unclear
how many vendors will survive the shrinking market intact and avoid either
bankruptcy or consolidation. Fourth Shift may well be one of those that
survive the shakeout. Moreover, the depth, breadth and innovativeness
of its offerings to the SME market are attractive at first sight and deserve
due attention.
More comprehensive recommendations for both current and potential Fourth
Shift users can be found in Fourth
Shift Corporation: Working Overtime To Provide Complete Customer Care.