Event
Summary
On January 24, Frontstep, Inc. (NASDAQ: FSTP), a leading provider
of business systems for mid-sized distributors and manufacturers, announced
financial results for the second quarter and six months ended December
31, 2000. Revenue from new license fees was $17.2 million, up 11% from
the same quarter last year. Total revenue was $34.1 million, up 22% from
the Q1 2001. However, compared to the same quarter last year, total revenue
was essentially flat on lower service revenue. As expected, the company
reported a loss for the quarter. The net loss was $957,000, compared to
net income of $288,000, for the same quarter last year (See Figure 1).
Figure
1.
"New
license revenue is one of the best indicators of the strength of our business,"
said Stephen A. Sasser, president and chief executive officer of Frontstep.
"New license revenue rose sharply in the second quarter, indicating that
our investments in new products and channels are paying off. The growth
in new license revenue is even more remarkable - up 20 percent from last
year's second quarter and up 45 percent from this year's first quarter
- when adjusted for divested products and fluctuations in currency exchange
rates. Service revenue is expected to rebound in the second half as we
implement new orders. Our progress with new license revenue, combined
with the associated growth in service revenue, is expected to result in
an improving revenue picture moving forward."
"We
significantly reduced our loss in the second quarter as planned, while
continuing to invest in product and channel development. We are on track
to report an even smaller loss in the third quarter and return to profitability
in the fourth quarter ending in June," continued Sasser. "This was an
exciting quarter in terms of new customers and business partners. We won
more new customer orders this quarter than in any of the previous six
quarters. We also signed on six new Frontstep partners. And it was the
first quarter under our new name - Frontstep. We now offer collaborative,
network-centric solutions to allow companies to streamline and automate
their business processes, including - most notably - processes that involve
customers, sales and channel partners, and suppliers. Our customers are
looking for ways to leverage information technology to improve their competitive
profile, and we are delivering the solutions and expertise to allow them
to do precisely that."
Market
Impact
Frontstep
seems to be on the road to recovery. This has been a crunching time for
smaller applications vendors and Frontstep (formerly Symix Systems)
has had its share of difficulties. 2000 was undeniably the year of drastic
business model change for the company. The name change was more than mere
a name change - it reflected the company's shift of focus from being a
leading mid-market ERP vendor to fully leveraging the Internet in the
suite of applications it provides to manufacturers, distributors and trading
exchanges.
The
company has also revised the channel, delivery methods and pricing strategies
in order to improve traction of its entire product portfolio. Through
its division, the brightwhite services group, Frontstep will provide the
e-business design and deployment services as required by customers. Having
a combined product mix will allow Frontstep to provide its target market
with an e-business strategy and the applications to embody it. Also, the
company has made substantial progress in developing an indirect channel
to supplement its strong direct sales force, as mentioned in the above
PR. Without it, we believe the company's growth would be insufficient.
This is particularly true in light of Tier 1 vendors learning the importance
of resellers in the lower end of the market (for more information, see
SAP
Claims Big Gains In The Low-End Battleground, and PeopleSoft
Joins The Hunt For SMEs).
We
believe the company has articulated an e-commerce vision that should have
an appeal to its mid-market users. Frontstep is offering its core transaction
back-office systems, the Symix Systems ERP applications (SyteLine, SyteCentre,
and SyteDistribution), then customer relationship management (CRM) functional
modules purchased from Profit Solutions (for more information,
see Symix
Expands Its Product Offering While Remaining Profitable), and supply
chain functionality from its much older purchase of Pritsker and
DAI. Frontstep is also delivering its Active Link backbone to provide
end-users with the ability to connect suppliers and customers to its core
transaction system.
While
Frontstep has been promoting the concept of an integrated solution, including
both ERP and e-business components, the company is also pursuing stand-alone
sales of its e-business offerings, both to manufacturing companies using
a different back-end system, and (to a lesser degree) to organizations
outside of the manufacturing industry. The openness and interconnectivity
are among the most important factors of competitiveness within the enterprise
applications market nowadays. The broad scope and flexibility of its product
offering as well as the size of the existing Symix ERP customer base should
provide Frontstep with recurring revenue and possible profitability during
the impending mid-market shakeout. The company had no choice but to extend
its traction in the crowded mid-market ERP market segment and to fill
the gaps and/or diversify its product portfolio.
While
Frontstep had initially taken serious knocks as manifested through its
recent poor financial performance, its 'bite the bullet' strategy seems
to be paying off, as seen in increased license revenue. Frontstep has
been figuring out how to facilitate adoption of e-business by the manufacturing
and distributing industry. Manufacturers and distributors have traditionally
not been early technology adopters, although they should benefit from
e-business and front office functionality. Mid-market companies increasingly
have been looking for a single source that can cover their core back office
system and extend the existing applications to both customers and suppliers.
This would maximize their investment and reduce the complexities of integrating
disparate applications. Frontstep seems to have positioned itself well
as it already possesses most of the required components.
Nevertheless,
the company still faces challenges. Its recent name change to Frontstep
will require a strong marketing initiative to inform potential and existing
clients about the company. Furthermore, its development initiatives have
all but dried up its cash reserves; that will present a serious constraint
to any unfinished work of integration of the newly released e-business
applications with a slew of its traditional back-office products, which
is inevitable if it wishes to mine its large customer base.
User
Recommendations
While it is unclear how many smaller vendors will survive the shrinking
and more crowded mid-market intact, potential and current Frontstep users
should not be overly anxious about the company's viability and the leading
position within its target market. The company has broadened its product
lines and seems to have responded to recent market trends. More important
will be how well it will manage the name change and brand recognition,
how well it will target the right e-business issues for the manufacturing
and distribution mid-market and demonstrate benefits to the prospect or
customer, and how it can continue improving its momentum.
More
comprehensive recommendations for both current and potential Frontstep
(Symix) users can be found in Symix
Systems Front-Steps Into Greener e-Commerce Pastures.