Frontstep Ups The .NET Ante

Frontstep Ups The .NET Ante
P.J. Jakovljevic - September 23, 2002

Event Summary

At the end of July, Frontstep, Inc. (NASDAQ: FSTP), a prominent global mid-market provider of business applications and services for discrete, to-order' manufacturers, announced SyteLine 7, its extended ERP suite architected on the Microsoft .NET platform. With the launch of SyteLine 7, Frontstep is delivering a global, integrated enterprise suite - including Extended ERP, Customer Relationship Management (CRM), and Supply Chain Management (SCM) - on a single technology platform. Current versions of SyteLine, Frontstep's flagship offering, are in use at thousands of manufacturing locations worldwide.

SyteLine 7 represents a fundamental technology shift that takes advantage of the vision and potential capabilities of Microsoft .NET, particularly the SQL Server 2000 database, Exchange Server 2000, and XML Web services. Through leveraging solutions built on .NET, Frontstep believes manufacturers are assured that today's technology investments will provide longevity, reliability and ease of maintenance with the greatest benefit at the lowest total cost.

In addition to the new architecture, Frontstep's SyteLine 7 includes key advances designed to help manufacturers address today's complex business requirements. Advancements have been made in the following areas: planning and scheduling, multi-site capabilities, business process automation, reporting, globalization, navigation and personalization. This latest release of Frontstep's flagship offering should thus help manufacturers meet the evolving requirements of their customers and compete successfully today and in the future.

SyteLine 7 is currently in final field-testing by select customers and is targeted for general availability in North America in September 2002. Frontstep will begin rolling out SyteLine 7 to international markets by year-end. Current versions of SyteLine will continue to be sold and supported. In addition, Frontstep has developed a program to upgrade customers to SyteLine 7 should they choose to do so.

Very detailed information about SyteLine 7 is contained in the ERP Evaluation Center at http://webtess2.technologyevaluation.com.

The prominent product release precedes the August 5 announcement, when Frontstep reported profitable financial results for the fourth fiscal quarter but still not for full fiscal year ended June 30, 2002. Total revenue for Q4 2002 was $22.7 million, an increase of 4% sequentially over the revenue of $21.8 million for Q3 2002, but still a 21% drop compared to $28.8 million revenue a year ago (See Figure 1). License revenue was $9.2 million, an increase of 23% sequentially over the $7.5 million reported in Q3 2002, but again, it was a 20% drop compared to $11.5 million revenue a year ago. Operating income in the fourth quarter was $1.0 million and net income was $487,000, as compared to an operating loss of $1.9 million and a net loss of $1.2 million reported for the previous quarter. For the same quarter in the prior fiscal year, the company reported an operating loss of $5.2 million and a net loss of $5.2 million. The prior year operating loss included a special charge of $3.7 million relating to restructuring of the Company.

Figure 1.

For fiscal 2002, total revenue was $92.8 million, a 21% drop compared to $117.1 million for fiscal 2001. More painfully, however, license revenue was $35.4 million, a 31% drop compared to $51.3 million in 2001. Still, the reported net loss for the current year was $3.3 million, significantly less compared to a net loss of $26.1 million for fiscal 2001 (See Figure 2). The prior year loss included restructuring charges of $6.4 million.

Figure 2.

The news of somewhat stabilized financial performance and revenue levels, and of improving cash flows, comes at the heels of other recent major events during the quarter. Frontstep signed 60 agreements with new customers in the quarter and completed the final phase of its previously announced $5.0 million Convertible Note transaction that makes available an additional $3.5 million to support working capital and operating needs (since the company already drew down the first $1.5 million in Q4 2002).

This is Part One of a two-part analysis of recent news from Frontstep. Part Two will cover Challenges and make User Recommendations.

Market Impact

While one should not jump too swiftly to any conclusion given pervasive pessimistic signals throughout the market, as to discern whether the company is in for a real turnaround, it appears nonetheless, that it is past the horror of the early 2000s (see Figure 1 & 2). More importantly, however, Frontstep seems to have finally solved a big piece of its long-nagging puzzle of developing a next generation product and of migrating its large and satisfied user base. The company has long been in a conundrum of concurrently enhancing its Progress Software-based flagship SyteLine product while developing a more technologically viable and amenable product to its target market. As Microsoft-centric technology and the .NET initiative have become mainstream in the applications mid-market, Frontsteps decision to focus solely on these has been prudent, given that, at the same time, Progress-based SyteLine faced a legacy status only several years after its delivery, making it less attractive to recent new prospects.

Also, after stellar late 1990s in which Frontstep, a traditionally strong player in the mid-market ERP space, achieved impressive growth, resolved some functionality weaknesses (e.g., international capabilities of its financial modules) in its own product and successfully partnered with and/or acquired vendors that offered complementary functionality, the company has embarked on a strategic technology transition from Progress to the Microsoft .NET platform while feeling the malaise of the shrinking market and economic depression. Further, the company has made efforts to also keep abreast of the enterprise applications market trends by providing both front- and back-office solutions, which, during the time of shrinking revenues, has been excruciatingly painful. Still, it was a worthwhile effort, as the company has delivered its entire product line, which includes ERP, CRM, and SCM, on a single technology platform. An indeed notable feat, given that many of its peers have mostly only recently embarked on this technology transition path, or, in a better case, have managed to deliver a module or so on the .NET platform, while it will take some significant time and resources to have their entire product suites rewritten.

Still, although the technology rewrite is important, it is only that the combination with new functional capabilities in areas like advanced planning and scheduling, flexible multi-site deployment, bills of material (BOM) workbench (i.e., material and routing information combined in a visual manner), operation sequencing, and flexible business process management (BPM) should position Frontstep well going forward.

While on the technology front one can imply Frontstep is conveniently piggybacking on Microsoft's push of its technology into mid-market enterprises, Frontstep nevertheless remains a visionary vendor in terms of functional requirements of the mid-market, by providing extended ERP and significant web-based supply chain and front-office functionality in a modular manner, also with a strong international presence. It has earned a reputation for being innovative in all of ERP, e-collaboration, and supply chain terms going back to its much-publicized 'customer-centric' nature of its product lines.

Key Frontstep functionality is aimed at synchronizing customer orders with inventory and capacity, with an overall visibility throughout supply networks. This may significantly lower operational costs and improve on-time deliveries by automating inventory sourcing and manufacturing planning with web-based demand and supply management across multi-site operations and suppliers. Frontstep is offering its core transaction back-office systems (SyteLine and, selectively SyteCentre and SyteDistribution), then front-office functional modules purchased from Profit Solutions in 2000, and supply chain functionality from its much older purchase of Pritsker and Distribution Architects International (DAI). In 1997, Symix also bought field service specialist Visual Applications Software. Frontstep is also delivering its Frontstep Active Link backbone to provide end-users with the ability to connect suppliers and customers to its core transaction system, although the product might be overshadowed by Microsoft BizTalk Server over time.

Frontstep Strategy

With its recently enhanced functionality as another stab at natively delivering solid SCM and CRM modules (see Mid-Market ERP Vendors Doing CRM & SCM In A DIY Fashion), Frontstep is positioning itself as primary business systems provider that offers comprehensive enterprise solutions with integrated CRM and SCM capabilities, on top of a strong manufacturing ERP capability and experience rather than as a mere ERP vendor. Its focus has long not been entirely on the traditional back-office functionality although that aspect of the offering has not been forgotten.

In that regard, the Syteline suite (featuring ERP, CRM and SCM) for mid-sized manufacturers, by and large offers support for customer service, order processing, inventory control and purchasing, manufacturing production management, production planning and scheduling, cost management, project control and financials, sophisticated product configuration for sales order management and manufacturing, advanced planning & scheduling (APS), business intelligence, workflow automation, with business process definition and execution, and advanced forms. Furthermore, Frontstep's Syteline ERP 7 ERP offers additional functionality such as an embedded APS engine into materials requirement planning (MRP), which enables order-by-order planning process rather than traditionally BOM-based MRP planning process, and much stronger inter-suite integration, user interface improvements (e.g., all screens are workflow enabled, browser enabled forms, filter' restricted access on a field level, etc.) alleviating thereby some functional shortcomings of the past.

Extended ERP Products

Smaller manufacturers and distributors have traditionally been pragmatic rather than early adopters. Mid-market companies have increasingly been looking for a single source for their core back office system needs and/or to extend the existing applications to both customers and suppliers, in order to maximize their investment and reduce the complexities of integrating disparate applications. To that end, the following extended-ERP broad offering from Frontstep, which is mostly provided natively, or in a tight OEM fashion from long-term partnerships, might fit the description:

• SyteLine ERP
  
  
• SyteLine APS
  
  
• SyteLine Business Intelligence (partnership with Cognos)
  
  
• SyteLine Business Process Management (partnership with Cobre)
  
  
• SyteLine Workflow Automation (partnership with former Keyfile, now Lexign)
  
  
• SyteLine Configuration
  
  
• SyteLine Forms (partnership with former JetForms, now Adobe)
  
  
• SyteLine Data Collection
  
  
• SyteLine EDI (using Sterling Commerce translator/information broker)

Apart from this, the company will bet its future on its CustomerSynchronized solutions initiative, with view to achieve dominance in the make-to-order (MTO) demand-driven manufacturing and distribution sectors. Modules include Frontstep Intelligent Sourcer, Frontstep Point Promiser (the promising engine for available-to-promise (ATP) collaboration across trading partners), Frontstep Capacity Promiser (a constraint-based planning tool for cross supply chain capacity promising) and Frontstep APS, which extends to cascading supply chain synchronization. All the above components incorporate Web services technology to simplify integration and information exchanges with other systems. While Frontstep has been promoting the concept of an integrated solution, including both ERP and collaborative e-Business components, the company might selectively pursue stand-alone sales of its above collaborative SCM components in a back-office agnostic manner.

In addition to strong extended-ERP functionality, at the heart of the vendor's business model is Internet messaging and XML-based technology, and professional services that enable it to connect to, and provide e-business solutions for, many back-office systems (e.g., via Frontstep Active Link for application integration, business process automation and collaboration). The strategy may seem innovative in a market where customers may view ERP as a hackneyed news, although still of a paramount importance as a pillar of all collaborative applications. Frontstep could therefore attract new prospects outside its large customer base, particularly enterprises with other competitive back-office solutions in place, which are open-mindedly looking for easily deployable Internet-based solutions.

Frontstep CRM

That might hold true also for Frontstep CRM, a manufacturing-focused CRM solution, which is a combination of traditional prospect management, product catalogs, product configuration, quotation creation, inventory availability, order management, and support—all done over the Web—and fully integrated with SyteLine ERP product. The above basic CRM features are what the targeted customers likely need at this stage. An affordable, natively integrated application with reduced implementation risk and innate integration to Microsoft Outlook and Microsoft Excel will likely strike a chord with the vendors' existing customers.

The integration factor, as well as the vendor's extensive experience in the manufacturing sector, may provide it a competitive edge against both larger ERP vendors and CRM specialists with more general-purpose products. Lastly, the company has made attempts to develop an indirect channel to supplement its strong direct sales force in order to better approach the lower-end of its target market. Frontstep has had a sizable indirect channel since the mid 80's that currently contributes around 25% of sales revenues. It targets enterprises with annual revenues up to $50 million primarily via resellers/VARs, while the larger enterprises with up to $1 billion per site/division are handled by its direct sales force.

This concludes Part One of a two-part analysis of recent Frontstep announcements. Part Two will discuss the Challenges Frontstep faces and make User Recommendations.