Event
Summary
On November 3, the Board of Directors of Geac Computer Corporation Limited
(TSE: GAC), a Canadian supplier of enterprise management software, announced
the appointment of. Charles S. Jones as non-executive Chairman of the
Board and. John E. Caldwell as interim President and Chief Executive Officer.
These appointments were made following the decision of William Nelson
to step down as Chairman and interim Chief Executive Officer of the Company
for personal reasons, only one month after his appointment on October
2. Mr. Nelson remains a director of Geac.
The
announcement comes only a few weeks after Geac's "profit improvement initiative"
announcement. On October 16, Geac announced that it had taken steps to
improve future profitability through a comprehensive restructuring program.
The Company expects this initiative will reduce annual costs by approximately
$60 million, commencing in the third quarter of the current fiscal year.
Staff reductions, achieved through a combination of layoffs and attrition,
as well as infrastructure cutbacks, will result in a one-time pretax charge
of up to $20 million, the majority of which is expected to be taken in
the second quarter. In addition, a pre-tax provision of approximately
$8 million will be taken in the second quarter for certain claims and
legal matters related to contract disputes involving a subsidiary of the
former JBA Holdings plc.
William
Nelson, Chairman and Chief Executive Officer of Geac at the time, said,
"This restructuring initiative was necessary to enhance our competitive
position and to restore ongoing profitability. We are experiencing lengthening
sales cycles in certain markets, as customers defer software acquisition
and related integration and implementation services. The cost reductions
coupled with the anticipated seasonal revenue increases should result
in improved operating profits and cash flow for the second half of the
fiscal year. We also will increase support for our e-commerce businesses.
Specifically, we will add resources to our Pyramaz division and e-purchase
business of up to $4 million annually to capitalize on its growing pipeline
of opportunities. In addition, Interealty.com, AMSI (our property management
business) and other e-focused divisions will be maintained at current
staffing levels to support ongoing business and product development initiatives."
On
September 11, Geac announced results for Q1 2001, which ended July 31,
2000. The revenues for the first quarter from continuing operations were
$212.5 million compared to $192.7 million for the same period last year.
(Revenues in both periods exclude sales made by the Banking Systems business
that was sold on July 13, 2000.) Excluding the gain on the sale of discontinued
operations noted above, but including the increase in amortization, the
fully diluted loss per share from continuing operations was $0.70 during
the quarter compared to earnings per share of $0.56 in the first quarter
of the prior year (See Figure 1). However, as a result of the sale of
the Banking Systems business Geac's balance sheet was significantly strengthened
compared to the year-end at April 30, 2000. Bank indebtedness has also
been substantially reduced.
Figure
1.
Douglas
Bergeron, President and CEO at the time commented: "Our revenues in the
quarter were significantly affected by the industry-wide softness in license
sales and professional services consulting in addition to the normal seasonal
slowdown in our now substantial European business. However, our customer
base remains largely intact. We remain confident that revenue will improve
during the second half of the year. We have taken steps during the quarter
to reduce our costs going forward and are continuing our efforts to manage
our costs to reflect properly our anticipated level of business activity."
Market
Impact
While one could have long sensed some forthcoming turbulent times at Geac,
not many expected the speed and the magnitude of the events. It is a no-brainer
that the company has irretrievably missed the opportunity to seriously
compete with other ERP giants like SAP, Oracle, PeopleSoft and J.D. Edwards.
Although Geac has proven itself an adept and disciplined acquirer of application
software businesses in the past, its rampant acquisition strategy in the
face of the overall weakness of the ERP market has resulted in insufficient
growth and dismal results. Consequently, the investors' diminished confidence
has crippled its market valuation. The loss in the last quarter and the
resignation of Douglas Bergeron have been the final straws in this basket
of negative events. Moreover, there are some indications that the company
has recently received a few takeover inquiries.
We
only partly agree with management that Geac's difficulties coincided with
the slump of the ERP market. However, the greater part of Geac's difficulties
lies in poorly executed acquisition of struggling UK-based ERP vendor
JBA in 1999. The acquisition has unfortunately stopped short of producing
the great synergy it seemed to have offered initially. In spite of the
fact that Geac, being a large software company with a track record for
profitability and growth, has significantly enhanced System 21 by embedding
acquired CRM and SCE products for the apparel industry, Geac has been
unable to be successful in marketing its System 21 business. The revenue
from the product in the last year was only $67 million compared to the
level attained in 1998, when JBA reported $487 million in sales.
Another
problem for Geac has been its preference for acquiring new products rather
than investing generously in in-house product development. The strategy
has apparently worked in a number of esoteric industries with a low penetration
of competitors like hotels and publishing. It is however, a completely
different ball game in the global enterprise applications market in the
mainstream industries. Contemporary enterprise applications must be able
to support dynamic business requirements, which are nowadays directly
related to customers' e-business strategies. Therefore, every vendor is
compelled to add much more value to its products and services portfolio
to attract and retain customers, rather than mainly investing in the existing
disparate, possibly outdated, core products and hoping for endless support
revenues. Sticking to this thrifty strategy instead of taking decisive
action to breathe fresh air into its arsenal of products, based on diverse
technologies and serving different, fragmented markets (e.g., System 21,
SmartStream, E- and M-Series mainframe packages, etc.) appears to have
backfired on Geac and put it in the back seat of the enterprise applications
market.
User
Recommendations
One thing must be clear - Geac is cry far from being in a dire situation
like Baan and SSA were a year ago. Its balance sheet, although somewhat
deteriorated, is still very sound. However, we believe that Geac will
not be regarded as an enterprise applications leader in the new economy
as long as it remains perceived only as a company that acquires, fixes,
and often divests other under performing software products. The company
will have to become a true software-developing vendor, not simply a software
collector and/or dealer.
The
"catch 22" for current and potential users is to discern Geac's corporate
strategy viability within the product line/industry in question. Users
will benefit from approaching Geac and informing themselves about what
the company plans for future service & support (or divestiture and/or
product stabilization?) of its individual products are and what would
the ramifications of migrating (or not) to its new product offering be.
Geac
customers should certainly consider the company's latest value proposition
within the above-mentioned product lines where it will supposedly continue
to invest, but avoid selecting it without looking at what the other vendors
have to offer. As for potential customers, we generally recommend including
Geac in a long list of an enterprise application selection to mid-market
and low end tier 1 companies (with $100M-$1B in revenue), within the following
industries: Library Systems; Construction Systems; Property Management
Systems; Hospitality Systems; Public Safety Systems; Publishing Systems;
Manufacturing & Distribution Systems; Real Estate Systems; Cash & Securities
Reconciliation Solutions.
We
also generally recommend including JBA System 21 in a long list of an
enterprise application selection to mid-market and low-end Tier 1 companies
(with $50M-$1B in revenue), within the following industries: Automotive
Components, Apparel & Footwear, Beverage, Food, and Electronics.
In
any case, ensure that you are feeling comfortable with Geac's declared
product strategy for your industry and keep a close eye on the future
developments.
Customers
are also advised to request the Company's written commitment to promised
functionality, general availability date, price, length of implementation,
and seamless future upgrades. Each component should be put through its
paces using a well-documented set of requirements, scripted scenarios
demonstrations and rigorous reference checking. If a complementary product
beyond core ERP (e.g., CRM, e-Commerce, SCM, etc.) is of a critical importance,
users should think carefully about the possible integration and/or product
discontinuation implications and may benefit from considering competitors'
value propositions too.