Event
Summary
As published in the company's press release from June 27, Great Plains
Software, Inc., a leading mid-market provider of back-office and e-business
solutions, announced financial results for the fiscal quarter and fiscal
year ended May 31, 2000. Great Plains' fourth quarter revenues increased
48% over the same period last fiscal year. Revenues for the fourth quarter
of fiscal 2000 were $59.6 million, a record level for the company, compared
to $40.1 million for the fourth quarter of fiscal 1999 (See Figure 1).
Net income and diluted earnings per share for the fourth fiscal quarter,
excluding the effect of amortization of acquired intangibles, were $1.6
million and 9 cents per share, respectively, compared to $4.6 million
and 29 cents per share, respectively, for the fourth quarter of fiscal
1999.
Figure
1.
Revenues
for the fiscal year ended May 31, 2000, increased 44% to $194.9 million
compared to $134.9 million for the fiscal year ended May 31, 1999 (See
Figure 2). Operating income for fiscal 2000, excluding the effect of amortization
of acquired intangibles was $16.7 million compared to $18.8 million in
fiscal 1999. Net income and diluted earnings per share for fiscal 2000,
excluding the effect of amortization of acquired intangibles, were $13.3
million and 80 cents per share, respectively, compared to $13.4 million
and 90 cents per share, respectively, for fiscal 1999.
Figure
2.
Including
the effect of amortization of acquired intangibles resulted in a net loss
of $2.6 million and a diluted loss per share of 15 cents for the fourth
fiscal quarter ended May 31, 2000, compared to net income and diluted
earnings per share of $4.4 million and 28 cents per share, respectively,
for the same period last fiscal year. Net income and diluted earnings
per share for the fiscal year ended May 31, 2000, including the effect
of amortization of acquired intangibles, were $5.4 million and 32 cents
per share, respectively, compared to net income and diluted earnings per
share of $12.8 million and 86 cents per share, respectively, for the same
period last fiscal year.
During
the quarter Great Plains made significant investments in building its
Customer Relationship Management (eCRM) business and increasing its resources
focused on e-business solutions. Going forward, Great Plains claims it
will continue to make investments across e-business and eCRM while driving
additional profitability from its back office business through leveraging
synergies across recent acquisitions, moving more of its business processes
on-line and through a restructuring process.
Great
Plains plans to realize savings from, among other things, greater use
of its e-support solution for customers and partners, greater leverage
of marketing, research and development, and administrative investments
across its business units, wider use of computer-based training alternatives
for partners, and reducing its workforce by approximately seven percent.
The company expects to report a non-recurring charge for the quarter ending
August 31, 2000, between $3.0 and $5.0 million to cover costs related
to the restructuring implemented during the quarter.
The
following are the major highlights that were announced or occurred during
Great Plains' fourth fiscal quarter:
- On June
9th, 2000, Great Plains acquired Solomon Software, its long time direct
competitor. With the acquisition finalized, Great Plains now has more
than 130,000 customers, 2,000 team members and a worldwide network of
2,000 channel partners.
- Great
Plains acquired FRx Software Corporation, possibly the standard for
mid-market financial reporting. As a result of the merger, Great Plains
and FRx plan to expand their Web-centric analytic applications to include
additional e-reporting and business intelligence applications.
- Great
Plains selected webMethods, Inc. to provide integration capabilities
that will allow business documents to be seamlessly exchanged over the
Internet between companies within Great Plains' interconnected business
community. In addition to selecting webMethods to provide transaction
integration capabilities, Great Plains has partnered with AppNet to
provide web development expertise.
- More
than 200 partners were authorized for Great Plains Siebel Front Office
bringing the total to more than 450 authorized reselling partners.
Market
Impact
Over the last 2 years, Great Plains has made a great noise and established
itself as a small-to-medium enterprises (SME) market leader while consistently
remaining profitable (See Figures 1 & 2). Earlier in its fiscal 2000,
Great Plains took full advantage of its favorable market capitalization
to extend both its foothold in the SME ERP market segment and fill the
gaps within its product offerings and geographical coverage.
We
believe that the company struck a good balance in extending its offering
through both acquisition and partnering with best-of-breed vendors. It
now derives almost 20% of revenue outside of the US market and has a potential
of reaching $300 million in revenues in fiscal 2001. Further, it has been
impressive in selecting partners and integrating disparate products. We
are not aware of any other vendor offering such tightly integrated out-of-box
Siebel functionality with its back-office applications (except for Solomon
IV, which Siebel integration will only happen in the future).
Nevertheless,
we believe that the company will have to take a deep breath, conduct a
thorough soul searching and carefully devise its future moves. Rampant
additional acquisitions may lead to an unmanageable product portfolio
and wear thin corporate financial and human resources, independently of
the current crippled market valuation and reduced acquisition leverage.
Exorbitant costs of training its staff in Siebel applications as well
as for in-house major product enhancements and cross trainings are major
contributors to significantly lower bottom line in Q4, besides unavoidable
one-time acquisition charges.
While
there may be a reason for concern due to a tainted profitability track
and announced impending restructuring, there is no real cause for serious
users' concern. Great Plains continues to grow healthily, while heavily
investing in R&D and still remaining profitable, which is generally not
the case with its major competitors.
The
combination of Great Plains and Solomon Software has a potential of a
juggernaut within the SME market, with a formidable combination of customers
and channel partners. The acquisition brings the combined company to more
than 130,000 customers worldwide. The following factors should contribute
to the synergy of this merger: products technology compatibility (Microsoft-centric),
the companies' similar market segment focus and a similar service & support
business model (with 10%-15% of their affiliate partners already specializing
in distributing both products).
Great
Plains offers fully integrated front office/back office business applications
for the mid-market. Its flagship product, eEnterprise, provides integrated
modules for financial, distribution, enterprise reporting, manufacturing,
payroll, human resources, service management, electronic commerce, and
Internet self-service. Great Plains' Dynamics product provides similar
functionality for the lower-end of the market.
Additionally,
Great Plains offers a number of legacy products, like Great Plains Accounting
product as well as various industry solutions. Solomon, on the other hand,
offers a range of similar applications, also on a Microsoft-based architecture.
Solomon IV, its flagship product, contains over 50 modules for financials,
project management, manufacturing, systems management, distribution, e-Business,
and relationship management.
While
the merger has been completed impressively smoothly (with almost zero
attrition), the downside of it was that it did not expand combined product
functionality per se. Great Plains therefore had to internally develop
enhancements for its multi-site manufacturing and distribution functionality,
field service, and multi-national capabilities (support for 8 languages,
etc.) to name but a few. Its major release of eEnterprise, 6.0, is slated
for September and will feature the above-mentioned functionality. The
company has just announced the partnership with Logility in order to strengthen
its supply chain collaboration capabilities, which will bring another
products integration need.
Yet,
the greatest challenge for Great Plains and its affiliate channel will
be the management of dual flagship product lines. It will be difficult
to support existing customers and existing products, while juggling competitive
product lines.
Since
the product lines seem to remain separate for at least two more years,
it will add additional development costs, as well as provide a challenge
in explaining the position of the different products. The company will
have to revise its sales strategy of how to optimize the sales of two
product lines with very much overlapping functionality and avoid a likely
internal competition. Not to mention the need of showing 'one face' to
customers. One way to resolve this is by slating eEnterprise, Solomon
and Dynamics product lines for different market segments, either by company
size or vertical industries. Consequently, Great Plains can expect growing
pains in merging disparate product lines and training and possibly specializing
its large affiliate channel.
User
Recommendations
Existing Great Plains/Solomon customers should certainly consider the
new offering and carefully determine their needs and/or time framework
for a migration/update, bearing in mind problems typical with major product
releases.
As
for potential users, we generally recommend including Great Plains and
Solomon in a long list of an enterprise application selection to the lower-end
of the mid-market companies (with $2M-$250M in revenue), which are staunch
users of Microsoft technology and have significant financial accounting,
project management, distribution, and service requirements, while currently
not needing complex manufacturing functionality. Great Plains should be
included on any package selection short list within the SME market where
electronic business, distribution, services and accounting modules are
the main pillars of an enterprise application.
However,
since we expect growing pains in merging disparate product lines within
the current affiliate channel, potential clients should conduct a preliminary
research on industry expertise and reference sites of a regional Great
Plains affiliate service provider when the Great Plains/Solomon product
is selected. They should also familiarize themselves with products' strengths/weaknesses
within certain vertical industries. Great Plains/Solomon distributors
generally offer vertical solutions on an opportunity-by-opportunity basis
only.
As
for the newly added and/or announced functionality through partnerships,
users are advised to ask for firm assurances on the availability and future
upgrades timeframes, and more detailed scope of combined product functionality.