Event
Summary
On February 5, Ross Systems, Inc. (NASDAQ: ROSS), a provider of
ERP and e-business solutions for mid-market process manufacturers, reported
the signing of a definitive sale agreement for certain assets related
to its Human Resource and Payroll product line to NOW SOLUTIONS,
LLC, a private company. Ross at the same time executed a distribution
agreement with NOW to continue to sell the product under license from
NOW as a complement to its enterprise systems for process manufacturing
companies. The gross asset sale price of $6.1 million excludes incentives.
After fees and expenses the company expects the transaction to generate
a non-recurring gain on the sale of approximately $3.7 million before
incentives.
"This
transaction is a win/win. Ross will utilize the cash to strengthen its
balance sheet, while at the same time continuing to provide the product
to its targeted market of process manufacturers, and NOW will take the
highly regarded product to a broader target market." said Pat Tinley,
Ross CEO. "We believe that the sale of this non strategic asset will permit
Ross to focus on its core competencies and accelerate our growth of market
share in the process manufacturing sector."
On
January 25, Ross Systems reported results for its second quarter ended
December 31, 2000. The net profit for the quarter was $0.2 million, compared
to a net loss of $1.1 million per share in the same quarter of the prior
year, and a loss of $4.2 million in the previous quarter (See Figure 1).
Revenues in the quarter were $12.6 million, down 42% from $21.8 million
in the same quarter of the prior year. But operating cash flow during
the quarter was positive and continued to improve from the previous quarter.
Lower license revenues (down 62%) also resulted in reduced consulting
demand for new installations (down 36%). Operating expenses for the quarter
however continued to improve and declined by 46% from the same quarter
of the prior year.
Figure
1.
The
company also continued its strategy of increasing market penetration in
the process-manufacturing segment, where it believes its product suite
is highly regarded. The company will continue with a direct sales organization
in North America and Western Europe but is leveraging its indirect distribution
channels in Eastern Europe, Latin America, and Asia to maximize its profitability
while maintaining a productive sales presence in markets where a direct
presence is not cost effective. During the quarter, the company signed
new customer agreements in Poland, Mexico, Russia, and Japan.
In
the prior quarter the company announced a partnership with Integris
US to provide IT outsourcing and ASP software solutions called
"Ross eSourcing". This new offering will provide Ross' customers
a hosted, subscription-based, alternative for their enterprise software
solutions. The company also continues to expand its eBusiness solutions
and during the quarter signed a number of new contracts. In Europe, the
eBusiness practice had its largest growth quarter to date.
"We
are pleased that our actions of the last several quarters have resulted
in a return to profitability ahead of our expectations,'' said Pat Tinley.
"As we predicted last quarter, the reduced operational costs combined
with our improving market momentum will provide for balanced growth and
more consistent profitability going forward. The management team believes
that completed expense reduction actions, combined with programs designed
to achieve both technology-based and process-based productivity improvements,
will permit the company to continue to accelerate its rate of profitability."
Market
Impact
Although
management's actions of pulling out all the stops are praiseworthy and
have produced possibly miraculous results, the company is still cry far
from being out of woods. Still, the company remains in the race for a
piece of the prosperous process manufacturing market. We applaud the company's
decision to divest its payroll and HR products for the healthcare and
public sector market segments. These products, which have proven to be
significantly less profitable than Ross' process manufacturing product
line, have long been diverting the company's resources and focus. The
benefit of divestiture is twofold: 1) the company will focus on its core
competencies in process manufacturing, and 2) the projected cash infusion
will come in handy for completion of the R&D mission the company embarked
on two years ago (for more information, see Ross
Systems, Inc.: In Process of Renaissance).
While
the company's steadily declining revenue trend ruthlessly continues (See
Figure 1), it may be mitigated in the future by Ross' recent profitable
quarterly performance. While Ross offers strong functionality for the
process manufacturing mid-market segment, with a sharp vertical focus
and good multi-national capabilities, it has all but lost visibility in
the high-end of the market owing to its protracted poor financial performance
(in contrast to the very good performance of its main competitor SCT
Corporation, see SCT
Corporation: The Last Viable Process Manufacturing Vendor Standing?)
as well as to scalability caveats caused by its recent commitment to only
Microsoft technology.
Given
its low-end market niche visibility and the likely focus, Ross' move to
better leverage its indirect channel is wise, and we recommend it consider
utilizing that model in North America and Europe too. Look for the global
process manufacturing market to be a fierce battlefield. As we became
aware of SCT's aggressive campaign to increase its international presence,
Infinum Software, another tacit vendor, with a viable product
for some process manufacturing industries (for more information, see Infinium
Software Inc.: Having All the Right Cards?), also notified us about
its intentions to maintain much higher profile in the future. To that
end, Ross should also swiftly and vigorously articulate its CRM and digital
marketplace strategy. As stated earlier, its ASP strategy in the US has
been improved by its partnership with Integris to provide Ross eSourcing.
While
Ross has a new suite of e-business products, a large customer base, and
a global organization with solid experience in the process manufacturing
market, Ross has to feel testy about its future. Ross could benefit from
focusing on the process market because it is one of the few vendors with
strong products to offer. For more information on the status of the process
market see Process
ERP Market Loses PRISM and Protean.
User
Recommendations
While Ross Systems' financial situation has significantly deteriorated
during the last two years, the latest moves indicate that the company
should not be written off. It still has a strong functional fit for a
number of process manufacturing industries. Users are advised to follow
the company's new product introductions and keep a close eye on its future
performance, though.
Also
important will be to watch how well it maintains its direct sales and
indirect channel, how well it targets the right e-business issues for
mid-market process manufacturing enterprises and demonstrates the touted
benefits to prospects or customers in order to increase the new licenses
growth.
More
comprehensive recommendations for both current and potential Ross' users
can be found in Ross
Systems, Inc.: In Process of Renaissance.