Event
Summary
On November 14, Ross Systems, Inc. (NASDAQ:ROSS), a provider
of ERP and e-business solutions for mid-market process manufacturers,
reported results for its first quarter ended September 30, 2000. Revenues
in the quarter were $14.2 million, down 39% from $23.3 million in the
same quarter of the prior year. Particularly bleak was a 60% license revenue
decline, to $2.4 million from $6 million a year ago. The net loss for
the quarter was $4.2 million, compared to a net profit of $0.3 million
in the same quarter of the prior year (See Figure 1). The loss for the
quarter included a charge of $0.8 million for non-recurring severance
costs.
Figure
1.
Lower
license revenues, which management attributes to a slowdown in new license
contracts, also resulted in lower consulting revenues and a slight decline
in maintenance revenues, despite continuing demand from existing customers
for add on products. A somewhat encouraging fact is that operating expenses
for the quarter were down 19% from the prior year.
"The
results are obviously very disappointing." said Pat Tinley, Ross' President
and CEO. "However, we are determined to take the necessary steps required
to return this business to profitability."
As
evidence of the company's determination for action, in mid September Ross
Systems announced a major restructuring program aimed at significantly
reducing the company's costs. The results of this program will be a reduction
of expenses in excess of $12 million on an annualized basis (for more
information, see Ross
Systems Ends Year On a Sour Note and Braces Itself For Survivor's Game)
The
company has made additional more decisive moves designed to return it
to profitability.
- As European
operations have been the major contributing factor to operating losses
over the past three years, the company has implemented a strategy to
move to an indirect distribution model in France and other smaller European
markets. Ross Systems believes that these new channels will minimize
its European operational exposure while maintaining a productive sales
presence.
- Ross
Systems will continue with a direct sales organization in North America.
The company believes this type of selling model allows it to leverage
the e-business opportunities in its installed base while selectively
focusing on new business opportunities in its core markets. "Ross will
focus its new business selling efforts where we have a differentiated
offering that provides a measurable improvement to our prospects' business"
said Peter Fausel, Ross' Senior Vice President, North American Sales
and Marketing. "Focusing on these markets will provide a more efficient
and profitable sales and consulting organization."
- In September
the company announced a partnership with Integris US to
provide IT outsourcing and ASP software solutions called "Ross
eSourcing". Ross eSourcing has been devised as a flexible outsourcing
service in which customers select a solution tailored to their technology
needs. This bold and possibly differentiating move will provide its
customers a hosted, subscription based, alternative for their enterprise
software solutions. There seems to have been a notable demand for this
type of solution as evidenced in recent contracts with Chemetals
Inc, LioChem, Elementis and Hussey Copper
Ltd.
The company
believes the reduced operational costs combined with future market momentum
will provide for balanced growth and more consistent profitability going
forward. Ross Systems believes that these actions, along with continued
technology-based productivity improvements, will move the company to profitability.
Market
Impact
'Doom,
gloom, and (not yet) despondency' aptly describes Ross' ongoing state
of affairs. While the company's steadily declining revenue trend inevitably
continues (See Figure 1) the outstanding R&D work in progress seems to
be winding down. The only remaining unresolved piece to place in the puzzle
would be more new license sales, which seems to be a tall order. Accomplishing
the much-needed transition from ERP to e-commerce has been an arduous
effort. Over the last 18 months, Ross has been delivering enhancements
to its traditional Renaissance ERP suite. Ross has re-architected
it to be Web-based (and, therefore, renamed it iRenaissance) and has released
the new e-business suite through its Resynt subsidiary. Part of
the suite was developed in house, while the supply chain planning capabilities
emerged from a partnership with Prescient Systems Inc.
The e-procurement and marketplace functionality came from an alliance
with Clarus Corporation.
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 the 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)
as well as to scalability caveats caused by its recent commitment to only
Microsoft's technology. Ross also offers financial and HR products for
the healthcare and public sector market segments, which have proven to
be significantly less profitable than its process manufacturing product
line, and have been further diluting the company's resources and focus.
Given
its market niche Ross' move to better leverage its indirect channel is
wise, and we recommend it consider utilizing that model in North America
too. The company has also been timid in articulating its CRM and digital
marketplace strategy. Its ASP strategy has been somewhat improved though,
with the above-mentioned announcement.
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, its future remains very uncertain. It may benefit, from recent
anxiety and confusion in Wonderware's customer base owing to its parent
Invensys' decision to merge the Wonderware (formerly Marcam) and Baan
product lines (for more information, see Process
ERP Market Loses PRISM and Protean). Failing to take advantage of
the opportunity would almost give SCT Corporation free rein within the
process manufacturing business software market.
User
Recommendations
While Ross Systems' financial situation has significantly deteriorated
during the last two years (down to mere $1 million cash and to below $10
million market value), 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. Also important will be to
watch how well it will maintain its direct sales and indirect channel,
how well it will target the right e-business issues for mid-market process
manufacturing enterprises and demonstrate the touted benefits to the prospect
or customer 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.