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.