Mid-market ERP vendor Epicor Software Corp. closed the books on fiscal 2005 with a good news, bad news scenario. Fourth quarter net earnings rose 7% to $10.6 million as sales jumped 15% to $82.6 million; however, the Irvine, CA company revealed that it is conducting an internal audit of its software licensing practices, which means its financial results are considered "preliminary."
Epicor said the audit is focused on the way it allocated revenue between software licenses and maintenance fees for the last three years. Although the company said the review isn't expected to unearth accounting irregularities, the revelation had some financial analysts scratching their heads.
In a research note distributed Wednesday (February 1) by SG Cowen & Co. LLC, the equity research firm concluded that Epicor's "fundamentals are solid [but] management's on shaky ground."
"An accounting review is never good news," the report stated. "Despite the company's assertion that there are no accounting improprieties, we don't expect the stock to trade higher until the review is closed and the company can offer credible 1Q guidance."
Epicor's stock closed Wednesday at $11.80, down $1.50 for the day, on heavy trading. But by late Friday the stock rebounded to $12.20 a share, still down significantly from its 52-week high of $16.58.
Despite Wall Street's concern, Epicor executives were forthright about the internal review. "Software revenue recognition in accounting is complex and subject to judgment and changes in the business," said company CFO Michael Piraino, during a conference call with financial analysts to discuss the fourth quarter results. "All of those things are being considered in the context of the review ... we are taking a look at how the company determines fair value for maintenance agreements."
Piraino said that the review won't impact current cash flow or total reported revenues. It also won't affect some large contracts -- including a deal worth over $1 million -- or a slew of smaller-scale contracts won during the review timeframe.
If the results hold up, fiscal 2005, ended December 31, was indeed a strong year for the company. Net income more than doubled to $54.2 million, while revenues grew 27% to $291.1 million from calendar 2004. Top-line results were driven by healthy increases in licensing revenues, as well as consulting and maintenance fees, the company said.
According to George Klaus, Epicor's chairman and CEO, the company added about 200 customer accounts as a result of international expansion efforts, and internal headcount increases are underway to support that effort. Last year, for example, 72 people were added to the company's consulting arm, Klaus told financial analysts.
But the year's biggest development, according to Klaus, was its acquisition of CRS Retail Systems, which added merchandising and retail point-of-sale software to Epicor's existing portfolio of ERP, CRM, and SCM applications. The CRS acquisition was completed in mid-December, so it had little impact on the quarter's financial results.
"What's unique about Epicor moving into this space is that they had no footprint in retail prior to this acquisition," said Rob Garf, research director of retail at AMR Research. "If you look at others that have made frenzied acquisitions [like] SAP and Oracle, at least they had some footprint in retail."
The frenzy to get into this space is a result of retailers' belated adoption of packaged applications after years of relying on best-of-breed and customized solutions, Garf said in an interview with Managing Automation. Epicor should benefit from the industry's embrace of end-to-end packaged suites, he noted.
To that end, Epicor projected a robust calendar 2006. The company said it expects full-year revenues to be in the range of $380 million to $385 million, including about $70 million in expected revenue from the CRS business.