Financial developments in the mid-tier ERP space yesterday reveal a business that remains challenging to even the most established players, as an accelerating architecture refresh cycle and continuing market consolidation exert fiscal pressure across the sector.
In the early afternoon SSA Global reduced the number and price of shares in its initial public offering in a bid to capitalize on the resurgent capital markets for technology stocks and end a nearly 12-month-long bid to go public. Later in the day QAD Inc. reported fiscal first quarter results that were inline with recently downgraded guidance, but not up to snuff with the company's year-earlier performance.
In its revised initial public offering (IPO), Chicago-based SSA offered 9 million shares at $11 each. It had originally planned to sell 14.3 million shares at $13 to $15 each. To make the offering more palatable, the company eliminated a $100 million special dividend payment to its controlling stockholders, including private equity firms General Atlantic and Cerberus Capital Management, which even after the IPO will own over two-thirds of SSA's shares.
Removal of the dividend was necessary since SSA expects the offering to yield only $87.1 million in fresh capital, compared with the $181.2 million projected earlier. Proceeds from the offering will primarily be used to pay down debt to existing shareholders, according to the company's prospectus filed with the SEC. Only $5.9 million will be retained for general working capital purposes, according to the SEC filing.
Nevertheless, the offering will add to the company's cash and equivalents horde of $97 million (as of January 31), according to its prospectus. SSA estimated in the filing that revenues would reach between $177 and $180 million for the fiscal third quarter ended April 30, up from the $164.5 million posted in the year earlier period. Of that total, license fees were expected to account for between $50 million and $53 million of fiscal Q3 revenues, compared with $41.2 million in the like period of 2004.
For the nine months ended April 30, license fee revenues were estimated at between $142.4 million and $145.4 million; total revenues were expected to reach between $521.5 million and $524.5 million. License fees and total revenues for the nine-month period last year were $109.2 million and $462.2 million, respectively, the prospectus said.
"Now that they have raised money, they can position themselves as a solid alternative in the general ERP market to SAP and Oracle," noted Bob Parker, vice president at Manufacturing Insights, a unit of market researcher International Data Corp. He pointed to the SSA's devotion to IBM's Websphere and i-Series platform as critical in a mid-tier market that remains true blue due in part to the reliability and scalability of IBM's minicomputer architecture. SSA stands to gain residual benefits as IBM invests resources to remain the mid-tier's top dog. "With SAP emphasizing NetWeaver and IBM looking for a story to support Websphere, SSA Global is there to fill the need," he added.
To maximize its position SSA will need to put its fresh capital to good use. That means ratcheting up spending on marketing and product development to leverage the work already done to integrate the sundry ERP applications SSA has acquired over the last few years, Parker explained.
QAD, meanwhile, posted fiscal first quarter net earnings of $2.5 million on revenues of $56 million, which came in at the high end of guidance provided earlier this month. Originally, the company said it expected revenues of between $57 million and $60 million in the period.
Tax benefits aside, the earnings figure was down considerably from the $5.6 million profit the company posted in the like period last year, on revenues of $58.2 million. Fiscal Q1 earnings were negatively impacted by lower than expected license and services revenues and a one-time charge of $900,000 related to a data center closure, the company said. Fiscal Q1 2005 earnings benefited from a $1.3 million tax credit that was attributed to the reversal of a deferred tax asset valuation allowance, the company said.
For fiscal Q1, license revenue was $13.9 million, compared with the $14.5 million generated in the like period last year. Maintenance and other revenue was $28.6 million compared with $28.9 million reported in the comparable quarter last year. Services revenue was $13.5 million versus $14.8 million last year.
In a conference call with analysts, QAD CEO Karl Lopker said the Q1 results looked worse than they were because the company had "raised the bar" in its initial guidance, a situation many software vendors have recently confronted. He pointed to softness in Europe relative to the company's expectations, continuing struggles in the automotive sector -- a key market for QAD -- and a lack of trained sales representatives (which has since been remedied) as factors that contributed to the company's lackluster quarter.
On the plus side, he cited two large deals from undisclosed JD Edwards' customers as further indication of growth opportunities created by its new JD Edwards conversion program , as well as services backlog that should pay dividends in subsequent quarters once the work is delivered.
Both of the new customers are divisions of companies where other units also run QAD software. QAD seized on their hesitancy to migrate to Oracle's Fusion architecture, which will blend the best features of Oracle's and PeopleSoft's application architecture when it begins rolling out in 2007.
"They were looking to expand with JD Edwards and we went in and showed how they could profit from moving off JD Edwards, and helped with discounts and other arrangements," Lopker said. He characterized the JD Edwards pipeline as "good," and pointed to "five to ten" former JD Edwards employees the company has recently hired for its new Denver sales office that should help the conversion cause.
Like SSA, QAD could also benefit from a mid-market that is more loyal to IBM than it is to applications software vendors like JD Edwards, Manufacturing Insights' Parker said. "A lot of JD Edwards customers are running System 34/36 and AS 400s (iSeries predecessors) and are concerned that Oracle may [stop supporting] the platform," he noted.
Parker agreed that a soft European economy and strengthening dollar versus the Euro has hurt many software vendors like QAD this year. "We expect activity to pick up a bit [in Europe], and for QAD to benefit there and from its strong presence in Asia, where there is good growth opportunity," Parker said.
Asia is a particularly bright spot for the company given its strong roster of customers -- especially automotive makers -- that are building new plants in China. Still, the company will need to convince many of these customers that they shouldn't expand their Oracle or SAP installations into the factory but should instead extend their QAD environments across the distributed manufacturing enterprise using the shared services model offered in the service-oriented architecture that underlies its recently unveiled Global Enterprise Edition.
Both QAD and SSA are positioned to take advantage of mid-tier growth opportunities, where analysts for the last few years have projected that companies with revenues from $500 million to $1 billion are expected to refresh their IT applications infrastructure. "It hasn't taken off as quickly as we thought," Parker said. "That does not mean it won't; the mid-market is famous fooling pundits -- it's just a question of how rapidly [smaller companies] are willing to go."