Epicor Software Corp. today reported record-high revenue for the second quarter, ended June 30, but problems in the company's retail business and its operations in the United Kingdom combined to slow new license revenue growth and reduce net earnings.
The enterprise software vendor reported quarterly revenue $105.7 million, up 6.2% from the second quarter of 2006. Epicor's net income for the quarter, however, slipped by 11.3% to $6.3 million, year over year. New license revenue for the quarter totaled $25.1 million, up a less-than-expected 5% compared with $24 million in the year-earlier period.
While calling the results "a solid second quarter," Epicor Chairman and CEO George Klaus, in remarks to financial analysts, blamed the lower earnings on a slowing in Epicor's retail business, weaker hardware sales, and lower-than-expected sales from the U.K. operations.
As a result of its second-quarter challenges, Epicor reduced its projected new license revenue growth for 2007 to a range of 10% to 12%. Previously, Epicor had said it expected growth in the 13%-to-15% range.
In anticipation of the lower new license revenue growth rate in the second quarter, Klaus said Epicor took steps to reduce operating costs. Those steps included job cuts in consulting and sales/marketing, and outsourcing some functions offshore.
Epicor said it is sticking by previously announced full-year 2007 revenue projections of $433 million to $437 million.
Second-quarter revenue included $1.3 million from the company's mid-May acquisition of Professional Advantage, a reseller in Melbourne, Australia. Epicor said Professional Advantage also contributed $300,000 to new license revenue during the quarter.
Klaus blamed lower-than-expected new license revenue in the United Kingdom on the failure of some expected large deals to close. "Some execution issues" were involved in the shortfall, as was the hiring of new salespeople in the region, he said. He added that the company has improved its forecasting and expects sales to improve there. Epicor expects full-year new license revenue from its international operations to grow 9% to 10%.
While Epicor's U.K. business slumped, sales in the United States flourished. The company reported a 12% year-over-year gain in new license revenue in the United States, despite a 3.5% drop in the region's retail sales for the same period. Klaus attributed the strong U.S. license revenue figures to strong demand for the company's Vantage 8 product. Epicor now has 1,500 customers of Vantage 8, of which 900 have gone live with the application, Klaus said.
Epicor also blamed the retail sales slowdown on the failure of a few expected deals to close. At the same time, sales of hardware products to retail customers, including terminals and scanners, were unexpectedly down. Hardware sales, which Klaus said have been difficult to forecast, came in about $2.5 million below Epicor's expectations, totaling $6.8 million, down from $10.7 million the previous year. Hardware sales in the first quarter of 2007, he noted, were $3 million above Epicor's expectations.
While Epicor's software and hardware sales experienced some rough patches during the quarter, revenue from maintenance contracts and consulting grew at healthy clips. Revenue from consulting, the company said, was up 24.9% compared with the year-earlier quarter to $34.1 million. Revenue from maintenance, meanwhile, grew 5.9% to $39.7 million.
Klaus attributed strong growth in the consulting business to the fact that, increasingly, Epicor is selling its Vantage 8 applications to larger enterprises. Those larger deals, he said, are driving larger consulting engagements. Epicor's gross profit margins from consulting, however, continued to lag at about 17.7% for the quarter. Klaus told analysts the company will curtail consultant hiring in coming quarters in an attempt to improve profit margins.
Epicor's strong maintenance revenue growth for the quarter was due, in part, to the success of renewal efforts directed at customers that had let their maintenance contracts lapse.
In remarks to analysts, Klaus predicted that demand for Epicor's Vantage 8 product will continue to grow despite the company's discussion of plans next year to ship Epicor 9, which will merge Vantage with other Epicor platforms. Migration to the new product, particularly for Vantage 8 customers, will require little more than an upgrade, Klaus said.