Continuing its recent high-growth run, mid-market ERP software supplier Epicor Software Corp. today reported significant jumps in software license and consulting revenues in its fourth quarter, ended December 31.
The company reported $32.3 million in net software license revenues for the period, up 26% compared to the fourth quarter of 2005. Even excluding software license revenue from CRS Retail Systems Inc., which Epicor acquired early last year, the company reported an organic software license revenue gain of 19% compared to the year-earlier period.
Epicor also posted unusually strong consulting revenues in the fourth quarter. The fourth quarter's total of $29.3 million was up 44.6% year over year.
The strong software license and consulting revenue gains pushed Epicor to a record quarter. The company had total revenues of $104.4 million, up 27.8% compared to the year-earlier period. It was the first time Epicor had recorded more than $100 million revenue in a quarter.
Despite the strong results, however, Epicor's quarterly earnings figures slumped. The company reported GAAP net income for the period of $6.7 million, down 15.1% compared to the year-earlier period. On a conference call with financial analysts this evening, Epicor Chairman and CEO George Klaus said higher tax rates and lower profit margins in the fast-growing consulting business were responsible for the lower earnings figures. Moreover, Klaus noted, the company benefited in last year's fourth quarter from a non-cash tax benefit of $1.6 million and a tax rate of 15.3%. This year's fourth quarter tax rate was 38.8%.
Calling the quarter's results a "milestone" for Epicor, Klaus said he believes the company's recent strong financial performance indicates that the company is gaining share on its competitors in the ERP mid-market.
"The market overall is growing at the mid-to-high single-digit rate on license revenue," Kraus noted. "If we're growing 19%, clearly we are taking market share."
The strong fourth quarter enabled Epicor to overcome a disappointing first quarter and report positive full-year financial figures. For 2006, the company reported total revenues of $384.1 million, up 32.7% compared to the $289.4 million it reported in 2005. Epicor's full-year net income figures, however, fell. The company reported $23.8 million in annual net income, down 35.8% compared to the 2005's $52 million.
In the first quarter of 2006, Epicor reported essentially flat revenues and a 19% drop in net earnings compared to the year-earlier period. At the time, Klaus blamed a since-resolved internal audit of the company's revenue recognition practices, which, he said, distracted Epicor's sales staff.
"Clearly, we were able to put these distractions behind us and focus on selling software," Klaus said today.
During the fourth quarter, Epicor saw a strengthening order pipeline and a rising percentage of large software deals, Klaus said. All 10 of its largest deals for the quarter included software license sales exceeding $300,000, a first for the company, he said.
Klaus attributed strong demand for Epicor's products to a decision the company made three years ago to revamp its product line around service-oriented architecture (SOA) technology, specifically Microsoft's .NET products. That, Klaus said, has given Epicor a technology lead in the mid-market and allowed it to attract new customers and strengthen relationships with existing customers. During the fourth quarter, Epicor added 228 new accounts, bringing the year's total to 750, Klaus said. Ninety-six percent of existing Epicor customers continued on maintenance contracts during 2006.
Epicor's rapid growth was not without some troubling financial consequences during the fourth quarter, however. As a result of higher-than-expected growth in its consulting business, Epicor was forced to pay out more in commissions than it had expected and to hire 84 new consultants, most of whom did not become fully productive during the quarter. As a result, consulting profit margins dropped during the quarter to 14%, lower than the company's historic consulting profit margin rate of 19% to 20%.
The company, however, said it has adjusted commission plans and expects consulting margins to improve in the first quarter.
Epicor also expects overall results to continue to improve through 2007. The company said it is confirming earlier financial guidance, indicating that 2007 revenues are expected to be between $420 million and $425 million and that software license revenue for the year is expected to grow at between 13% and 15%. Net earnings for the year are expected to rise 25%.
For the first quarter of 2007, Epicor expects total revenues of between $93 million and $95 million. That compares to 2006 first quarter revenues of $84.5 million.
Epicor also expects to continue to be on the lookout for acquisitions in 2007, Kraus said.
"We are still interested [in acquisitions], no question about that," he told analysts.
The company, however, has seen prices of potential takeover targets rise in recent months. And that, Klaus said, makes it difficult for Epicor to guarantee that a prospective acquisition will be accretive to the company's earnings within the first quarter after acquisition.