The midsize manufacturing software market is taking a tumble as some software giants start stomping on its territory.
Three of the leading vendors in the market posted losses for the most recent quarter. QAD lost $4.4 million, American Software lost $5.4 million, and beleaguered System Software Associates lost $115 million. J.D. Edwards, the leader in the midsize manufacturing market, is expected to make its earnings announcement late tomorrow after markets close.
"What you have here are a lot of people chasing fewer deals," said Bruce Richardson, analyst at Boston's AMR Research. "SAP has taken control of the high end of the market, so there are fewer and fewer $1 million-plus deals, and what are left are going to SAP. So you have everyone else chasing everything else."
Adding to the market crunch is the fact that SAP itself is having to go after smaller deals, as are the other big-name players, like Oracle, PeopleSoft, and Baan, who all have launched campaigns and programs aimed at attracting and serving smaller companies.
QAD, based in Carpenteria, California, reported a net loss of $4.4 million or 15 cents per share for its second quarter ended July 31. Those figures compare with net income of $1.7 million or 7 cents diluted earnings per share reported for the same period last year. The company's second-quarter revenues increased 18 percent to $47.3 million, up from $40.2 million posted last year. Its product revenue, comprised of license and maintenance revenue, increased 21 percent to $44.2 million, up from $36.6 million reported for the prior-year period.
QAD blamed its loss on several factors, including as of yet unseen results from expense-control measures that were implemented early in the quarter and an internal investment in On/Q, the company's supply chain management software system. QAD invested approximately $6 million in On/Q during the quarter, bringing its total investment in the division so far this year to $10 million.
Wall Street is keeping a cautiously optimistic eye on the company. BancAmerica Robertson Stephens is maintaining a "market performer" rating on QAD while the company works out "issues relating to management execution and quarterly financial management," according to a recent report by the San Francisco investment firm. Robertson Stephens is lowering its annual earnings per share estimate on the company to a loss of 19 cents from its original estimate of a 45-cent gain, as well as its annual revenue expectations on QAD, which were lowered to no more than $204.5 million from an original estimate of $227.3 million.
"While expense levels were higher than we would have desired, we believe our continuing investments in both our flagship product, MFG/PRO, and in our cutting-edge supply chain solution, On/Q, creates a solid foundation for future success," said Karl Lopker, QAD's chief executive officer. "This month, we added four additional customers to our On/Q Customer Design Team. Our goal is to have at least one of these beta customers fully implemented on On/Q by the end of the first quarter, in support of what we believe will be a compelling ROI story."
But Richardson had a different take, explaining that, for one thing, QAD was not quite ready to be taken public last summer and that its trading price reflects that assessment. He argued also that QAD's investment in its supply chain product is dragging down the company's earnings and probably wasn't the best strategy for tackling the all-important supply chain management industry.
"The whole On/Q product is taking a lot longer and a lot more money to build than initially thought," Richardson said. "I'm sure QAD would have liked to have found some off-balance sheet way to finance this, and they still don't have a firm date when it will be delivered. You have to be very careful when you build a second-generation product, it will almost always take longer and cost more than you thought."
Witness SSA as a case in point.
The Chicago vendor has had a long string of bad quarters and has undergone massive restructuring in an effort to get back into the manufacturing software game. It also has suffered a bit of an identity crisis, and has spent millions--and almost killed its business in the process--trying to leapfrog competitors by developing a component-based software system.
For the third quarter ended July 31, SSA posted a loss of $115 million or $2.42 a share, including a one-time restructuring charge of $120 million. Without the charge, the loss would have been $9.1 million or 19 cents a share, compared with profits of $3.3 million or 8 cents a share reported for the like quarter last year.
Revenue for the period dropped 6.8 percent from last year's third-quarter figures, to $106.9 million. Compared with the last quarter, however, SSA's revenue was up 4.4 percent, mainly due to a growth in services.
"SSA's third-quarter results were in line with our expectations,'' said William M. Stuek, the company's chairman and chief executive officer. "We are continuing to implement a range of actions that we believe will restore SSA to profitability in fiscal 1999. These measures include a new business model, strengthened management, and enhanced financial discipline."
But Richardson said SSA's "public atoning for sins of the past," may cost it some business in the near term, because its competitors are leveraging the fact that SSA spent $120 million on a reorganization to frighten its potential customers, claiming that the company is not financially viable for the long term.
Robertson Stephens is maintaining its "market performer" rating on SSA as the company sifts through its problems.
"With the restructuring, and implications for a leaner operating cost structure going forward, we believe SSA is well-positioned to deliver operating-margin improvements," Robertson Stephens analysts said in a recent report. The firm added, however, that, while it remains impressed with the caliber of new management put in place earlier this year, SSA "has to make up for lost ground owing to its lengthy and costly product transition."
As for American Software, the company posted a loss of $5.4 million or 23 cents a share for its first quarter ended July 31, as it had pre-announced earlier this month. The loss included a one-time charge of $1.8 million or 8 cents a share, which resulted from the company's recent acquisition of New Generation Computing of Miami Lakes, Florida, which specializes in accounting and manufacturing control software for the sewn goods industry (apparel, handbags, shoes, hats, etc.). Revenue for the period grew 9 percent from the same period during the previous year, to $27.4 million.
In an effort to improve its financial picture, Atlanta-based American has launched a plan to enhance its sales execution that includes a reorganization of its sales force "to optimize the level of management in certain segments of the sales structure," an increase of its investment in alliance programs with major consulting firms, and an increase in its focus on sales and research and development for core markets. The company also is taking a look at its cost structure to see where cuts may be needed.
But analysts, including Richardson, said American needs to get a clearer focus on its business objectives, especially with regard to its plans for the ERP market. American traditionally only has played in the manufacturing materials management arena, but recently launched an effort to develop products that will manage other functions as well, like financials and supply chains.
"They lost their way and have been meandering down the ERP path since 1990," Richardson said. "They got a lift when the supply chain market got a lift because they still own 80 percent [of their spin-off, Logility]."
Despite the grim earnings reports of the third quarter, analysts overall are still bullish on the manufacturing software sector. While many expect to see some consolidation, they say it is unlikely that any vendor will disappear completely.
"Software companies never die, they just live off of their installed base," Richardson said. "Even if they do poorly in licensing, they make it back in services."