Baan warns Street of loss

Shares of the business software maker tumble by more than 25 percent after the company warned that it expects to post a 13- to 16-cent loss.

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Shares of business software maker Baan tumbled by more than 25 percent today after the company warned that it expects to post a 13- to 16-cent loss on revenues of $190 to $195 million, well below Wall Street analysts' expectations that the company would earn 15 cents, according to First Call.

Baan said it believes its license revenue growth was adversely affected by a combination of factors, including weak global economic conditions and market volatility. The markets' outlook led its customers to cut or reallocate capital expenditure, according to Baan.

But analysts say it is more a result of internal problems at Baan including its new and untried indirect sales channel needing to mature.

The company's stock was down 22.38 percent or 4 points, to 13.88 in afternoon trading, The stock has reached as high as 55.5 and as low as 16.38 during the past 52 weeks.

The company said its customers were more cautious in making IT purchasing decisions, and were reallocating their budgets to tackle the Year 2000 problems in their existing systems. As a result, Baan said potential customers deferred or delayed IT projects and those that signed deals decreased their software expenditures, particularly in the U.S. market.

Baan expects these trends to continue into future periods until economic conditions improve and companies complete the correction of their Year 2000 problems. In light of these uncertain economic conditions, Baan said it is reevaluating its business outlook and reassessing the impact on its future operating plans.

Although analysts agree there is an overall slowdown in the enterprise resource planning market, some say that Baan is facing other weaknesses.

Analyst Bert Hochfeld at Josephthal & Company says that he views Baan as one of the weaker companies in the enterprise resource planning sector.

"This is not a value judgment, let me start by saying that," Hochfeld said.

Hochfeld said he makes his judgment on companies based on the following criteria: their overall business strategy; the strength of their vision; their distribution strategy, and their position in the competitive features function set.

"Baan comes up short on a number of those counts in my opinion," Hochfeld said. "Since I haven't been positive on the Baan company for the past 15 months, I feel somewhat vindicated."

Despite the shortfall in license revenue, the company said it expects to report a record number of more than 500 license sales transactions, as compared to 450 transactions in the second quarter of 1998. Baan said it estimates that more than 80 percent of this quarter's transactions were with new customers. For the first time in its history, more than half of its new customer transactions were sold on the Microsoft NT operating system.

He added that he thinks J.D. Edwards and PeopleSoft are the stronger companies in the market currently.

Industry analysts agree. Jim Shepherd, analyst at AMR Research in Boston, said that if Baan were experiencing a slow down because of Year 2000 issues, then other companies in its market would be saying the same thing--but they aren't.

"We haven't seen any real indication from the buying public that they are slowing down deals that are in progress, or that there are fewer companies that are starting the evaluation process," Shepherd said. "Fundamentally, when a company at this stage in this market gets into trouble, they fall back on age old issues like global economics and Year 2000 problems. If it were the case, why is it effecting Baan and not SAP or J.D. Edwards? They are selling to the exact same accounts."

Baan has already been transitioning to a high-volume, low-cost distribution model through the expansion of its indirect channel to more than 220 resellers.

Shepherd said Baan's main problem is the indirect sales channel is not mature enough nor is it tested in the enterprise resource planning market. In 1997, 88 percent of the enterprise resource planning software systems were sold directly by the vendor that made them. In 1996, 86 percent were sold directly, according to Shepherd. Enterprise resource planning systems are huge integrated software packages that users spend up to $10 million installing and use them to run most of their business processes.

"There are people who like to buy from the manufacturer. People are not comfortable betting their business on a system from some $3 million local operation," Shepherd said. "There is nothing wrong with Baan's product and nothing wrong with the market, [the quarterly results] are because this is a very new indirect sales model and is untried and isn't working yet. But it begs the question: Will ever it work?"

Indirect sales also tend to be smaller sales, so the average sale price goes down which is also going to be a factor for Baan's bottom line.

Baan today announced a licensing agreement with Microsoft that combines Baan's complete business software offering with certain Microsoft software. The company also entered a separate deal with IBM.

The anticipated results are preliminary and are based on partial information and on management assumptions. The company plans to announce its final results for the quarter on October 28.