OS/400 Edition
Volume 11, Number 41 -- September 30, 2002

Short-Term Financial Outlook Tough for App Vendors

by Alex Woodie

The poor financial performance among tech companies has spread across the economy like the flu in recent months, with just plain bad news coming from industry giants like SAP, Oracle, and EDS. Among the smaller application vendors that play dominant roles in the OS/400 ecosystem, the news is upsetting as well, with most publicly traded software companies reporting a drop in revenues on their most recent quarterly report and no short-term improvement in sight.

The bad news just seemed to spiral after the co-chairmen of SAP came out several weeks ago and said that tech spending would probably not increase in 2003. Since then, the largest publicly traded application vendors have reported poor performances, restated their future outlooks, and endured precipice drops in their stock values. When Oracle, the second-largest software maker, reported that profits were down 33 percent and new license revenue were down 24 percent in its most recent quarter, its stock price dropped 10 percent. SAP's news wasn't much better, with a reported 23 percent drop in revenue from new software license fees. PeopleSoft reported a 21 percent drop in license sales last month.

Things are just as bad in the midmarket as they are among top software makers. The eight OS/400 application vendors discussed in this article by no means represent a definitive census of the financial health of the industry, but they do give a pretty fair assessment of the shape of things in the midmarket, and things are looking pretty rough. Blame the economy; they all do, and rightly so.

Geac Computer, a Toronto, Canada, ERP software vendor, is still in the midst of a restructuring and has recently embarked on a technology overhaul of its System21 ERP suite--which got when it acquired JBA Software a few years back--to update the RPG III-based code to ILE RPG and add some Java extensions. Financially, the company has managed to trim costs faster than its revenue has dropped, and as a result the company reported about $16 million Canadian in net income for the first quarter of fiscal 2003, which ended July 31, despite a 13.6 percent drop in total revenue, to $155.1 million Canadian. When analysts take a closer look at Geac's numbers, however, they're not pleased to find that the company gets only about 9 percent of its total revenue from software licenses; that number should be closer to 40 percent for software companies, they say. Geac's executives don't expect to turn the ship around this year. They are forecasting a 17 percent decline in revenues from last year for fiscal 2003.

Infinium Software is coming off a rough couple of years but seems to have stabilized, and it appears to be fighting hard for midmarket customers in a very tough environment. The ERP and CRM software vendor, which used to bring in close to $100 million per year, hit bottom about a year ago, when software license revenues shriveled up to $1.3 million in a quarter and its stock (which is listed on the Nasdaq exchange) dropped beneath the required dollar-per-share floor. Since then, the company has rediscovered its roots, getting rid of its Windows software business and an ASP division that never saw many customers, concentrating solely on OS/400 ERP and CRM software. Aggressive cost-cutting measures have kept the Hyannis, Massachusetts, company in the black, although revenues are nowhere near where they used to be. The company's fiscal year 2002 ends today; stay tuned for reports.

At press time last week, JDA Software Group's stock still had not recovered from the beating it took the week before, when the Scottsdale, Arizona, company announced that it would not meet its software license revenue forecast of $18 million to $20 million for its third quarter, which ends today. The developer of enterprise software for retailers that runs on OS/400, Windows, and Unix servers blamed the shortfall on lengthening sales cycles for the deals in its pipeline. It will be the second straight quarter that JDA has missed its target. Investors drove its stock price down more than 40 percent following the news.

Jack Henry & Associates has been one of the more consistently performing OS/400 application vendors over the years. The company, which develops enterprise software for banks that runs on OS/400, Unix, and Windows platforms, reported its 13th consecutive year of revenue growth for the fiscal year that ended June 30, 2002, with nearly $400 million in total revenues. That led the company to issue a dividend of $.035 per share for the year, up slightly from $.03 per share for fiscal 2001. (Jack Henry is one of the few publicly held technology companies to issue dividends on its stock.) Despite the profitability, investors and brokerage houses aren't impressed. Earlier this month Prudential cut its rating on the stock to "hold" from "buy," and as we went to press last Thursday, the company's stock was trading near its 52-week low of $11.70, down from the $25 range it was trading at a year ago.

J.D. Edwards ran afoul of investors two weeks ago, when it was discovered that one of the main reasons the company exceeded revenue targets for its third quarter was that it had improved its bill-collection processes, not by selling more software. Wall Street had assumed that JDE was selling more software. The Denver, Colorado, company--whose software and operations are held as the gold standard in the OS/400 applications market--reported a profit of $.08 per share for the quarter ending July 31 on revenues of $229 million. However, papers filed with the Securities and Exchange Commission on September 12 showed that the company effectively boosted its bottom-line earnings by 2 cents a share--or about $4 million--by reducing its reserve related to risky accounts, and the company garnered another $2.3 million boost in profits by changing the way it accounts for vacation time. While there was nothing illegal about the moves, which the company's auditors signed off on, investors and analysts were miffed that it wasn't as clearly spelled out to them during the regular quarterly conference call. As a result, the company's stock price was punished, dropping almost 20 percent immediately after the revelation. It has fallen about another 10 percent since, to about $9 per share, still up from its 52-week low of about $6 a year ago.

Manhattan Associates, an Atlanta, Georgia, supply chain software provider, has also been one of the more consistent performers during the recession, and has garnered regular praise from respected research firms, such as AMR Research. The software company recently announced its financial results for the second quarter, which ended June 30. In that quarter, Manhattan Associates posted revenues from software license fees of $10.2 million, a 9 percent increase over both the previous quarter and the same quarter last year. The company said it was the 11th straight quarter it has met or exceeded analysts' earnings estimates.

MAPICS delayed reporting its financial results for its third quarter ended June 30 because it was in the middle of changing the way it reports software license revenue. The Atlanta, Georgia, ERP software vendor is now spreading revenue from software sales out over 12 months, instead of booking it as soon as it comes in, as it had done since 1993. This announcement preceded an immediate drop in price valuation for MAPICS stock, listed on the NASDAQ, but it almost immediately recovered and is again trading in the $5 to $6 range, where it has been for most of the past year. The company's financial results, released August 15, reflect the slow down in spending that is affecting almost all enterprise software vendors. Total revenue for the quarter was $31.3 million, compared with $33.2 million in the previous quarter and with $37.0 million a year ago.

SSA Global Technologies announced its fiscal year 2002 results about a month ago, even though it is no longer a public company and not required to disclose its finances. According to SSA Global Technologies, the company brought in $187 million for the 12 months that ended July 31, 2002. The company said this represented a 39 percent increase from its 2001 results, although it did not declare how much of this revenue was generated from its interBiz software unit, which it acquired from Computer Associates in April for an undisclosed amount. The company claimed to have earnings of $35 million before accounting for interest, taxes, or amortization (which may have been considerable in the interBiz acquisition). Michael Greenough, the Chicago, Illinois, company's chief executive officer, said he expects revenues to increase by 30 percent, to $245 million, in fiscal year 2003.

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Managing Editor
Shannon Pastore

Contributing Editors:
Dan Burger
Joe Hertvik
Kevin Vandever
Shannon O'Donnell
Victor Rozek
Hesh Wiener
Alex Woodie

Publisher and
Advertising Director:

Jenny Thomas

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Last Updated: 9/30/02
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