After a four-year run, Irvine’s Epicor Software Inc. has hit a rough patch.
The company’s stock tells the story.
In 2003, Epicor, a maker of business software for midsize retailers, manufacturers, distributors and hotels, saw a huge run-up, rising nearly 1,000%.
Since then, the shares have traded in a tight range, mostly moving sideways.
But slowing software license revenue and lowered ex-pectations for the past two quarters have driven Epicor’s shares down more than 20% in the past 12 months.
It had a recent market value of about $650 million.
Wall Street didn’t like Epicor’s disappointing results for the second and third quarters.
“They reported their second disappointing earnings results in a row,” said Mark Schappel, an analyst with Benchmark Co. in New York, referring to Epicor’s third-quarter results in October. “That’s very unlike these guys.”
For the third quarter, Epicor reported sales and profits that fell short of the consensus of Wall Street analysts.
Profits before stock compensation and other items were $12.7 million, up 18% from a year earlier but below the $13.3 million analysts were looking for.
Revenue rose 8% to $103.1 million but missed the $107.6 million Wall Street wanted.
Chief Executive George Klaus, who’s run Epicor since 1996, shrugs it off. He said he’s looking to new software and more global sales to boost growth in 2008.
“We have gone through some ups and downs since I’ve been here,” Klaus said. “Fortunately, I think we are on the upside right now.”
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Epicor’s Irvine HQ: company had recent market value of $650 million |
Epicor makes accounting and other software that integrates data from production, distribution, accounting, sales, marketing and customer support. In 2006, it made a big move into retail software that runs cash registers and other store operations.
A key concern: a sudden drop in revenue Epicor gets from licensing fees.
The company typically gets a big check up front when it sells its software and then collects fees for licenses and maintenance over time.
Epicor had been averaging 14% yearly growth in licensing fees during the past four years,one of the fastest rates in the sector, Schappel said.
“That ended recently,” he said.
In the third quarter, the company had $24 million in licensing revenue, flat with a year earlier and $2 million below analysts’ estimates.
For 2008, Epicor said it sees licensing revenue growing 8% to 10%, not the “low teens” analysts were looking for.
Schappel downgraded the stock to “hold” from “buy” after Epicor’s third-quarter results.
“In June it appeared that some of the struggles they were having were relatively isolated, one-time events,” he said. “They were things they could fix without too much difficulty. With the second miss, it became apparent that there are some other things going on.”
Epicor could be hurting because it hasn’t put out a product in a while, according to Schappel. Its last big offering was Vantage, a package of software for managing accounting, inventory, sales, contacts and other items.
“The product cycle they have been living off of for the past five years, Vantage, might be getting a little bit long in the tooth,” Schappel said. “Customers like things that are fresh and new.”
New Threat
Epicor also faces a threat from “on-demand” software companies that offer business programs to companies over the Internet.
A handful of Epicor’s competitors, including SAP AG, Ultimate Software Group Inc. and Workday Inc., offer on-demand software.
The companies charge a monthly or quarterly fee that includes all of the costs of setup and support for the software.
“The on-demand software model is a legitimate threat,” Schappel said.
Oracle Corp.’s Larry Ellison has invested in two on-demand software makers, San Francisco’s Salesforce.com Inc. and up-and-comer NetSuite Inc. of San Mateo.
“It’s relatively new but it’s a risk that may be impacting the company,” Schappel said of Epicor. “Instead of pulling the trigger and buying Epicor’s software, their customers may be delaying a purchase.”
Epicor’s Klaus calls on-demand software “very low end.”
“The companies that will be utilizing that will be under $20 million in sales,” he said.
Epicor goes for customers with $100 million to $500 million in annual sales that “want to run and own their software,” Klaus said.
The company is looking to come out with a program late next year for distribution companies in Europe, Klaus said.
The software “is going to be a huge uptick for us,” he said.
The product, which has been in the works for three years, “is going to allow us to be way more competitive in Eastern and Western Europe,” Klaus said.
It could boost Epicor’s global revenue, which makes up about 40% of its $420 million in yearly sales.
Epicor is looking to increase its presence abroad.
Unlike some other software companies that rely on resellers in other countries, Epicor has its own sales force across the globe.
The company said it has representatives in more than 140 countries and its software comes in 30 languages.
“My goal is to try to get to a 50-50 split in sales between U.S. and international,” Klaus said.
For now, Epicor is eyeing stronger sales in the current quarter.
“The fourth quarter is seasonally strong for all software companies,” Schappel said, as companies look to spend what’s left of their technology budgets.
Epicor is looking for profits of about $15 million to $16 million in the quarter, up from $12.3 million a year earlier. It sees sales of $110 million to $112 million, up from $104 million.
Licensing revenue could come in around $30 million, versus $32 million a year earlier.
“Top of mind is finishing off the year in good style,” Klaus said. “We are very positive about our fourth quarter.”
