Epicor in transition: revenue up, profits down

Last week, Epicor released second quarter results that were mixed. Revenue rose 21% to $127.9 million. But net income fell sharply to $1.3 million a 79% plunge from the same quarter last year. Epicor blamed the fall in profits on an additional $4.5 million in amortization costs related to the firm's purchase of NSB Retail last year.

Digging a little further, the revenue number is not as impressive as it first appears. New license sales actually fell 3%, but the drop was more than made up by increases in consulting revenue (up 20%) and maintenance fees (up 23%). Epicor blamed the drop in new licenses on weak economic conditions in the retail sector.

On the other hand, Epicor's ERP business (primarily Epicor's Vantage product) was strong, said CEO Tom Kelly in an investor conference call:

Our ERP license performance was within our expected range, and we are pleased to see our customers continue to spend and allocating dollars to ERP solutions. ERP implementations remain at the top of the Company’s must-do IT projects as evidenced by the fact that we added a significant number of new name customers, more than 150 in total in Q2. We have not seen a change to the competitive environment, nor have we seen deals disappearing for lack of funding. While our ERP pipelines remain strong, we continue to see some lengthening of the ERP cycles as we’ve talked to you in the past. This is in due part to some of the larger deals we are tracking, but is also due to some customers deciding to implement projects on a stage basis where they initially purchase and rollout smaller parts of their total solution.

How did Epicor manage to increase consulting and maintenance revenue? Kelly said that Epicor won back 177 customers to maintenance contracts. How Epicor managed to entice back these customers, or why they left in the first place--he didn't say. Nevertheless, it's a good sign, as maintenance is a recurring revenue stream.

On the consulting side, Kelly said that results were due to a focus on increasing utilization and a strong backlog of business. What's driving the backlog--in light of weaker new license sales--he didn't say. He did hint, however, to a more aggressive pursuit of consulting opportunities by aligning the services group more closely with sales:

Additionally, our consulting and sales organizations have become intimately late and in the joint pursuit of maximizing Epicor’s revenue opportunity from every customer. We’ve not optimized the synergies in the past and this is the working relationship I believe must exist for Epicor to accelerate on top and bottom line growth rates in the future. Lauri's [Lauri Klaus, EVP Worldwide Consulting] background in sales and her current role in consulting give us the best opportunity from a senior management standpoint to melt these two organizations more closely together.

Read Epicor's conference call transcript at Seeking Alpha for more details.

What does it all mean?
As Kelly indicated in his remarks, Epicor is in a transition year. This is partly due to the management transition from George Klaus, longtime Epicor CEO. Kelly has only taken over the top spot since February. Epicor is also in transition as it broadens its footprint from that of a traditional midmarket ERP vendor to include a focus on the retail industry with its acquisition of NSB Retail Systems last year as well as its earlier pick up of CRS Retail Technology Group in 2005.

The macroeconomic conditions in the retail sector, however, are weak right now, and the fall off in new license revenue for Epicor in that segment is understandable. The increase in maintenance revenue is a positive sign, but the increase in consulting revenue is likely unsustainable if it simply reflects increased utilization and a more aggressive pursuit of consulting deals for new and existing customers. Ultimately, consulting revenue follows new license revenue. Furthermore, some of the new consulting work is likely coming at the expense of Epicor's implementation partners, which live and die by those projects.

Expect a few more quarters to be needed to see if Epicor is successful in its transition.

Update, Aug. 1. A Spectator reader left an anonymous comment on another post indicating that Epicor today terminated five employees from CRS Retail Systems in Newburgh NY. He indicates that such layoffs have been occurring quarterly. Though such layoffs may be necessary for Epicor to maintain its financial performance, conducted in a drip-drop fashion, they are likely hurting staff morale in this unit that is key to Epicor's diversification strategy.

Related posts
More on Epicor's management changes
Epicor replaces CEO and COO: why?
Epicor expands presence in retail sector