Date: April 29, 1999
Industry: Enterprise Software Type: Sales/Earnings Analysis
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Rating: Neutral Price: $9 5/16
52-wk Range: $48 - 6 Price Target: NAV
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FY Ends ----EPS----
DEC Curr Prior P/E
98A -$0.89 NM
99E -$0.04 $0.02 NM
00E $0.16 $0.06 X58
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Qtrly ---- 1Q ---- ---- 2Q ---- ---- 3Q ---- ---- 4Q ----
EPS Curr Prior Curr Prior Curr Prior Curr Prior
98A $0.01A $0.13A -$0.20A -$0.83E
99E -$0.09A $0.00E -$0.01E $0.01E $0.01E $0.04E $0.02E
00E $0.01E $0.00E $0.03E $0.00E $0.05E $0.02E $0.07E $0.04E
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5 Yr. EPS Growth: 15% Debt to Cap.: %
Dividend: Yield: Mkt Cap./Rev: 2.6x
Shares Outst.: 205 MM Mkt Cap.: $1,909 MM
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KEY POINTS:
Baan reported a Q199 loss of $0.09 per share, which was slightly ahead
of consensus but moderately larger than the loss we had modeled.
REVENUES
Revenues on the direct and indirect side were both down 30%. The
company signed over 600 new license transactions in Q1. The company
is diversifying its revenue stream out of the large accounts and going
for volume. The average deal size is falling that may not be a bad
thing for predictability and smoothness of the quarter. EDS contributed
$5 million in revenues in the quarter via a deal for Baan's frontoffice
products. KPN, a dutch conglomerate, signed a deal for 25,000 seats
of all Baan products for approximately $50 million. The revenue from
this deal will be recognized over 5 years as Baan tries to get away
from the all you can eat deals recognized up front and build more
recurring license revenue.
EXPENSES REDUCED
The company has reduced operating cost by 24% and consumed $24 million
in cash in the quarter excluding non-recurring items. The company
reduced headcount by 1300 people to 4900 people which reduced spending
by $62 million a quarter.
FINANCING IN PLACE
The company has lined up enough financing to take care of its cash
needs for at least another year. Baan has $125 million in cash on
hand, $21 million in credit lines which will be extended to $75
million with a consortium of banks, $41 million due in tax refunds,
$241 million in receivables, and the option to call in $75 million of
equity financing in October from an institutional investor. That sums
to $150 million in incremental financing available this year and
another $282 million on collections that are due.
The company's cash burn is down to $24 million a quarter. The on-
going viability question which is a natural one under the
circumstances, should be addressed by the myriad of financing options
the company has assembled as well as the reduced run rate in expenses.
Software companies aren't capital intensive and rarely run out of cash
to the point of not being viable because the maintenance revenue
stream. Baan's viability is intact financially and the only question
is can the company move from ensuring viability to moderate growth.
Table 1
Baan Q1 1998 at a Glance:
Reported Repor MS Repo
ted Estima rted
Q1 Q1 Q1
1999 1999 1998
Lic. Revenue $65 $72 $92.9
Lic. Rev. Grth-30% -23% 11%
Revenue $176 $185 $179
Rev. Growth -2% 3% 35%
Op Margin -15% -6.2% 1.6%
Tax Rate 30% 32% 32%
EPS* $-0.09$-0.04 $0.01
Shs. Out. 205 203 211
DSO 123 na 132
Source: Baan and Morgan Stanley Estimates
OUTLOOK
Baan has been through the ringer over the last 18 months but the
company has taken tangible steps to steady the ship and position
itself for a recovery. The cost reductions were a necessary evil that
is now behind the company. As importantly, the company's early entry
into the front office and supply chain areas is paying dividends. We
suspect frontoffice is 60-70% of the company's revenues and backoffice
(ERP) has declined sharply. The mix shift to front office and soon to
e-commerce provides a foundation for reasonable growth. Customers are
focused on frontoffice applications in an effort to combat possible
Internet-driven disintermediation from their customers.
Baan has a large installed base of customers still committed to its
backoffice suite of products. Marketing follow on products for e-
commerce and the frontoffice to these customers is a logical strategy
to get through 1999 and rekindle the top line. The company began
focusing on the installed base over the last couple of quarters and
two thirds of revenues came from the installed base in Q1 compared to
25% a year ago. Baan could become a frontoffice play with a path into
a familiar set of prospects already using Baan backoffice products.
The company has a reasonable chance of breaking even in Q2 and we
expect a small profit in Q3. The salesforce has been stabilized as
the company did away with the two-tier structure involving global
accounts and regional accounts representatives. A new sales
management is also in place and the turnover that was going to happen
took place mostly in Q4 and early Q1 and the current team is pushing
forward.
DETAILS:
Baan generated $176 million in total revenue in the quarter ($65
million in license fees and $111 million in maintenance and services).
License revenues were down 30% year over year and total revenue was
flat year over year.
Baan signed more than 600 licensing contracts in the quarter 200 of
which were to new customers.
Of the $65 million in license revenue $49.6 million was generated by
the company's direct sales force and $15.6 million was generated by
the company's reseller network. On a geographic basis, Europe, Middle
East and Asia contributed $86 million, North America contributed $75.6
million and Latin American/Asia PAC contributed $14.2 million. North
America continues to be the weak with perhaps the most saturation as
corporations are still focused on Year 2000 testing.
Margins on the Baan software licenses have decreased to 78% from
previous levels which were 90% or better. We suspect that the company
is having to discount a little more aggressively to sign deals and a
heavier concentration of mid-market deals are impacting the company's
margins.
Baan has reduced the expense run rate of the company to approximately
$200 million dollars per quarter which the management feels is a
sufficient cut to aid the company in returning to profitability by Q3
1999.
Baan burned $81 million in cash in the quarter - $24 million of which
were related to operating expenses. The remaining $57 million were
due to one-time expenditures including restructuring, payments, tax
reconciliation with the Dutch government and currency translation.
DSO was 123 days at the end of the quarter and deferred revenue was
down sequentially by $3 million to 163 million.
Product News:
Baan announced some new e-commerce functionality that the company has
termed XRP (extended resource planning) which are e-commerce-related
technologies that extends the BaanSeries suite of products. The
company expects to ship these new modules in June of 1999.
- Baan E-Collaboration
- Baan E-Sales
- Baan E-Procurement
Management Changes:
James Mooney - CFO - Previously CFO of Americas, IBM
Andrew Dailey - VP of Product Marketing - Previously Research
Director, Gartner Group
Ronald Florisson - VP Corp. Communications - Previously Ministry of
Finance of The Netherlands
Katrina Roche - Gen. Mgr of Supply Chain - Previously CEO of Cygnus
Technology
Steve Pugh - Gen. Mgr. of CODA - Previously held various
management positions with CODA
Personnel Reductions:
Headcount before restructuring 6,200
Restructuring reductions:
Sale of businesses (300)
Sales & Marketing (350)
Services & Support (260)
Research & Development (260)
Other (130)
Total Reductions (1,300)
Headcount - March 1999 4,900
Supervisory Board Additions:
- John Barter - Former CFO of AlliedSignal
- Henk van den Breemen - Former Chief of Defense Staff, Dutch Armed
Forces
- Pierre Jean Everaert - Former CEO of Koninklijke Ahold and former
board member at Philips Electronics N.V.
- Joop Janssen - Current Chairman of Heijmans N.V.
- Koichi Nishimura - Chairman, President and CEO of Solectron
Corporation
- New members join current board members - Dave Hodgson, Bill
Grabe, Hans Wortmann
The information and opinions in this report were prepared by Morgan
Stanley & Co. Incorporated |
