Baan loss shocks analysts

Baan has recorded its fifth successive quarterly loss, but the scale of the loss took analysts by surprise.

At $24.7 million, it was a significant improvement on 1998, when Baan recorded a loss of $39.7 million, but much worse than analysts' forecasts of between $8.2 million and $1.4 million.

Baan, which is Europe's second largest vendor of enterprise applications software said new licence revenue collapsed by 59 per cent to $35.9 million from last year's $86.6 million. Total revenue was also down to $142.8 million from $195 million, a drop of 27 per cent.

Baan said the reason for the unexpectedly large loss was due to a change in the way it is accounting for revenue. Rather than using a model based on licence sales, Baan is moving to a subscription basis, where customers pay what amounts to a monthly fee for software use.

The company stated that if it had maintained its old sales model, revenue would have been an additional $34 million.

The company's analyst call today concentrated on getting full explanations about the effect the new licencing model will have on Baan's performance.

While cautious, Jim Mooney, Baan's chief financial officer said: "There's a lot of certainty in it. In this quarter, we have been very conservative about how we recognised revenue." Asked to comment on customer acceptance of the new model, Mooney added: "There are three times as many deals under discussion as have been closed so far."

Much of the revenue impact came from a subscription based deal with Boeing for Baan to supply its entire applications suite to an estimated 200,000 users, the largest contract in Baan's history. Mooney said the model was sufficiently attractive for Boeing to close the deal much quicker than would be expected under the old model. There were four other deals of a similar type in the quarter.

Pricing models for very large deployments are under general review among the applications community. SAP has moved to a new role-based pricing model and Oracle is working on creating a unified pricing model.

Analysts view Baan's move as a bold step. It relieves Baan of the price pressures associated with frantically closing deals in the last few days of a quarter and has the effect of improving the longer term earnings quality, because once the contract is finalised, revenues are certain into the future.

This means Baan will be in a better position to accurately predict cash and revenue flows. The downside is that in the short term, assessing how well Baan is doing in comparison to others will be difficult.

Describing the move as logical, Brian Skiba, senior research analyst at Lehman Brothers commented: "Baan's new model will provide the company with a more visible revenue stream on a go forward basis. On the downside, it will have a material impact on the revenue recognised and reported earnings near term." In Skiba's view, Baan will not now return to profit until the second half of next year.