Baan?s profit warning and decision to write off $160 million in restructuring costs is the strongest indication yet that it is seriously trying to respond to doubts over its long term future.
The enterprise resource planning (ERP) applications supplier announced today that it expected to make losses of about $250 million for its fourth quarter, ended 31 December 1998.
At the same time, it provided a welter of facts and figures that focused heavily on the restructuring the company has undertaken since it recorded a loss of $31.7 million for its third quarter, which was announced on 29 October, 1998. The restructuring will cost it $160 million this quarter, up from last year?s first estimates of $110 million.
However, Klaas Wagenaar, Baan?s chief financial officer, says: "The real cash cost was about #70 million, and we covered that with the money from Fletcher Investments (FI)."
Baan received a $75 million cash injection from FI earlier this month, with promises of a further $150 million to follow.
But doubts remain as to whether this will be enough to carry it through what many analysts consider will be a difficult year, even for the most successful vendors.
Gartner Group, for example, estimates that the ERP market will grow by only 20 per cent this year.
But to make things even more difficult, Baan is not being wholly clear about what will count as revenue in its fourth quarter. In its announcement it said it expected to generate revenues of $142 million, which is well down on the $195 million reported last quarter. But the telling point is the split between license and service revenues.
In the fourth quarter, Baan says it sold 567 new licenses, 65 per cent of which went to new customers. But the average value of each deal was only $176,000, which is well below that of competitors. PeopleSoft?s average contract size is at least twice that amount, while SAP?s is about five times that figure.
But any average is just that - and Baan is known to have been involved in at least a couple of seven-figure deals during the quarter. AT&T, Volvo, Delta Airlines and GM-Opel are listed among the big names that committed ?substantially? to using the supplier?s products during that period.
While total license sales are anticipated to be about $100 million, some $17 million of this will be generated from indirect channel sales that Baan will not recognise this quarter due to doubts over whether all of its related contractual commitments have been fulfilled.
This, however, casts serious doubts on Baan?s ability to execute on its indirect channel strategy, which it had previously said would be its main sales method going forward.
Last week, the company held an internal sales conference in the Netherlands, at which it provided its team with intensive courses on selling to the channel.
Sheila Gibson, Baan?s European marketing director says: "There?s no way this was a salesmen?s jolly. I think the sales people know what?s expected now and have the tools to respond to the market."
But Baan notes that $33 million of inventory, which had been counted as sales, remains stuck in the channel and cannot therefore be included in the firm?s financial results either.
The overall effect of all this is that Baan is expected to see sales drop in the fourth quarter.
Wagenaar explained: "We?re doing what Novell did in 1996/97 when it went through its clearing operation."
The move is intended to enable Baan to present a clean balance sheet where it now has deferred revenue assets of $162 million. To convert the deferred revenue into real income, however, it has to satisfy all of its contractual obligations.
And should the company find it can no longer continue to operate, it could end up being tied to onerous conditions about access to original source code. It could also see customers in the early stages of implementing Baan?s software backing out and leaving it with more egg on its face.
But, despite what Wagenaar says, there is a fundamental difference between Novell?s former position and Baan?s current one. Baan has $206 million in the bank, which is slightly more than its projected quarterly operating costs of $200 million. When Novell made its swingeing cuts, however, it had over $1 billion in cash and so was well insulated.
And Wagenaar himself is still not certain as to whether the new lower cost base the firm has worked out will be low enough.
"It is too early to say at the moment. We hope it is, but recognise this will be a difficult period. We believe we have answered the main questions about viability and now we have to execute in the field," he says.
Elsewhere, Baan has responded to investor criticism in regard to its relationship with Vanenberg Investments, a company that, for all intents and purposes, is owned by founder, Jan Baan, and his brother, Paul.
Last year, the two brothers were removed from their management roles, but maintained an influence due to Vanenberg?s ownership of Baan Midmarket Solutions (BMS).
It was widely rumoured that BMS was being used as a vehicle to siphon sales away from Baan and also a means of inflating revenues. This resulted in a $42 million sales write down in last year?s first quarter and a series of lawsuits by disgruntled investors.
From now on, however, Baan says it will treat BMS as a genuine third party. It has acquired BMS for a notional $2 million in cash, along with a commitment over three years to pay Vanenberg 15 per cent of its revenues, starting at a figure of $32 million, but capped at $80 million.
This clears the decks for Baan to credit sales properly and so avoid the stream of re-statements that plagued last year?s results. Credit Suisse has confirmed the Vanenberg deal is fair value, but says that in the short term, the new arrangement may continue to impact Baan?s share price.
Vanenberg has now reduced its share of Baan?s traded shares to 25 per cent from 39 per cent, but significantly, gave up five per cent in the last month.
This is because Vanenberg?s bankers wanted to recoup some of the money they lent the organisation at a time when its shares were pledged at very high valuations. They dumped another five percent on the market in December last year.
Wagenaar says: "I agree there?s a risk the share price will be impacted in the short term," but he remains confident that in the long term, the relationship will enter a phase of stability.
He stresses that the relationship is now clean, although the two companies still have a few peripheral investments relating to development companies in Israel that they need to sort out. "These are very minor," however, he added.
So the remaining question is whether Baan can deliver on its stated ?evergreen software? strategy and generate positive marketing messages.
With a potential cash shortage, however, such hopes would appear limited, although Wagenaar says that the company will make further announcements regarding research and development issues in the next few weeks.
Gibson adds: "You?ll see us a lot more focused on the Microsoft relationship, do serious branding and positioning in respect of the non-ERP products, and look at applying value messages to demand generation. This is a big switch for Baan and will get us away from a pure technology story."
Elsewhere, rivals and industry watchers hope that Baan?s latest announcement will simply be regarded as a local problem.
"When I saw this I nearly puked ? what a mess," said Mark Lane, Peoplesoft?s vice president of global marketing.
Bruce Richardson, vice president of strategic research at Boston based AMR Research also posed the question: "Name an enterprise applications company that cut 30 per cent of staff and came back to be a contender?"
However, things may not be as bad as they first appear. Cap Gemini is continuing to make Baan related deals, and Tony Kelly, Cap?s UK alliances partner says: "We?ve done two deals in the #2 million range and have another two in the pipe. This is a lot better than it was. I?m bullish."
Baan?s shares reacted slightly on the news, falling 87 cents to $10.13.
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