As Informix prepares to announce heavy first quarter losses, the database supplier?s annual report to the Securities and Exchange Commission suggests that its financial problems stem as much from unsold old products in its distribution channels as its overemphasis on their object-relational replacement.
Informix shocked Wall Street when it announced that its first quarter financial would see the company reporting ?substantial? losses, bringing to an end the meteoric growth rates which took the company to the number two slot in the mid-range database market.
The full extent of those losses will not be known until the end of this month - the company was not commenting on financial matters this week - but in the interim, the company has filed its 1996 report on its financial health with the US Securities and Exchange Commission - a report which makes for interesting reading in the light of developments in the first quarter of 1997.
No mention was made in the company?s profit warning of sell-through difficulties, but the SEC report makes it clear that the database supplier is suffering from a backlog of unsold product in its third party channels, potentially making it more difficult to rely on that route to market to increase sales in the coming months.
Although it has introduced a policy of increasing the level of direct sales activity, Informix has traditionally shipped product through a network of third parties, including VARS, distributors and original equipment manufacturers (OEMs). In 1996, there was a deliberate shift in emphasis towards OEMs which - when coupled with increases in other reseller channels - resulted in third party sales accounting for half of the total licence revenue.
But almost half of the licenses sold to the reseller community - 25% of total licences sold - had not yet been sold on to end user customers by the end of the 1996 fiscal year. This is bad news for Informix, as it makes it unlikely that its channel partners will be in a position to buy fresh product from the supplier until they have cleared this backlog.
While noting that in 1996, ?Many Informix partners purchased high volumes of product to resell in anticipation of customer demand?, the report to the SEC acknowledges: ?If these resellers do not commit to licensing the same level of products for resale to end users in future periods, [Informix?s] future revenues could be adversely affected.?
In his profit warning statement at the end of last month, Informix chief executive Phil White admitted that the company had neglected its established products - such as Online Dynamic Server (ODS) - in favour of its next generation Universal Server object-relational product. But the new product has not been taken up by customers in large enough numbers to date and he indicated a renewed focus on the tried and trusted relational products in the coming quarter.
But the company has already indicated that it wants all its customers to migrate to the new object relational platform in the short term and intends to stop selling the older products in order to encourage this move. For example, the company is likely to stop pushing ODS some time towards the end of the third quarter in a bid to get ODS customers onto Universal Server by Christmas this year.
The old products might still be sold though the channel, but the knowledge of the limited lifetime of the relational products seems unlikely to encourage future sales. Even if the channel does manage to pass on the software, Informix will see no new revenue from such sales, which will also mean the resellers are occupied with the old products at a time when Informix needs to promote the next generation replacement. The possibility must exist that the company will be forced to write off some percentage of the value of these products.
All of this places the emphasis squarely on Universal Server to carve itself a market and revive the company?s sales. The SEC report notes that : ?a lack of market acceptance of [Informix?s] products or failure to accurately anticipate customer demand?could have a material adverse effect on the Company?s business, results of operations and financial condition.?
The cost of bringing Universal Server to market has been high for the company. The new product is based on an amalgamation of Informix own ODS parallel relational architecture and extended object-relational technology gained through the acquisition of Illustra last year. As well as the cost of acquiring the company and the R&D costs of merging the two products, Informix incurred what it calls in its report ?significant marketing expenses in connection with the initial announcement and launch of Universal Server?.
It goes on to state that the level of marketing and sales expenses associated with Universal Server are likely to remain high in 1997. When these are combined with the ?relatively low operating margins of Illustra?, the company concludes: ?In the near term, these development and marketing efforts will continue to negatively affect the Company?s operating margins.?
Other revelations in the SEC document include the startling statistic that Informix last year bartered software licences to other companies in return for goods and services to the tune of $55 million, close to 8 per cent of its total licence revenue. This is a perfectly legal practice, but one which has implications for the overall performance of the company if relied upon too heavily.
The SEC report notes: ?The company?s licence sale transactions can be relatively large in size and difficult to forecast both in timing and dollar value. As a result, these transactions have caused fluctuations in net revenues and net income because of the relatively high gross margin of such revenues.?
This was enough for one major Wall Street institution to downgrade Informix stock from ?accumulate? to ?neutral? in the near-term. The supplier has already suffered downgrades from other major brokerage houses, included Salomon Brothers, Paine Webber and Smith Barney.
One unnamed investment analyst warned that Informix would have to wipe $300 million off its expenses to prevent permanent decline, a figure which he claimed equated to around 1,000 jobs. ?Given the bad press and the great concern by customers, it is not fathomable that the company could recover and do $275 million this quarter in revenue,? he said. ?It will be lucky, very lucky, to stay at the same level of $140 million.?
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