JD Edwards, the mid-market stalwart of ERP, broke with tradition earlier in the month when it made the first acquisition since going public in September 1997. We’re a thoughtful and plodding company and we wanted to make sure Premisys was the right company to buy. We were also aware that a number of our competitors [Baan and PeopleSoft] were experiencing difficulty carrying through acquisitions and we didn’t want to repeat the same mistake, says Ben Goodison, a vice president of sales and marketing for the company, explaining why it took the $934m manufacturing, financial and HR software supplier some six months to buy Premisys, a tiny 28 person sales configuration company for $12m in cash and stock.
Whether JD Edwards’ reticence was shaped by rivals’ acquisition experiences, or whether it was more due to an inability to find an acquisition target with the right technology at a suitable price, is open to debate. What is clear is that the acquisition signals continuing consolidation in the sales configurator sector as a whole. In purchasing Premisys, JD Edwards is following in the footsteps of Oracle and i2 which also bought sales configurators last year via their respective purchases of Concentra and Innomat.
Acquisition activity in the ERP market as a whole is inevitable when the market for ERP suites per se continues to be sluggish. For the past 9 months vendors in this sector have been looking for new avenues that will bring revenue growth in the mid-market through offering cut-down ERP packages to $50m-$200m companies a la SAP, PeopleSoft, Oracle, Baan and/or broadening the software to encompass front-office functionality such as supply chain management, customer service and sales force automation a la Baan and Oracle. And, in the frenzy to grab a slice of what has become a diminishing pie, the contest between buy versus build has been all but been eliminated as vendors scramble to buy into new markets.
Analyst estimates vary but the general consensus is that the ERP market has been affected by two main factors: the re-allocation of budgets to Y2K projects and the economic turmoil in East Asia. A report by Industry Directions predicts that the ERP market will not emerge from the doldrums until the tail end of 2000. Until then it will face a quarterly decline in revenues of between 30%- 40% in the third and fourth quarter of 1999, with total ERP vendor growth slowing to 6% in 1999 and 1% in 2000. Total license and service revenues will fall to roughly $1.5bn in the first quarter 2000 from a high of $8.5bn in 1998, according to Industry Directions, and will remain below 1998 levels until the fourth quarter 2000.
Companies are delaying purchasing decisions until at least the second quarter of next year, say analysts. In the meantime, ERP vendors are having to new find new avenues of opportunity in the mid-market where implementation cycles are shorter or look to grow within their existing installed bases.
The Premisys acquisition is J D Edwards’ bid to squeeze revenues from its customer base of some 2,000-2,500 industrial customers where Premisys plays alongside Calico Technology, Firepond and Trilogy Development Group. CustomWorks will be targeted at JD. Edwards’ industrial customers, including businesses in the automotive, electronics and fabrication sectors. This vertical accounted for between 40% and 50% of the company’s fiscal 1998 revenue.
The revenue opportunity for JD Edwards comes from integrating the Premisys CustomWorks sales configurator into OneWorld, its client/server ERP for NT and Unix as well as WorldSoftware, its traditional AS/400 back-office application that competes alongside Marcam, JBA Holding and SSA and which is still the main stay of its customer base. (As of January 31 1999, only 189 of its 5,050 customers had implemented OneWorld.)
CustomWorks is a three-dimensional visualization tool that enables users to draw up and assemble complex products such as office cubicles and then transmit the resulting design by email. For enterprises needing to model spatial relationships or view custom products graphically, this functionality is a must have and few ERP vendors offer it, says Bruce Bond at the Gartner Group. The product is particular suited to sales people, argues Goodison at JD Edwards, because it has a smallish footprint and therefore can be loaded onto a laptop and used by sales people to configure a product in the field and create a sales and work order on the fly.
Flat file integration between CustomWorks and OneWorld/WorldSoftware is already available as Premisys, and JD Edwards has been working on bringing the respective packages closer together for over a year under a partnership agreement. The next step is to deliver real-time integration between the Premisys sales configurator and the rules-based sales, procurement and planning module that the company already offers within existing ERP applications. This should be achieved by the close of the company’s fiscal year in October, according to Goodison.
Premisys also provides JD Edwards with a $5m-$6m revenue stream from its CustomWorks sales configurator, which, since accounted for as a purchase, will immediately provide a much needed boost to the company’s bottom line. Although the first quarter is typically its weakest three months, the first quarter 1999 was particularly difficult for JD Edwards. Although not alone among the ERP vendors who, in the most part, issued profit warnings for the period, 25% was shaved off JD Edwards stock last month when the company cited slower-than-expected license fee growth as the reason why it would miss Wall Street estimates by as much as 7 cents a share.
When it did release first quarter results on February 23, its EPS was 5 cents shy of analyst expectations. The company reported first-quarter net income down 33.6% at $4.3m on revenue up 25.1% at $222.9m. But that was enough to initiate a volley of down grades by investment institutions. And, rather like its competitors in ERP that have all seen roughly a 30% degradation in stock in the March quarter, JD Edwards’ share price is still languishing at $13.69, barely above the 52-week low of 13.56 it hit on February 12 1999.
The Premisys acquisition will increase the number of deals in the pipe line as new customers sign up to license CustomWorks to use with their existing JD Edwards applications. The company has six customers in the process of signing contracts and will have won a further six contracts within the next 60-90 days, according to Goodison. The acquisition will therefore increase Premisys/JD Edwards customers from zero to double digits in the next quarter or so.
At the moment Premisys’ 30 customers use SAP, PeopleSoft and QAD as their back-end ERP package. While JD Edwards will continue to support the flat file interface bridge between the respective products, it will focus exclusively on integrating CustomWorks with its own ERP package. Once integration is complete it will stop offering them separately and will terminate Premisys’ partnerships with other ERP companies. Premisys customers that also use systems such as SAP R/3 should plan to assume responsibility for the products’ integration going forward, warns Bond at Gartner.
Furthermore, there is some suggestion that Premisys may be the first of further acquisitions as the company looks to increase OneWorld and World Software’s supply chain functionality through partnerships and acquisitions over the next 12-18 months. Enterprises should not assume that JD Edwards can leverage Premisys to penetrate more complex engineer-to-order accounts such as the aerospace industry. Although Premisys’ CustomWorks supports some assemble-to-order configuration functions, it falls short of other best-of-breed vendors such as Calico, Firepond and Trilogy. This shortfall, combined with functionality gaps in its rules-based configurator, will require it to build or buy to provide a viable sales configurator, warns Bond.
