Epicor
IRVINE, Calif. (July 25, 2007) – Epicor Software Corporation (NASDAQ: EPIC), a
leading provider of enterprise business software solutions for the midmarket and divisions of
Global 1000 companies, today reported financial results for its second quarter ended June 30,
2007. All results should be considered preliminary pending the Company’s filing of its quarterly
report on Form 10-Q for the quarter ended June 30, 2007.
Total second quarter revenues reached an all-time quarterly high of $105.7 million,
increasing more than 6% when compared to total revenues of $99.5 million in the 2006 second
quarter. Total second quarter revenues benefited slightly by incremental revenue of
approximately $1.3 million from a mid-May 2007 acquisition by Epicor of the Epicor Division of
an Australian reseller, Professional Advantage1. Second quarter GAAP net income was $6.3
million, or $0.11 per diluted share, compared to $7.1 million, or $0.12 per diluted share in the
2006 second quarter. The reseller acquisition was slightly dilutive to GAAP net income. The
2007 second quarter tax rate was 37.2%. The Company’s actual cash tax rate for the second
quarter was approximately 11%.
2007 second quarter non-GAAP net income was $12 million, or $0.21 per diluted share,
compared to non-GAAP net income of $11.2 million, or $0.20 per diluted share, in the 2006
second quarter. The reseller acquisition was slightly dilutive to non-GAAP net income. In
addition to excluding amortization and stock-based compensation expense, non-GAAP earnings
for the 2007 second quarter also excludes a write-off of capitalized debt issuance costs that
resulted from the Company’s pay-off of an outstanding term loan with proceeds from the
convertible financing in May 2007, all net of tax.
Epicor chairman and CEO George Klaus commented, “We had a solid second quarter
with the highest total quarterly revenues in the Company’s history and our third consecutive
$100 million+ revenue quarter. Total revenue and GAAP and non-GAAP EPS were in-line with
the guidance provided in April. We also had very strong cash flow from operations of more than
$14 million during the quarter. These results benefited from solid year-over-year maintenance
revenue growth of nearly 6% and strong consulting revenue year-over-year growth of 25%, but
were tempered by NLR year-over-year growth of approximately 5%, as well as lower than
expected hardware revenues.
“As you saw last quarter when the Company’s top line benefited from approximately $3
million in additional hardware revenue above our expectations, and as demonstrated in our
quarterly results for 2006, the hardware business that accompanies our retail solutions can be
unpredictable,” Klaus said. “This unpredictability led to 2007 second quarter hardware revenue
coming in approximately $2.5 million under our expectations. It is important to note that when
hardware and other revenue is excluded from our 2007 and 2006 second quarter revenues,
total revenue for the 2007 second quarter increased by more than 11% year-over-year.
Hardware represents lower margin business and the impact to the bottom line of any quarterly
variance is generally minimal, however, it is an important part of our retail business strategy as it
goes hand-in-hand with many of our retail solutions.
“Robust sales of Vantage 8 drove domestic NLR growth in excess of 12%, despite a
year-over-year decline in sales in the retail vertical of approximately 3.5%,” Klaus continued.
“Strong Vantage contribution is a very important metric as the Vantage product already
leverages some key elements of the go-forward technology platform for our converged product,
Epicor 9. The decline in the retail vertical sales was due to a couple of large contracts that were
expected to close in the second quarter, but were delayed into the third quarter. The retail
contracts that slipped are expected to close later this week and we are expecting a solid second
half of the year from this vertical.
“Additionally,” he said, “we experienced lower than anticipated contribution from
international NLR – specifically from new name sales in our United Kingdom region. We had a
large pipeline for this region going into the quarter, but our close rates were not what we
expected on new name deals. It is important to note that NLR sales into our existing UK
customer base, as well as consulting and maintenance revenues met or exceeded our
expectations for the quarter.
“Pipelines remain strong in all geographies,” Klaus said, “however, based on the lower
than expected contribution from our UK new business sales, our current outlook is for Moreinternational
NLR to grow at approximately 9% to 10% for the full-year, causing us to slightly
adjust our 2007 full-year total NLR growth expectations to 10% to 12% (from 13% to 15%). In
light of our new NLR growth projections, we have taken what we believe are prudent steps to
reduce operating costs across the Company to align our operating structure with our revenue
expectations.
“Importantly, and as evidenced this quarter in our solid EPS performance,” Klaus said,
“we are beginning to experience leverage in our operating model, with adjusted EBITDA
margins improving sequentially by nearly 300 basis points to 15.7% in the second quarter. This
operating leverage and the reduction in operating expenses we have implemented, combined
with our expectations over the course of the second half of 2007 for double digit NLR growth,
second half improvement in our consulting margins and very solid growth in maintenance
revenues, is expected to drive a 400 to 500 basis points improvement in our adjusted EBITDA
margin during the second half of the 2007 year, when compared to the first half of 2007. We
also believe we will continue to experience excellent leverage into 2008 with adjusted EBITDA
margins improving an additional 150 to 200 basis points over the course of the 2008 year.”
Revenue by Segment
NLR grew just under 5% to $25.1 million, when compared to NLR of $24.0 million in the
year earlier period. The 2007 second quarter’s NLR revenue growth was led by a strong yearover-
year increase domestically, but was slowed by retail deal slippage and lower than
anticipated international contribution. 2007 second quarter NLR did benefit by approximately
$0.3 million from the reseller acquisition.
Consulting revenue was up significantly in the second quarter to a record $34.1 million,
an increase of 25% when compared to consulting revenues of $27.3 million in the 2006 second
quarter. 2007 second quarter consulting revenue was bolstered by undertaking larger
engagements, which are being driven by strong new Vantage sales, as well as by the
Company’s efforts in building a larger professional services team and an uptake in the
Company’s strategic objective to provide higher margin professional services, such as managed
services and hosting. 2007 second quarter consulting revenue benefited from approximately
$0.8 million as a result of the reseller acquisition.
Maintenance revenue for the second quarter also experienced solid growth, with 95%
customer retention driving record maintenance revenues of $39.7 million, a nearly 6% increase
compared to maintenance revenues of $37.5 million in the 2006 second quarter. 2007 second
quarter maintenance revenue includes approximately $0.1 million as a result of the reseller -Moreacquisition.
Maintenance contribution from the acquisition is lower in the first year postacquisition
due to the application of purchase accounting rules, which generally result in
reductions in deferred maintenance revenue.
Hardware and other revenue for the second quarter was $6.8 million, down from $10.7
million in the prior year’s second quarter.
Excluding hardware and other revenue for the 2007 second quarter of $6.8 million,
second quarter total revenue increased more than 11% to $98.9 million when compared to 2006
second quarter total revenue of $88.8 million, excluding $10.7 million in hardware and other
revenue.
Balance Sheet Summary
The Company’s balance sheet at June 30, 2007 included cash and cash equivalents and
short-term investments of $196.5 million, which benefited from excellent cash flow from
operations of more than $14 million during the quarter and approximately $222 million in net
cash from the Company’s convertible note offering in May 2007. The Company’s total long-term
debt balance as of June 30, 2007 was $230.1 million, consisting primarily of the $230 million
obligation to holders of the Company’s convertible bonds. The Company paid $16.3 million in
cash, including transaction costs, for the reseller acquisition in May 2007.
At the end of the 2007 second quarter, net accounts receivable was approximately $82.5
million. Days sales outstanding (DSOs) was 71, up from 68 in the first quarter of 2007.
Working capital increased to $189.8 million at the end of the 2007 second quarter, up from
$67.6 million at the end of the 2007 first quarter. Deferred revenue was $63.6 million.
2007 Third Quarter and Full-Year Guidance
The Company is reaffirming its 2007 full-year total revenue guidance last issued on April
25, 2007. Specifically, total revenue for the 2007 year is expected to be in the range of $433 to
$437 million. The Company’s full-year guidance includes expectations for incremental 2007
second half total revenue contribution from its acquisition of the reseller of approximately $3.5
million, which includes approximately $0.5 million in NLR. The acquisition is expected to be
slightly dilutive to GAAP and non-GAAP net income in the 2007 second half of the year. The
acquisition has been integrated into Epicor’s operations and the Company will not be separately
reporting revenues or earnings from this acquisition in any subsequent quarters.
The Company is increasing its 2007 full-year GAAP net income and non-GAAP earnings
per diluted share guidance. The Company now expects its 2007 GAAP net income to be in the -Morerange
of $30 to $31 million, an increase of 26% to 30% over 2006 GAAP net income of $23.8
million. Non-GAAP earnings per share for the 2007 full-year are now expected to be in the
range of $0.88 to $0.89, compared to the Company’s earlier guidance of $0.85 to $0.87. 2007
full-year non-GAAP guidance includes the Company’s expectations for accretion of
approximately $0.03 in the second half of the 2007 year from the Company’s convertible note
offering in May 2007.
The Company’s full-year 2007 non-GAAP net income guidance excludes current
expectations for full-year amortization of intangible assets of approximately $11.1 million and
full-year stock based compensation expense of approximately $9.5 million, each net of tax.
2007 full-year non-GAAP earnings per share expectations assume a weighted average share
count of 58.1 million shares. Expected earnings results presume an effective tax rate of
approximately 37.2%, with a cash tax provision of approximately 11% for the 2007 year.
For the 2007 third quarter, the Company expects revenue in the range of $107 to $109
million, which includes expectations for hardware and other revenue of $8 million. NLR revenue
for the 2007 third quarter is expected to increase 10% to 13% over 2006 third quarter NLR.
Non-GAAP earnings are expected to be $0.22 to $0.23 per diluted share, with GAAP earnings
of approximately $0.14 to $0.15 per diluted share. The reseller acquisition is expected to be
slightly dilutive to GAAP and non-GAAP net income for the 2007 third quarter.
The Company’s 2007 third quarter non-GAAP earnings guidance excludes current
expectations for third quarter amortization of intangible assets of approximately $2.9 million and
stock based compensation expense of approximately $2.3 million, each net of tax. 2007 third
quarter earnings per share expectations assume a weighted average share count of 58.1 million
shares.
Source: epicor
