Contact: Damon Wright
Sr. Director, Investor Relations
Epicor Software Corporation
949/585-4509
dswright@epicor.com
Epicor® Reports 2007 Third Quarter Earnings
IRVINE, Calif., October 23, 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 third quarter ended September
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 September 30, 2007.
Total 2007 third quarter revenues were $103.1 million, an increase of approximately 8%
when compared to total revenues of $95.7 million in the 2006 third quarter. 2007 third quarter
GAAP net income increased 49% to $8.1 million, or $0.14 per diluted share, compared to $5.4
million, or $0.10 per diluted share in the 2006 third quarter. The 2007 third quarter tax rate was
36.4%. The Company’s actual cash tax rate for the 2007 third quarter was approximately 10%.
2007 third quarter non-GAAP net income increased approximately 19% to $12.7 million,
or $0.22 per diluted share, compared to non-GAAP net income of $10.7 million, or $0.19 per
diluted share, in the 2006 third quarter. In addition to excluding amortization and stock-based
compensation expense, non-GAAP earnings for the 2007 third quarter also excludes
restructuring charges resulting from the Company’s reduction in operating costs as announced
in July 2007, all net of tax.
Epicor chairman and CEO George Klaus commented, “We had a solid overall quarter,
with GAAP and non-GAAP EPS landing within the ranges of our previously provided guidance
and our consulting and maintenance organizations continuing to post record quarterly revenues.
Additionally, we continued to drive strong cash flow from operations of more than $20 million in
the third quarter, which brings our total cash flow from operations for the first nine months of
2007 to more than $40 million. We also began to deliver on our adjusted EBITDA improvement
expectations, with third quarter adjusted EBITDA of 17.6% increasing 330 basis points over first
half 2007 adjusted EBITDA of 14.3%. These positive results were somewhat offset by software
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that did not meet our previously provided expectations for year-over-year growth, as
well as additional volatility in our low margin hardware business.
“Having grown software revenues organically by approximately 20% in last year’s third
quarter, we knew we were faced with a very difficult year-over-year comparison,” Klaus said.
“The continuing strong growth in our worldwide pipelines firmly supported our expectations for
2007 third quarter software revenue growth of 10% to 13%, as provided in July, however, we did
not close the deals forecasted to reach this goal and software license revenue grew year-overyear
by approximately 1%.
“While we are disappointed in our less than expected software license revenue growth,”
Klaus said, “we strongly believe these results are not due to reduced demand, lack of market
momentum or increased competition. Rather, we believe that our continued success moving up
market has led to a lengthening in the sales cycle. With larger and more complex transactions
in bigger companies playing a more prominent role in our pipelines and in our quarterly results,
our near-term ability to precisely forecast the timing of expected opportunities closing has been
impacted as we adjust and realign our pipeline metrics to this change.
“While we are confident that continuing to move up-market is very positive from a
business standpoint,” Klaus continued, “it has become apparent that our sales team is
encountering a more customer-driven sales cycle. In the past, our teams were able to close
orders within Epicor’s timeframe, which led to excellent forecasting. Presently, and as we
experienced in the most recent two quarters,” Klaus said, “a greater percentage of our pipeline
consists of larger opportunities in larger companies resulting in a shift of order-close timing
away from Epicor’s traditional timeframes to one that requires additional internal steps and signoffs
by the customer, which are more difficult for Epicor to influence or control.
“We have identified the need across our organization for a higher degree of precision in
forecasting the timing of the close of larger opportunities and have put the processes in place to
do so,” Klaus said. “Adjusting our forecasting methodology for the larger opportunities in our
pipeline does not create an immediate fix, as this change moves the expected close of these
orders out throughout our license pipelines. As such, we expect that our year-over-year
software growth rates will be affected for the next one or two quarters. Our pipelines are larger
than they have ever been and we have a highly skilled sales team that is rapidly adjusting to
these new forecasting metrics.
“Looking over the longer term,” Klaus said, “Epicor has demonstrated strong organic
software revenue growth rates that have averaged approximately 12% over the past six
quarters. Even though we have taken what we believe is a prudently conservative approach to
our fourth quarter guidance, which has reduced our 2007 full-year financial expectations, we still
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to report a very good year with total revenue expected to increase by approximately 10%
year-over-year and non-GAAP EPS expected to increase by 12% to 14% versus the 2006 fullyear.
“Our expectations for 2008 illustrate our belief that adjusting our pipelines to reflect
different forecasting for larger opportunities is a short-term issue. We believe we remain
prudently conservative in projecting year-over-year software license growth in 2008 of 8% to
10%,” Klaus said. “We currently expect to continue to experience strength across all areas of
our business, with total revenue for the 2008 year expected to grow 9% to 11% and continued
operating leverage driving a 14% to 19% increase in 2008 non-GAAP EPS versus expected
2007 results.”
2007 Third Quarter Revenue by Segment
Software license revenue was $24.1 million for the 2007 third quarter, up slightly when
compared to software license revenue of $23.9 million in the same period in the prior year.
Neither the Americas nor International stood out in regards to software license sales, with each
experiencing minimal growth.
Consulting revenue was up significantly in the 2007 third quarter to $32.8 million, an
increase of 26% when compared to consulting revenues of $26.0 million in the 2006 third
quarter. 2007 third quarter consulting revenue continues to be bolstered by undertaking larger
engagements and an uptake in the Company’s strategic objective to provide additional
professional services, such as managed services and hosting.
Maintenance revenue for the 2007 third quarter also continued to experience solid
growth, with 94% customer retention driving record maintenance revenues of $40.1 million, up
approximately 6% when compared to maintenance revenues of $38.0 million in the 2006 third
quarter.
Hardware and other revenue for the third quarter was $6.1 million, down from $7.8
million in the prior year’s third quarter. The Company said the roll out of a few hardware orders
that were expected to be completed in the third quarter were extended into the future quarters,
which caused third quarter hardware revenue to be approximately $2 million below previously
provided expectations.
Balance Sheet Summary
The Company’s balance sheet at September 30, 2007 included cash and cash
equivalents and short-term investments of $217.0 million, which benefited from strong cash flow
from operations of more than $20 million during the quarter. The Company’s total long-term
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balance as of September 30, 2007 was $230.4 million, consisting primarily of the $230
million obligation to holders of the Company’s convertible bonds.
At the end of the 2007 third quarter, net accounts receivable was approximately $84.4
million. Days sales outstanding (DSOs) was 75, up from 71 in the second quarter of 2007.
Working capital increased to $203.6 million at the end of the 2007 third quarter, up from $189.8
million at the end of the 2007 second quarter. Deferred revenue was $64.9 million.
2007 Fourth Quarter and Full-Year Guidance
Based on resetting its expectations on the timing of larger orders closing, the Company
is providing the following financial guidance for its 2007 fourth quarter: Specifically, total
revenue for the 2007 fourth quarter is expected to be in the range of $110 to $112 million.
Software license revenue for the 2007 fourth quarter is expected to be in the range of $30 to
$31 million. Hardware revenue for the 2007 fourth quarter is expected to be approximately $5
million. The Company expects its 2007 fourth quarter GAAP net income to be in the range of
$10 to $11 million. Non-GAAP earnings per share for the 2007 fourth quarter are expected to
be in the range of $0.26 to $0.27. The Company’s current 2007 fourth quarter revenue
expectations equate to expectations for 2007 full-year revenue of $420 to $422 million, an
increase of 9% to 10% over 2006 full-year revenues of $384.1 million. The Company’s current
2007 fourth quarter non-GAAP earnings per share expectations bring expectations for 2007 fullyear
non-GAAP earnings per share to $0.83 to $0.84, an increase of 12% to 14% over 2006 fullyear
non-GAAP earnings per share. 2007 fourth quarter earnings per share expectations
assume a weighted average share count of 58.5 million shares.
The Company’s 2007 fourth quarter and full-year non-GAAP earnings per share
guidance excludes current expectations for full-year amortization of intangible assets of
approximately $11.2 million and full-year stock based compensation expense of approximately
$7.9 million, each net of tax. 2007 full-year non-GAAP earnings per share expectations assume
a weighted average share count of 58.0 million shares. Expected earnings results presume an
effective tax rate of approximately 36% for the 2007 fourth quarter and 36.5% for the 2007 fullyear,
with a cash tax provision of approximately 10% for the fourth quarter and 2007 year.
Full-Year 2008 Guidance
The Company is also issuing its 2008 full-year guidance for the first time. Total
revenues for the 2008 year are expected to be $458 to $468 million, an increase of 9% to 11%
over total expected 2007 full-year revenues. Full-year 2008 GAAP net income is expected to
increase approximately 36% to 39% over expected full-year 2007 GAAP net income. NonPage
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GAAP earnings per share for 2008 is expected to be between $0.96 to $0.99, an increase of
14% to 19% over expected 2007 full-year non-GAAP earnings per share. Software license
revenue for the 2008 full-year is expected to increase 8% to 10% over expected 2007 full-year
software license revenue.
The Company’s full-year 2008 non-GAAP net income guidance excludes current
expectations for full-year amortization of intangible assets of approximately $10.6 million and
full-year stock based compensation expense of approximately $7.8 million, each net of tax.
Full-year 2008 non-GAAP earnings per share expectations assume a weighted average share
count of 59.3 million shares. Expected earnings results presume an effective tax rate of
approximately 37.0%, with a cash tax provision of approximately 11% for the 2008 year.
Conference Call Information
The Company will hold an investor and analyst conference call at 5:00 p.m. ET/2:00 p.m.
PT on Tuesday, October 23, 2007.
When: Tuesday, October 23, 2007
Time: 5:00 p.m. ET/2:00 p.m. PT
Dial in: +1 (888)601-3861 or outside the U.S. +1 (913) 312-0662
Conf ID: Epicor 2007 Third Quarter Earnings Call
On the call, George Klaus, chairman and CEO, Mark Duffell, president and COO, and
Michael Piraino, executive vice president and CFO, will review third quarter earnings and the
Company’s outlook for the 2007 fourth quarter and the 2008 full-year. Investors and analysts
are invited to participate on the call. Please dial in approximately ten minutes prior to start time.
A live audio-only webcast of the call will be made available to the public on the Company's Web
site at www.epicor.com/company/investor and will be archived for thirty days following the call
on the Company’s Web site.
About Epicor Software Corporation
Epicor, named one of FORTUNE magazine’s 100 Fastest-Growing Companies in 2006, is a
global leader dedicated to providing integrated enterprise resource planning (ERP), customer
relationship management (CRM), supply chain management (SCM) and professional services
automation (PSA) software solutions to the midmarket and divisions of the Global 1000
companies. Founded in 1984, Epicor serves over 20,000 customers in more than 140
countries, providing solutions in over 30 languages. Employing innovative service-oriented
architecture (SOA) and Web services technology, Epicor delivers end-to-end, industry-specific
solutions for manufacturing, distribution, retail, hospitality and services that enable companies to
drive increased efficiency, improve performance and build competitive advantage. Epicor
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provide the scalability and flexibility to meet today's business challenges, while
empowering enterprises for even greater success tomorrow. Epicor offers a comprehensive
range of services with its solutions, providing a single point of accountability to promote rapid
return on investment and low total cost of ownership. Epicor’s worldwide headquarters are
located in Irvine, California with offices and affiliates around the world. For more information,
visit www.epicor.com.
Epicor is a registered trademark of Epicor Software Corporation. Other trademarks referenced are the property of
their respective owners. The product and service offerings depicted in this document are produced by Epicor
Software Corporation.
Forward-Looking Statements
Management of Epicor Software believes certain statements in this press release may constitute forward-looking
statements under the Private Securities Litigation Reform Act of 1995. These forward-looking statements include
statements regarding expected revenues (including growth rates), earnings and earnings per share (including on a
non-GAAP basis), tax rates, sales pipelines and opportunities, forecasting ability, target market, customer renewal
rates, product release dates, technology lead, competitive advantage and other statements that are not historical fact.
These forward-looking statements are based on currently available competitive, financial and economic data together
with management’s views and assumptions regarding future events and business performance as of the time the
statements are made and are subject to risks and uncertainties. Actual results may differ materially from those
expressed or implied in the forward-looking statements.
Such risks and uncertainties include but are not limited to changes in the demand for enterprise resource planning
products, particularly in light of competitive offerings; the timely availability and market acceptance of new products
and upgrades; the impact of competitive products and pricing; the discovery of undetected software errors; changes
in the financial condition of Epicor's major commercial customers and Epicor's future ability to continue to develop
and expand its product and service offerings to address emerging business demand and technological trends and
other factors discussed in Epicor's annual report on Form 10K for the year ended December 31, 2006 and Form 10-Q
for the quarter ended June 30, 2007. As a result of these factors the business or prospects expected by the
Company as part of this announcement may not occur. Epicor undertakes no obligation to revise or update publicly
any forward-looking statements.
Non-GAAP Financial Measures
This press release and the related conference call contain non-GAAP financial measures. In evaluating the
Company’s performance, management uses certain non-GAAP financial measures to supplement consolidated
financial statements prepared under GAAP.
Non-GAAP Earnings Measures. The Company uses a non-GAAP earnings measure and adjusted EBITDA in its
public statements. Management believes these non-GAAP measures help indicate the Company’s baseline
performance before gains, losses or charges that are considered by management to be outside on-going operating
results. Accordingly, management uses this non-GAAP measure to gain a better understanding of the Company’s
comparative operating performance from period-to-period and as a basis for planning and forecasting future periods.
Management believes these non-GAAP measures, when read in conjunction with the Company’s GAAP financials,
provides useful information to investors by offering:
· the ability to make more meaningful period-to-period comparisons of the Company’s on-going operating
results;
· the ability to better identify trends in the Company’s underlying business and perform related trend analysis;
· a better understanding of how management plans and measures the Company’s underlying business; and
· an easier way to compare the Company’s most recent results of operations against investor and analyst
financial models.
The non-GAAP earnings measure for 2006 used by the Company is defined to exclude the following charges and
benefits: amortization of intangible assets and stock based compensation expense, each net of tax. The non-GAAP
earnings measure for the first nine months of 2007 used by the Company is defined to exclude the following charges
and benefits: amortization of intangible assets, stock based compensation expense, debt issuance fees write-off,
restructuring charges and a gain from the sale of a non-strategic asset, each net of tax. The non-GAAP earnings
measure for the 2007 third quarter used by the Company is defined to exclude the following charges: amortization of
intangible assets, stock based compensation expense, and restructuring charges, each net of tax. Management
believes that the expense associated with the amortization of acquisition-related intangible assets is appropriate to be
excluded because a significant portion of the purchase price for acquisitions may be allocated to intangible assets
that have short lives and exclusion of the amortization expense allows comparisons of operating results that are
consistent over time for both the Company’s newly acquired and long-held businesses. Management also believes
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the exclusion of stock-based compensation allows for more accurate comparisons of our operating results to our
peer companies because of varying available valuation methodologies, subjective assumptions and the variety of
award types which effect the calculations of stock based compensation. Management believes that it is appropriate
to exclude the gain related to the sale of the Company’s Russia-based payroll bureau, because this additional income
as a result of the asset sale is not related to the Company’s ongoing business operations. Finally, management
believes it is appropriate to exclude the 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 and the restructuring
charges because these charges are not related to the Company’s ongoing business operations and it allows for more
accurate comparisons of our operating results to our peer companies.
The Company is also providing adjusted EBITDA, because the Company internally uses adjusted EBITDA measures
for determining (i) compliance with certain financial covenants in its credit agreement and (ii) management incentive
bonus, including vesting of certain nonvested share incentive awards. The adjusted EBITDA measures used for those
purposes may differ from the EBITDA measure because additional items may be excluded from net income for
purposes of calculating adjusted EBITDA. For example, restructuring charges, gain on sale of a non-strategic asset,
write off of in-process research and development and foreign currency gains/losses may be required to be excluded
from adjusted EBITDA under the terms of the Company’s credit agreements and/or management incentive plans.
The adjusted EBITDA measure presented in this press release is defined as net income before (i) interest expense,
(ii) income taxes and (iii) depreciation and amortization, (iv) interest and other income, net, (v) gain on sale of a nonstrategic
asset and (vi) restructuring charges.
General. These non-GAAP measures have limitations, however, because they do not include all items of income and
expense that impact the Company’s operations. Management compensates for these limitations by also considering
the Company’s GAAP results. The non-GAAP financial measures the Company uses are not prepared in accordance
with, and should not be considered an alternative to, measurements required by GAAP, such as operating income,
net income and income per share, and should not be considered measures of the Company’s liquidity. The
presentation of this additional information is not meant to be considered in isolation or as a substitute for the most
directly comparable GAAP measures. In addition, these non-GAAP financial measures may not be comparable to
similar measures reported by other companies.
- TABLES FOLLOW -
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EPICOR SOFTWARE CORPORATION
PRELIMINARY CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(Unaudited)
September 30, December 31,
2007 2006
ASSETS
Current assets:
Cash and cash equivalents $ 215,700 $ 70,178
Short-term investments 1,333 -
Accounts receivable, net 84,438 83,965
Deferred income taxes 17,652 17,909
Inventory, net 5,690 4,885
Prepaid expenses and other current assets 6,329 7,587
Total current assets 331,142 184,524
Property and equipment, net 13,757 12,251
Deferred income taxes 21,797 19,836
Intangible assets, net 50,860 56,209
Goodwill 174,712 163,360
Other assets 12,518 5,710
Total assets $ 604,786 $ 441,890
LIABILITIES AND STOCKHOLDERS’
EQUITY
Current liabilities:
Accounts payable $ 14,054 $ 14,298
Accrued expenses 48,242 50,919
Current portion of accrued restructuring
costs
1,166 795
Current portion of long-term debt 105 1,102
Current portion of deferred revenue 63,946 63,726
Total current liabilities 127,513 130,840
Long-term debt, less current portion 230,354 98,273
Long-term portion of accrued restructuring
costs
438 876
Long-term portion of deferred revenue 968 1,271
Long-term deferred income and other taxes 8,148 2,010
Total long-term liabilities 239,908 102,430
Stockholders’ equity:
Common stock 60 59
Additional paid-in capital 363,049 350,605
Less: treasury stock at cost (13,771) (10,895)
Accumulated other comprehensive income
(loss)
553 (954)
Accumulated deficit (112,526) (130,195)
Total stockholders’ equity 237,365 208,620
Total liabilities and stockholders’ equity $ 604,786 $ 441,890
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EPICOR SOFTWARE CORPORATION
PRELIMINARY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
Three Months Ended
September 30,
Nine Months Ended
September 30,
2007 2006 2007 2006
Revenues:
License fees $ 24,094 $ 23,892 $ 71,229 $ 67,199
Consulting 32,752 26,028 99,575 78,255
Maintenance 40,149 37,985 118,902 111,687
Hardware and other 6,105 7,805 20,429 22,589
Total revenues 103,100 95,710 310,135 279,730
Cost of revenues 46,284 41,402 141,340 121,197
Amortization of intangible assets 4,474 4,250 12,959 12,744
Total cost of revenues 50,758 45,652 154,299 133,941
Gross profit 52,342 50,058 155,836 145,789
Operating expenses:
Sales and marketing 18,300 17,332 55,745 48,755
Software development 9,129 8,615 27,379 25,791
General and administrative 12,800 13,750 42,634 39,072
Restructuring charges 985 - 1,207 -
Total operating expenses 41,214 39,697 126,965 113,618
Income from operations 11,128 10,361 28,871 32,171
Gain on sale of a non-strategic asset - - 1,579 -
Interest expense
(1,808)
(2,187)
(6,660)
(6,398)
Interest and other income, net 3,380 607 5,973 1,803
Income before income taxes 12,700 8,781 29,763 27,576
Provision for income taxes 4,623 3,357 10,962 10,505
Net income $ 8,077 $ 5,424 $ 18,801 $ 17,071
Net income per share:
Basic $ 0.14 $ 0.10 $ 0.33 $ 0.31
Diluted $ 0.14 $ 0.10 $ 0.32 $ 0.30
Weighted average common shares
outstanding:
Basic 57,310 56,030 57,008 55,800
Diluted 58,038 57,003 57,885 56,859
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EPICOR SOFTWARE CORPORATION
PRELIMINARY NON-GAAP EARNINGS RECONCILIATION
(in thousands, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2007 2006 2007 2006
Net income $ 8,077 $ 5,424 $ 18,801 $ 17,071
Add back, net of tax:
Amortization of intangible assets 2,877 2,786 8,283 8,416
Stock-based compensation expense 1,120 2,475 6,026 4,375
Debt issuance fees write off - - 532 -
Restructuring charges 626 - 762 -
Gain on sale of a non-strategic asset - - (997) -
Non-GAAP earnings $ 12,700 $ 10,685 $ 33,407 $ 29,862
Non-GAAP earnings per diluted share $ 0.22 $ 0.19 $ 0.58 $ 0.53
Weighted average common shares
outstanding:
Diluted 58,038 57,003 57,885 56,859
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EPICOR SOFTWARE CORPORATION
PRELIMINARY NET INCOME TO ADJUSTED EBITDA RECONCILIATION
(dollars in thousands)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2007 2006 2007 2006
Total revenues $ 103,100 $ 95,710 $ 310,135 $ 279,730
Net income $ 8,077 $ 5,424 $ 18,801 $ 17,071
Income taxes 4,623 3,357 10,962 10,505
Interest expense 1,808 2,187 6,660 6,398
Amortization 4,524 4,511 13,119 13,594
Depreciation 1,548 1,361 4,545 4,137
Restructuring charges 985 - 1,207 -
Gain on sale of a non-strategic asset - - (1,579) -
Interest and other income, net
(3,380) (607) (5,973) (1,803)
Adjusted EBITDA $ 18,185 $ 16,233 $ 47,742 $ 49,902
Adjusted EBITDA percent of total
revenues 17.6% 17.0% 15.4% 17.8% |
