Business software provider Great Plains Software (Nasdaq: GPSI) headed into a Great Plains downpour after revealing that fourth-quarter earnings will miss estimates by a wide margin, and sales will come in lower than management expected.
The Fargo, North Dakota company expects revenues in the $58 million to $60 million range and net income (excluding amortization) in the $0.05 to $0.10 per share range, way off the $0.32 per share mark analysts polled by IBES International expected. Not that investors should pay much attention to analyst estimates, but that's a big miss, like Heath Shuler big.
Investors ran for the hills... er, plains... pressuring the shares down more than 40% to $23 1/16 in early trading. After climbing as high as $83 1/2 in early January, the shares now trade at their lowest levels in more than two years.
Many of the companies that sell enterprise software -- players like German giant SAP (NYSE: SAP), PeopleSoft (Nasdaq: PSFT), and troubled Baan (Nasdaq: BAANF), which is getting bought out by London-based Intersys -- struggled once the market became saturated and demand for Web-based platforms surged. Great Plains managed to sidestep the turmoil by catering to smaller companies and ramping up its e-commerce services quickly.
Clearly, not everything has gone smoothly. The company attributed the Q4 miss to "slower post-Y2K sales recovery and lower sales results as Great Plains partners broadened their business to include Great Plains eCRM and e-business solutions."
What does that mean? Great Plains is growing its portfolio of software applications rapidly through acquisitions. In fact, it has bought six companies since October and expanded in Europe. The acquisitions gave the company stronger field services, front- and back-end business software solutions, human resources and payroll software, and fixed-asset management software products. Great Plains has issued around 3.4 million shares of stock and $60 million in cash to make the acquisitions.
That's a lot to juggle. The company is retraining its employees to offer front-office business software and services as well as back-office applications, and the adjustment led to the Q4 miss.
Could investors have seen the trouble coming? Everything looks easy in hindsight, but there were clouds on the horizon -- if only the risks from folding in so many companies. Great Plains has been a prodigious producer of cash, piling it up like so much corn. At the end of Q3 last year, Great Plains had generated $14.6 million in cash from operations. By the end of Q3 this year, that number had increased to $18.5 million, but its accounts receivable soared 142% while sales grew 20%. That's way out of whack.
Tami Reller, Great Plains' vice president and chief financial officer, said the increase in accounts receivable is the result of acquisitions. She said the company has a very conservative credit policy, aggressively collects accounts, and that the company has adequate reserves for doubtful receivables.
The company has a good track record as far as managing its working capital accounts, and, as Reller said, the receivables didn't spike until the third quarter, once the acquisitions were folded in. Investors should watch this account carefully, nevertheless, to make sure receivables don't continue to outpace sales.
There were other flags that the company has put a lot on its plate. Its gross and operating margins have trended down since the end of last year. Gross margins at the end of Q3 stood at 69%, down from 73% at the end of last year. Operating margins slipped to 9% from 15%. Some of this is to be expected. Services make up a larger part of revenue and they cost more than software. Operating expenses as a percentage of revenue continued to climb as the company expands. Reller said these issues are being addressed and she doesn't see them as red flags.
Overall, I like the company's ability to spin off cash, but it needs to integrate its acquisitions and prove it can make them pay off.
