Baan doing "housecleaning"

In spite of the $US250 million fourth-quarter loss announced by Baan Co. N.V. today, several analysts today said they felt the Dutch-American software house was making moves in the right direction.

In spite of the US$250 million fourth-quarter loss announced by Baan Co. N.V. today, several analysts today said they felt the Dutch-American software house was making moves in the right direction.

Earlier today, Baan said in a statement that it will post a net loss of US$250 million, or $1.22 per share, for its fourth quarter ended Dec. 31, 1998, and also will re-state its third-quarter loss downward.

Baan's fourth-quarter loss is significantly higher than what analysts had been predicting. Analysts surveyed by First Call Corp., for instance, had predicted a loss of about 7 cents per share.

Baan's reasons for the losses included a restructuring charge and deferred revenue. It also announced that it would make other changes at the company, including purchasing the assets of its reseller subsidiary, Baan Midmarket Solutions. It also said that Vanenburg Ventures N.V., the entity indirectly owned by Baan's founders, Jan and Paul Baan, had reduced its stake in Baan from roughly 39 percent to 25 percent.

"We have strengthened our balance sheet the best way we could," Klaas Wagenaar, Baan's chief financial officer, told IDG News.

Several analysts agree. The changes show that Baan is making efforts to clean up its balance sheet, according to Harry Tse, research director with the Yankee Group.

Laurent Lachal, enterprise resource planning consultant with Ovum Ltd., also lauded at least some of the moves. "They should have made these moves last May. Well, better late than never," he said. The restructuring that the software house has done until now were merely "a face lift," he said.

Some $160 million [M] of the $250 million loss stems from non-recurring charges related to Baan's previously announced restructuring, Baan said today. The moves include staff cuts, the closure of offices, the sell-off of certain businesses and the write-down of some of Baan's assets.

Another $50 million in losses came from deferring $50 million [M] in revenue, Baan said. Specifically, that includes $17 million [M] in revenue from Baan products sold to end users, but not recognized as revenue in the fourth quarter, Baan said. The remaining $33 million [M] in deferred revenue came from products that Baan had sold to channel distributors and resellers but which were not sold to end-users as of the end of the third quarter of 1998.

"We have basically taken all the inventory that was somewhere in the channel and deferred the revenues," Wagenaar said. "That also gives us a reserve for the first quarter."

Baan has been criticized in the past for aggressively recognizing revenue from software which it had sold to its own reseller organization, Baan Midmarket Solutions, but had not actually delivered to customers. Last year, it began changing the way it recognized these revenues, waiting until products were delivered to clients, which lowered its results in some cases.

The move also is in response to criticism that "that's not the way things are done in the ERP (enterprise resource planning) software market," according to Wagenaar. This will make these transactions more transparent, he said.

It appears that Baan is deferring some revenue from the fourth-quarter which had already been booked, Yankee Group's Tse said.

Lachal sees the move the same way. "They are flushing out the channel of non-sold inventory," he said.

But what concerns Lachal is the part of the loss not accounted for by the restructuring or deferred revenue, which amounts to a $40 million [M] operating loss. "That's a huge loss compared to its announced revenues. It looks like pipeline sales are thin," he said.

Tse is more optimistic. "They still have a healthy franchise," he said of Baan's ERP products.

The software house will report revenue of approximately $142 million [M] for the fourth quarter, according to the Baan statement. Baan also brought in commitments for new license contracts from 567 customers worth $100 million [M] in the fourth quarter, the company said.

The move to lower its third quarter loss, which amounted to $31.7 million [M], is also part of Baan's housecleaning moves, said both Tse and Lachal. Baan is retroactively reducing its results to reflect a different way of accounting for the acquisition of Caps Logistics Inc., an Atlanta, Georgia-based supply-chain software company.

The change will amount to a loss of 24 cents a share for the third quarter, instead of the anticipated loss of 16 cents a share, Baan said. Baan was actually forced to adopt a different accounting method, Wagenaar said, to comply with certain GAAP (generally accepted accounting principles) requirements.

Ovum's Lachal said it is part of the more conservative accounting approach that Baan is now taking.

"They are becoming a more American company, and have to comply with strict GAAP requirements," he said.

Baan today also gave out details of its restructuring during the fourth quarter. It has reduced its workforce by about 1,250 employees, bringing total headcount to about 4,975 worldwide. Additionally, 50 offices were closed or consolidated, and 14 businesses were sold or are in the process of being sold.

Baan also announced measures to clarify its much-criticized relationship with Vanenburg Ventures, the entity indirectly owned by the Baan brothers. That includes calling an extraordinary meeting of shareholders at the end of March to approve new members to the supervisory board, Baan said. Baan expects the board to expand from its current three members to roughly seven members, which will include outside directors, it said. Baan is also negotiating with Vanenburg Ventures to acquire other software companies owned by Vanenburg Ventures that license software to Baan Company for resale. It expects these transactions to occur before the end of the first quarter of 1999.

Wagenaar also clarified that Vanenburg Ventures was forced to reduce its share in Baan, because it had put some Baan shares up as collateral on a bank loan, which it was later forced to sell.

For investors who need more information about these changes, Baan has created a special Web page to help them understand the restructuring. It can be reached at http://www.baan.com.

Baan, with dual headquarters in Barneveld, The Netherlands and Reston, Virginia, can be reached at +31-83-805-8888, or at http://www.baan.com/.

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