Baan Gears Up for a Comeback

SAN FRANCISCO -- Remember Baan (BAANF)? The Netherlands-based enterprise software company was plagued with accounting woes just as sales of back-office automation software were slumping.

Well, the company may have finally built a solid foundation on which to grow again, say some analysts. Baan addressed accounting concerns by restating its earnings last year. In May, it revamped its management team, naming Mary Coleman its CEO and Jim Mooney its CFO. It also started refocusing on new markets.

"Baan has the broadest suite of deliverable products," says Rod Johnson, analyst at industry research firm AMR Research. "They have all the applications," including supply chain, back-office automation, customer management and e-commerce. But, he says, "the issue has been integration."

Baan is now taking steps to integrate tightly its products to sell to companies as a complete solution at a higher average selling price, a strategy that Johnson says should boost revenue.

"Baan looks like a turnaround story," says Bob Herwick, a fund manager at Herwick Capital Management who's collected Baan shares at an average price of about 9 over the past few months. "It's clearly moved off its low."

Baan shares closed Monday off 1/8 at 13, nearly double the 52-week low of 6 7/8 the stock reached in early April.

The first clear signs of a turnaround surfaced in Baan's second-quarter earnings report, released July 27. Though Baan stayed in the red in the second quarter with a loss of 4 cents a share, the company generated about $7 million in cash flow from operations. The last time Baan was cash-flow positive from operations was in the third quarter of 1998, a company spokesman says.

Though Salomon Smith Barney analyst Neil Herman attributes the upswing in cash flow to tighter cost controls and better service margins instead of higher license revenue, Herman believes the worst is over. On July 28, he upgraded his recommendation on the stock to neutral. Before that, Herman, whose firm has no underwriting relationship with Baan, had rated Baan underperform since April 1998.

"Many of the original reasons that we had downgraded the shares are now gone," Herman wrote in a report after the earnings release. "The old regime is gone. The financial statements have been restated. Baan is more focused now on customer satisfaction."

Of all the traditional enterprise software companies, Baan is well positioned to plunge into new markets, Herwick says. Baan has real products in customer management, "unlike the phantom ones of Oracle (ORCL) and SAP (SAP)," he says.

Baan already offers customer-management products that work thanks to its Aurum division, which it bought in 1997 and where Coleman was president and CEO. SAP is still developing its line of Internet-based front-office software, and Oracle spends much time deflecting criticisms that its products, though available now, aren't real solutions because they don't give users enough functionality.

Wendy Close, an analyst at research firm the Gartner Group, says that "Oracle's front-office functionality is still immature." She admits that Oracle has made much progress in the front-office space but says the Redwood City, Calif., company still has "a lot of work" ahead of it.

Proof that Baan is already a fairly serious contender in the hot market for front-office software came when executives at Siebel (SEBL), the leader in front-office software, acknowledged during the company's second-quarter earnings conference call that Baan is a major rival.

On the call, CEO Tom Siebel said his company sees Aurum as a contender in roughly 6% of the deals it bids on, compared with 7% for Clarify (CLFY) and 11% for Vantive (VNTV).

And with other issues finally aside and integration solutions in sight, Baan can finally focus again on growing license revenue. In order for it to increase its sales, the company realizes it needs to rebuild its brand name and is taking steps to do that with a $25 million marketing campaign, which starts next month. "Baan finally sees the remaining obstacles and has the tools to overcome them," AMR Research's Johnson wrote in an Aug. 3 report.

Johnson predicts Baan will return to profitability by year-end, but others were not so sure the turn would come so soon.

Though Baan told analysts in a conference call after its second-quarter earnings release that it expected to return to profitability in the second half of 1999, Salomon Smith Barney's Herman has kept a more conservative forecast, citing lingering year 2000 uncertainties. He predicts Baan will continue showing per-share losses into the first quarter of next year, but he expects profits after that. In the second quarter of 2000, he estimates Baan will earn a penny per share.

The First Call consensus estimate forecasts Baan to lose 3 cents a share in the third quarter of 1999 and to break even in the fourth.

But, says fund manager Herwick, when Baan becomes profitable is less important to some investors than the fact that profitability is "going to come."

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