IssueAlert Emerging Technologies ~ February, 2003

[News Item from BusinessWire] Indus International, Inc. (NASDAQ: IINT), a leading provider of enterprise asset management (EAM) solutions, announced it has entered into a definitive agreement to Acquire the Global Energy and Utility Solutions (GEUS) business unit of Systems & Computer Technology Corporation (NASDAQ: SCTC).

Analysis
Recent conversations with industry insiders at Pennwell's DistribuTECH conference in Las Vegas centered on who would ultimately buy SCT's GEUS practice. Lunch with SCT's Connor Gray, Vice President Solutions Management and Mary McDaniel, Director Marketing & Communications provided no definitive clues as they were tight-lipped over their new owner. While many customer information system (CIS) providers have integrated to various work management and asset management systems, none have been purchased by one. This signals the first time an EAM software company has acquired a customer care software company. EAM can consist of work management functionality such as managing service orders (utility customer connects and disconnects) in the field and the management of utility assets such as meters, poles, etc. Customer care includes registration, metering, billing, and phone center interactions with utility customers. Will this acquisition create a new value proposition for utilities?

Indus' history is in work/asset management
Indus was originally formed through the combination of The Indus Group, Inc., a California corporation, and TSW International, Inc., a Georgia corporation, in August 1997. It develops, markets, implements and supports integrated Enterprise Asset Management ("EAM") and supply chain software and service products for capital-intensive industries, utilities included, worldwide. Indus' three principal software products are PassPort, EMPAC and Indus InSite(TM), which is offered as a hosted product. These products are implemented by a Professional Services organization and supported by a Worldwide Customer Service organization. It derives its revenues from software licensing fees, implementation and training services, maintenance fees and hosting services.

The company markets its principal EAM products, known as PassPort, EMPAC and Indus InSite, internationally and to distinct industry segments, specifically to industries that have very complex assets, such as utilities, oil and gas drilling and refining, defense, pulp and paper, metals and mining, and process manufacturing. Overall Indus' products and services consist of scalable, flexible business application software; regional professional services centers positioned throughout the Americas, Europe, the Middle East and Africa, and Asia Pacific; and service packages, which support such functional areas as asset and work management; materials procurement and eProcurement; knowledge management; safety and regulatory compliance; mobile computing; electronic document management; and integration with financial and human resources products.

In March of last year, the company launched Indus InSite, a product designed for the collaborative asset management market that is accessible through the Internet. Indus InSite was developed using a pure JAVA 2EE (J2EE) design, thereby ensuring compliance with Internet standards, and is designed to deliver collaborative asset management to the mid-tier market of industries with less complex assets. Indus InSite brings Indus EAM expertise to the mid-tier market of industries that need asset management functionality, but with higher collaborative capabilities and much lower cost points.

Indus has announced plans to incorporate the broader functionality of the EMPAC product into InSite and consolidate EMPAC and InSite onto a single development platform in 2003. The company believes that this consolidated platform will lower its costs and enhance its ability to deliver competitive software products at economical prices. The expanded InSite platform will also be functionally richer than EMPAC, making it an attractive option for existing EMPAC customers, with whom Indus will work to develop migration plans.

On February 4, 2003, Indus released ActionPoint Asset Management™, a new business process improvement program. The ActionPoint Asset Management capabilities of Indus solutions empower end users by delivering the information needed to make the best decisions at the precise “action point” in which they need the information.

SCT GEUS focused on utility customer care
SCT Banner is likely the most widely used customer information system (CIS) in the utility industry. It claims to be the predominant provider of customer billing system solutions to the energy market, boasting over one hundred electric, water, and gas utilities using its Banner Customer Management System to support more than 92 million utilities accounts worldwide, and generate over 38 million utility services bills each month.

SCT Banner was originally created to Bill multiple commodity customers in the utility environment, and doing this brings in many utilities that belong to the municipal sector. SCT began a wave of “new technology” CIS in the 1990s by developing a client-server system that many analysts discounted simply because of its architecture. The belief was that the CIS could not scale in a client-server environment. SCT, along with other well-known client-server application developers such as Peoplesoft, proved the critics wrong as they have implemented record numbers of their products in utilities around the globe.

During the quarter ended June 30, 2002, the parent company that owns the GEUS business unit announced the discontinuation of that specific line of business in order to focus on the higher education software market. Also during the quarter ended June 30, 2002, the parent company completed the sale of another of its lines of business, the Global Manufacturing & Distribution Solutions ("MDS") business.

Integrated Solution
According to a joint press release from late last week, Indus and SCT hope that an integrated solution will positively impact both operations and provide new value to utilities. Indus CEO Tom Madison emphasized, "The combination of CIS with EAM will provide a completely new breakthrough profit opportunity for our customers by integrating customer information with powerful asset management solutions. This integration will enable, for the first time, real-time responsiveness to action requests from the meter to the plant, enabling customers to vastly improve their responsiveness, accuracy, and customer satisfaction, thereby delivering to them an increased competitive edge. Standalone EAM systems that are not directly linked to the customer fall short and simply no longer meet this growing demand."

Yesterday I followed up with Connor Gray and Mary McDaniel of SCT via conference call. According to Gray, much of the costs in a utility phone center setting originate out in the field. Indus has the ability to manage both service orders and work orders—calls that originate for new service via the CIS need to be recorded in the work management and asset management system (where the utility is doing the actual dispatch and recording of metering inventory). Some of that data is pertinent to Billing (like the number of registers on a meter).

Indus and SCT already share specific joint clients and as a result, there is some integration that has already been done. Some of it was done by SCT, Indus, integration partners, and/or internal utility information technology (IT) staff. However, none of that integration has been made a part of the existing product offerings at the moment, but could definitely be leveraged.

According to Gray, “There are significant synergies that both companies can leverage. We both have significant install base already that can be cross-sold. A utility that has Passport can use SCT's customer care products and vice versa. It differentiates us from our competitors.” Gray, who is participating in an integration process that begins today at SCT's GEUS main facility in Columbia, SC, is encouraged by what he sees thus far.

In order to gauge industry analyst reaction, I placed a call to Greg Galluzzi, President of TMG Consulting, a recognized expert in the utility customer care industry. “It was a surprise to hear that Indus was the acquirer,” said Galluzzi. “But it does make some sense once you think about it. Marrying the CIS with the work management side is a good thing, especially for these two firms.”

Financial Terms
Indus has agreed to pay $39 million, subject to adjustment based on the working capital of the business at closing, which is expected to be before March 31, 2003. The parent company of the GEUS business segment expects to recognize a gain on the sale of the GEUS business. Revenues from the GEUS business were $14.9 and $19.5 million for the three-month periods ending December 31, 2002 and 2001, respectively. Net assets of the GEUS operation were $28.5 million as of December 31, 2002, comprised of the following (in thousands):

It should be noted that Indus has acquired approximately $3.5 million of labor from Enlogix CIS L.P. for customer care software development (a prior commitment GEUS had made). The purchase commitment extends through December 22, 2005. Enlogix is currently owned by Alliance Data Systems, a major outsourcer of utility customer care in North America.

Absent detailed net income statement data for GEUS, this appears like a decent deal for Indus and one that can be explained. The purchase price of $39 million is less than one times revenue. Some of the recent energy information technology M&A deals are ranging all over the map, from fire sales to enormous premiums. (Note the Itron acquisition of Silicon Energy for $71.2 million, or over 3 times revenue.)

Will this announcement bring on a new value proposition for utilities? Possibly. The nearest I can get to this deal are existing alliances with enterprise resource planning (ERP) software vendors such as:

• Peoplesoft and SPL WorldGroup
• SAP and its own SAP-UCCS
• JD Edwards and AMX International's Utiligy

As previously mentioned, no one to date has strategically joined work/asset management with CIS at the utility. They have previously integrated them because they had to, but not as part of a joint offering. Should Indus and GEUS be successful in their integration efforts, the resulting product offering should offer utilities a financial and operational efficiency not yet realized.