The Exchanges

Q little Hardware business for twenty million, maybe for installing on-prem sort of hardware stuff. You've now come in, obviously, I imagine, drastically changed this revenue mix, and the company has gone across many hands. So take me into your head, when you were first reached out by the Epicor team to join in 2017, what was the thesis? What did they want you to do, and what got you excited?

A Yeah, you know what? The big one was the products were just about, well, in two out of three cases, they were cloud ready, and the pivot to cloud hadn't been done yet. And for the listeners, Thinking about, well, what does that mean cloud? It's kind of a, one of these terms is confusing. They had been designed and built in a modern architecture so that you could have nothing more than an Android or an iPhone in your hand and be running the warehouse or the factory with the software actually running in servers in Seattle or Bombay or, you know, somewhere else far away. Now, having said that, we hadn't done it yet four years ago. We hadn't actually retooled and failed force and gone out and converted our existing base to software as a service Or gotten good at selling that product into new customers. And over the last four years, that's been our mission. And we've been very successful at it. We've built that business into about a quarter of a billion dollars. We'll be about a billion dollar top line business this year. And between a quarter and a third of that now is the cloud. And that's been the, uh, it's been a lot of work, but that's the transition we've worked our way through. And one of the things we may talk about is it's change management and people As much as anything when it comes to transitioning a company with that big of a change.

AI assessment note: “the products were just about, well, in two out of three cases, they were cloud ready”

Q with this transition, again, you also have to manage growth, right? I mean, people want to see growth in a business, not just changing revenue and cannibalizing on-prem for SAS. So if you're said, you think you're about to break a billion dollars in AR about, you know, a third of that's going to be SAS. Where were you exactly a year ago in terms of run rate top line?

A Yeah. Uh, a year ago, the run rate was, was about seven or eight percent lower. So we've been a steady mid to high single digit top line grower. Because the number's big, you know, you, you, uh, you're, you're good with numbers. I am too. So the nominal amount's big enough that we've grown in that range, and we'll probably grow closer to 10%, the top line, uh, this year. Wow. Having said that, the, because SAS has been a quarter to a third, that has grown at three or four times that fast, and we've typically seen 30 to 40% growth, sometimes more in that SAS business, and it's most of our growth. And then with the on-prem Seeing it be roughly flat. It's, um, the on-prem business and the maintenance business, it isn't contracting. It isn't getting smaller, but it's almost perfectly flat.

AI assessment note: “a year ago, the run rate was, was about seven or eight percent lower.”

Q Our debt providers or other people that are putting valuations in the business, do you feel like they're appreciating the rapid growth of the SAS business considering it's a little bit muddied from all the other revenue lines? Yeah.

A You know, it's a great question. I think two years ago, uh, we were just at the point where they noticed it a year ago when Clayton Dubliner and Rice was Putting a price tag on us, valuing us. They did appreciate it. At this point with the numbers we're talking about, they absolutely do, but there's, there's kind of a, uh, within your question, I think there's a saturation point at around third to a half of your ARR. When you get to that point being cloud, people do have to say you're kind of a cloud business. And then with the bookings number I gave you, because we're booking more SaaS, anything else, it changes the valuation and it will be interesting for people like us to see whether or not that valuation model Holds up. I mean, there's no, um, Excel model that says you should have a different discount rate for one revenue stream versus another, but people do like cloud as far as valuation, and that is In style and probably will be at least for a while.

AI assessment note: “At this point with the numbers we're talking about, they absolutely do”

Q CDNR is kind of a surprise buyer in this space. I mean, you've got ties to Austin. KKR knows who Vista Equity is. Why didn't Vista come in and offer more than 4.7 billion?

A Well, you know, they're all pretty shrewd operators and bargain hunters. And I think that in some cases, um, the, the analysts or the people running the valuation models look more at the point I made earlier, which is, Hey, there's a lot of legacy business here. It's going to be expensive to migrate it over. And if the attitude of the investor, like a CDNR is, Hey, let's take a little time and look at the quality of the SAS products. Have they really modernized them as much as they say, in our case we have, and then some, It is, it's interesting when you do one of these beauty contests, different people look for different things and come to different conclusions. And it's, it's capitalism and it's rawest form. So I think CDR has been a great partner. And I think they're thrilled with how well we've done since they bought us. But I think, uh, you know, I have a lot of respect for Vista. I think they'd probably kick the tires and said, that's a big chore, you know, to continue to rotate over from the on-prem business. And we're not sure we want to sign up for something that can take that long.

AI assessment note: “I think they'd probably kick the tires and said, that's a big chore”

Q if you only had at that .300000000 bucks and pure SAS ARR. Right. There are companies out there right now that are pure SaaS plays with less AR getting higher valuations than 4.7 billion. And you go, what the hell is going on here? Steve's, this is a more durable business. Steve has more experience. They should be getting a higher valuation. Why did CDNR only pay 4.7 billion? Yeah.

A You know, it's a really good question. I think there are two things going on. One is when you think about how much. Capital right now is on the sidelines chasing growth stories. You do see some frothy, uh, exuberance in some of the bets people are willing to place. So that's one. I think the other one is there's a, there's a sense of a well-deserved respect for how hard it is to migrate the installed base. So you could look at an Epicor and say, well, you've got a tremendous amount of value, but unleashing it or unlocking it takes time and effort. And that's true. So, I mean, I understand why the valuation came out around 4.8000000000. Now, as we demonstrate, you know, kind of the say, do quotient for us is high as far as converting that installed base. Which it has been. It does help with the valuation, and I think, you know, as we go through this year, a year or two from now, as those metrics, the one you referred to, the ARR, you know, the percentage of it, which is SAS, goes higher and higher and higher. You have to say, okay, you've got it. You're there, but I think that's it. I think that you've got a lot of companies where the market, the architecture, a couple of points you made, you know, 60, 70 times ARR, the market architecture could be completely modern, and there's some of those points of resistance they just don't have in the model that gives them Benefit evaluati…

AI assessment note: “there's a sense of a well-deserved respect for how hard it is to migrate”

Q acquired both Epicor and Activant in a two billion dollar deal, merged them together, and then ended up with KKR in 2016 and a 3.3 billion dollar deal. Were you sort of an EIR at KKR and they put you in this, like, did they find you as a, at the same time as they bought KK, as they bought Epicor and knew you were going to be the guy?

A Yeah, you know what? They found me. And if you think about, well, when they find somebody, what are they looking for? And I think in the case of Epicor. They were looking for an executive that really understood manufacturing and distribution like the business. I'm a process engineer. I'm a mechanical engineer. And about half of my career was in factories and warehouses. And when I think about why KKR thought I would be a good fit, they knew that I knew the products and had used the products and competed against the products. And more than anything, I believed in the quality of the company and the products, which was what it took. Four years ago, there was a lot of, um, There were many open questions about, around what would be required for the company to grow and be successful. And at an absolute minimum, whether it's you or me or somebody else, you had to look at it and say, wow, these are great products. Customers will love these products and they'll buy them. If you couldn't believe that, you probably wouldn't have taken the CEO job. And I, I knew enough to say products are in good shape. They've been invested in and cared for properly. We can go out and grow the business. They found me. I was a good fit. I took a look at it and said, I think I'm the right person to grow this business. And it has worked out as planned, which doesn't always happen, but in this case it's happe…

AI assessment note: “Yeah, you know what? They found me.”

Q bucks of the proceeds from that loan being sold by Epicor was used for a payout to KKNR, right? So they can still make money on this. My question for you as CEO is, Like when they're recruiting and you're coming in, how do you make sure that you and your team, right, get the equivalent of some gains from this sort of arbitrage that private equity firms are playing?

A Yeah. So I think that, you know, human beings, uh, there's some consistency or want to, want to be paid, right? They want to make money. And when you're, one of the biggest challenges to the point you just made is when you're private, the payout may be three or five, you know, three, four, five years apart. Whereas when you're public every 90 days, you get outside the quiet period, you can trade the stock. So I keep an eye on that because I've got, you know, a group of people, we've got 4000 employees, but a hundred or so, most of what they make is in stock or a big portion of what they make is in stock. And we try to think about whether it's a dividend, you know, once every three or four or five years or a transaction, what's the frequency upon which people need to get that compensation and feel right about it. And you can't rush it. So you can't go, Hey, we're going to try to do something to create liquidity and have the, uh, the company's balance sheet suffer at that expense. So I think it's thinking, think with the end in mind, if you think, Hey, within the next three or four years, we want to do something like this. What are the metrics? How does the balance sheet and the income statement, what do they need to look like? So that the banks would be thrilled to be a part of whatever we're expecting to do. And if you do that, then you're fine. I think where people get in trou…

AI assessment note: “we try to think about whether it's a dividend... or a transaction”

Q Rarely happens. I might add rarely happens. So Steve, give me a sense of how the mix has changed since 2017. Again, you had a big on-prem business, a big maintenance contract, SLA oriented business. You're trying to transition a lot of this to the cloud, but what did the revenue mix look like in 2017? What was total top line and what percent was licensing SaaS?

A Yeah. So I think the best two points, the best way to look at it would be four years ago in a given quarter, we would book a 90% on-prem. 10% SAS or less. In the most recent quarter, it was a sixty-forty split. It's flip-flop. So, 60% SAS, 40% on-prem. So, we have crossed the Rubicon. We do book more SAS than on-prem, and that did take the full four years to get to that point, and I don't think we'll ever go back. I think from this point forward, we'll always book more SAS. There is a, um, a segment that really likes on-prem, and in many cases, it could be a, A family business where they are good at managing assets because the biggest difference with on-prem is you have a cabinet with servers in it, you know, Dell servers or whatever. And if you're good at managing those and, and patching and upgrading, you got people that have that know-how on-prem can be very cost efficient, but it requires that level of skill. I think that for us, uh, a 60, 40 split will probably move towards, um, 80, 20. I don't know if it'll ever go much beyond that because I think there'll always be a segment that likes to be do-it-yourselfers. When it comes to managing the ERP system, that's my guess.

AI assessment note: “four years ago in a given quarter, we would book a 90% on-prem. 10% SAS”