JDA Software: Red Flags on Strategic Revenue and Dealflow (JDAS)

Jul.10.06 | About: JDA Software (JDAS)

JDA Software (NASDAQ:JDAS) spoke on Friday about its weak second quarter and the closed acquisition of Manugistics Group. Both companies are supply chain management [SCM] vendors — a group that’s been threatened by consolidating (larger) ERP vendors. Sound fiscal footing should help Manugistics; they’ve admitted that competitors are now skilled at calling their solvency into question during sales calls.

On the call yesterday, the CEO highlighted the benefits of a shift in revenue mix:

The most volatile component of our revenue, namely software, while still an important indicator of new business growth, is no longer a primary determinant of profitability. Conversely, maintenance has become by far the largest source of revenue and is the most stable revenue stream that we have and generates by far the highest operating margin. Given the shift in our business, we look forward to not only having more stable earnings quarter to quarter, but also significantly improved earnings as a percent of total revenues

The acquisition drops JDA’s software sales from 24% (of the total) to 14% and sends company maintenance revenues to almost 50%:

It’s probably true that software companies are generally trying to mitigate lumpy license sales and pump up subscription-based sales. We agree with those people who agree with Larry Ellison and who point to salesforce.com, seeing a shift away from on-premise installations and toward hosted or on-demand service-based models (but, it seems more gradual than dramatic). As you migrate from installations to on-demand, the economic corollary is to shift away from per-unit sales and toward subscription-based models. In Oracle’s case, we like the shift (i.e., their plan is to breach 50% in subscription revenues) because it’s a strategic embrace.

But this doesn’t seem to be JDA’s logic, where the shift looks defensive rather than strategic. Their maintenance revenue looks like master agreements that cover follow-on implementations. We may be shallow but we like the business model shift more than the other (and if you hear i2 Technologies, the follow-on stuff, while higher margin, is under lots of price pressure; it’s the sort of thing ripe for off-shoring). This would be more compelling if you could find something strategic in the revenue shift. Also, JDA’s other segment, the consulting unit (services), doesn’t help because their utilization rates are pretty low. All in, stable profit streams are good, but where is the source of strategic revenue growth?

The other red flag I see is this admission:

Deals continue to be deferred and delayed at what I would say is historically unprecedented rates, but at the same time we’re also seeing a large number of expensive RFPs being issued into the marketplace, perhaps indicating a potential shift towards some more strategic decision making processes underway within our target market.

That sounds like, “we are seeing fewer but bigger deals.” This looks to favor SAP and the larger vendors who can do deliver end to end solutions; i.e., back-office plus front-office plus supply-chain plus business intelligence.