JDA Software Group, Inc. Q1 2009 Earnings Call Transcript

| About: JDA Software (JDAS)

JDA Software Group, Inc. (NASDAQ:JDAS)

Q1 2009 Earnings Call

April 20, 2009 4:45 pm ET


Hamish N. J. Brewer – President & Chief Executive Officer

David Alberty – Vice President of Accounting, Finance & Treasury


Brad Reback – Oppenheimer & Co.

Andrey Glukhov – Brean Murray, Carret & Co.


Welcome to the JDA Software Group Incorporated first quarter 2009 earnings conference call. During today’s presentation all parties will be in a listen only mode. Following the presentation the conference will be opened for questions. (Operator Instructions) This conference call is being recorded today, Monday, April 20, 2009. I would now like to turn the conference over to Hamish Brewer, Chief Executive Officer.

Hamish N. J. Brewer

Welcome to the earnings results call for the first quarter 2009. The first quarter was a solid performance for JDA although not as strong as recent quarters. With me on the call today is Dave Alberty, JDA Group’s Vice President of Accounting, Finance & Treasury. He’s acting as our primary financial executive while our search for a new CFO is underway. Dave will review the financial results for the quarter and then I will discuss the general condition of the markets from JDA’s perspective and our expectations going forward.

David Alberty

Before I begin let me remind you that our comments today contain certain forward-looking statements that often involve risks, uncertainties and assumptions. All statements other than statements of historical facts are statements that could be deemed to be forward-looking statements. These risks are described from time-to-time in our SEC reports including but not limited to our annual report on Form 10K for the year ended December 31, 2008.

Our presentation also includes certain non-GAAP measures which JDA uses internally in budgeting and performance monitoring activities to gage our business performance. We believe these measures provide useful information to our investors in evaluating JDA’s ongoing business results. We’ve prepared a reconciliation of each of these measures to the most directly comparable GAAP measures in our press release which will be posted on our website at www.JDA.com.

Today we reported adjusted earnings per share of $0.26 for the first quarter of 2009 compared to $0.33 in the first quarter of 2008 and $0.43 in the fourth quarter of 2008. Adjusted EPS excludes $7.1 million and $7.6 million in amortization of intangibles and $1.4 million and $1.2 million in stock-based compensation in the first quarter of 2009 and the first quarter of 2008 respectively. Restructuring charges of $1.4 million and $756,000 are also not included in adjusted EPS for the first quarter of 2009 and 2008 respectively.

Total revenues decreased 11% to $83.3 million in the first quarter of ’09 compared to the first quarter of ’08 and decreased 22% sequentially compared to $106.2 million in the fourth quarter of 2008. EBITDA decreased 24% year-over-year to $16.7 million in the first quarter which represents a margin of 20% compared to $21.8 million or a margin of 23% in Q1 2008 and $28 million or a margin of 26% in Q4 2008.

In the first quarter software license revenues were down 24% year-over-year and 55% sequentially. Our average selling price for the trailing 12 months ended March 31, 2009 was $697,000 per deal compared to $392,000 in the first quarter of last year and $687,000 Q4 2008. We signed three large software license revenue deals of $1 million or more and three multiple product deals during the first quarter of 2009 and as Hamish will discuss in further detail later in our call, our pipeline remains strong as we enter the second quarter.

Maintenance revenue represented 52% of our total revenues in the first quarter of 2009 and a 75% gross profit margin contributed significantly to our overall profitability. This compares to gross profit margins of 74% in Q4 2008 and 76% in Q1 2008. Maintenance revenue is down 2% sequentially and 6% year-over-year. The annualized retention rate in Q1 2009 was 96.7% compared to 97.3% in Q1 2008. Retention rates were negatively impacted during Q1 2009 as a result of certain bankruptcies in our retail customer base and as a result of other customers who have opted for reduced levels of support.

We believe the annualized attrition rate for all of 2009 will be approximately 93% to 93.5%. Foreign exchange rate variances resulted in a $917,000 decrease in maintenance revenues when compared to Q4 2008 primarily due to a strengthening of the US dollar against European currencies. When compared to Q1 of 2008 foreign exchange rate variances resulted in a $3 million decrease.

Our consulting services revenues continued to be impacted by product mix, delays in project start dates and both competitive and economic pressures on our realized billing rates. Services revenues decrease sequentially and year-over-year 10% and 11% respectively. Services margins were 15% in Q1 ’09 as compared to 15% in Q4 ’08 and 21% in Q1 ’08. Worldwide utilization and realized billing rates were 52% and $184 per hour respectively in Q1 ’09 compared to 49% and $196 in Q4 ’08 and 57% and $189 per hour in Q1 ’08.

Operating expenses excluding amortization of intangibles and restructuring chargers were $37.9 million in Q1 ’09 compared to $45 million in Q4 of ’08 and $41.4 million in Q1 ’08. Total incentive compensation included in operating expenses which includes commissions, bonuses and share based compensation in Q1 ’09 was $4.4 million compared to $11.7 million in Q4 ’08 and $5.7 million in Q1 ’08. The bad debt provision this quarter was zero. We will continue to be focused on aggressively managing expenses and looking for ways to lower our cost structure throughout the remainder of the year.

Product development expenses decreased $1.1 million or 8% to $12.6 million in the first quarter of 2009 compared to $13.7 million in both the fourth quarter of 2008 and the first quarter of 2008. The sequential decrease results primarily from lower incentive compensation in Q1 2009 due to lower operating results compared to Q4 2008. The decrease year-over-year is primarily due to lower incentive compensation and a decrease in travel costs. In addition, although the average product development headcount increased 18% in the first quarter of 2009 compared to the first quarter of 2008, our cost of salaries and related benefits dropped 2% as new and replacement positions are being filled with lower cost resources at our center of excellence operation in India.

We entered the first quarter of 2009 with 566 people in product development compared to 531 at the end of 2008 and 478 as of March 31, 2008. These headcount totals include 322 FTE and 254 FTE in product development functions at the COE. Sales and marketing expense decreased $4.5 million or 24% to $14.3 million in the first quarter of 2009 compared to $18.8 million in the fourth quarter of 2008 and decreased $1.9 million or 12% compared to the first quarter of 2008. This sequential decrease is primarily due to a decrease in commissions resulting from lower software license sales. In addition, fourth quarter commissions also included the impact of yearend escalators and sales commission plans. The year-over-year decrease results from a decrease in commissions attributable to the 24% decrease in software license sales.

G&A expenses were $11 million in the first quarter of 2009 compared to $11.8 million in the fourth quarter of 2008 and $11.6 million in the first quarter of 2008. The sequential decrease results primarily from lower incentive comp in Q1 2009 due to lower operating results compared to Q4 2008. The year-over-year decrease is primarily due to a lower bonus accrual and a decrease in professional fees in Q1 2009 compared to Q1 2008 offset in part by a slight increase in headcount.

We recorded an income tax expense of $1.3 million in Q1 ’09 and $3.3 million in Q1 ’08. This equates to an effective tax rate of 34% and 38% respectively. The effective tax rate in Q1 ’09 is lower than the federal statutory rate of 35% primarily due to the utilization of research and development credits. Our days sales outstanding increased sequentially to 71 days in Q1 ’09 from 67 days in Q4 2008 due to the heavy annual maintenance renewals that occur each year in the first quarter and decreased eight days year-over-year from 79 days in Q1 2008.

We generated $33.1 million in cash flow from operations in Q1 ’09 compared to negative cash flow from operations of $23.6 million in the fourth quarter of 2008 and positive cash flow of $23.1 million in the first quarter of 2008. Q4 2008 included $29.7 million in costs related to the terminated acquisition of i2 Technologies, $3.6 million of which were accrued but not paid as of December 31, 2008. Excluding these onetime charges, the company generated $2.6 million of pro forma cash flow from operations in Q4 ’08.

Finally, we spent $1 million in cap ex during the quarter and invested $2.5 million on the repurchases of about 230,000 shares of our common stock pursuant to our approved stock repurchase program. We ended the quarter with $63 million in cash. The company is in excellent financial conditions.

With that I’ll turn it over to Hamish.

Hamish N. J. Brewer

Well, the first quarter was not a strong quarter from the software sales perspective in absolute terms. I think it represented a solid performance from JDA in a very difficult market and I certainly believe that we’re doing much better than our major competitors many of whom seem to be really struggling right now. What’s also very clear is that JDA’s value proposition, our business model and our financial health are all in excellent condition.

I’d like to start my account of our performance this afternoon with a discussion about what I believe happened in the first quarter and then I’ll move on to discuss our prospects going forward. During the first quarter we saw an elevated number of deals mainly in the Americas which were deferred as a result of a number of reasons cited by our customers. The majority of these slippages seemed to be centered around the retail industry rather than manufacturing and I think it’s notable that man retailers begin their new financial year during the course of the first quarter.

It’s our belief that as budgets were finalized for 2009 a number of projects were put in to additional review and some of those projects were cancelled as a result of that review process and some were just delayed. Based on our experience we believe that about half of the incremental deal slips were generally delays and we expect those deals to materialize in the next 90 to 180 days and the other half may never materialize as long as we remain in the current economic environment.

We also saw a lot of management changes which typically have a disruptive impact on our ability to close business as projects are put on hold pending the hire of new executives and their approval of the underlying business initiatives. In addition to these market conditions I also believe that there was a JDA specific factor in play during the first quarter in the Americas which I alluded to during the last earnings call. As you know, we had a record fourth quarter which somewhat drained the first quarter pipeline particularly of large deals.

The good news in this respect is that during the first quarter we have successfully rebuilt our large deal pipeline and we enter the second quarter with a much stronger list of potential large deals. So, when you put all this together, I think you can see why our software results were somewhat modest. Certainly not a disaster by any means which we believe has happened to a number of our competitors but, clearly weaker than the past few quarters.

However, in spite of this modest software result, I think that our first quarter really showed the strength and durability of our business model in challenging times and I’d like to spend a moment highlighting some key aspects of this resilience. At the start of 2008 we implemented a major initiative to develop our center of excellence in Hyderabad. When we announced this initiative we talked about the potential to significantly improve operating margins and as it turns out our timing was excellent and our fully allocated operating expenses for the company were down 6% compared with the fourth quarter 2008 which translates in to an improvement in profits of about $4.5 million. To be clear, I’ve included all operating expenses in these numbers including our expenses in consulting and support.

Of this $4.5 million savings, about $2 million of it is accounted for by reduced incentive compensation across the company. So, if you disregard this component you can see that we have significantly reduced our operating expenses run rate in real terms. The second point which I think is notable which is directly related to my previous point is regarding our maintenance revenues. At $43 million, our maintenance revenues in the first quarter represented 52% of our total revenues and these revenues delivered a 75% margin and as such they provided more than 100% of our total EBITDA.

This revenue stream provides a very solid foundation for our business in difficult times as long as we can maintain our historically high maintenance retention rates. You can imagine that we’ve been very focused on the potential impact of increased efforts by our customers to reduce maintenance expenses. We have seen a substantial increase in pressure from our customer base in 2009 to cut maintenance expenses however, so far we’ve been successful at limiting the impact of this source of maintenance attrition and additionally the attrition resulting from bankruptcies and liquidations have also been modest.

The result of this progress to date is that during the first quarter, our maintenance retention was 96.7% compared to 97.3% in the first quarter of last year. When you consider that about 40% of our annual maintenance renewals occur in the first quarter, we believe this metric is critical and represents a successful result for our financial strength this year.

Finally, last year we put in place a number of new controls and procedures around accounts receivables. Concerned as we were about the risk of having aged payables in this tough economic environment, I’m very pleased to report that our efforts in this process have been successful. Our DSOs at the end of the quarter which is a seasonally high point for us due to first quarter maintenance renewals were just 71 days compared to 79 days at the same time last year.

This combined with strong license performance in Q4 has translated in to a very impressive $33.1 million of cash flow from operations in Q1 2009 compared to $23.1 million in the first quarter of 2008 which was actually a stronger quarter in terms of overall revenues. Just to remind you, we are debt free having repaid [inaudible] in just 19 months and as a result I’m very pleased to report that we ended the quarter with $63 million on our balance sheet.

So all-in-all, while we may face challenging quarters from time-to-time from a software sales perspective in this tough economic climate, I hope that all of these indications of our financial strength and health encourage you to believe that JDA is a solid performer with the ability to weather difficult times quite well. With that thought in mind, let’s look forward to the second quarter.

As I said at the start of the year, although our software sales business remains volatile on a 90 day basis, we felt that the risk of providing quarter-to-quarter guidance was lower than the risk of trying to provide full year guidance with so many unknowns about how the economy was going to change this year. As I mentioned earlier on this call, we have entered the second quarter with a stronger pipeline of large deals but, as you can imagine, we’re also a little gun shy after having seen the elevated level of deal erosion that we experienced during the first quarter.

But in the balance, we believe that we will sell more software in the second quarter and as a result we’re guiding software sales to come in between $17 million and $22 million this quarter which we believe will give rise to total revenues of between $85 and $92 million which we believe should generate between $18 and $23 million of adjusted EBITDA or $0.28 to $0.38 of adjusted EPS.

Finally, before I open up the call for questions, I’d like to update you on a major strategic initiative that we’ve just begun to implement at JDA which we believe will provide a growth platform for the company and which will directly address the pressure our customers are facing today to cut costs. Typically today the vast majority of the work involved in operating our solutions once we’ve implemented them are under taken by our customers without our direct day-to-day involvement.

We believe that we can offer a compelling value proposition which will reduce costs, increase quality and decrease work load for our customers by developing a high quality, low cost managed services offering. This initiative will build directly upon our 2008 initiative of developing center of excellence in Hyderabad as we’re able to leverage those resources to achieve our goals.

At this stage we’ve just begun to implement this new initiative but, as we get further in to this opportunity, I’ll speak more about the significant opportunity that I believe this business could represent. With that final comment, I’d like to open up the call to questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Brad Reback – Oppenheimer & Co.

Brad Reback – Oppenheimer & Co.

Hamish, did I hear earlier in the call that you expect the attrition rates or maintenance for the year to be 93% to 93.5%?

Hamish N. J. Brewer

That’s correct.

Brad Reback – Oppenheimer & Co.

So, would the implication there be that we should expect quarterly maintenance revenue to trail off here a little bit from the $43 million reported in the current quarter?

David Alberty

I believe that we’re looking for maintenance revenue to be about $43 million in the second quarter. So, I don’t think it’s going to trail off.

Brad Reback – Oppenheimer & Co.

On the strategic initiative Hamish, looking forward what type of expenses should we think about associated with that as you build up those capabilities?

Hamish N. J. Brewer

We’re still putting together our detailed plans. The first step that we really took was to bring in some outside expertise to help us really build this business correctly. Obviously, a lot of other software companies have gone down this path, historically we’re not breaking any ground here and so we wanted to hire some of that expertise and we’ve done that. We’re really just detailing out our plans at this point.

I don’t really have any firm numbers I can give you in terms of expectations around costs or revenue expectations. But, as we start to build that out during the course of the next few months [inaudible].

Brad Reback – Oppenheimer & Co.

On the consulting business as I look through my model, this looks like the lowest number on a gross margin basis that you’ve put up since March of 2003. I understand what you’re saying about getting the Indian center of excellence up and running but thus far the investment there doesn’t seem to be generating the returns that we would have expected.

Hamish N. J. Brewer

From a consulting services perspective, you’re right we’ve got people in place and we’ve got them trained but what we have not been able to successfully do is to get the level of attach rate in to our consulting business that we were hoping for in our center of excellence. So, we’ve still go quite a bit of work to do in that area and margins as we pointed out are pretty low for this quarter.

In general, our feeling is that things are improving slightly in our consulting business now and so we’re hopeful going forward we’re going to be able to turn in some better results from our consulting business. But, to be quite frank with you, I’m waiting to see that happen before we start to set further expectations about what you can expect to see in the future because obviously we’ve had a protracted series of quarters here where we’ve just seen really poor results from a margin perspective in our consulting business.

Brad Reback – Oppenheimer & Co.

What’s the biggest push back you’re getting from customers not wanting to adopt some of that?

Hamish N. J. Brewer

I think to be frank with you there’s kind of two sides to it, one side of it is just getting our own processes internally and our own organization to think in a different way of delivering our projects. Obviously, when you’re involving our remote services center as part of a project you need to think differently about how you’re going to start the project and how you’re going to position that with customers and I think we’re still going through that change internally within JDA. Secondly, I think also it’s true that some customers still feel more comfortable having people visible and onsite at their premises when they’re implementing a solution and so we have to manage that as well.

Brad Reback – Oppenheimer & Co.

Finally, on the CFO search, any expectation on timing?

Hamish N. J. Brewer

No, no news yet but we’re looking at it hard and we will start meeting up with some candidates in the not too distant future.


Your next question comes from Andrey Glukhov – Brean Murray, Carret & Co.

Andrey Glukhov – Brean Murray, Carret & Co.

Hamish, just to follow up on the consulting margin question, it seems that your utilization there continues to decline and sitting at 50% is probably below what you would have hoped for. Do we come to a point where you take more proactive measures on just adjusting the headcount in the consulting organization?

Hamish N. J. Brewer

Our proactive measure is to build out more of our services delivered from our center of excellence. As I just said to Brad, we’re behind where we planned to be in terms of adoption of that in our business today so we’ve got a lot of work to do there but, that is our proactive measure, to improve utilization and improve margins overall in our business. When we look forward right now, we do anticipate that hopefully we’re going to start to see improving utilization across the consulting business but, you’re right we’ve got a long way to go to where we are really gaining [inaudible] to be in the business.

Andrey Glukhov – Brean Murray, Carret & Co.

So then maybe let me ask the question a different way, is there any specific product family where you guys opted to sort of maintain the strategic [inaudible] but right now those product families are not getting sold to the strength you were hoping for. Is that weak utilization pretty much across the board?

Hamish N. J. Brewer

No, it’s patchy in different geographies. Unfortunately, it’s kind of a moving target because every quarter, all the different mix of products in different geographies with different language requirements for implementing those solutions, so getting that mix right is a constant challenge for our consulting business. I don’t think I would point to any one area in particular where we’ve got a whole bunch of people standing around with nothing to do, I don’t think that’s really the case. It’s just the way that the mix changes every 90 days and it does change that frequently.

Andrey Glukhov – Brean Murray, Carret & Co.

As far as the licensing revenue is concerned, all these numbers were softer than you guys were hoping for this quarter, it sounds like you’re quite a bit more optimistic on Q2. Can you give us a little more color as to why do you think the retailers are going to start pulling the trigger on some of the larger projects which you would need to sort of get that license number up in Q2 when the environment arguably continues to be fairly challenging?

Hamish N. J. Brewer

I think during the course of the first quarter, as I kind of alluded to in my script, I think we sort of went through a shakedown where a lot of projects got essentially put on the shelf. I think the stuff that we’re dealing with now is real and has been vetted and has been reviewed and budgeted with the current economic environment very much in mind. It’s our belief at this point that we’ve kind of seen a shakeout and we’re hopeful that the projects that we’re counting on for the second quarter are really going to materialize and quite frankly, we’re seeing a lot of activity in our customer base to indicate that’s the case. So, while I can’t go in to obviously a lot of details about that, we feel pretty good about the way a lot of these deals are moving forward right now.

Andrey Glukhov – Brean Murray, Carret & Co.

The incremental uplift in the license revenue in Q2 versus Q1 is it going to be largely the function of the North American execution or is Europe and Asia also part of it?

Hamish N. J. Brewer

It’s mostly North America. We are looking for a better performance out of Europe as well but from a dollar perspective it’s mostly has been provided in North America.


Mr. Brewer it looks like there are no further questions. I’ll turn the call back over to you for closing comments.

Hamish N. J. Brewer

Thank you very much all of you for joining us here today. We look forward to joining with you again in July.


Ladies and gentlemen that will conclude today’s teleconference. You may now disconnect.

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