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JDA Software Group, Inc. (NASDAQ:JDAS)

Q2 2009 Earnings Call

July 20, 2009 4:45 pm ET

Executives

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

David Alberty – Vice President of Accounting, Finance & Treasury

Analysts

Brad Reback – Oppenheimer & Co.

Patrick Walraven - JMP Securities

Jeffrey L. Van Rhee - Craig-Hallum Capital Group

Kevin Oram - Praesidium Investment Management

Operator

Welcome to the JDA Software Group Incorporated second quarter 2009 earnings conference call. (Operator Instructions) This conference call is being recorded today, Monday, July 20, 2009. I would now like to turn the conference over to Hamish Brewer.

Hamish N. J. Brewer

Good afternoon and welcome to the earnings results call for the second quarter of 2009. The second quarter was a record quarter for JDA from two critical points of view. First, in terms of software sales we achieved $27.6 million in the quarter, a record for the second quarter. And this means that for the first time in the company's history our trailing 12-months software sales have exceeded $100.0 million.

Secondly, in terms of adjusted EBITDA, we achieved $28.7 million for the quarter, which is an all-time record for the company and which also means that for the first time in the company's history, we have trailing 12-months adjusted EBITDA in excess of $100.0 million.

With me on the call today is David Albert, JDA's vice president of accounting, finance, and treasury. Dave is going to review the financial results for the quarter and then I will discuss the general condition of the market from JDA's perspective and our expectations going forward.

David Alberty

Before we 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 10-K for the year ended December 31, 2008.

Our presentation also includes certain non-GAAP measures which JDA uses in budget and performance modeling activities to gauge our business performance. We believe these measures provide useful information to our investors in evaluation JDA's ongoing business results. We have 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 Web site at www.JDA.com.

This afternoon we reported record software license revenue and the highest adjusted EBITDA total ever in a quarter. Second quarter 2009 software license revenue of $27.6 million was the second highest quarterly software total in the history of the company and is the third time in the last four quarters that JDA has obtained a software license milestone in a quarter.

We achieved adjusted earnings per share of $0.47 for the second quarter of 2009 compared to $0.29 in the second quarter of 2008 and $0.26 in the first quarter of 2009. Adjusted earnings per share excludes $7.0 million and $7.5 million in intangibles amortization and $2.2 million and $1.0 million in stock-based compensation in the second quarter of 2009 and the second quarter of 2008 respectively.

Restructuring charges of $2.7 million and $2.9 million are also not included in adjusted EPS for the second quarter of 2009 and 2008 respectively.

Total revenues increased 8% to $99.5 million in the second quarter of 2009 compared to the second quarter of 2008 and increased 19% sequentially compared to $83.3 million in the first quarter of 2009.

Adjusted EBITDA increase 41% year-over-year to $28.7 million in the second quarter, which represents a margin of 29% compared to $20.4 million, or a margin of 22%, in Q2 2008 and $16.7 million, or a margin of 20%, in Q1 2009.

Software license revenues were up 77% year-over-year and 80% sequentially. Our average selling price for the trailing 12 months ended June 30, 2009, was $819,000 per deal compared to $397,000 in the second quarter of last year and $697,000 in Q1 2009, representing a 17.5% sequential increase.

We signed five large software license revenue deals of $1.0 million or more and five multiple product deals during the second quarter of 2009.

Maintenance revenues up 3% sequential to $44.4 million compared to $43.0 million in the first quarter of 2009 and decreased $2.3 million, or 5%, compared to Q2 2008.

The decrease in maintenance is attributable to currency fluctuation year-over-year with $3.4 million, which was somewhat offset by revenue growth of approximately $1.1 million.

Maintenance revenue was higher sequentially in the second quarter as the net change from previously suspended accounts increased by $1.2 million versus a net reduction of $718,000 in the first quarter of 2009.

Foreign exchange rate variances resulted in a $328,000 increase in maintenance revenues in Q2 of 2009 when compared to Q1 2009, primarily due to a weakening of the U.S. dollar against European currencies.

When compared to the second quarter of 2008, foreign exchange variances resulted in a $3.4 million decrease. Foreign exchange rate volatility in the current economic environment will continue to be a significant risk in our efforts to stabilize maintenance revenue perform and improved sequential and year-over-year results.

We believe the annualized retention rate for all of 2009 will be approximately 91% to 92% on a constant currency basis. This projection is lower than previously forecasted as a result of the customers who have opted to drop or reduce the level of support on their applications, and the result of certain bankruptcies.

Services revenues increased sequentially 10% and decreased 7% year-over-year. Services margins were 18% in Q2 2009 as compared to 15% in Q1 2009 and 19% in Q2 2008.

Worldwide utilization increased to 57% from 52% in first quarter of 2009 and from 54% year-over-year.

Realized rates dropped to $179 per hour in the second quarter of 2009 compared to $184 an hour in the first quarter of 2009 as we doubled the number of consulting hours performed through our Center of Excellence in India, which are billed at lower rates.

As expected, our overall services revenue and margins are increasing and the realized rate is declining as consultant at the CoE comes online.

Operating expenses, excluding amortization of intangibles and restructuring charges were $40.5 million in Q2 2009 compared to $37.9 million in Q1 2009 and $39.3 million in Q2 2008.

Total incentive compensation, which included commissions, bonuses, and share-based compensation, including non-operating expenses in Q2 2009 was $7.1 million compared to $4.4 million in Q1 2009 and $4.2 million in Q2 2008.

The bad debt provision this quarter was $300,000.

Product development expenses was flat at $12.7 million in Q2 2009 compared to $12.6 million in Q1 2009 and decreased $568,000, or 4%, compared to $13.2 million in Q2 2008.

The decrease in product development expense in Q2 2009 compared to Q2 2008 was due primarily to a decrease of salaries and related benefits and a decrease in outside contractor costs.

The average product development headcount increased 16% year-over-year while salaries and related benefits dropped 6% as new and replacement positions were filled with lower cost resources at the Center of Excellence.

We ended the quarter with 575 associates in product development, compared to 566 at March 31, 2009, and 503 at June 30, 2008. These headcounts include 377 FTE, 355 FTE, and 287 FTE in product development functions at the CoE respectively.

Sales and marketing expense increased $1.9 million to $16.2 million in Q2 2009 compared to $14.3 million in Q1 2009 and increased $440,000 compared to $15.7 million in Q2 2008. The sequential and year-over-year increase in sales and marketing expense was due primarily to the increase in sales commissions resulting from the substantial increase in software license sales both sequentially and year-over-year.

We ended the quarter with 225 people in sales and marketing, including 72 quarter-carrying sales associates.

General and administrative expense increased $344,000 to $11.4 million in Q2 2009 compared to $11.0 million in Q1 2009, and increased $992,000 compared to $10.4 million in Q2 2008. The sequential and year-over-year increase in general and administrative expense is due primarily to an increase in the bonus accrual on stock-based compensation and the company's higher operating results.

We recorded income tax expense of $5.2 million in Q2 2009 and $1.7 million in Q2 2008. This equates to an effective tax rate of 37% and 36% respectively. Income tax expense in the second quarter of 2009 is higher than second quarter 2008 primarily due to the company's improved operating results.

Our days sales outstanding decreased sequentially to 57 days in Q2 2009, from 71 days in Q1 2009 and decreased 11 days year-over-year from 68 days in Q2 2008. This is the lowest quarterly DSO the company has ever reported and highlights our continued emphasis on collections.

We generated $27.4 million in cash flow from operations in Q2 2009 compared to $33.1 million in the first quarter of 2009 and $28.8 million in the second quarter of 2008.

First half 2009 cash flow from operations is $60.5 million, which is more than 16% higher than the first half of 2008.

Finally, we spent $400,000 in capital expenditures during the quarter and repurchased about 36,000 shares of our common stock pursuant to the approved stock repurchase program.

We ended the quarter with cash of $92.7 million.

And with that, I'll turn it over to Hamish.

Hamish N. U. Brewer

As I mentioned during our first quarter earnings call, we entered the second quarter with a stronger pipeline, and in particular with a stronger pipeline of March software deals. You can imagine after a somewhat disappointing first quarter we were concerned about the potential for ongoing instability in the market, so while it's exciting and positive for the company that we were able to deliver a record quarter and close five large deals, the fact that gives me greater comfort is that it appears as though the volatility of the first quarter has dramatically diminished. This bodes well for the balance of the year.

On software sales, all three of our operating regions were up year-over-year and quarter-over-quarter, which is a substantial improvement in both the Americas and Asia/Pacific. In fact, it was the largest quarter ever for our Asia/Pacific region, exceeding all of last year's sales in one quarter, so I would like to spend a few minutes talking about the demand environment in each of our three regions.

The Americas delivered a solid $14.4 million software sales, up over 60% year-over-year. This result was driven by a solid performance from both large and mid-sized deals. Our sales operations in the Americas have performed consistently and grown the business at the expense of our competitors in a tough market over the past four quarters and more.

I expect this trend to continue and the pipeline for new business in the second half of the year looks robust. The Americas region is leading the growth charge at JDA and I expect that to continue throughout 2009.

Our EMEA region delivered a solid $5.0 million in sales, up slightly over last year. As you may remember, we made some leadership changes in this region in March and so the second quarter was the first full quarter under the new leadership. While I think we have suffered from some sales execution issues in this region over the past 18 months, despite these challenges the pipeline for new business is reasonably strong and with the changes that we've made, I'm optimistic that we can drive software sales growth in EMEA over the medium term.

In support of this goal, you may have seen that we recently acquired a stake in our leading reseller in Europe, which will provide us with additional momentum in Central and Eastern European markets and Russia.

I don't expect this strategy to have a major impact in the immediate term but in the medium term, especially as Russia recovers economically, I am optimistic that this strategy will act as a growth driver for the EMEA region.

In Asia/Pacific we had a record software sales quarter driven by one large deal. While of course this is very exciting, I think it's important to note that I expect our underlying trend in the software sales in this region to remain relatively soft for sometime due to the widespread economic challenges in many of the major markets in this region.

In the face of these macro economic difficulties, strategically we have decided to focus our energies on developing China. During the second quarter we announced our intentions to quadruple our local presence in China over the next couple of years in support of our growth plans.

I believe that Chinese industry has largely been through the initial phases of packing software adoption, implementing low cost local solutions and horizontal infrastructure applications such as finance and HR.

The market now appears ready to focus on planning and optimization software, with an understanding that today's lower labor cost advantage may not be sustainable in the long term.

I believe that the search for efficiency and productivity in China is beginning and this means that the second largest economy in the world is starting to look for the tools that JDA can deliver.

Once again, this strategy is not going to deliver immediate results but I do expect it drive growth for our Asia/Pacific region in 2010.

Moving on to our consulting business, we have spoken publicly about our anticipated gradual improvement in consulting margins and I pleased to be able to report that it appears that we have started to move in a positive direction for this part of our business.

As you may know, our consulting business was always a lightening indicator for JDA and I think we're beginning to see the impacts of the recent successful quarters of software sales drive improvements.

Consulting margins in the second quarter improved 3 point to 18%. I expect this gradual margin expansion to continue in the second half of 2009. Additionally, we started to make some headway with our strategy of delivering services out of our Center of Excellence in India. In the second quarter approximately 7% of all billable hours were delivered through the CoE compared to just 3% in the first quarter.

Our maintenance business continues to be subject to unusually intense pressure from customers to reduce maintenance costs. As a result of this challenging environment, we have seen elevated levels of maintenance attrition and we now project that annual maintenance retention for the full year will come in between 91% and 92%.

While on an absolute basis, this leaves JDA at the high end of our industry, it's lower than our typical retention rate. This outlook is slightly reduced compared with the annual retention rates previously predicted at the end of the first quarter, the further reduction being a consequence of the increased visibility that we now have established during the second quarter.

While these retention rates are somewhat disappointing, they are more than being offset by our strong resales performance, which together with the recent weakening of the U.S. dollar, have resulted in sequential front line growth of $1.4 million in our maintenance business in the second quarter, which is better than we expected. And our support margins remain strong, at 75%.

During the second half we expect to deliver flat or slightly improving results from our maintenance business as revenue streams from new customer sales will continue to offset the impact of the cushion in our existing customer base.

Our maintenance results in the second half will be subject to risk of impact from currency rate fluctuations.

Moving on to profitability, in the second quarter we delivered $28.7 million of adjusted EBITDA, which is both a record in absolute terms, as well as in terms of EBITDA margin. At 29% we believe our adjusted EBITDA margin is an industry-leading result for companies our size.

The other good news is our profits are resulting in strong cash flow from operations. We delivered $27.0 million of cash from operations in the second quarter, assisted once again by our ongoing program of tight credit and collections management. This means the cash flow from operations in the first half are up more than 16% compared to the first half of 2008.

With net cash of $92.7 million and no debt, the company is in extremely good financial health.

That completes my review of our global operations. As you know, software sales is a leading indicator for the overall health of our business and on this basis and many other metrics, the company has never performed better than it is today.

While quarter-to-quarter sales may fluctuate, we believe the underlying trend in software sales of JDA is up. If I consider trailing 12-months sales over the past four quarters, it has risen from nearly $74.0 million in trailing 12-month license sales at the period ended June 30, 2008, to over $100.0 million in the period ended June 30, 2009, an outstanding result in this economic environment.

So while I don't think that any of us have a clear view on exactly how the global economy is going to recover from the current recession, it is clear that companies are focused on improving operating margins in tough times and risks, combined with JDA's timely emergence as a clear market leader in supply chain software has proven to be a potent growth driver for the company.

With this in mind, as I said at the start of my remarks, the most important outcome of the second quarter for me was the apparent stabilization of the demand environment. As you know, we normally provide full year guidance due to the fact that our business cycle is longer than 90 days. However, at the outset of 2009 our concern for the overall impact of the recession on JDA led us to a shorter term quarterly guidance. The stabilization of the second quarter means that I now feel as though we can start to look further out.

As a result, today we are going to provide guidance for the second half of 2009. Our guidance for the second half of 2009 is as follows: software, between $43.0 million and $47.0 million; total revenues between $195.0 and $202.0 million; adjusted EBITDA between $49.0 million and $50.0 million; and adjusted EPS between $0.84 and $0.86.

Regarding the mix of the two quarters, I look at 2009 this way. The first quarter was softer, the second quarter was strong, I expect the third quarter to be seasonally softer again, and then the fourth quarter to be strong.

Finally, I am delighted to be able to announce that we have successfully recruited Pete Hathaway as executive vice president and chief financial officer for JDA. Today is Pete's first day at JDA and that's why he's not on hand to handle this call with me.

With that final comment I would like to open up the call for questions.

Question-and-Answer Session

Operator

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

Brad Reback – Oppenheimer & Co.

I saw on the data sheet that the service industry business was up very significantly year-over-year. Is there anything special going on there?

Hamish N. U. Brewer

Yes, you know we made actually a conscious decision at the beginning of this year that we were going to try and grow that business unit and I think we're really starting to get a lot of traction in the marketplace. And we had a great, really fantastic quarter. We are expecting our service industries business unit to expand during the course of this year, most of it happening in the second quarter. It's a very lumpy business with big transactions that happen infrequently, but second quarter was certainly I think the best quarter we've ever had.

Brad Reback – Oppenheimer & Co.

You had mentioned a pretty significant deal in Asia. Can you put any parameters around that?

Hamish N. U. Brewer

Not a great deal, no. I can't tell you very much about it but—

Brad Reback – Oppenheimer & Co.

Can you tell us if it was over a $5.0 million transaction?

Hamish N. U. Brewer

No, I can't. It was a substantial deal and in historic terms for JDA. And I think what's important about it is not just the immediate impact of the deal but hopefully the long-term revenue and opportunities that we can both derive from it.

Brad Reback – Oppenheimer & Co.

On the service business, finally you've stemmed the tide and got going in the right direction there. Is this going to be a steady move upward or should we expect some volatility there, some lumpiness from quarter-to-quarter as the margin improves?

Hamish N. U. Brewer

Right now we're hoping for, and we're projecting, steady improvement through the balance of 2009. There will be the usual seasonal impact. First quarter has got seasonally small number of billing days, so there will be that kind of fluctuation that we normally would have, but overall we are expecting to see hopefully some of the continued steady improvement in the margins throughout the rest of this year.

Operator

Your next question comes from Patrick Walraven - JMP Securities.

Patrick Walraven - JMP Securities

If I look at your space and category management product line that was 41 deals, that was tremendous. Can you just describe for us what's going on and so when people ask us what's driving the business there we can give some sense of the dynamic?

Hamish N. U. Brewer

Well the overall our space and category management has been leading space for us for quite a long time and I don't know if there is any particular happening during the course of the second quarter.

Patrick Walraven - JMP Securities

You had 41 deals this quarter versus 27 a year ago and it sounds like the highest number you've had in that space in the last 6 quarters was 35. So something.

Hamish N. U. Brewer

I can't say that I've really focused on that so I don't know what more to say about it.

Patrick Walraven - JMP Securities

Okay, how about sort of bigger picture. Why is the spending opening up again? What is driving that?

Hamish N. U. Brewer

I think that what we are seeing, as we kind of theorized going into the year, that people would take capital spending and divert it to software that would help them improve margins. And I think that's what we're seeing happen. And in fact, if you look at the software space in general, and outside of JDA, it fits with that model, because companies like JDA are really focused on planning an optimization application and companies that are more focused on infrastructure type applications are having a tough time because they just don't have an ROI associated with them.

So I think that that is the underlying trend that's going on in the marketplace and I would anticipate that that would continue for some period of time here.

Patrick Walraven - JMP Securities

Can you just comment a bit on your thinking around acquisition plans now. Particularly given when you look at the background of your new CFO. He seems to have a tremendous amount of experience, sort of rolling things up.

Hamish N. U. Brewer

That was an important factor for us going into that process of looking for a new CFO and I think we've been pretty public about the fact that we want to go through acquisitions. Clearly we ran into our difficulties last year with the overall global credit market but I think that as that market stabilizes, and we've said this many times, publicly, we're actively going to be looking for opportunities to pick up new companies and drive our business forward.

Operator

Your next question comes from Jeffrey L. Van Rhee - Craig-Hallum Capital Group.

Jeffrey L. Van Rhee - Craig-Hallum Capital Group

In terms of the quarter, can you talk about how the quarter played out, from start to finish, in terms of the linearity of it? The feeling of the customers, their willingness to spend, the sense of stability. Just give us a bit more of a play by play as to how things improved throughout the quarter.

Hamish N. U. Brewer

Well, as I mentioned in my scripted remarks, for me I think the big thing in the quarter was the second quarter was much more like a normal quarter than the first quarter was. The first quarter we had a lot of unexpected last minute surprises and while there were still some during the course of the second quarter, it was dramatically reduces.

And so my sense overall is that budgets are set, the demand environment is more stable, people have a plan, they're executing to the plan. Fortunately for us the plan involves buying JDA software. What we see is people saying they're going to do A, B, and C and then they actually do A, B, and C and they don't get suddenly surprised halfway through the process and say they have to delay this for a year or something.

So I think to me, the most important thing was the overall environment stabilized and with that force in mind, in fact, it was a relatively linear quarter for us. Relatively speaking it was a relatively linear quarter because I think people have a plan and they're working to it.

Jeffrey L. Van Rhee - Craig-Hallum Capital Group

So you're just saying the linearity was a little better than you've seen in the more recent quarters, if not a typical quarter.

Hamish N. U. Brewer

Yes.

Jeffrey L. Van Rhee - Craig-Hallum Capital Group

And taking a look at your pipeline, you gave some incremental color in comparisons when you entered Q2 compared to what it looked like when you entered Q1 and now you're giving second half guidance so there's no way to directly correlate it to Q3, but is there any lesson that you see in terms of looking at your pipeline, whether it's by verticals, your geography product, or other breakdowns that you see in there in terms of what's selling, what's not, or suggestive trends?

Hamish N. U. Brewer

Well, what's selling for us most definitely, by product line, is far more on the planning and optimization area than on the transaction systems. I mean, I mentioned there is definitely planning and optimization that people are interested in buying right now in terms of product.

In terms of geography, we're actually seeing pretty good demand obviously across North America, pretty good demand across the middle of the western European countries, and Latin America is tough, although it looks as though it may be slightly loosening up now, which hopefully is going to be an improving situation. And then Asia/Pacific is really a mixed bag. You know, you've got some countries doing quite well and remaining pretty stable and you've got others that have really just ground to a halt almost completely, so it's very mixed across Asia/Pacific.

Operator

Your next question comes from Kevin Oram - Praesidium Investment Management.

Kevin Oram - Praesidium Investment Management

In terms of the accounts receivable and how much you've been able to continue to improve that, is that just more blocking and tackling? Is there anything you can tell us in terms of expanding on that about how you got, I mean, an amazing drop in DSOs.

David Alberty

It's just increased emphasis on collections, credit quality, and certainly tend to stay ahead of situations that could turn into a problem. So we 're very focused on that.

Operator

There are no further questions in the queue.

Hamish N. U. Brewer

Thank you everyone for joining our call today and we look forward to speaking with you all on the next earnings call.

Operator

This concludes today’s conference call.

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