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Executives

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

Peter S. Hathaway - Chief Financial Officer

Analysts

Richard Williams - Cross Research

Andrey Glukhov - Brean Murray, Carret

Brad Reback - Oppenheimer & Co.

Analyst for Patrick Walraven - JMP Securities

Jeffrey Van Rhee - Craig-Hallum Capital Group

JDA Software Group, Inc. (JDAS) Q3 2009 Earnings Call October 19, 2009 4:45 PM ET

Operator

Welcome to the JDA Software Group Incorporated third quarter 2009 earnings conference call. (Operator Instructions) This conference call is being recorded today, Monday, October 19, 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 third quarter of 2009. The third quarter closed in line with our expectations, delivering total revenues of $95.5 million with $17.3 million in software license sales, resulting in $24.1 million of adjusted EBITDA and a healthy $20.0 million of cash flow from operations.

With me on the call today are Pete Hathaway, Chief Financial Officer of JDA, and Dave Alberty, JDA's Chief Accounting Officer. Pete will review the financial results for the quarter and then I will discuss general market conditions and our outlook for the balance of the year.

Peter S. Hathaway

Before I begin, let me remind you that our comments today will 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 internally in budgeting and performance monitoring activities to gauge our business performance. We believe these measures provide useful information to our investors in evaluating 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.

Turning to the results for the quarter, this afternoon JDA reported total revenues of $95.9 million and software revenues of $17.3 million for the third quarter of 2009 compared to total revenues of $98.4 million and software revenues of $23.0 million for the third quarter of 2008.

For the nine months ended September 30, 2009, JDA reported total revenues of $278.7 million and software revenues of $60.2 million compared to total revenues of $284.1 million and software revenues of $58.6 million for the nine months ended September 30, 2008.

Adjusted earnings per share were $0.40 for the third quarter of 2009 compared to $0.42 in the third quarter of 2008. Adjusted EPS for both 2009 and 2008 respectively excludes these conventional items: $6.7 million and $7.4 million in intangible amortization; $2.8 million and $911,000 in stock-based compensation expense; and $2.5 million and $399.0 million of restructuring charges.

Net income for Q3 2009 was also reduced by $8.6 million for consideration paid in excess of the carrying value on the repurchase of redeemable preferred stock.

Thomas Bravo, who held this position, has completely exited and has relinquishes it's seat on our board of directs.

Total revenues decreased 3% to $95.9 million in the third quarter of 2009 compared to the third quarter of 2008 and decreased 4% sequentially compared to $99.5 million in the second quarter of 2009.

Adjusted EBITDA decreased 11% year-over-year to $24.1 million in the third quarter, representing a margin of 25% compared to $27.0 million, or a margin of 27% in Q3 of 2008, and $28.7 million, or a margin of $29%, in Q2 of 2009.

Software revenues were down 25% year-over-year and 37% sequentially. Q3 2008 and Q2 2009 were both record license quarters for JDA, making Q3 2009 a difficult comp. Our average selling price for the trailing 12 months ended September 30, 2009, was $733,000, which continues at strong levels compared to historical benchmarks. This compares to $520,000 in the trailing 12 months ended September 30, 2008, and to our all-time high of $819,000 in the trailing 12 months ended June 30, 2009, that was largely driven by one transaction. We signed one large software license deal of $1.0 million or greater in revenue in Q3 of 2009.

Maintenance revenue was up 1% sequentially to $45.0 million compared to $44.4 million in the second quarter of 2009 and a slight decrease from $46.4 million in Q3 2008. Foreign exchange rate variances increased Q3 2009 maintenance revenue by $989,000 compared to last quarter and reduced maintenance revenue $2.0 million compared to the same quarter last year. We believe foreign exchange rate volatility will continue in the current economic environment at above normal levels.

The estimated annualized retention rate for all of 2009 will be approximately 91% to 92% on a constant currency basis, which is unchanged from the outlook we gave last quarter.

Services revenue increased 22% sequentially and 16% year-over-year. Billable consulting hours increased 14% compared to Q2 2009, which resulted in an increase in services margin to 26% in this quarter compared to 18% margin last quarter and 21% margin in the same quarter last year.

Our utilization increased to 61% from 57% in the second quarter of 2009 and 52% in Q3 of 2008.

Realized billing rates increased to $193[?] per hour in Q3 of 2009 compared to $178 in Q2 2009 and decreased compared to $193 per hour in Q3 2008. The sequential increase is due to an increase in onshore billable hours resulting in higher rates. The decrease in realized rates in Q3 2009 compared to Q3 2008 reflects the higher utilization of services resourced from the COE in India.

We increased the number of billable hours at our CEO by 45% in Q3 2009 compared to Q2 2009 by over 700% compared to Q3 2008.

Operating expenses, excluding amortization of intangibles and restructuring charges were essentially flat at $40.7 million in Q3 2009 compared to $40.5 million in Q2 2009, and up slightly compared to $39.6 million in Q3 2008.

Total incentive compensation, comprised of commissions, bonuses, and share-based compensation, included in operating expenses in Q3 2009 was $7.5 million compared to $7.1 million in Q2 of this year and $6.8 million in Q3 of last year.

Bad debt provision in this quarter was $600,000 compared to $300,000 last quarter and there was no bad debt provision recorded in Q3 of 2008.

Product development expenses this quarter were essentially flat compared to Q2 of 2009 at $12.5 million and decreased 6% to $12.3 million compared to Q3 2008.

We had 581, 575, and 535 associates in product development in Q3 of 2009, Q2 of 2009, and Q3 of 2008 respectively. The COE represented 281 of these associates, or two-thirds of the total product development headcount at the end of this last quarter.

Sales and marketing expenses decreased to $15.9 million in Q3 of 2009 from $16.2 million in Q2 of 2009, almost flat compared to Q3 of 2008.

We ended the quarter with 229 people in sales and marketing, including 75 quota-carrying sales associates.

General and administrative expenses increased 5% to $12.3 million in Q3 of 2009 compared to $11.7 million in Q2 of 2009 and increased $1.9 million compared to $10.4 million in Q3 of 2008. The sequential and year-over-year increase G&A expenses is due primarily to increases in incentive compensation. In addition, Q3 of 2009 included higher legal and accounting fees and the bad debt expense I mentioned earlier, compared to Q3 of 2008.

We recorded income tax expenses of $3.9 million this quarter and $5.4 million the same quarter last year. This equates to an effective tax rate of 38% and 40% respectively.

Our days sales outstanding this quarter remained unchanged at 57 days compared to last quarter and improved from 58 days from the same quarter last year.

We generated $20.0 million in cash flow from operations in Q3 of 2009 compared to $27.5 million in Q2 of 2009 and $18.8 million in Q3 of 2008. Cash flow from operations for the first nine months of 2009 is $80.5 million compared to $70.7 million for the nine months ended Q3 2008.

During Q3 2009 we spent $30.1 million on the repurchase of the remaining Series B Convertible shares owned by Thoma Bravo. We have also spent $5.5 million on capital expenditures year-to-date and we anticipate spending between $8.0 million and $9.0 million of capital expenditures for the full year.

We ended the quarter with cash balances of $85.5 million.

And now I will turn the call back over to Hamish.

Hamish N. J. Brewer

In contrast to the record-breaking results of the second quarter this year, the third quarter was another solid quarter for the company and supports the second half guidance we set in July during our last earnings conference call.

On the call today I would like to run through a qualitative discussion of the third quarter results and then I will move on to the fourth quarter.

Software sales were softer than in Q2, as expected, due to the timing of deals in our pipeline. Asia Pacific in particular had a soft quarter, coming in somewhat lower than our expectations. Our software sales results, consistent with past quarters, were shaped by the volume and timing of large deals in our pipeline and from the outset we could see that third quarter software results was going to have this kind of profile.

Consulting services, on the other hand, delivered a strong performance, and I should point out that the results for consulting services were inflated by delayed recognition of about $1.0 million consulting work that was completed in the second quarter and recognized in July. However, even if we remove that $1.0 million from Q3 consulting revenues, consulting margins in the third quarter would have come in at 23%, which is, once again, in line with our expectations that we set earlier this year that consulting services margins would gradually improve throughout the year.

We expect the underlying performance of the consulting services business to continue to gradually improve, however, that will be significantly offset by the seasonally lower number of billing days in the fourth quarter.

Due to both the seasonal factor and the impact of the one-time $1.0 million bonus to consulting margins experienced in the third quarter, we expect a modest sequential drop in consulting services margins in the fourth quarter of 2009.

Maintenance revenues came in as expected for the quarter and maintenance expenses remained under tight control, resulting in a very healthy profit. Maintenance renewals have stabilized and we feel confident in our previous guidance of 91% to 92% maintenance retention for the full year.

Overall, I am very pleased with the cost structure and profitability of the company. We are effectively controlling costs and this is having a positive impact on margins.

With $10.0 million less software sales compared to the second quarter, our adjusted EBITDA was only $4.7 million less than Q2. The actions we took earlier in 2009 to keep tight control on costs while gaining a handle on what the economy would be like for the year has ensured continued protection of our operating margins.

The question now is how are software sales likely to fare in the fourth quarter. In the July earnings call we indicated that the third quarter would be softer and we anticipated the fourth quarter to provide a stronger surge results. I am pleased to be able to reiterate this commentary and consequently reiterate our guidance for the second half.

The pipeline for the fourth quarter has a strong representation of large deals and assuming that they close as predicted, we expect this factor to help drive a strong sales performance in Q4.

Having delivered about $17.0 million in software sales in the third quarter, meeting our second half guidance means that software sales need to come in between $26.0 million and $30.0 million. At this early stage in the quarter, and with all the usual caveats about the uncertainty of software sales in our business, I believe that the strong pipeline that we have in front of us supports delivering this kind of strong quarter.

And if we are able to deliver this level of software sales in the fourth quarter, then I am very comfortable that we will meet or beat our profitability guidance.

I remind you our guidance for the second half was software between $43.0 million and $47.0 million, total revenues between $195.0 million and $202.0 million, adjusted EBITDA between $49.0 million and $50.0 million, and adjusted EPS between $0.84 and $0.86.

And with that, I would like to open up the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Richard Williams - Cross Research.

Richard Williams - Cross Research

I wonder if you could give some color on the geographies and the tone of business, if you don't mind.

Hamish N. J. Brewer

The Americas continues to perform strongly and I would say that when we look back to the first half of this year we saw a softer sales performance from the Americas in the first quarter and then we saw a strong sales performance in the second quarter. And at this stage, when I think of the third and fourth quarter I think of a similar pattern. I anticipate the Americas driving their software sales performance that we're expecting to get in the fourth quarter.

Europe seems to be, I would say, steadily improving, and our prospects and pipeline there are beginning to look better and Asia Pacific, I still feel as though we are in re-build mode there. You may remember that we pretty much replaced most of the sales in Asia Pacific and we started this year with pretty much a brand new team, and while that team is getting underway, and we're seeing some early signs of progress.

For example, we announced last quarter that we were building an initiative to grow our business in China, and we were able to announce one significant win in the third quarter, in China, although no license revenue was recognized from that deal in the third quarter. Apart from a few signs like that, in general I would say we still have a lot of work to do in Asia Pacific. So I think it's going to be a strong performance for the Americas, increasingly strong performance from Europe over the next few quarters, and then I am hopeful Asia Pacific will start to catch up during the course of 2010.

Richard Williams - Cross Research

Do you think the economy is stable, improving, deteriorating at this point from a macro sense?

Hamish N. J. Brewer

When I look at—and the best measure we have of the economy is people's willingness to write a check for a big-ticket item, like a piece of software. And when I look at the execution of deals and the sort of volatility and the transactions that we're trying to execute, I feel that the third quarter came in pretty similar, really, to the second quarter in many ways.

It feels like things are fairly stable, certainly not the kind of volatility and unexpected last-minute deferrals and delays and what have you that we experienced in the first quarter, so I mean, I think we said before the first quarter was really very volatile and to me there were strong indications of a very nervous buying market out there, whereas I think things settled down in the second quarter and now I would say that that trend seems to have continued through to the third quarter.

Richard Williams - Cross Research

And signs of budget flush? Obviously it's early but what are your expectations of budget flush?

Hamish N. J. Brewer

I think it is a little early to say on budget flush. What we are usually looking for is how does the first week after Thanksgiving perform, in terms of sales, before people start to get a little more aggressive about spending money at year end. At this stage, I think if we have a reasonable sales performance, hopefully we will see some evidence of budget flush but it's a little too early for us to tell at this stage.

Operator

Your next question comes from Andrey Glukhov - Brean Murray, Carret.

Andrey Glukhov - Brean Murray, Carret

First, on the services margin, obviously it was very healthy in the first quarter. Can you address what you think the longest on services margins is going to be now that the stages of recovery. And obviously Q4 is a weak quarter, but what should we think about entering next year?

Hamish N. J. Brewer

I think at this stage I would say the services margins—I mean, we've got services margins now up into the sort of mid-20s range, even if you factor out that $1.0 million extra that we got in the third quarter. And I think that a plus or minus, around the sort of 25% mark, we may be a little bit lower, we may be a little higher, but I think that's a reasonable range now for us for the foreseeable future.

Obviously we are going to work to try and drive that up further with increased contribution from our Center of Excellence. We have an ongoing effort to drive up the number of hours—billable hours—that we drive out of the Center of Excellence, and to the extent that we are successful with that, you should see margins increase slightly above the levels that they're at now, but the billable rate per hour will come down.

Andrey Glukhov - Brean Murray, Carret

We navigated for this year, you know, we took care of the capital structure and you've always stated for the new interest to continue to grow the scale of the company. Can you comment about the landscape, some of the valuations out there? Are they getting a little bit more palatable and maybe on use of cash you are contemplating.

Hamish N. J. Brewer

I don't see any significant changes out there on the landscape in general. I think the situation is that with a lot of companies are having to consider how can they achieve meaningful organic growth or are they going to have look carefully at alternatives. I think that is a common question that people are asking themselves out there in the marketplace right now. It is a tough market for a lot of our competitors. Things seem to be going reasonably well for us but I know that a lot of our competitors are struggling right now.

So I don't think that things have really changed that much in the last 90 days or the last 6 months, really. I would say that the landscape is pretty much the same as it has been.

Andrey Glukhov - Brean Murray, Carret

And lastly, from a competitive standpoint, I think one of your larger competitors may have been struggling in resale, which obviously opened some opportunities. What are you seeing out there going forward? Of the two larger players to step up, do you see any increased emphasis from them on the resale vertical into Q4 or is it status quo?

Hamish N. J. Brewer

Speaking about the resale vertical, I don't really see a changing situation there. It seems that SAP has carved out a certain space for itself, particularly where people are looking for an all-in-one financial merchandising system all in one package. And they seem to continue to do reasonably well in that space. Oracle, it seems to me, is struggling on pretty much all fronts.

And we seem to be doing very well on finding an optimization. And we then we continue to take reasonable share on the transactions systems market as well. So I don't see any fundamental changes right now and I don't see SAP or Oracle effectively changing their competitive profile against us, at this point. I would not say that they may not try to do that in the future but right now it appears as though they are struggling.

Operator

Your next question comes from Brad Reback - Oppenheimer & Co.

Brad Reback - Oppenheimer & Co.

Shares outstanding. How should we think about that for the fourth quarter?

Peter S. Hathaway

You need to take into consideration obviously the reduction in the share basis result of the Thoma Bravo sale.

Brad Reback - Oppenheimer & Co.

Sure. So I'm just trying to get a sense of $23.00, today's sort of stock price, what you feel that the fully diluted shares out would be.

Peter S. Hathaway

Let us go through that number and we'll get back to you.

Brad Reback - Oppenheimer & Co.

In the past there have been some instances where you have had a really big Q4 but some of that upside has been sucked out by bonus payments, etc. Could you give us a sense of where you stand on your accruals right now and if you come in line with what you're guiding to, or if you do better how we should think about the upside to the bottom line.

Hamish N. J. Brewer

The fourth quarter is the point in our annual sort of plan for all of our associates where we run into the accelerators. So incentive comp does become an increased percentage of our number. And frankly, if we hit our guidance numbers, then we are going to be looking in pretty good shape overall in terms of hitting our internal targets. So we have accrued everything that we have earned on our incentive plan through to the end of the third quarter, and now it just depends on how the fourth quarter goes.

Clearly, the strong the software license quarter, the more of a disproportionate impact that would have on the payout on the internal incentive plan. But we have accrued everything up to the third quarter.

Brad Reback - Oppenheimer & Co.

And not to come back to something on a sort of beat a head horse here, but just on the service margins, so I'm clear, you talked about it being down in the fourth quarter. I completely understand the seasonal reasons for that. Now is that down from the adjusted number, the 23% number or is it down from the 28%?

Hamish N. J. Brewer

I think it may be down a little bit on the 23%. It is going to be in that range, not very far from that, I would say at this point.

Operator

Your next question comes from Analyst for Patrick Walraven - JMP Securities.

Analyst for Patrick Walraven - JMP Securities

It looks like you have added about six reps since the end of 2008. Is that about on track with your hiring plans in the U.S. and how are these new reps ramping?

Hamish N. J. Brewer

Actually, I don't think it's the U.S. that's really driving that, I think it's mainly our expansion plans in China that are driving it, where we are adding sales headcount out there. We may have added one or two sales reps in North America but it wouldn't be any more than that.

We don't have a plan at the moment to significantly increase our sales headcount in North America. We feel that we've got plenty of capacity to deliver significant sales performance in North America. One area in the world where we are aggressively expanding our sales headcount is in China.

Analyst for Patrick Walraven - JMP Securities

It sounds like you are pretty confident in the pipeline. Can you characterize some of the types of deals you're seeing out there? Whether or not they are new deals that are in the pipe or they've been in there for a while and sort of the geography, maybe what you're seeing in Europe.

Hamish N. J. Brewer

I don't particularly like to get into a lot of details on the pipeline but what I will say is that there is a nice representation of large, million-dollar-plus deals. And I think that's really a defining characteristic of the pipeline that we've got going into the fourth quarter.

By definition those larger deals you typically have been working on them for a while, so they will have been sitting in our pipeline for a little while and it looks like a number of them are going to land in the fourth quarter.

Operator

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

Jeffrey Van Rhee - Craig-Hallum Capital Group

On the Center of Excellence, can you talk to the Center of Excellence and the strategic goals there. I guess, it certainly gives you low-cost operations and as you utilization higher, you can get the benefits accordingly. But does having those low-cost resources ultimately expand the total dollars of service opportunities available to you or is it simply the cost shift?

Hamish N. J. Brewer

Oh, we believe it expands the total dollars because the work that we're doing—I mean, our guys who are working in our onshore practices are pretty busy. We haven't got a situation where the offshore services guys are taking business away from the onshore guys. What we're seeing really is that they offshore services guys enable us to deliver proposals for work that we previously were just uncompetitive for. And so we are taking work away from—I would say largely, in fact, other low-cost service providers out of India.

Analyst for Patrick Walraven - JMP Securities

I missed the utilization numbers. Can you just hit those again?

Hamish N. J. Brewer

61%.

Analyst for Patrick Walraven - JMP Securities

And just specifically for the Center of Excellence, I am wondering what either a number of directionally what kind of improvement you saw there in utilization.

Hamish N. J. Brewer

What we've been monitoring is the contribution of the Center of Excellence, the total billable hours each quarter. And I think in the third quarter it was 3% and in the second quarter I think it was 7% of total billable hours. And in the third quarter I think we got it up to about 10%. So it's increasing in total contribution. Obviously total consulting revenues are rising and we will keep working on that. We've got it into double digits now and our goal is to keep moving it up.

Analyst for Patrick Walraven - JMP Securities

And second, as it relates to the outlook in looking for the Q4 license picture, can you just relate the scope of the big deal opportunities you are looking at now, maybe compared to when you entered Q2, which was the last time you also noted a pretty good big deal pipeline.

Hamish N. J. Brewer

This is pretty healthy. Obviously in Q2, as we described at the end of the quarter, we had this one deal that was a big deal sitting out there. I would characterize this as a longer list of good size million dollar plus deals. That's probably how I would describe it overall.

Analyst for Patrick Walraven - JMP Securities

Just so we were clear. I was referring to when you exited Q1 and you were looking forward at Q2, that's what you are referring to.

Hamish N. J. Brewer

Yes, that's right.

Operator

There are no further questions in the queue.

Hamish N. J. Brewer

Thank you everybody for joining us on the call and we look forward to speaking with you again in January to announce our year-end results.

Operator

This concludes today’s conference call. This conference will be available for replay today through November 19, 2009. You may access the replay system at any time by dialing 303-590-3030, or 1-800-406-7325, and entering the access code 4164779.

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Source: JDA Software Group, Inc. Q3 2009 Earnings Call Transcript
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