Peter Hathaway - Chief Financial Officer and Executive Vice President
Hamish Brewer - Chief Executive Officer, President and Director
Patrick Walravens - JMP Securities LLC
Jeffrey Van Rhee - Craig-Hallum Capital Group LLC
Richard Williams - Cross Research
JDA Software Group (JDAS) Q1 2010 Earnings Call April 27, 2010 4:45 PM ET
Good afternoon, ladies and gentlemen, and thank you, for standing by. And welcome to the JDA Software Group Inc. First Quarter 2010 Earnings Conference Call. [Operator Instructions] At this time, I would now like to turn the conference over to our host, Hamish Brewer, who is the Chief Executive Officer. Please go ahead.
Thanks, Craig, and good afternoon, and welcome to the earnings results call for the first quarter 2010. Following the close of the i2 acquisition on January 28, we delivered a record first quarter, with total revenues of over $131 million and $28.7 million of software and subscription revenues.
This impressive license sales performance was particularly notable because of the strong representation of inherited i2 pipeline in the mix, indicating a very smooth transition with our new i2 customers.
With me on the call today is 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'll add some color to what I regard as an excellent start to the integration of i2 into the JDA business. Pete?
Thanks, Hamish. Before I begin discussing the numbers, 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, 2009.
Our presentation also includes certain non-GAAP measures, which JDA uses internally in budgeting and performance monitoring activities to engage our business performance. We believe these measures provide useful information to our investors in evaluating JDA's ongoing business results. We prepared a reconciliation of each of these measures to the most directly comparable GAAP measure in our press release, which will be posted on our website at jda.com.
Also, I wanted to remind you that the first quarter results include the impact of the i2 acquisition for the two months since the transaction was completed on January 28, 2010. The tearsheet included with the press release shows the JDA and the i2 revenue reported in Q1 for each company.
This afternoon, JDA reported strong revenue earnings and cash flow results for the first quarter of 2010. Adjusted EBITDA increased to $31.4 million in the current quarter from $16.7 million in Q1 2009. Adjusted earnings per share increased to $0.38 compared to $0.26 for the first quarter of 2009. Adjusted EBITDA and adjusted EPS figures exclude the conventional items related to the amortization of identifiable intangible assets, stock-based compensation expense and for i2 acquisition transition and restructuring charges, which were also separately identified in the tearsheet.
GAAP EPS was a loss of $0.11 for Q1 2010 compared to income of $0.08 in the same period in 2009, due to approximately $15 million of acquisition transition and restructuring charges in the current quarter. At quarter end, we completed the bulk of the purchase accounting and valuation work for i2 but as is normal, the entire process won't be finalized until later in the year.
Total revenues increased to a record $131.6 million for the quarter, including software and subscription revenues of $28.7 million, as compared to total revenues of $83.3 million and software and subscription revenues of $15.3 million for the first quarter 2009. The software and subscription revenue increase included eight transactions of $1 million or more compared to three in the prior year's first quarter. As a data point for continued validation of the combination of JDA and i2, half of these large deals this quarter were i2 products.
We closed 51 new software deals in the quarter compared to 46 in the first quarter of 2009, and our average selling price for the trailing 12 months ended March 31, 2010 was $618,000 compared to $630,000 in the fourth quarter of 2009, representing the sixth consecutive quarter our trailing 12-month ASP has exceeded $600,000.
Maintenance revenue increased to $57.1 million compared to $43 million in the first quarter of 2009, and the maintenance gross margin increased to 79% from 75% in Q1 2009. The gross margin increase was driven by the continued strength in our software license sales over the last year that generated new maintenance streams. In addition and importantly, for the first quarter of this year, our retention rate improved to 98.3% as compared to 96.7% in Q1 of 2009. We also had a $1.6 million favorable impact in the current quarter from the year-over-year change in foreign currency rates.
The i2 maintenance renewals have lagged a bit during this get-acquainted period as we expected they would. Consequently, we suspended the recognition of revenue on a number of renewals until future period when the negotiations are complete. To be clear, we expect the vast majority of the i2 maintenance revenue to renew on schedule. For the small portion that become suspended, we think most of it should be resolved and recorded in 2010. In his remarks, Hamish will speak further to our successes in this area.
Services revenue increased to $45.8 million from $25 million in Q1 2009. Billable hours increased 117% from Q4 2009, and the utilization rate improved to 59% in Q1 from 55% in Q4 of 2009 and 52% from a year ago. The services margins improved to approximately 17% for the quarter compared to 15% last year in Q1 and 16% in Q4 of 2009. Hamish will speak further to this in his remarks. As we continue the integration of the i2 service's business, we expect to take advantage of the increased sale scale and see the services results improved.
Turning to the cost structure, we continue to focus on effectively establishing the proper infrastructure in support for the combined company. Our goal is to achieve our stated cost synergies, while effectively and efficiently supporting the operations and sales organizations. Operating expense as a percentage of total revenue, excluding amortization of intangibles, restructuring charges and acquisition-related costs, decreased to 43% in Q1 2010 from 45% in Q1 of 2009. This compares and reflects only two months of the i2 results in the current quarter. It also shows the cost leverage we can achieve when growing strategically through acquisition.
Product development expenses this quarter increased $17.3 million from $12.6 million in Q1 2009 due to the addition of i2. However, as a percentage of total revenue, product development costs declined to 13% from 15% in the prior year's first quarter.
We continue to make progress with our initiative to increase and expand the use of our Centers of Excellence in Hyderabad and Bangalore, India. Our goal is to better leverage high quality, lower cost resources throughout our business. We are managing the two facilities in India uniformly through one management team, and expect to consolidate certain functions into logical units.
Sales and marketing expenses also increased this quarter to $21.1 million from $14.3 million in Q1 2009 due to the addition of i2. However, as a percentage of total revenue, these costs also decreased to 16% from 17% in Q1 2009. We ended the quarter with 323 people in sales and marketing, including 96 quota-carrying sales associates.
Similarly, general and administrative expenses increased to $17.7 million from $11 million in Q1 2009. As a percentage of total revenue, these costs increased slightly to 13.4% from 13.2% in Q1 2009. We expect these costs as a percentage of revenue to decrease over time as $717,000 of transition expenses recorded in G&A are expected to roll off over the next three quarters. These costs relate to salaries and retention bonuses for employees that are being retained for a defined period. Interest expense was $6.1 million, primarily related to the $275 million senior notes issued in connection with the acquisition of i2 and the amortization of various bank fees.
Turning to cash flow, we generated $12 million in cash flow from operations in the current quarter compared to $33.1 million in Q1 2009. The decrease in operating cash flow is primarily the result of the net loss for the quarter. The net loss results from the restructuring and acquisition costs.
In addition this quarter, we have lower cash provided by working capital, which is due to the increase in receivables. Receivables are up from increased sales over the last 12 months. Lastly, in Q1 2009, we collected a significant receivable, which had the affect of increasing cash flow in Q1 2009.
DSO in the first quarter 2010 increased to 74 days from 71 days in Q1 2009, primarily due to the assumption of i2 receivables. In addition, Q1 is typically our highest quarterly DSO as a result of heavy maintenance renewals in the beginning of the year. Our collections group will be working throughout this year to apply our processes and procedures to these new customer accounts. We expect to improve this metric as we have been successful addressing our own balances in the recent past.
We spent about $500,000 on capital expenditures during the quarter compared to $1 million of CapEx in the first quarter of 2009. Our cash position at the end of the quarter was $167.5 million including restricted cash, leaving a net debt position of $107.5 million.
In conclusion, after a couple of months of combined operating activity as of the end of the quarter, we feel we are executing well against our integration plan. We have achieved about $4 million in cost savings for the two-month post closed period, indicating that we are on track to realize our cost-savings goals. And with that, I'll turn it over to Hamish. Thank you.
Thanks, Pete. First quarter was an excellent start to the year for JDA in many ways. Obviously, the biggest item for the company was the closure of the i2 transaction which for us, signaled the start of a process to build the market leader in the supply chain management market. Since closing on January 28, in the first 60 days of this process, I could not have asked for a better start on a number of fronts. First, let's talk about sales.
As you can imagine, the last thing we get to see when we acquire a company is a detailed view of their pipeline. And based on past experience, we have planned some significant erosion of the pipeline in the first 12 months. I'm delighted to be able to report that the integration of the i2 and JDA sales teams went very well. And we picked up the i2 new business pipeline and started closing it aggressively without any real delay. This excellent result tells us two things. First and foremost, our new customers from the i2 business have readily and rapidly accepted the changes that any acquisition brings and have voted in favor of this transaction in the best way possible, by reaching into their pockets and buying substantial amounts of i2 software product right away. The second thing it tells us is that the two sales forces have connected and are effectively working together to close business right out of the gate. This combination has produced the excellent $28.7 million result we've reported. And this, in my view, was about as good as we could have hoped.
Moving onto our Maintenance business. Once again, we delivered everything I could reasonably have hoped for in this vital part of our business. Margins came in at a very healthy 79%, but the most pleasing statistic for me was the 98.3% maintenance retention rate for the first quarter. This was up substantially from JDA's result a year ago, of 96.7%. And those of you who track i2's maintenance retention rates in 2009 will know that this also represents a substantial improvement on the results they reported.
We did see the usual extended negotiation process as we go through the first maintenance contract renewal cycle with the i2 customer base, and that will continue throughout the year. But as I stated before, right now, with what amounts to just about a perfect maintenance retention rate, our Maintenance business is running just about as well as I could have possibly hoped.
Our Consulting business still has more work to do, with a complex process of absorbing all the large i2 services engagements, still effectively underway. However, we're making good progress. And as Pete reported, utilization rates across the business are up sequentially and year-over-year, reflecting a high demand we're currently experiencing worldwide for our services.
We still have work to do on margins but our initial focus was on ensuring a seamless transition to JDA ownership. And so far, I think that process is going according to plan. We plan to announce an integrated product roadmap for all our customers by the end of the first quarter and we met that objective. We now have a comprehensive multi-year plan for each of our product family is firmly established, and execution of the plan is underway. This is an important achievement because it creates the clarity that the market and our sales force need in order to continue to do business without delay or uncertainty.
The product roadmap also forms the foundation of our ability to establish and deliver leadership in the supply chain management market. In that respect, I'm very pleased with the early reactions that we've received from our customers. Our industry executives have executed a customer outreach program, targeting all i2 customers, who are responsible for the vast majority of the revenues generated by that business. That outreach program have been completed now, and the response that we've received has been very positive. I believe that our customers see the acquisition of i2 by JDA as a positive step that's going to deliver real benefits to them as we integrate our businesses, expand our offerings, accelerate our rates of innovation and maximize the value delivered to customers worldwide.
Another data point supporting this premise is our annual user conference, FOCUS, which currently has over 1,070 customers registered. This level of attendance clearly indicates to me that our customers are engaged and excited to hear about JDA's plans for the future.
In addition to all of our work related to the integration of i2, I'm also pleased to report that we continue to make solid progress with our managed services offering. As you may remember, last year, creating this offering was our primary objective. Now we're beginning to see the results from our foundation building. We signed five new deals in the fourth quarter and increased the new deal count to eight in the first quarter. So this means business is beginning to move forward and build a respectable quarterly run rate. Our offering is competitive, and it's clear from our pipeline that our customers are very interested in this delivery model.
So overall, I'd summarize Q1 as a great success for JDA. Our financial plan is on track. Our cost synergies are on track. Our product strategy has delivered and resonating well. Our customers are supporting us and buying at record levels. Our organization integration is largely complete, and our back office system and processes are beginning to settle into a routine.
Looking forward to Q2, I continue to see a strong pipeline for new product sales, and I expect to start to see cash production increase as we get through the majority of the integration expenses and start to drive operations growth. At this stage, I feel comfortable reiterating our full year guidance for JDA, and look forward to taking major steps forward towards this objective in the second quarter. And with that, I'd like to open up the call for questions.
[Operator Instructions] And our first question does come from the line of Jeff Van Rhee with Craig-Hallum.
Jeffrey Van Rhee - Craig-Hallum Capital Group LLC
Hamish, could you expand a little bit more on the pipeline? You feel comfortable reiterating. Could you just give us a little more color about quantity, depth verticals and particularly, your typically big-deal centric in many ways. Can you comment to the extent that you have a high number of large deals in that pipe?
Jeff, I think as I said, the pipeline looks pretty solid for the second quarter. I mean, obviously, we've set out what our objective is for the year. We want to get to somewhere between $125 million and $135 million of software. And we still feel comfortable with that guidance, which means obviously, that we're going to -- in order to stay on track with that, we're going to have to deliver a pretty solid second quarter. And right now, I think, when I look at the pipeline, I can see across the various markets, the opportunity for us to do that. I see the solid pipeline in North America. I see it in Europe. I see it in Asia Pacific. So it's across-the-board geographically. We had a very strong representation of i2 product in the first quarter. That's going to be bounced up and down from quarter-to-quarter. I'm not sure we're going to get the same percentage contribution of i2 in the second quarter that we got. But like I said, that's going to fluctuate up and down. But overall, I think we feel pretty good about the pipeline coverage right now.
Jeffrey Van Rhee - Craig-Hallum Capital Group LLC
You referenced the product roadmap that you've released. Can you touch on that and give us a few of the key things we're going to see there?
What we've done is we've created a pretty comprehensive document for our customers. Basically, what it does, is it goes through each of the major product families. Just as we described when we announced the deal with i2, we followed through with our practice, which is to basically, where we have overlapping products. We've established a convergence program for each product line that gets the customers towards a superset product. Those superset products will be released. Some of them, as soon as next year, which means in that product line, the integration of the products is complete. Some of them will take as long as three years. There's a bunch in between. So it varies depending upon the amount of work to be done. But the point is our customers can see the enhancements that we're going to deliver and the integration that we're going to deliver. And I think that's the key point. Our product roadmap is not just about smashing everything together. We also have a significant amount of new innovation that we'll be delivering, which will help continue to drive sales growth, I believe.
Jeffrey Van Rhee - Craig-Hallum Capital Group LLC
In the Managed Services business, you mentioned the deal count. Can you just talk a little bit about what -- both the customers you're signing, as well as the pipe? What kind of customers you're seeing? Are these typically more mid-market or lower, smaller-scaled deals? Are they in particular verticals?
No, particular vertical at this stage. We're seeing it in retail and in manufacturing. Going into this thing, my guess would have been exactly what I think lays behind your question, which is we're probably going to see more activity in the mid-market. But actually, as it's turning out, that's not the case. We're seeing really nice representation from mid-market and from Tier 1. Tier 1 is interested in this business model as well, it would appear. So we signed some quite large companies.
And our next question does come from the line of Alan Weinfeld [ph] with Riverfront Research [ph].
Could you talk about, with i2, the business that it used to have, not recently but if you think back in the beginning of the decade. Should we think of JDA in 2010 and possibly, going forward as more than half a -- still a retail-oriented company? Or now with the acquisition of Manugistics and i2, and now you have a lot of different products from those areas. Are you so diversed that is one vertical not larger than one-third of any of your business?
Well, obviously, it depends on how you break it up. The fact is, we are more diversed today. Our two big pieces are manufacturing and retailing. With the acquisition of i2, I think, now manufacturing just peeps [ph] retailing.
Just to give the number specifically for the quarter, we were 52%, manufacturing, 48%, retail.
Yes. So bigger, overall. so retail is still a sizeable chunk of the total business. But we've obviously increased divestiture now, not only dealings with strong representation in process manufacturing but also now, particularly with the addition of i2, a very strong representation of discrete manufacturing. So I think the business model has evolved, and the other thing to -- of note, with the addition of i2, is that i2, historically had done a lot of business primarily in Tier 1 in the market. And I think that we believe that there's a significant opportunity to expand that addressable market and start to do more business in Tier 2, which is something that JDA is very familiar with on how to do that. And so there's growth opportunity there. But the addition of i2 today, definitely increases the weight of our revenues coming out of the high end of the market versus mid-market, I would say.
And also, could you talk about cost savings in India as i2 obviously had a major base of operations, and you had just started to really build there in the last few years. Will you see some really major cost savings?
Well, we were definitely in the process of building our Center of Excellence in India. But interestingly enough actually, by the time we closed the transaction, the JDA operation in India was actually bigger than the one in Bangalore that was operated by i2, just about. It's about 650 people in Hyderabad and about 550 people in Bangalore. Now we will continue to expand our combined operation in India. Our plans this year are to expand our headcount in India and essentially, continue with our Center of Excellence strategy, which is built around the fact that we're going to deliver product development, consulting services, support services and internal administrative and general and administrative functions out of India. So we're continuously looking for opportunities for margin expansion by pushing activities to our CoE in India. But we're well done the part now, I believe, of achieving the goals that we originally set out in the beginning of 2008 with the strategy.
So you just wanted to continue to build and not lay back because the margin is just so compelling. Is it just because there's been -- the talk from some other company's has become tougher and tougher to get the dollar for, I don't know. Is it tougher to get those savings out of India that were projected a few years ago?
Well, we haven't had that experience. We definitely achieved the goals that we set for ourselves at the beginning of 2008. Right from the outset, our objectives were to have a balanced operation. For instance in product development, we stated right from the outset, our goal was to have a 70-30 split. 70% of our operations in India, 30% of our operations in onshore, if you want to call it that. And that's where we are. So we've achieved our goal and we have no plans to change that mix because we think that, that's the ideal mix for a software company. So I think, to the extent that we find further opportunities to expand operations in the CoE, we will do that. But this year, the growth of headcount in the CoE is probably going to be mostly attributable to just expansion of the business as a whole.
And our next question comes from the line of Patrick Walravens with JMP Securities.
Patrick Walravens - JMP Securities LLC
Pete, in your prepared remarks, you made a comment about suspending revenue recognition on some maintenance contracts. That's the first time I heard that particular term, I guess. Can you just describe just what's going on there?
Sure. As we go through the process of renewing some of the contracts or essentially, all of the contracts that come up for renewal. Some of those contracts may not have automatic renewals that essentially rolled them over automatically as they expire. So from an accounting perspective, once that termination comes about, we just essentially stop recording revenue until that negotiation process is resolved, and this isn't new. It's just part of, let me just say it, it's part of the integration. It's part of bringing new customers on board to the JDA family, if you will. And we actually expected some of this to happen. And in fact, it is happening. And it's actually tracking relatively close to what we expected. So when it's happening, the customers remain -- we continue to serve the customers during this suspended period, and then when we get the contracts settled out with them going forward. And if there's any revenue to catch up, then we book that in future quarters.
Patrick Walravens - JMP Securities LLC
And then my second question was just around -- I also heard something in your prepared remarks about, it sounded like, you said there's a large collection last week or month. It sounded like that somehow increased cash flow in Q1. Did I hear that right?
Well, you heard the main point but wrong period. And it was a little confusing, actually, we wrote that section like four times. But basically the point was, last year, first quarter, we collected I don't know, a big, big receivable. I think it was in the neighborhood of $10 million or something like that. And it obviously, it drove up cash flow from operations a year ago. So when you're comparing last year to this year, it had the benefit of a very large contract collection.
[Operator Instructions] And your next question does come from the line of Richard Williams with Cross Research.
Richard Williams - Cross Research
I wonder if you could give us color on the business conditions by geography, please?
Sure. I think during the course of this downturn or recession that we've been through for the last year and a half or so here in the U.S., we've seen continued strong sales activity in our North American business. And as far as I can see, nothing in that respect is changing. It feels like our ability to build pipeline and close business is excellent. Frankly, I think when you're looking at the U.S., my message will be just looks like more of the same to me. Europe, I think it would appear as though there are some economic -- obviously, they'll see some serious economic challenges over there. It's a little bit difficult to balance that or to try and draw any major conclusions out of that. And the reason I say that is because I still think in Europe, our penetration of the total available business in Europe is so low, that even if there was a significant downturn in total activity, that wouldn't necessarily guarantee that we were going to have a downturn. But Europe had a pretty good quarter, pretty good first quarter and the pipeline for new business looks strong as I mentioned earlier on. So right now, I don't see any major reasons for being overly pessimistic or overly optimistic at this point in time about the prospects in Europe. In Asia-Pacific, we had a strong quarter, driven by i2's strong presence in discrete manufacturing, which obviously, a lot of the Asian countries are really, the manufacturing engine of the world today. And in particular, that applies to discrete manufactured products. And so my goal is that over time, that Asia-Pacific were to grow significantly as a result of the i2 acquisition and I think we're off to a great start in Q1 in that respect. So I think, actually i2 will be a growth driver and will increase the total share of JDA's business coming out of Asia-Pacific over time.
And our next question comes from the line of Frank Jarman with Goldman Sachs.
Just a quick question on cash flow. I think cash from operations was down a little bit this quarter on a year-over-year basis. You mentioned working capital and some integration costs in the quarter, that some of that should improve as we look going forward over the next few quarters. Can you just give me a little bit more color around what your expectations are for working capital, as well as some of the restructuring costs that could potentially improve cash flow in the next few quarters?
Well, for the full year, we are expecting cash flow from operations of, I think, it's roughly $100 million to $110 million, and we're still comfortable with that guidance. In particular, I think what we'll see over the next couple of quarters, is we'll see some of the acquisition-related costs, which amounted to almost $7 million in this quarter, as well as the transition costs, which I think were also about $7 million or $8 million in this quarter. Those obviously, are relatively one-time event. Some of the transition will bleed off over time. And included in, I should say, transaction. Then included in SG&A, we have some transition costs of just under $1 million, which again that will bleed off too. So that will have an impact on our cash flow from operations as well. So we started out with sort of a net loss, which caused us to have to climb a hill with respect to cash flow for the quarter. We got into positive territory. Our receivables are up a little bit, as they tend to be up in Q1 because -- and this tend to be an industry phenomena. They tend to be up because maintenance renewals were up in Q1, so we have receivables from that, which we'll then collect over the rest of the year. That's part of it. Then I think as I mentioned to Pat a minute ago, we had -- just in terms of comparing the cash flow from operations year-over-year, we had a big collection of our receivable in Q1 of 2009. So on a comparable basis, it makes it look a little bit stable [ph] .
[Operator Instructions] And management, at this time, I'm showing no further questions. I'd like to turn it back for any closing comments you may have.
No closing comments for me. Thank you very much for joining us, and I look forward to talking to you all again on the next quarterly earnings announcement.
Thank you. Ladies and gentlemen, this does conclude the JDA Software Group Inc. First Quarter 2010 Earnings Conference Call. We do thank you for your participation on today's call. You may now disconnect your lines.