JDA Software Group Inc. Q2 2010 Earnings Call Transcript

Jul.28.10 | About: JDA Software (JDAS)

JDA Software Group Inc. (NASDAQ:JDAS)

Q2 2010 Earnings Conference Call

July 27, 2010 4:45 pm ET

Executives

Hamish Brewer - CEO

Pete Hathaway - CFO

Analysts

Jeff Van Rhee - Craig-Hallum

Richard Williams - Cross Research

Patrick Walravens - JMP Securities

Frank Jarman - Goldman Sachs

Operator

Good afternoon, ladies and gentlemen, thank you for standing by. Welcome to the JDA Software’s Second Quarter 2010 Earnings Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentations, the conference will be open for questions. [Operator Instructions].

I would now like to turn the conference over to, Hamish Brewer, CEO. Please go ahead, sir.

Hamish Brewer

Thanks, Douglas. Good afternoon and welcome the JDA Software earnings call for the second quarter 2010. Second quarter was a record quarter for JDA with $38 million of software license sales, driving a strong performance across the board for the company.

With me on the call today is Pete Hathaway, our Chief Financial Officer and Dave Alberty, our Chief Accounting Officer. Pete will now walk you through the financial results and then I will follow-up with some commentary on factors driving the ongoing success of our business. Pete?

Pete Hathaway

Thanks, Hamish. Before I begin discussing the numbers, let me remind you that our comments today will contain forward-looking statements that often involve risk, 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 gauge 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 measures in our press release, which we will post on our website at www.jda.com.

This afternoon, JDA reported strong revenue and earnings results for the second quarter of 2010. Adjusted EBITDA increased to $41.3 million or 26% of revenue in the current quarter from $28.7 million or 29% of revenue in Q2 2009.

The decline in margin is primarily due to the revenue mix in Q2 2009 which was more heavily weighted to higher margin software and maintenance revenues. On a sequential basis, EBITDA margins increased 200 basis points from 24%.

Adjusted earnings per share increased to $0.48, compared to $0.47 for the second quarter of 2009. Adjusted EBITDA and adjusted EPS figures include the conventional items related to the amortization of identifiable intangible assets, stock-based compensation expense and the i2 acquisition transition and restructuring charges which are separately identified in the tear sheet attached to the press release.

GAAP EPS was $0.19 for Q2 2010, compared to $0.25 in the same period in 2009, due to higher operating earnings including approximately 5.4 million of acquisition transition and restructuring charges in the current quarter, offset by a higher amortization and interest expense resulting from the i2 acquisition.

Total revenues increased to a record $158.4 million for the quarter, including software and subscription revenues of $38 million as compared to total revenues of 99.5 million in software and subscription revenues of $27.6 million for the second quarter of 2009.

During the second quarter, approximately 43% of software and subscription sales were from i2 products. As you may recall, Q2 2009 included a significant software sale in the Asia-Pacific region.

As a percentage of total revenue, this was a very large deal that significantly impacted total company margins for 2009. We closed 54 new software deals in the quarter compared to 68 in the second quarter of 2009 including six large transactions of $1 million or more in Q2 2010 compared to 5 in Q2 2009.

Our average selling price for the trailing 12 months ended June 30, 2010 was $608,000 compared to $618,000 in the first quarter of 2010, the seventh consecutive quarter our trailing 12 month ASP has exceeded $600,000. On average, we continue to close more large transactions and we expect this trend to continue.

Maintenance revenue increased to $60.6 million compared to $44.4 million in the second quarter of 2009 and the maintenance gross margin increased to almost 77% from 75% in Q2 of 2009. Second quarter 2010 maintenance revenues include a 25% contribution from the acquired i2 product line.

The gross margin increase was driven by the combined strength in our software license to sales over the last year that generated new maintenance revenue streams. In addition, our customer retention rate on expiring maintenance contracts continued to be strong during the second quarter as we reported 97.3% annualized retention rate as compared to a 93.8% annualized retention rate in Q2 of 2009.

While overall retention is exceeding our expectations, separately for i2, maintenance renewals are lagging but not outside of our expectation.

At June 30, we had four million of maintenance revenue suspended until future periods when customer negations are complete. We currently believe the majority of this amount should be recognized over the remaining two quarters of this year.

Lastly, included in maintenance revenue is a favorable year-over-year change in foreign currency rates of approximately $700,000. Services revenue increased to $59.8 million from $27.5 million in Q2, 2009. Billable hours increased by 30% from Q1 2010 and the utilization rate from 4/2/2010 increased from 57% in Q2 2009 while it is comparable to our first quarter at 59%.

Our services margins improved significantly to 24% for quarter compared to 18% in Q2 2009 and 17% in Q1 of this year. These increases are a result of higher volume of consulting services revenues, higher billable hours from certain high margin projects and increased deployment of COE resources on global services projects.

Turning to the cost structure, we see a balance reflected in our numbers between cost savings from the i2 acquisition and the maintenance of an appropriate infrastructure to support the growth of the combined company.

Our immediate priorities is to effectively service our customer base and support the sales organization. After a couple of quarters of combined operating activity, we feel we are executing well against our integration plan. We achieved about five million in cost savings in the second quarter 2010 and approximately nine million year-to-date, which indicates that we are on track to realize our net cost savings goals of $20 million.

Total operating expense as a percentage of total revenue excluded amortization of intangible, restructuring charges and acquisition-related costs, decreased year-over-year to 40% in Q2 2010 compared to 41% in Q2 2009.

Product development expenses this quarter increased to $19.5 million from $12.7 million in Q2 2009, primarily due to the addition of the cost associated with i2. However, as a percentage of total revenue, product development costs declined to 12% from 13% in the prior year's second quarter.

We continue to progress with our initiative to increase and expand our use of our COEs in Hyderabad and Bangalore in order to better leverage high quality, low cost resources in our business.

Sales and marketing expenses also increased this quarter to $24.6 million from $16.2 million in Q2 2009 due to the addition of i2. However, as a percentage of total revenue, they decreased to 15% from 16% in Q2 2009.

Sales and marketing includes higher commission expense from increased software sales. We ended the quarter with 323 people in sales and marketing including 92 quota-carrying sales associates.

Similarly, general and administrative expenses increased to $19.8 million from 11.7 million in Q2 2009. As a percentage of total revenue, these costs increased to 13% from 12% in Q2 2009. Also included in G&A is $723,000 relating to transitions costs that should decline over the next two quarters as transition personnel completed their assignment.

Additionally, legal expenses increased to $3.4 million in the quarter from approximately $700,000 in Q2 2009 primarily due to the Dillard’s litigation in the patent infringement litigation i2 filed against the competitor. We expect this level of legal expense to persist until we resolve these matters.

Net interest and other expense increased to $6.8 million in Q2 2010 primarily due to interest on the $275 million of senior notes issued in connection with the acquisition of i2, amortization of bank fees and about $1 million negative impact from currency exchange rates.

The effective tax rate for the quarter on GAAP earnings was 23%. This deferred from the adjusted effective tax rate of 35% due to favorable resolution of several discrete non-recurring tax items. Weighted average shares outstanding for the quarter ended June 30, 2010 was $42.3 million and is expected to remain around this level for each quarter for the remainder of the year.

Turning now to cash flow, we used 2.6 million in operating cash flow in Q2 2010 compared to a positive cash flow from operations of 27 million in Q2 2009. The change in operating cash flow in the current period was primarily driven by realized deferred revenues from the i2 acquisition where the cash was collected prior to acquisition close date, combined with an increase in receivables due to increased revenue and deferred expenses in connection with a long-term contract.

Looking at the full year, I wanted to elaborate on the impact of deferred revenue and cash flows. We believe that cash flow from operations will approximate $80 million to $90 million for 2010 and the free cash flow will approximate between $65 million and $75 million for the same period. This view of cash flow reflects cash collections made by i2 for maintenance and other contracts that renewed in months before we acquired the company.

However, the revenue on these contracts is differed. As balances, we expect to receive from i2 and the transaction increased from $175 million to $218 million, we actually received upon the close of the acquisition. This is better than $30 million increase in cash was primarily due to these contract renewals.

For the period after close, the deferred revenue moves to income, indicating the use of cash. However, since the corresponding cash was collected by i2 prior to the close of the acquisition, there is no corresponding inflow of cash from these transactions. This dynamic is one-time event that will impact 2010; it will not recur in future years. Separately, our earning outlook for the year remains unchanged as Hamish will mention shortly.

DSO on the second quarter 2010 decreased to 66 days from 74 days in Q1 2010, an increase compared to 57 days in Q2 2009 primarily due to the assumption of i2 receivable.

Our collections group continues to work to apply our processes and procedures and we expect to continue to improve this metric throughout the year. Our goal is to improve DSO to 60 days or less by year-end. Each day represents approximately $1,750,000. We spent about $5.9 million on capital expenditures during the quarter compare to $400,000 of CapEx in the second quarter of 2009.

For full year, we expect to spend between $12 million and $14 million on CapEx. Our cash position at quarter-end was $157.9 million including restricted cash, leaving a net debt position of approximately $117 million.

In summary, we are pleased with the results of the quarter and continued progress that the entire organization is making in our efforts to further increase shareholder value.

With that I will turn it over to Hamish.

Hamish Brewer

Thanks, Pete. As I said at the beginning of this call, the primary feature of our second quarter is the record software license sales. You know license sales are a leading indicator for our business and these excellent results reinforce the ongoing competitive strength of our offering.

In particular, it’s noteworthy that the i2 solutions contributed 43% of total license sales, which is once again a very strong result this early into the integration of i2. When we announced the i2 acquisition last November, we planned to achieve significant cost synergies in 2010 and we’re well under way with that plan. However, we did not count on any real revenue synergies from i2 in 2010 based on our past experience with other acquisitions. However, so far, we are seeing immediate and positive reaction from our new i2 customer base and that's helping to drive these record results.

Looking into the regional sales performance, the primary driver for this record quarter was in the Americas, with a record-breaking $27 million of license revenues. This result was made up of both large deals. We had $4 million plus transactions from the Americas in the second quarter as well as a strong performance in mid size transactions.

Asia-Pacific also had a strong quarter with $6 million of license sales. Once again, there is a strong contribution from the i2 solution and I think that this supports our theory that there’s a potential upside for Asia Pacific from i2 with the global concentration of discrete manufacturing companies in that region, it’s potentially more significant than anywhere else in the long run.

European sales were not particularly strong, and although we have taken a number of steps forward with our organization in that region over the past year or so, I don't expect to see significant improvements in Europe for a while, perhaps not until some time next year.

During the second quarter, we held FOCUS, our annual user conference in Las Vegas. As you can imagine, this event is the greatest opportunity that we have annually to assess the attitudes of our customers towards investing in technology, and in particular, FOCUS this year, it was the first major opportunity for us to evaluate the intentions of the i2 customer base.

The results were everything we could have hoped for. Record attendance was of course very nice to see in this environment where companies are still operating under strict expense and travel controls.

However, more than that, I believe that we really created a firm foundation for the establishment of JDA FOCUS as a leading global forum for the supply chain industry to meet, network and make technology plans. I’m confident that this event will ultimately drive significant growth in our pipeline.

Moving on to our consulting services results in the second quarter, here we also saw significant improvement with record revenues and a sizable step forward in our consulting margins, increasing from 17% in the first quarter to 24% in the second quarter.

As you probably know, unlike software sales, consulting revenues are a lagging indicator for our business and I expect strong consulting revenues to continue for the balance of this year.

I believe that there are still margin expansion opportunities in this business, but frankly right now, as we integrate the i2 business, our primary focus is on maintaining customer satisfaction and driving growth.

As this process matures and we achieve more of a steady state, which will probably not happen until next year, then I think we can start to push harder for further margin expansion. As we've said before, we think that mid to high 20s is a realistic target for margins in this business.

Our maintenance results are a little deceiving from two perspectives, both in terms of total maintenance revenues and the impact on cash flow from operation. As Pete described, we still have a sizable list of i2 maintenance renewals that have been suspended under our internal policies while we conclude the first round of renewals with our new i2 customers.

This process is being made a little more challenging than usual because in addition to the normal resetting of pricing expectation, we’re also renegotiating the terms of agreement many of which have historically been one-year contract.

JDA maintenance contracts have automatic renewals built into them with the right to cancel, whereas the i2 contracts require the customer to opt in each year at renewal time. As you can imagine, this change is extending the renewal negotiation process for us as a one-time change and hence, the apparent reduction in maintenance revenues as many contracts have run overdue and consequently been suspended from revenues.

However, I believe you need to focus on the maintenance retention rates as well to get complete picture. Only when a customer cancels, do we impact the maintenance retention rates. So this metric tells you about the real loss of maintenance revenues, excluding the impact of suspensions from renewals.

Our maintenance retention rates right now are running extremely high, 97.3% at the end of the first half. Not only is this a substantial reversal of the high levels of attrition that i2 is experiencing last year, it’s also an excellent result for the JDA maintenance space. So although the maintenance revenues have dipped, I am not concerned about this and I expect them to come back in future quarters as contracts are removed from suspended status. Given the high level of suspensions, I’m also very satisfied with the support margins, which came in at 77% for the quarter.

Finally, on this subject, as Pete described earlier, we are seeing an artificially low level of cash flow from operations as we recognize revenues from assumed maintenance contracts where the related cash was collected by i2 prior to the acquisition close in January.

As the year continues, this temporary operation will also reverse itself assuming that we keep our maintenance retention rates anywhere near where they are. An additional issue for me to comment upon is of course litigation between Dillard’s and i2 technologies.

As you hopefully may have seen in the open letter I sent to our shareholders a few weeks ago, we believe that the shocking verdict issued by the jurors against us was ill founded and excessive. Since my letter, the only further developments to have occurred was a judgment hearing on the 15 of July where the trial court judge heard Dillard's arguments for converting the jury verdict into a judgment and our arguments for a judgment in which the amounts of the jury verdict is reduced or eliminated.

The judge did not enter a judgment at the hearing and requested both parties to submit additional information regarding their respective arguments. We will keep pursuing all avenues available to us to have this verdict overturned or substantially reduced to something we believe is reasonable.

Once again, that may take some time if we have to go into the appeals process. An immediate impact of this process is that we are spending significant sums on unplanned legal expenses and of course, this will drive a sizable hold in our G&A budget for the year.

Consequently, you can imagine that we are currently proactively doing all that we can to preserve our EBITDA performance without limiting our ability to continue to drive these excellent sales results.

Right now, I’m focused on protecting EBITDA margin through a combination of both continued strength in top line revenues combined with short-term cost savings. I remain very confident that i2 is going to deliver significant value in growth opportunities to the company, even with the negative impact of the lawsuit. Furthermore, I firmly believe that i2 will drive significant shareholder value to JDA over time.

From an operations perspective, the software sales growth we are seeing today still has long-term upside and the extremely strong maintenance retention rate are a clear indicator that our customers right across the base are excited by the vision that we have painted with our multi-year product road map and they believe that JDA is extremely well placed to live up to our new tag line, the supply chain company.

Finally, I would like to comment on our 2010 financial outlook issued earlier this year. As I said earlier on the call, revenues are progressing well and I see no issue with meeting or beating our revenue outlook. I also think we can hit our profit outlook if revenues continue the way they are going despite the setbacks from additional legal expenses. So in summary, we are reiterating our earnings outlook for the year.

Commenting on the flow of revenues, we currently expect the third quarter to be softer followed by a stronger fourth quarter. So with that, I would like to open up the call for questions.

Question-and-Answer Session

Operator

Thank you, sir. We will now begin the question and answer session. [Operator Instructions]. Our first question comes from the line of Jeff Van Rhee with Craig-Hallum. Please go ahead.

Jeff Van Rhee - Craig-Hallum

Great, thank you. Hamish, in the commentary, there's a couple of pieces I was just hoping for some clarification on. On the expense side, I think the original expectation was $26.5 million in cost savings offset by some revenue due to synergies. Can you comment on the $26.5 million, is that still the number we’re looking for?

Hamish Brewer

I believe that's still the range we’re looking for.

Jeff Van Rhee - Craig-Hallum

Ok. So there are couple of points in your script you’ve commented that in fact, you're weighing appropriate reinvestment in the business. I’m just trying, I don't want to read too much into it but it did sound like you eluded to some incremental investments that maybe weren't on the table last quarter?

Hamish Brewer

No, I think it’s more just – yes, I think it’s more just operational stuff. If you think about it right, as we’re running the business today, day-to-day, our first priority is making sure that we maximize the opportunity to grow the i2 business as rapidly as possible within JDA.

And so, whether we’re looking at consulting or whether we’re looking at maintenance or whether we’re looking at sales opportunities, what we want to do is we don't want to inhibit the potential for this business to drive upside for JDA because we choose to maybe have a resource here or spend some money on something on a product in a certain area or whatever.

So right now, I think the priority for us is to make sure that the i2 business transitions smoothly and that we keep all the customers on board, we keep the maintenance stream flowing, we keep the projects running successfully and we don't create problems by getting overly aggressive on cost cutting. I think that the opportunity for cost cutting for us is we focus; we still got work to do in that area. There's still more opportunity for us to cut costs and still to achieve our numbers for the year and I think as we get a little more towards the end of this year, we will start to really get our arms around all of the customer situations and we’ll be able to start to drive harder in terms of are we being as efficient as we possibly can be in each part of our business. So it is really just that transition process, I think that I am referring to.

Jeff Van Rhee - Craig-Hallum

Ok. I didn't hear any commentary about the managed services. It’s a, Q1 was a real nice quarter. Your obviously upping the CapEx, you’re spending considerably. Can you update us on progress there?

Hamish Brewer

Yes. Business is going pretty well. The number of deals I think we had in the quarter, I am just trying to remember the exact number.

Pete Hathaway

I’ll get that.

Hamish Brewer

I’ve got someone looking it upright now. Hopefully I will be able to get it to you. But the number of deals went up and we are making good progress there, I think.

Jeff Van Rhee - Craig-Hallum

Okay. While he's digging for that and then I just had two, your last brief ones Pete, the cash flow from operations. When we had the last call back in the latter part of April, the expectation then was we were going to see a considerable improvement in the cash flows in Q2. I understand the explanation that you got more on the balance sheet or more in cash from i2 as opposed to seeing it on the balance sheet, but it help us with the time line there, why at the April call were we expecting significant improvements in cash flow this quarter and we obviously, that's not how it played out this quarter?

Pete Hathaway

Jeff, it is Pete. Just as we went through this quarter, what became more evident to us was the impact of the deferred revenues flowing through as a use of cash, whereas the cash associated with those customer renewals was obviously on the balance sheet. So we began to see that disparity a little more clearly.

Jeff Van Rhee - Craig-Hallum

Ok. I guess what I was just asking is the time line there. Wasn't that, that was not something that you had expected as the end of April?

Pete Hathaway

No, no. We didn't expect it and now we are seeing that more clearly.

Jeff Van Rhee - Craig-Hallum

Ok and then, just one last one, I’ll let somebody else jump on. Hamish, you’ve certainly across the board seen pretty good renewal rates on the maintenance but I’m curious, are you satisfied at the corporate level at JDA corporate. You had a strong Q4 and we’ve have been down sequentially for a couple of quarters. Help me compare that with the commentary that you’re real satisfied with the renewal rates. You’re putting up real good license growth, at some point, I would maybe expect that start show a bit more on the sequential rates here and maybe the answer is it will in Q3 but I don’t want to answer for it for you.

Hamish Brewer

Yes. The big issue is the suspension. I mean, it is just taking a lot of revenue out of our P&L and it is not, it hasn't gone away, it is just we can't record it in Q2. And when those contracts close and we feel very comfortable with those contracts that we are renewing, the i2 maintenance contract that we are renewing right now, we feel comfortable that we are going to have a good hit rate in closing them and we feel like a large number of risks or anything like that and all of that revenue will flow straight back into the P&L again.

Jeff Van Rhee - Craig-Hallum

Yes. Maybe I didn’t -- I probably didn't explain it real well. I was actually talking about just the core JDA excluding i2. I understand the i2 explanation but it looks like the core JDA maintenance went from roughly 47 to 46.5 to 45.5, give or take.

Hamish Brewer

Yes, I don't have a good explanation for that right now.

Pete Hathaway

We did have -- we put some revenue into suspense because of some slow pay.

Jeff Van Rhee - Craig-Hallum

Okay.

Pete Hathaway

And the entire block share there but it’s probably that.

Jeff Van Rhee - Craig-Hallum

Ok. I’ll let somebody else jump on. Thank you.

Hamish Brewer

And just to answer your other question, we did nine deals of remaining services in the quarter. So that’s up from five, I think in the first quarter.

Operator

Thank you. Our next question comes from the line of Richard Williams with Cross Research. Please go ahead.

Richard Williams - Cross Research

Hi, guys. I wonder if you could give a little more color on Europe in terms of the business conditions you were seeing there and also Asia, both of those look kind of a little bit weaker than they have been.

Hamish Brewer

Well, Asia actually that was, we had a pretty strong quarter in Asia. If you look on a year-over-year basis, the reason maybe it doesn't look as strong. If you look over, if you look maybe on a first half basis, is that you may recall that in second quarter last year, we had a fairly sizable license transaction that happened in Asia.

So that’s why, if you just look Q2-to-Q2, you don't see a strong per performance but actually in Europe with about six million in license in Asia-Pacific for the quarter. That was a pretty strong performance for that region and so I’m not – it’s maybe Asia Pacific business actually doing rather well at the moment.

The European business is a little bit light. We feel that there's upside there, we feel we can do better. We’re working on it and we've got the new management in place there we've had. They have been building up for the last few quarters and we've been also replacing some of our sales force and we feel that we’re beginning to establish a platform growth in Europe, let's put it that way. But I don’t think we’re seeing the results yet and it may take a few more quarters before we see start decent some benefits from the changes that we’ve made there.

You’ve also got to factor in how much are we going to be impacted by the economic situation in Europe. I can't say that I have seen a significant impact at this point, but it’s obviously potentially a risk there in the future.

Richard Williams - Cross Research

Fair enough. As looking at the managed services, can you describe the types of customers that are lining up? Are we still seeing large enterprises as opposed to SMBs and in particular industry that has a lot of following?

Hamish Brewer

I think when we look at the list of companies that are signing up any deals with us; it’s across the Board really. It’s big companies, its smaller companies, when we originally thought about this managed service, we obviously thought that smaller companies would go for it because perhaps it might be more appealing to them not to have to take on the infrastructure and overhead and people to run our applications but what has been I think a positive surprise is that it turns out the big companies are just as interested in doing the same. So it is a blend really of larger companies as well as smaller companies.

Richard Williams - Cross Research

Great, appreciate the progress. Thanks guys.

Operator

Thank you. Our next question comes from the line of Patrick Walravens with JMP Securities. Please go ahead, sir.

Patrick Walravens - JMP Securities

Thank you. Hamish, I will just go with one pretty big picture question which is you know it seems like there's three major negative surprises that have come out of the i2 deal. So there's the lawsuit, the maintenance suspensions and the fact that i2 collects a lot of cash up front and given these negative surprises, do you still think i2 was a good acquisition and if so, can you share your specifics on it?

Hamish Brewer

Well, first of all I wouldn't characterize two of those items as unforeseen if you go back to last November when we announced the deal. The third one being the maintenance suspensions, we fully expected maintenance revenues to suffer as we go through our first round of renewals. I think we talked about it in the first quarter of this year. It’s what we saw when we acquired Manugistics. It is not unexpected. It is taking us a bit longer than we would ideally have liked but we knew it was going to happen and it is just something we’ve got to work through the first cycle of renewals. And as I say, if we were losing contract as a result of this process, then obviously I would be concerned but I don't see that happening and in fact, we feel pretty confident that those maintenance contracts that we are renewing are going to come through and then revenue will start to flow again as a consequence.

The i2 cash, through my perspective, it is a wash. You get it on the balance sheet with the acquired company or you get it through cash flow from operations in the first few months of operations. I mean, either way we’ve got the cash. So I don’t feel negatively about that at all.

As far as the lawsuit is concerned, obviously that's a big surprise to us and I think we rely upon the fact that we think that the verdict is not justified to be honest with you, by the fact of the case and we’ve done expect something special. We don't think i2 behaves in a way that they described and we are pretty confident that we are going to be able to hopefully find justice through this process that we are going through and we are well represented. Now it’s going to be -- it’s going to cost us to do that and it’s going to be some distraction, which obviously, I’d rather not have either of those two things but I think that we’ll – I think our chances of getting this either completely reversal, which potentially reduced are pretty good.

Patrick Walravens - JMP Securities

Thank you.

Hamish Brewer

I can't say that I’m – if you ask me, if I knew everything I know now and you put me back in November would I still sign the deal? The answer absolutely is yes.

Patrick Walravens - JMP Securities

All right, thank you.

Operator

Thank you. Our next question comes from the line of Frank Jarman with Goldman Sachs. Please go ahead.

Frank Jarman - Goldman Sachs

Thanks very much. So I guess the first question I had is just on the maintenance renewals. Can you help me think about how pricing is evolving as you discussed those renewals with customers?

Hamish Brewer

You know, I don't know the specifics obviously, there’s a lot going on, but in general, what you saw from i2 over the last five years was a pretty significant attrition of maintenance and that attrition was made up of really two things: One is contract cancellations and the other one is pricing renegotiations where i2 was agreed to reduce the annual maintenance fees for customers.

We, obviously, one of the challenges of the first round of renewals for us is that our policy isn't to put price down this year but actually its trying to do the opposite and put it up because our cost of running our maintenance service go up each year. So that is a bit of a reversal in terms of expectations for the i2 customer base is the impact from these to having an annual negotiation process with i2 and that in itself is going to take us a while just to reset those expectations and validate that the original value in the service we provide and we should be willing to provide reasonable market, paid reasonable market rates for it. Now, we’re going to have some attrition, we’ve probably got some concessions that are going on across the Board. But overall, when we look at our maintenance renewal rates at 97.3%, that's the conclusion of everything that has happened. So, if we’ve given concessions, they're in there. There are cancellations, they're in there and at 97.3, I can't remember it ever being that high. So, on balance, I’ve got to say that right now I feel very good about the maintenance renewals.

Pete Hathaway

This is Pete, Hamish is right. We have some concessions and we have some price increases, on average for the first few months of the year, it is about flat.

Frank Jarman - Goldman Sachs

Got it.

Pete Hathaway

So we are getting some, we are giving some up but I think the key is the retention rate.

Frank Jarman - Goldman Sachs

Great and then just on the cash flow, you provided the update to free cash flow for 65 to 75 million for the full year. Should I think of that as evenly split between 3Q and 4Q or should I think of it as more back-end loaded or front-end loaded?

Pete Hathaway

My best guess right now is it’s pretty evenly split.

Frank Jarman - Goldman Sachs

Okay great and then the last question I had was just given the litigation process that’s unfolding, have you thought about taking additional liquidity actions vis-à-vis considering a revolver or are we still too early in the process right now?

Pete Hathaway

I think it is B. We have in over a $150 million on the balance sheet. We don't see this as being a big risk. Liquidity is not a major concern. As time goes on, our cash flow is good and we expect it to still remain relatively good for this year.

If you look at an annualized basis going forward, we can still be up in that $90 million to $100 million of cash flow from operations. So I don't see anything that really changes our liquidity position.

We might put a revolver in at some point. It depends on pricing and ease to market so to speak. But it is really not a major concern of ours right now. We don't have anything else to do with our money in the meantime while we work through the lawsuit. So that is, I think we will remain in pretty flush with cash.

Frank Jarman - Goldman Sachs

Okay great. Thanks. That's all I had.

Operator

Thank you. [Operator Instructions].

Pete Hathaway

Okay.

Operator

And I’m showing no further questions in queue. I would like to turn the call back over to management for closing remarks.

Hamish Brewer

All right, thanks and thank you very much for joining us on the call. I look forward to speaking to you again in October. That’s the end of our call, thank you.

Operator

Thank you. Ladies and gentlemen, this concludes JDA Software's second quarter 2010 earnings call. We thank you for your participation and you may now disconnect.

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