JDA Software (Nasdaq: JDAS) recently reported its Q4 2006 and full year results. The integration of supply chain software vendor Manugistics (formerly Nasdaq: MANU) appears to be giving JDA considerable indigestion. More troubling is the lack of a coherent strategy to drive the business in 2007.
Scottsdale, AZ-based JDA Software built a reputation as a leader in business application software running on IBM's iSeries for the retail industry. Today the company has over 5,400 customers, predominately in the retail sector. In July 2006 the company finalized its acquisition of Manugistics, once a leader in supply chain management and related enterprise applications. JDA has a number of assets. Notably, its own retail domain expertise and its core of midsize retail implementations. With the addition of MANU, it now has a leading TMS (transportation management system) solution, a leading multi-enterprise collaboration offering ("Manugistics Collaborate"), and domain expertise in supply chain planning and execution. Historically, Manugistics derived over 50% of its revenues from retail-related industries, however, less than 25% of revenues came from retail-related customers at the time of the deal with JDA. A major cash cow for MANU was the former WDS (Western Data Systems) ERP apps business -- focused squarely in the aerospace and defense industry. Although the analysts on the call were taking it easy on the company, it is clear that the honeymoon phase of the deal is ending.
JDA has taken steps to integrate its acquisitions and boldy move ahead. It has reduced headcount (e.g., over 100 FTEs in R&D alone) and selected a single product architecture, leaving the Microsoft .Net architecture for a Java-based platform. Beyond its marketing platitudes, JDA has yet to articulate a differentiated vision that is connected to what customers are buying today. Implicit in its messaging is the desire to be the dominant retail software supplier. However, instead of aspiring to be the leading provider of world-class point solutions for retail and retail-related companies, JDA is trying to compete with the likes of SAP and Oracle as a broad, end to end total solution. In so doing, JDA risks relegating itself to a distant third place in a rapidly consolidating market of business suites aimed at the retail vertical.
We see three primary challenges for JDA in 2007:
1. Improve Customer Satisfaction
For JDA to remain financially viable it must stabilize, and even grow, its maintenance revenues. JDA is working its way through a number of challenging implementation projects. Some of these are "legacy" MANU projects that suffered from over-promising and under-delivering to the customer. JDA raised its services rates around Q3 last year - and is meeting stiff resistance to its consultants trying to bill $285+/hour, which is over the market rate for comparable skills. DSO, a simple barometer of customer satisfaction, is at 80 days, and management believes it can get this down to the mid-70s. Compared to MGI Benchmark data, even 70 days is extraordinarily high. Pre-merger, JDA claimed maintenance defections of 5% per annum. This is at risk of increasing. $400k in maintenance revenue was written off in Q4. Clearly, JDA has ample room for improvement in the customer satisfaction category.
2. Get R&D on Track
JDA (and MANU) has a marginal track record in delivering new products to market in the past year. 2006's major accomplishment was the delivery of product roadmaps. Prior to buying MANU, JDA was in the process of re-architecting (re-writing) its core code to a Microsoft .Net architecture. JDA has now declared that its Enterprise Architecture ("JDA EA") will be based in a Java Platform (J2EE) environment, which was being built by Manugistics. JDA has a multitude of products written in a variety of development environments. Delivering a single, unified core architecture is a monumental development challenge for even the best software companies in the world (think Oracle Fusion, SAP NetWeaver, Microsoft Project Green). Typically, midsize companies embarking on such massive projects are unable to continue delivering incremental functional releases. As a result, customers become disgruntled, and the maintance revenue stream shrinks. To avoid such a fate, JDA needs to deliver new functionality in the first half of this year and stay close to its customers with small, visible value-add services.
3. Energize Sales and Marketing
JDA CFO Kristen Magnuson highlighted during the call the fact that software license revenues drive the JDA financial model. This is the toughest challenge facing JDA - and it requires addressing the first two challenges. Prices & margins are compressing. SAP (with its Khimetrics acquisition) and Oracle (with Retek and ProfitLogic acquisitions) are increasingly strong in the retail vertical. Oracle's G-Log acquisition is gaining market share and mindshare relative to MANU and i2. Oracle's Retail Business Unit claims JDA has virtually disappeared from the competitive landscape. The fact that JDA only had six deals >$1MM in all of 2006 speaks volumes to its sales execution. JDA sales reps are accustomed to selling many deals to make quota (>10 on average), whereas the average MANU rep could make quota with 2-3 elephant size deals. JDA needs to a) focus its marketing messages; b) rebuild the Manugistics sales and partnership channel in the short term; and c) prove it can win new-name business.
On its current trajectory, JDA is likely to tread water in 2007. Few companies have simultaneously undertaken a re-write of their core architecture, grown sales in line or faster than the market, and held on to their maintenance base with success. Attempting too broad a marketing message will likely relegate the company to niche status - another diminishing enterprise software applications vendor that is neither highly profitable, nor growing faster than the market.
Comments on Potential Acquirers:
The probability of JDA being acquired is low. With EV/EBITDA at almost 17X, JDA is pricey at today's valuation and already loaded with debt ($140MM). At these metrics and with more work to be done to improve operationally, it's unlikely that any private equity buyer would take out the current investors.
SAP needs to strengthen its retail application functionality, particularly relative to Oracle. In addition, the MANU products would help bolster SAP's known shortcomings in supply chain. Given the chaos in JDA' development organization, its customer base issues, and the fact that some MANU customers are coming over to SAP already (e.g., Rohm and Haas), it is unlikely that SAP would step up and buy JDA.
Oracle's retail unit could use the additional customers, the capability of JDA's space management functionality fills a hole for Oracle, and the supply chain expertise would be welcome. The JDA EA commitment to a Java Platform fits with Oracle architecturally.
INFOR is on every software investment banker's speed dial, and for the right price could be a buyer. JDA could benefit from INFOR's focus on cost containment and cash flow improvement.