JDA Software Group's CEO Discusses Q1 2012 Results - Earnings Call Transcript

May. 7.12 | About: JDA Software (JDAS)

JDA Software Group (NASDAQ:JDAS)

Q1 2012 Earnings Call

May 07, 2012 4:45 pm ET

Executives

Mike Burnett - Group Vice President of Treasury & Investor Relations

Peter S. Hathaway - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Hamish N. J. Brewer - Chief Executive Officer, President and Director

Analysts

Richard T. Williams - Cross Research LLC

Mark W. Schappel - The Benchmark Company, LLC, Research Division

Alan Weinfeld

Jeffrey Van Rhee - Craig-Hallum Capital Group LLC, Research Division

Brian Murphy - Sidoti & Company, LLC

Unknown Analyst

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the JDA Software Group, Inc. First Quarter 2012 Business Update. [Operator Instructions] At this time, I'd like to turn the conference over to Mike Burnett, Group Vice President and Investor Relations. Please go ahead, sir.

Mike Burnett

Great. Thank you, Vince. Good afternoon, and welcome to the JDA Software business update call for the first quarter 2012. On our call today, we will discuss current business conditions, trends and plans of JDA in order to keep you apprised of our progress. We are hosting this update call in an effort to provide transparency where appropriate, during a period in which we cannot report financial results due to the pending restatement surrounding revenue recognition, which was announced in April of this past year. Accordingly, with the exception of our cash balance, we will not be disclosing or providing any GAAP financial statement results for the first quarter or providing year-over-year analysis of our financial performance. We appreciate your understanding of the disclosure limitation that we have at this time.

We will begin the call with a brief update on the status of the restatement process by Pete Hathaway, our Chief Financial Officer; and then Hamish Brewer, our President and CEO, will continue with the business update before we open the call to questions.

Before we begin our review, let me remind you that our comments today will contain certain forward-looking statements that often involve risks, uncertainties and assumptions. In all statements, other than statements of historical fact, they are statements that could be deemed to be forward-looking and as such, are subject to risks that we have identified in our various SEC filings. Actual results may differ materially from those predicted.

With that, I will now turn the call over to Pete Hathaway.

Peter S. Hathaway

Thanks, Mike. First, we would like to give you a brief summary update about the ongoing investigation into our revenue recognition practices and also, indicate some decisions that we have made as a result of this experience. As we mentioned in our last press release on the subject, the company has decided to restate its financial statement for the fiscal years 2008 to 2010. The company is determining and quantifying the specific adjustments that need to be made to each of the periods affected. Based on the review to date, the company anticipates making adjustments relating to certain transactions linked to associated service agreement, and the related license revenue will generally be moved from the quarter originally recognized to the immediate subsequent quarter.

We are continuing to evaluate the 2 other previously disclosed areas relating to contract language around sunset clauses and VSOE for cloud services. The company continues to believe that the restatement will change the time period in which revenue is recognized, as opposed to the existence of the reported revenue, and our cash position is not expected to be impacted.

To reiterate, to date, the company has not identified any instances of intentional wrongdoing. The process is ongoing so there's not much that I can say about the financial performance of the company until we conclude the process. It should be noted that we do not expect to file our first quarter Form 10-Q by the May 10 deadline, and therefore, we expect to file a Form NT 10-Q with the SEC, as well as issue, later this week, a press release and 8-K acknowledging that we will continue to be noncompliant with NASDAQ listing rules.

We expect to be current with the SEC filings by the time that our second quarter 2012 10-Q is due in August. Though no material new facts have emerged since our update a couple of weeks ago, I want to emphasize to you that we are committed to addressing this matter in a timely manner, but first and foremost, we are focused on making sure we are thorough and accurate in completely resolving any and all issues. We have been and will continue to be committed to expending the necessary resources to resolve the issues and answering all questions raised by the SEC. We are further committed to making any necessary improvements in order to create a solid foundation from which we can move the company forward. This process has also strengthened our resolve to implement improvements to our business information and financial systems infrastructure.

In fact, prior to this investigation, we retained an outside consulting firm to help us perform an end-to-end review of our systems. The outcome of the review is a 3-year systems investment plan, which we originally planned to execute starting this year. Although delayed somewhat due to the investigation, we are beginning to move forward. The plan contains 4 major elements.

First, we are introducing a project optimize and systematize the end-to-end flow of opportunities through our business cycles for sales implementation, operations and support all the way through to cash collections. We call this opportunity to cash. Secondly, we are going to implement a new support and maintenance CRM solution that will enable us to enhance the management of our customer relationship systemically and provide new services that will be more tightly integrated between our various services offerings, including our new cloud services offerings.

Thirdly, we plan to implement a new internal HR system designed to support our ongoing leadership and associate development programs. Fourth, we will be upgrading our financial systems and plan to implement a contract management system. In general, we will be using cloud-based offerings to support our transition to these new systems because we believe they will allow us to adopt them more rapidly and with less disruption to our business. We believe significant value will result from upgrading our business-oriented and financial systems, and we are taking a prudent methodical approach over a 3-year time period to accomplish this in a fiscally responsible manner.

I will now turn the call over to Hamish for an overview of the business conditions and strategy.

Hamish N. J. Brewer

Thank you, Pete. There are a few key points that I'd like to discuss with you today in order to bring you up-to-date regarding our recent quarter and trends that we see in 2012, along with a number of strategic initiatives that we are implementing. The items I plan like to discuss today are: first, the software license environment, along with the status of our services and support business; second, our cash position; third, the status of our ongoing product investment and innovation strategy; fourth, our new JDA cloud strategy; and lastly, I'd like to discuss some recent organizational changes at JDA and enhancements to our board.

In looking at the software license environment, you may remember that we experienced the unanticipated decline of our new license bookings in the fourth quarter of 2011, primarily from retail in North America. When we held our earnings call at the start of this year, we said we plan to hold off providing guidance for 2012 until we could assess buying sentiment in our customer base and better gauge the likely run rate of this critical market for JDA.

The first quarter has now made the situation clearer. I continue to believe that retailers in North America, in general, are challenged by the shifting -- the shift to online or multichannel retailing that's occurring, and at the same time, many of them are facing sales and margin challenges resulting from continued fragility in consumer confidence due to such factors as slowing jobs growth, increased energy costs and consumer debt levels.

The multichannel challenge is an interesting issue for almost all retailers. During the first quarter of this year, and most recently at our user conference, FOCUS, we've seen plenty of indications that retailers are concerned about their ability to compete in a multichannel, online retail world. You may have read some of the commentary about the impact of online competition for traditional market leaders in retail. With no doubt in my mind, that many traditional retail business models are under reconstruction to allow companies to tackle new challenges such as showroom-ing.

As noted recently in the Wall Street Journal, Wal-Mart and Target are willing to sell a few things at a loss. Amazon's whole business is a loss leader, and retail information systems recently said showroom-ing is a symptom of the pricing and merchandising dilemma confronting a lot of shelf-durable, slow-moving consumer goods. On the surface, it looks like consumers doing price and product comparisons, but it's all about the availability of data.

But when it comes to pricing, merchandising, supply chain and decision support data in tools, this is what JDA solutions are focused on. Our assortment planning, merchandise planning, pricing, demand planning, supply chain planning and transportation tools all inherently support a multichannel business model. In addition to this, JDA announced the upcoming release of a brand-new product called Customer Engagement cloud at NRF trade show in January this year. This product not only provides retailers with the ability to service consumers ordering via store, web and mobile channels, it also provides a unique and patented capability called profitable promising, which provides the ability for retailers to deliver the multichannel service customers demand while protecting margins.

I believe that retailers have no choice other than to rewire their businesses to compete in an online multichannel environment. Doing so involves changing multiple aspects of a retailer's business. But at the heart, the retailer must have the systems to deliver seamless service across channels.

Most retailers do not have this technology, and as I just explained, JDA arguably has the strongest suite of capabilities in the market. If you consider these points, then it's reasonable to conclude that we may be entering a significant period of investment in systems for retailers, one which I believe is long overdue in many cases.

So that developed such a shift, and the market has the potential to create an important revenue stream for JDA overtime. However, I would emphasize that this potential shift is still in early stage. One positive sign that I can point to, in just the last few days, is that JDA enjoyed record attendance at our recent FOCUS user conference, with attendance up around 15% over last year. This willingness to invest time and money, at least, represents a healthy level of interest from our customers.

And to help translate this interest into revenue in 2012, we plan to encourage retailers to prioritize investment in technology, with new marketing programs aimed at raising the profile of JDA solutions with senior level executives in the top retailers worldwide. So in summary, with respect to North American retail, we expect -- we currently expect to see a gradual improvement during the course of 2012, a recovery that I expect will be tied to consumer confidence and spending on the one hand, and the urgency of the multichannel challenge on the other.

Coming back to our license environment in Q1. We had a better performance from retail in North America compared to Q4 last year, but this sector continues to be soft. During the quarter, we had a solid performance for manufacturing in North America, Europe was strong once again and Asia Pacific remains challenging for us. However, there's good news regarding Asia Pacific. We now expect to see steady improvement this year in Japan, a market that has historically been our largest in Asia.

So overall, while we do not expect meaningful license growth in the first half of this year, we do expect license growth to improve generally over the course of the year. Please bear in mind that these comments are based on current estimates and are subject to the impact of restatement.

Regarding services, this business is steady overall. Our North American business continues to be strong from a utilization and a billing rate perspective, which has mitigated the weakness in our Asia Pacific region due to the overall weakness in Japan following the natural disasters in that country last year. Additionally, our maintenance retention remains strong, and we expect to achieve our typical retention rates of 94% to 95% this year, which is in line with many previous good years.

One financial data point we can talk about is our cash balance. During the first quarter of 2012, our total cash balance increased approximately $46 million to $341 million from $295 million at December 31, 2011. This is a substantial increase, even considering that Q4 -- Q1 is a seasonally strong cash flow quarter. With capital expenditures of about $2 million in the first quarter, we're extremely pleased with the cash-based results.

The third item I wanted to update you on is our progress in implementing our R&D strategy. As you know, after the acquisition of i2, we announced a major multi-year roadmap for the company. We've made major progress on that plan. While all product development programs take some time before results start to emerge, 2012 is the year when those results are going to start to hit the market. And by 2013, our new solutions under development will be streaming steadily into the market.

In the first quarter of this year, we released the first major combined JDA and i2 solution, which is targeted at the retail industry for assortment planning. This innovative new assortment planning solution is the first that allows retailers to simultaneously plan assortments while respecting constraints from a shelf space supply chain network and financial investment perspective. Deciding which product to place in which market is a key capability that's relevant for both traditional store-based retailing, as well as online multichannel retailing.

Our new assortment planning solution has been designed with multichannel retailing inherently built in to the solution. Later this year, we will commercially launch our brand-new Customer Engagement solution, targeted at multichannel retail businesses and designed to optimize retailers ability to profitably service consumers across multiple channels in a way that traditional ERP systems simply cannot achieve.

Finally, in early 2013, we'll begin to launch a series of products operating on a new technology platform that we've built by combining JDA's enterprise architecture with the i2 Agile Business process platform. These new solutions will enable our customers to implement unconstrained workflows that transitions seamlessly across JDA products so that the user is provided with a comprehensive integrated end-to-end workflow that's built around their roles and associated tasks rather than the traditional approach of software products built around discrete modules or discrete products.

The overall point I want to make to you here is that we're entering an exciting new phase following the integration of JDA and i2. We're beginning to deliver major new capabilities into the hands of our sales force, who, until now, has largely been selling the same products that JDA and i2 owned before the acquisition.

The fourth item that I wanted to review with you today is our cloud strategy. In 2009, we announced that we were going to build a new business within JDA, and we called it Managed Services. The concept was simple, we would offer to run our software for our customers as a service. Three years later, we've refined the model and identified many business opportunities for JDA. Based on what we've learned, we are launching the transition to cloud as a major new initiative for the company in 2012. So let me start this discussion of the cloud initiative by summarizing what we've learned over the last 3 years.

First of all, I indicated in January that we built our cloud services business up to around $40 million of revenue, and that we now have around 100 customers using the cloud platform. While these revenues are still relatively modest, we are confident, based on this initial experience, that we have a compelling value proposition as our solutions, when run optimally, produce significant return on investment beyond just the cost savings implicit to our the cloud model.

This means that if we can improve the experience using our products, that our customers can realize real, new benefits. Additionally, we've learned that we can accelerate the delivery and improve the quality of our implementation projects if we integrate our cloud services into the offering right from the start. This approach saves our customers money and increases their satisfaction with our products and our services. More importantly for our future growth prospects, it readies customers to take on the next project sooner, accelerating the pace at which JDA can deliver new capabilities into our substantial customer base.

Finally, we validated that an opportunity exists for JDA to reach beyond traditional cloud services and embed specific industry analysis and insights that can help our customers make better supply chain, pricing and merchandising decisions, which, in turn, can drive margins and reduce working capital, further increasing the ROI of their JDA software purchase.

There's a range of such potential optimization services that can be provided weekly or monthly to customer in areas such as CPFR, BMI, network optimization, inventory optimization, full cost optimization, master planning, integrated business planning. Once again, there's no one better equipped to provide this kind of value-added service around our products than JDA.

The outcome of these learnings and opportunities is that we've decided to launch a major strategic initiative within JDA that will result in the gradual transformation of our business from a traditional, behind-the-firewall business to a cloud-based planning and optimization solution services provider. We believe this strategy will deliver significant value to our customers, create a sizable accretive recurring revenue stream for JDA and will establish a powerful competitive differentiation between JDA and our primary competitors, the traditional ERP companies.

We plan to launch a company-wide program in 2012 that will kickstart our transition to the cloud. I expect that for sometime we'll continue to offer our customers the option of a traditional solution deployment, but we're going to do all we can to commit our customers to adopt our cloud platform by clearly demonstrating how they'll be better off in financial and operational terms if they do so. One important point to note is that our transition to cloud should not be confused with the change in our IP licensing strategy. We intend to continue offering capital licenses, along with the separate recurring services revenue stream for cloud and support services.

If the customers demand subscription licensing, then we'll offer it if it's required to win. But we'll let our customers decide which one they prefer. This important point means that you should not expect a wholesale change from upfront revenue recognition to subscription at JDA. We presented this strategy to our customers at our recent FOCUS user conference last week, and we have received a great deal of interest.

The last item on my agenda is to update you on organizational changes at JDA and changes at our board level. Over the past couple of years, since the acquisition of i2, we've been proactively strengthening our management team with leaders who have experienced running the kind of company that we plan to become. We hired a new Global Leader for Services, a new Head of Global Support, a new Chief Accounting Officer. And just last week, we announced a new Chief Legal Officer, with an extensive background providing internal legal support to leading technology companies.

The point I want to make to you here is that we're building an leadership organization that can take us to the next level. Leveraging the experiences of other large technology companies, we've already made that transition. In parallel with this, we've also been investing in leadership development from within. Today, we are investing at record levels to train and develop our existing leaders who have the potential to grow and assume greater responsibility as the company develops. I believe that these 2 organizational development programs will only strengthen the company and prepare us to manage continued growth effectively.

In addition to management changes, we've announced changes to our Board of Directors, including the appointment of a lead Independent Director, Dick Haddrill, and the addition of Arty Young from Blum Capital, a major shareholder in our company. We are determined to support JDA's growth with a diverse and strong independent board that will help ensure that we are wholly focused in generating shareholder value.

To wrap up, I think that 2012 could well turn out to be a major inflation year for our company in many respects. We look forward to keeping you apprised of our progress as we implement these exciting new initiatives. And to that end, we plan to host a detailed investor day in the Northeast sometime in the fall after our financial results have been made public.

And so with that, I would like to open up the line to your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Richard Williams with Cross Research.

Richard T. Williams - Cross Research LLC

Hamish, could you talk about what's required for some of the retailers to be fully prepared to take on the Customer Engagement cloud? And how far are they from that state, do you think, at present?

Hamish N. J. Brewer

Well, one of the key things we've done because we've realized that asking retailers to rip out their old ERP systems is a nonstarter. So we designed the Customer Engagement cloud right from the outset to be able to integrate into a traditional batch offline ERP system without impacting the realtime customer service that we need to provide at the point of sale or on a mobile device or on a website. So we've specifically designed these offerings so that it can integrate directly into whatever back-end systems they've got, even legacy homegrown systems. So we don’t require them to rip and replace a whole lot of infrastructure. It's built so that it can essentially plug right into whatever you've got. And then it becomes the face of your merchandising and multichannel business to the customers through whatever channel.

Richard T. Williams - Cross Research LLC

So you don't think there's any lag that early before customers can start investing in the multichannel aspects, as opposed to having to essentially build the infrastructure to support a composite application as I think of Customer Engagement?

Hamish N. J. Brewer

No. We paid a lot of attention to that, Rich, because if we go and ask our customer -- if we say to our customer, "Okay, well to start with, we've got to replace your inventory management system." I mean, that's just a nonstarter. It's going to take them 3, 4, 5 years in some cases. So we were very focused on how can we deliver this solution very quickly so that retailers could literally get up and running, hopefully, in a matter of months. But the other aspect of that is, we're also -- as the name implies, with Customer Engagement cloud, we're providing the solution as a cloud-based solution, which, once again, we think simplifies the IT and infrastructure impact for our customers.

Richard T. Williams - Cross Research LLC

Do you get a sense -- and that will do it for me. Do you get a sense that customers are happy with the license and maintenance model? Or any preferences coming out from the discussions at FOCUS?

Hamish N. J. Brewer

We -- it's going to be interesting. I would say in the past, we have pretty much led with traditional capital license model, and I would say that customers had to really push us to be willing to offer a subscription. So I think that the shift that you'll see at JDA is that we're going to be more open to subscription in the future than we have been in the past. But my opinion is that companies that have a robust balance sheet, in general, are going to prefer a capital license with a maintenance stream to an ongoing expense from a subscription licensing program. But we'll see. I mean, we'll go either way. It'll depend on how the customers -- what the preferences are from the marketplace.

Richard T. Williams - Cross Research LLC

So just to clarify, you have both subscriptions and license maintenance? Or essentially majority rules?

Hamish N. J. Brewer

We have -- I imagine, it will be majority license and maintenance. But we're willing to do subscription, if that's what the customer prefers. If the customer comes to us and says, "We want to do subscription. That's the way we want to buy", then that's fine with me. What I'm not going to do is go out to the marketplace, as some companies in the past have done, and say, "We will only do subscription." I mean, we don't want to do that because, to be honest with you, I'm still not convinced that in the long run, that's going to be the preferred IP licensing approach for companies.

Operator

Our next question comes from the line of Mark Schappel with Benchmark.

Mark W. Schappel - The Benchmark Company, LLC, Research Division

Hamish, with respect to your earlier prepared remarks regarding new challengers that some of the retailers are facing, do you believe that you have all of the software components in place to address retailers' challenges with respect to multichannel retailing?

Hamish N. J. Brewer

Well, I could think of things that would add more to our capabilities, but what I can also say to you confidently is that the suite of offerings that we've got to support an online multichannel retailing capability is at least as good as anything else in the marketplace, if not definitively better, actually. I mean, I feel that we're in a very strong position. As a I read out a whole list of our product areas that inherently support this business model, I think we're very well positioned from that point of view.

Mark W. Schappel - The Benchmark Company, LLC, Research Division

Okay. And with respect to the number of quarter carries you had at quarter end, are you allowed to reveal that information?

Hamish N. J. Brewer

I'm afraid I don’t have that with me to hand here. So I'm sorry, I can't answer that question right now. If we -- can't probably share at this stage.

Operator

Our next question comes from the line of Alan Weinfeld with Davis Securities.

Alan Weinfeld

I missed you last week. Too many companies announcing earnings. They just won't stop until now. So you teased us with some -- the interesting things that we normally hear on the first quarter call, but stopped when we got to actually give us the numbers. I've followed the company for 11 years, and Mr. JDA was the CEO. When they had the no guidance policy, that was with the last CFO and through all the different hush and other policies. But can you give us a little more about 1Q? Was it a little better or a lot better or something better than -- you said retailers were challenged in North America in the fourth quarter -- I mean, in the first quarter they were challenged. But were they better than the fourth quarter, like they weren't grim death?

Hamish N. J. Brewer

Yes, I actually said that license sales in retail in North America were better than they were in Q4. But still not up to the level that we would describe as historically normal. We provided you with the information that we can right now. I'm sorry, we don’t meet your requirements, but that's the best we can do. Actually, that's not our policy. These are the rules that we have to follow.

Alan Weinfeld

Right. But you said for the first half, we shouldn't look for much growth in software revenue. So basically, in the second quarter wherein we should just expect anything you said about the first quarter to really not change too much.

Hamish N. J. Brewer

Like I said, we don't expect much in growth in the first half. And -- but we do expect to start again the growth in the second half. That's what we're willing to say right now.

Alan Weinfeld

You did say something about manufacturing in the first quarter. And was that the manufacturing clients, I guess, the suppliers to retail that they were a bright spot menace? Is there a bright spot? Or they were a slow spot?

Hamish N. J. Brewer

Manufacturing continues to perform well today. The issues that we ran into in the fourth quarter of 2011 was retail in North America. Manufacturing continues to perform well. EMEA continues to performs well, as we saw in the fourth quarter last year, and Asia Pacific continues to be soft for us. But the outlook for Asia Pacific is improving as we begin to see Japan coming back on stream. That's what I said, and that's our position.

Alan Weinfeld

All right, and one more. You did tell us first quarter cash flow from operations was $2 million. And...

Hamish N. J. Brewer

No, that was our CapEx.

Alan Weinfeld

CapEx, all right. That's the wrong number. So you did give us a number of how much you spent on, I guess, legal and accounting fees, and it's a negligible $0.12 a share so...

Hamish N. J. Brewer

So it's about $5 million, which I don't consider that negligible. But anyway that's where it was .

Alan Weinfeld

Well, I mean we don't know if your first quarter -- I mean, we've no idea what it was. So $0.12 a share, it could possibly be $2. But I mean that's really nothing. But you did have a substantial rise in cash to 341 from 295. But you had -- and you've put that in the 8-K. But you give absolutely no explanation on the call how that happened. I mean, did people come in and do something with options? Did you...

Peter S. Hathaway

Alan, this is Pete. We had nothing unusual in the first quarter with respect to our cash flow. We had a good cash flow quarter, which is typical of our business in the first quarter. It's cyclical or seasonal and associated with the maintenance renewal business. So Q1...

Alan Weinfeld

It was just the normal -- I know you guys do a great job. I've never seen you lower than the 90s in maintenance, and that's why 341 versus 295 was totally normal, right?

Peter S. Hathaway

There wasn't any unusual activity in Q1 with respect to cash activity.

Operator

Our next question comes from the line of Jeff Van Rhee with Craig-Hallum.

Jeffrey Van Rhee - Craig-Hallum Capital Group LLC, Research Division

Several questions for you. Hamish, maybe just start on the subscription push. Just to be clear, this is not going to be single-instance SaaS, this is going to be managed service with an option to buy a license or pay through subscription, is that right?

Hamish N. J. Brewer

Well, yes, it's a cloud service offering, which is made up of several different components, which run from implementation of our projects through to well maintained and also, includes optimization capabilities that sit above that, that's provided by analytics and insight. We do not provide multi-tenant offerings. And to be frank with you, many of our customers actually require us not to intermingle their data with anybody else's, and from a technology standpoint, we don't have a cost advantage as a result of that. So there's no benefit to us in terms of a multi-tenant technology deployment because what we want to provide to our customers in terms of some very specific capabilities to each individual customer is better provided with the platform that we've got.

Jeffrey Van Rhee - Craig-Hallum Capital Group LLC, Research Division

Okay. So the plan would then be you're essentially wrapping this whole series of services around the existing products as it evolves and then, just offering different licensing models. If that's a fair read back?

Hamish N. J. Brewer

That's one way to put it, yes. I think you've got a little bit more fundamentality in that, to be honest with you. A lot of customers today experience a lot of challenges running applications of the complexity of JDA solutions. We know this because we've analyzed the issues in our customer support database. And we know that more than half of all the problems our customers run into could be avoided, and it's not just theoretical. Having been done this now for 3 years, with more than 100 customers, we know that those customers achieve substantially better quality service and in fact, achieve better results as a consequence of using their applications more effectively. So it's more than just a technology play or a delivery paradigm. This really is about a different way to consume advanced planning and optimization solutions to optimize a customer's ability to reduce working capital and improve service levels, that kind of thing.

Jeffrey Van Rhee - Craig-Hallum Capital Group LLC, Research Division

Okay. And then you had said that, I think, if I read it back right, Q1 licenses were better than Q4. Just so I'm clear, are you saying dollar-wise? Or are you talking about growth rates?

Hamish N. J. Brewer

I was talking specifically about retail license sales in North America because that's where we'd had the issue in Q4. So I was just saying that from a total license bookings, whatever you want to call it, perspective, we had a better performance in Q1 than we did in Q4. We don't specifically break it out. I just wanted to give you a sense that the issue that we faced in Q4 feels like it's improving, but it's not back to normal. That was really the point I was trying to get you there.

Jeffrey Van Rhee - Craig-Hallum Capital Group LLC, Research Division

Okay. Okay, and then, so you're looking for roughly flattish in the first half or a minimal growth and then some conviction that you see acceleration in the back half of the year. Maybe just spend a minute just giving me the clarity of what drives the conviction for the back half of the year, if you had to prioritize. I know you've got a lot of things going on here.

Hamish N. J. Brewer

Yes, it's really just -- since what we've done on the pipeline of opportunities that we have. We've laid them out. We've looked at it 10 different ways. And it seems like we've got steady improvement in sales to retail happening through the year, like I talked about. We anticipate that Europe is going to continue to perform well in 2012. And we're also outlooking gradual improvement from Japan, which, prior to the tsunami, was our largest market in Asia Pacific. So we anticipate some improvement in Asia Pacific this year as well. So when you add all of that up, we can see a bit of a buy wave building in the second half of the year. That's really where it's coming from.

Jeffrey Van Rhee - Craig-Hallum Capital Group LLC, Research Division

Got it, okay. And then last one, Pete, on the cash flow. I know you're limited and I understand that. But as I look at the cash increase, it's an exceptional number, and in the prior year, the only number that comes close had the benefit of, I think, maybe a legal settlement and some other items. So if I go back and look for cash increases of that magnitude they're not there. Was there anything else debt-wise, working capital shifts that we're having or any other color you can give there, if you're able?

Peter S. Hathaway

Well, I mean there's working capital changes here and there all the time. But I think the point is, we -- the business still continues to operate well. Customers are paying their bills, and they're relatively happy. We had a good cash collection. As you know, the cyclicality of the maintenance renewals in late Q4 and then into Q1 tends to always be reflective in the cash flow in Q1. But nothing unusual, nothing particularly odd.

Operator

[Operator Instructions] Our next question is from the line of Brian Murphy with Sidoti & Company.

Brian Murphy - Sidoti & Company, LLC

Just a couple of follow-up questions on the Customer Engagement platform. Hamish, could you just give us maybe a little bit of color on maybe where you stand in terms of pilots, beta customers, et cetera?

Hamish N. J. Brewer

Yes, we're not at that point yet. The product isn't finished yet. We'll be ready for general release around the fall of this year. So we're in conversation right now with a handful of potential, early adoption customers. I don’ t particularly anticipate that this is going to be a significant revenue driver for 2012. So we're really just in the mode right now of internal lineup. Hopefully, a few customers are being get on board with a solution in the first 6 months or so of its general availability.

Brian Murphy - Sidoti & Company, LLC

And when you talk to these customers about some of these -- what seem to be pretty transformational projects here, do you have a sense for to what extent it would be -- these projects would be suited for, I guess, packaged apps or suite of applications versus maybe custom development projects?

Hamish N. J. Brewer

Yes, I think that's an interesting question because certainly, the projects you've heard about in the retail market until now, to tackle these kind of issues, have generally been run as pretty much more like custom development projects, huge, big expensive projects that go on and on. That's not our business model. We -- our intention is to provide a package offering that's relatively quick and lower cost to deploy, and then some of these -- the other approach is out there in the marketplace. And I don't really think that alternative has been available until now for a true multichannel, online sort of distributive customer order management solution. So it's hard to know what to compare it with because I'm not really sure that there's been an offering like out there in the marketplace until now. So it's -- but my -- the reason that we've taken this approach is because we believe that for the retail market, in general, speed is going to be critical. I just don't see how retailers can hang around and wait when it comes to their ability to respond to multichannel consumer demand in an agile fashion.

Brian Murphy - Sidoti & Company, LLC

Okay. And another question, and this is kind of similar. I know it's early, so I think it's probably another tough question here. But with respect to the Customer Engagement platform specifically and just the kind of a general move to cloud services in particular, do you expect, at this point, competition to come from the traditional kind of sources? Or are there new kind of players out there in the horizon?

Hamish N. J. Brewer

Well, what we are doing, I think, to some degree is we are -- I think we're kind of separating JDA from the traditional ERP crowd by going down this path. And I wouldn't be surprised, if in the future, our primary competitors are also cloud-based solution providers. That's my anticipation of where the whole market is going. We just had our user conference, which is great because we got an opportunity to speak a couple of thousand people for several days. And to be frank, we got lower positive feedback from our customers. I mean, it varies. People have got different attitudes, and they've certainly got some questions. But I would say, some of them are absolutely convinced this is what they've got to do. And others are in the mode of, "well, if you'd ask me a year or 2 ago, I probably would have said no, but now I'm starting to think that maybe the world is shifting." And you could see it out there with the other cloud-based providers really providing competitive leadership in other markets in technology. And frankly, that's what we intend to do in our markets.

Operator

Our next question is a follow-up from the line of Jeff Van Rhee with Craig Hallum.

Jeffrey Van Rhee - Craig-Hallum Capital Group LLC, Research Division

Just a couple of brief ones. Peter, are you able to give deal counts for the quarter at all?

Peter S. Hathaway

No, we haven't identified that yet for external discussion.

Jeffrey Van Rhee - Craig-Hallum Capital Group LLC, Research Division

And then the VSOE and the sunset clauses that are -- the 2 other remaining rev rec items in discovery, how long have those been in place? Mainly, are those just things that have been structured as is for a long time? Or was there some change to the way you dealt with those in that window?

Peter S. Hathaway

Well, those aspects of revenue recognition accounting have been in existence for a long time, but what the -- a part of the investigation will be to -- is to examine sort of a history of that and partly how it's changing. So I don't want to anticipate the results of that investigation report, so I'm going to stay away from that answer right now.

Jeffrey Van Rhee - Craig-Hallum Capital Group LLC, Research Division

Okay. Just so I'm clear you understood the question. I was really just asking your internal policy around those 2 things and how or when did it change. Is that how you understood the question?

Peter S. Hathaway

It is.

Jeffrey Van Rhee - Craig-Hallum Capital Group LLC, Research Division

Okay. And then last one. The IT initiative sounds like you're investing on a number of projects. I think you said 3-year time frame. Can put your hands around roughly what the cost of those projects will be?

Peter S. Hathaway

Yes, we've estimated a total cost over this 3-year period of about $20 million, about 1/2 of that will be capital. And of that capital, the majority of that, if not all, it will probably be pretty consistent with the other kind of project work we've done in the past. So it shouldn't have a big impact on the sort of CapEx run rate for internal JDA hardware and software acquisitions or purchases. The other portion will be expense and where will be seeing an increase over the next -- during that 3-year period on the expense side will be associated with the cloud subscription models that I made reference to. So we'll see some increase in operating expenses that will probably be -- will be basically expensed across the organization, so you won't see that solely in G&A

Operator

Our next question comes from the line of Kevin Ordum [ph] with Presidium.

Unknown Analyst

A real quick question on the legal expenses. The $5 million related to the SEC inquiry, I guess, if you were to report in the quarter, you would have expensed that. But has that been paid out yet? In other words, was that a negative to cash flow in the quarter?

Peter S. Hathaway

The majority of that has not yet been paid out, Kevin, so it is in the payables.

Operator

Thank you. Ladies and gentlemen, this does conclude the JDA Software Group, Inc. First Quarter 2012 Business Update. Thank you very much for your participation, and you may now disconnect.

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