i2 Technologies' Turnaround: Part I

i2 Technologies (ITWO) has turned around financially and has been making money for 11 consecutive quarters, albeit not consistent with analysts' expectations quarter by quarter.

When a software company like i2 goes through a turn-around, the initial stage is bound to be choppy due to a few factors such as its new business model, the maintenance/services revenue, and the new products on a delivery platform.

i2 has gone through this period of painful transformation, it has all its products on a new SaaS platform which alone places it 2-3 years ahead of its bigger ERP competitors Oracle (ORCL) and SAP (SAP).

Due to the complex nature of Supply Chain Management systems, i2 realized that it can't just sell customers its software and expect them to extract the real benefits out of it like ERP software products. Therefore, i2 has re-organized its entire company to become a very efficient provider of SCM results. It consults, implements and it even runs the SCM operation for its customers.

i2 currently delivers its products/services in three different forms that meet the different buying preferences of its customers.

This is probably the most "misunderstood" company by Wall Street analysts. Most analysts following i2 lack the understanding of its new business model which is very different from the ERP software providers like ORCL and SAP.

A so called "5 star analyst" estimated i2 to book new business of $47 millions in 4Q07; it turned out i2 booked $82 million - a 3-year high in terms of quarterly bookings.

What made this $82 million booking so special was in the middle, several of its major stockholders (all hedge funds) openly demanded selling the company due to its inconsistent performance in 2007. The Wall Street analysts (Patrick Walravens of JMP Securities and James Friedman of Susquenhana to name a few) made it more difficult for i2ers to sell by talking about their own wild speculations since i2 treats them just like anyone else, providing absolutely no inside information or preferential treatment.

The inconsistent earnings in 2007 were caused by its former CEO Michael McGrath, a chain-saw cost cutter with no experience growing a new business. Now that he's been gone for 6 months, i2 is having its best bookings in 3 years.

Coming out of 4Q07, i2 has a good pipeline which is entirely different than 12 months prior under CEO McGrath. The Company is currently run by its interim CEO Pallab Chatterjee, a seasoned SCM expert and an executive who can execute. Chattterjee could become the new CEO if i2 is not sold in the near future.

Among potential bidders, SAP, IBM and ORCL make the most sense. Here's why.

SAP is i2's number one competitor due to its size but for real complex SCM deals, i2 always won due to its superiority in SCM products and services. i2 is currently suing SAP for infringement of 7 SCM patents and i2 is dead serious about winning this lawsuit. By buying i2, SAP instantly becomes the indisputable SCM leader and avoids the potentially disastrous loss of a lawsuit in which i2 is making 200-300 claims. The cross-sale opportunity is huge for SAP with i2's more advanced products and services organization in India.

IBM (IBM) is a long-time i2 partner and i2's best customer by implementing lots of i2 solutions worldwide over the past 10 years. IBM is the host of i2's on demand Logistics/Transportation Matrix with a growing customer list like Costco (COST) and many other top U.S. retailers. Buying i2 fits the expansion of IBM's software portfolio strategy nicely.

Oracle, in competing with SAP on many fronts, will strengthen its SCM offering tremendously and win all sizes of business deals if it buys i2 and the cross-sale potential is huge. The i2 patent infringement lawsuit against SAP will help ORCL pin SAP down quite well.

Disclosure: None

Comments

[getitright]

In reading your article and looking at your chart it appears i2 had a successful turnaround in motion up to the point they ousted Michael McGrath, not since his departure. i2 stock continues to fall regardless of who is covering it or the thoughts on analysts and unfair practices for reporting.

As someone who has partnered and worked closely with i2 for over a decade, the only success since Greg Brady was President occurred during the 29 months when Michael McGrath and his turnaround team were in place at i2. They are the individuals to thank for delivering positive results for i2’s growth, not an individual who is collecting off the coattails of success from their efforts.

Chatterjee has been inside the company since 2000 when he joined as COO. He did not deliver results, changes were made and the board searched for a CEO who had experience to make it happen.

As one of the most respected individuals in the supply chain consulting world, co-founder of PRTM and the father of SCOR, McGrath resided on i2’s board. After a long, extensive, and unsuccessful search for CEO, the board turned to McGrath and asked him to consider becoming the CEO to take on the turnaround. McGrath felt with support from the board and his knowledge in the market he could make a difference and agreed.

He built a management team of key individuals who were respected in the market and they dedicated almost 3 years to restructure, rebuild and restore a sense of stability to i2 resulting in the 11 consecutive quarters of profitability and growth. An impressive badge to earn as the company had significant SEC issues when he stepped in.

He and his team built out a strategy plan based on customer feedback. They listened to their clients and partners. Our partner program was rebuilt. Marketing and development prioritisation was designed around customer and partner input. The focus of McGrath’s team on the client resulted in the delivery of 11 profitable quarters. A successful turnaround. While he was in charge, i2’s stock went from not being listed to being relisted and hitting the mid 20's.

Many realise he and his team were forced out of i2 and the market has responded to the threat of stability which is reflected in i2’s continual stock drop.

To claim Pallab Chatterjee as a success because i2 has experienced a couple of follow on successful quarters since McGrath's release is preposterous. Those who are experienced in covering the enterprise software market recognise it takes 3 to 4 quarters to identify a project and bring it to closure due to the length of building out custom demonstrations, contract negotiations, and hitting the budgeting cycles of companies at the right time. These 2 quarters, and probably the next 2, are results from the momentum of the changes put into affect under McGrath's team. Simply check with i2 clients and partners.

The analysts you mention in your article are top analysts in the software market. They are highly respected by Wall Street, have an accuracy rate which is impressive and they do not make comments based on hearsay. By placing your message on a public post board without having your facts straight on their coverage of i2 is completely unprofessional and not credible.

If you wish to document the facts, you need to do your research in a balanced manner. In the process of developing your article, did you interview McGrath, Cummings, Walravens, or others? Did you stop to review the history of this company? Do you realise that pipeline is usually 3-4 quarters deep and the last 2 quarters are simply a continuation of the successful development created by McGrath and his team?

Your comments on the SAP lawsuit are valid with one exception. The legal action was initiated by McGrath. He was the person to recognise the patent infringement. He took the legal action required which now has set i2 up for significant gains.

McGrath and those he hired to help turnaround the company hold consistent, successful track records outside of i2. They delivered results for i2 only to be thanked by being ousted by the old regime.

Pallab Chatterjee’s track record has not been impressive. His scorecard cannot be measured until you have year over year results to show whether or not he can deliver.

You need to remember that many of us have worked with i2 as clients and partners for almost two decades. We know their politics, their people, and who can and cannot deliver. i2 had a team who was leading them to success. They stopped to listen to us as their customers and partners. Trust was being rebuilt. The listening has stopped and the arrogant approach has returned. Whether this results in continued success is yet to be determined.

[JD Peterson]

The contribution of McGrath was cutting cost and selling asset to raie money but he did not grow the revenue, and he wasn't spending much time with i2 clients like i2 executives did and do now.

It cost almost 12 cents per share per year of i2 earnings to have McGrath, he was paid $1 million plus and he ran over $1 million in charter plane and huge stocks and stock options and all kind of perks you can think of. This man is a typical greed, how can someone ran that kind of tab while the company and all its shareholders were trying to grab a piece of wood just to stay alive?

Some people don't like Chatterjee but this man is very well respected in i2 and in SCM world. He was born in India with a little accent like all foreign born Americans but he's getting a lot better in presiding the earning conference calls.

Some of those American born CEO's are such smooth talkers, they scar me to death.

[JD Peterson]

By the way... your so called McGrath and his team were McGrath, B. Stinnet and J. Cummings.

Stinnet was obviously another corp. hopper, very expensive but very unimpressive in terms of performance. A smooth talker but more like a car saleswoman, as to SCM, I don't think she can have a deep conversation with a client who needed help.

As to J. Cummings, he was the biggest joke. Nobody can stay awake after listening to his presentation for 10 minutes. An i2 shareholder got so pissed and asked McGrath how in the world did the guy get that job.

Thank God the team is all out of i2.

McGrath was a quick cost cutter or so-called a chain-saw and he was more than fairly compensated. The i2 board should have let him go 7 months earlier; in other words, the renewed of his last year contract was a mistake and they had to let him go 5 months before the term ended.

As to the two Wall Street analysts mentioned, you just have to listen to them asking questions at i2 conference calls to realize how clueless these two were. When i2 had a good quarter, they move their target a few bucks higher and vise versa, these people have out-lived their usefulness since i2 is all on fair disclosure.

[JD Peterson]

4/30/2008 comes and goes.

Today is the date i2 and SAP went to court, i2 is suing SAP for infringing 7 of its SCM patends involving about 300 cases/deals.

Can you believe that the Markman hearing is over?

Although we don't know how it went now but we know i2 was well prepared and dead serious about winning this case for several reasons.

1. SAP used the partnership to steal the patented technologies from i2.

2. SAP hired i2 employees who were familiar with the technologies to develop products with similiar capability to compete with i2.

3. SAP bad-mouthed i2 to scare potential customers from buying i2 products products by spreading rumors that i2 will be going out of business.

If wins the case, i2 intends to seek the maximum damage to SAP including court injunction to prohibit SAP from selling its products and servicing its customers together with maximum monetary damage.

i2 do not intend to license its technologies to SAP.

SAP had better be praying hard that i2 do not win the case, otherwise the loss will be devastating.

[Buzzly]

Amen to what getiright said.