i2 Technologies' Turnaround: Part II

Now that i2 Technologies (ITWO) has reported its Q12008 earnings, it's time for part II of this story (see part I here).

News Headlines Are Misleading

Anyone reading the headlines would think that i2 is still not out of the woods, but for those following the i2 story, its Q12008 report was the news they had been waiting for.

Why? Well, in Q12008, i2 again had a 3-year high of its Q1 business bookings at $66.4 million. Together with Q42007, i2 now has two consecutive quarters of 3-year highs of respective quarterly business bookings.

Aside from the $66.4 millions bookings, i2 also booked multi-year, $10.5 million worth of business in Q108 with a European high-tech company. This was not included in its Q1 bookings of $66.4 million due to contract contingencies, but i2 said that it expects to start recognizing part of that booking beginning in Q32008.

For the past two quarters, i2 has demonstrated that its business is solid, its finance is strong (generating cash very fast) and its business is growing significantly under the most adverse environments namely, a) the U.S economic slowdown, and b) many of its hedge fund owners openly demanding to sell the company.

Strategic Review Committee [SRC]

On May 07, 2008, after a thorough investigation, i2's SRC, headed by Jackson Wilson, Jr., concluded that although i2 has turned around and is thriving even in the worst environments, it's better that i2 undergoes a "rapid addition of scale" to better serve its clients, employees and stockholders by selling, merging or other transactions.

Sanjiv Sidhu, i2's co-Founder and Chairman of the Board, has stepped down and Jackson Wilson Jr. has been named Executive Chairman, now actively in charge of negotiating strategic alternatives with at least two credible parties.

How Much is i2 Worth?

i2 will not be sold to those who have been buying ERP software companies to milk its maintenance revenue because i2 is currently doing better than 90% of all software companies, small or large, including Microsoft (MSFT), Oracle (ORCL) and SAP (SAP). i2 is showing huge organic growth in this very difficult time and it'll grow faster as the economy gets better. In other words, it does not need to be sold but it does need a much bigger scale to become a more significant player.

The most valuable assets of i2 are:

a) i2's intellectual properties - i2 has a portfolio of 140 patents and another approximately 140 still pending. Collectively it has spent over $1 billion to develop these intellectual properties. i2 is currently suing SAP for infringing seven of its very important SCM patents; the Markman Hearing was conducted on April 30, 2008. Those who are familiar with the case like the odds of i2 winning; if i2 does win, the damage claim will be at least in the hundreds of millions (involving about 300 cases/deals) and will paralyze the SCM business of SAP, its biggest competitor.

My take: if i2 wins this case, its SCM business will surge rapidly with new customers and will be financially strong enough to acquire many smaller companies; SAP will encounter the biggest loss since its inception.

b) i2 is carrying more than $1.8 billions of NOL and $300-400 millions of other tax deductibles in its books - these are tax assets that will not expire until 2026. (Most expire in 2024). This is a very valuable asset to the buyer and the new company if it merges with another company.

c) i2 has successfully transformed itself to SaaS (both products and company organization to provide effective services to its clients) - i2 currently sell its solutions in all three different formats according to the preferences of its clients. i2's solutions are the Mercedes-Benz of the SCM world and its US and India operations are among the most effective solution providers.

i2 is aware of its valuation. Those who recognize its intellectual properties/technologies and have the resources to rapidly scale it up worldwide will find that i2 is a very valuable addition that doesn't come by very often.

Potential Buyers

Now that i2's board is ready to accept offers, let the bids begin....

IBM (IBM) - best fit in every aspect. A long time i2 partner currently hosting i2's Freight Matrix; customers are among top US retailers. IBM will make the best use of i2 assets worldwide rapidly.

SAP- If there's one company that can't afford not to buy i2, it's SAP. The patent infringement lawsuit could trigger the irreversible downfall of SAP. I wouldn't want to go to court with i2 if I were the CEO of SAP.

There are a group of very possible bidders out there, such as ORCL, Accenture (ACN), Tata and other IT outsourcing firms based in India. The motivation and probability of each buying i2 is about the same.

Disclosure: Author has a long position in ITWO

Comments

[Philip Obal:]

Better software firms have ZERO long term debt. ITWO has 84.45M according to Yahoo Finance. I hope that i2 can become profitable over the next few years (seems just barely profitable at this point). Perhaps, execution of the SaaS will help margins significantly.

My point here, is that profit margin at i2 HAS been low. Going forward, one hopes it to be much higher. TIME will tell.

2008 May 12 12:55 PM

[p. smith:]

Many had been hurt by i2's downfall in the past and many will miss its coming back if it's not been acquired in the near future.

i2's stock is still in the bottom of a trash bin just don't know when will it start to surge? maybe until enough people know the story.

The buy-out price (if it happens) could have very little to do with today's trading price. Hedge funds know the valuation and are demanding the company to do something to increase shareholders's value.

One particular hedge fund named "AMALGAMATED GADGET LP" aka Q investment based in Fort Worth who holds i2's 2.5% prefer stock has been crying out loud to sell the company at any price. Why? because as long as i2 has a "change in control", Q will be entitled to a 110% payback of its holding of prefer stock, NO MATTER WHAT PRICE I2 IS SOLD FOR, and that's part of the deal of the prefer stock.

Many other hedge funds and i2 shareholders have realized that what's good for Q is not necessarily good for every shareholder.

"AMALGAMATED GADGET LP" aka "Q investment" is said to be run by Geoffrey P. Raynor, a Texas multi-millionaire.

2008 May 12 01:24 PM

[p. smith:]

i2 has $139 millions in cash and $86 millions in debt which eq. to $53 millions cash and no debt.

Most importantly, i2's maintenance revenue has shown a 5% growth y/y in q1-2008, 1st time in 10 years.

When a software company turned-around, maintenance revenue growth is the last thing to happen.

i2 has reported 12 consective quarters of profit and has been growing record bookings for the last 2 quarters.

2008 May 12 01:34 PM

[p. smith:]

Quote Mike Berry, i2 CFO... "i2 solutions are second to none and the team implimenting them are second to none as well."

Not many people can say that.

2008 May 23 12:03 PM