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JDA Software Group Inc. (NASDAQ:JDAS)

Q2 2008 Earnings Call Transcript

July 28, 2008, 4:45 pm ET

Executives

Hamish Brewer - President and CEO

Kristen Magnuson - EVP and CFO

Analysts

Kevin Oram - Praesidium Investment Management

Brad Reback - Oppenheimer

Andre Glukhov - Brean Murray

Richard Williams - Cross Research

Operator

Good afternoon ladies and gentlemen, thank you for standing by. Welcome to the JDA Software Group Incorporated Second Quarter 2008 Earnings Conference Call. (Operator Instructions). This conference is being recorded today, Monday, July 28, 2008.

I would now like to turn the conference over to Hamish Brewer, our Chief Executive Officer. Please go ahead, sir.

Hamish Brewer

Thank you, [McKayla]. Good afternoon, everyone and welcome to the earnings results call for the second quarter 2008. With me on the call today is Kristen Magnuson, our CFO and Executive Vice President. Today I am going to provide you with an overall review of the quarter and then I'll hand it over to Kristen for financial review.

Before I get started, I would like to ask Kristen to read the Safe Harbor statement.

Kristen Magnuson

Good afternoon, everyone. This presentation will contain certain forward-looking statements. Our actual results may differ materially from those projected in forward-looking statements. Additional information concerning factors that could cause our actual results to materially differ from those in the forward-looking statements may be found in our Form 10-K for the year ended December 31, 2007, and other SEC filings.

Furthermore, this presentation includes 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 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 will be posted on our website at www.jda.com.

Hamish Brewer

Thanks, Kristen. The second quarter was a mixed quarter for JDA. Clearly, software sales were not as strong as we would have liked or indeed where we expected at the outset of the quarter. The primary cause of the lower than expected license revenue which came in at about $15.5 million was the number of deals that moved out of the quarter right at the end of the quarter. While this is disappointing, we do not feel that this situation represents an underlying weakness in our business. The majority of the deal flips occurred in North America and we've performed an analysis of reasons to try and determine if we're seeing an impact from macroeconomic conditions.

The results of this analysis is that three deals flipped for what we believe were macroeconomic related issues. You may recall that similar analyses in previous quarters identified one deal in the third quarter last year, three in the fourth and one deal in the first quarter this year. So while we are experiencing some impact from macroeconomic conditions, in the context of the 57 deals that we did successfully close, it still remains relatively limited.

The bigger issue related to these flipped deals was simply drawn out sales cycles on deals that we still expect to close. A consequence of this situation is that we now have a loaded pipeline going into the second half of the year and I can confirm to you now that we fully expect to achieve our software license guidance set out at the start of this year of $75 million to $85 million. Our confidence is bolstered by two facts. First, at this stage in the third quarter we have a good number of deals where we're selected and we're completing the final stages of the sales process and, secondly, the fact that our pipeline looks very robust not only in the third quarter but also throughout the fourth quarter. Further to my comments last year, we continued to see very high win rates against our competitors -- sorry, last quarter.

We continue to see very high win rates against our competitors. We're maintaining our elevated average sales selling prices for our solutions and we continue to believe that the solutions we offer align well with the needs of the market in these difficult times. Additionally, our annual user conference focus was the best attended ever, tangible assurance that our customers are focused on what we have to offer. So looking beyond software sales, the company performed very well from a profitability standpoint despite the reduced contribution from sales.

Adjusted EBITDA demonstrated solid profitability at $20 million, only slightly down compared to the second quarter of last year despite more than a $3 million negative variance in software revenues and this EBITDA performance translated well into strong cash flows with nearly $29 million of cash flow from operations. Our EBITDA performance is largely attributable to strong profit contributions from our maintenance business and tight cost control in our product development department. Both of these departments in our business are operating well and exceeding their financial plans. Our consulting business continues to under-perform against their plan and they are offsetting much of the financial benefit that we're getting from the maintenance and R&D over-performance.

So to summarize and share my perspective on the performance of the entire business, software sales, overall, are performing well. The first quarter this year and the fourth quarter before that were both very strong software quarters and sales in the past 12 months were 10% up on the previous 12 months. So while the second quarter was disappointing, I believe that this is a temporary dip and we expect to make up the short fall in the second half. Maintenance and R&D are both over-performing, resulting in strong EBITDA performance despite lower sales in the second quarter and consulting services is continuing to under-perform against plan.

When you put all of this together, what does it mean for our full-year guidance? As I stated earlier, we fully expect to deliver our projected license revenues. We also expect our maintenance and R&D departments to continue to over-perform and we expect our consulting services business to continue to under-perform, offsetting much of the over-performance of the maintenance and R&D functions. So where we land at the end of the year is really going to be determined by software sales performance in the second half. I believe that the third quarter software sales performance will set the pace for the balance of the year and right now at this early stage in the quarter, it looks very promising.

Our full year guidance for software, total revenues and EBITDA all look highly achievable and although our adjusted EPS number also looks achievable, we expect to miss our GAAP EPS number due to higher restructuring charges as we transition to the COE. So once we've completed this quarter, I think we'll be in a good position to provide a clear picture on how the whole of the year looks and how it's likely to perform and in the meantime, given that we have a significant potential up side in our software pipeline, we're leaving our FY '08 guidance unchanged.

And so with that, I'd like to hand over to Kristen to walk us through the financial performance in detail.

Kristen Magnuson

Thank you, Hamish. Because of the software signing delays, total revenues increased to $91.8 million in the second quarter '08 from $90.8 million in the second quarter '07 an increase of 1%, but decreased 2% sequentially compared to $93.9 million in the first quarter of '08. We generated $42.3 million of adjusted EBITDA in the first half of 2008, including $20.4 million in the second quarter. This compares to $40.5 million of EBITDA in the first half of 2007. Maintenance revenues increased sequentially to $46.6 million in the second quarter of 2008 compared to $45.8 million in the first quarter of '08, a 2% increase and also increased 9% compared to $43 million in the second quarter of '07. When compared to the second quarter of '07, foreign exchange rate variances provided a $1.4 million benefit due to a weakening dollar against virtually all foreign indexes.

Our year-to-date retention rate is 96% and total maintenance revenue grew 6% in the first half with a 76% gross margin overall. Total services revenue increased $1.6 million or 6% sequentially to $29.6 million in the second quarter of '08 compared to $28 million in the first quarter of '08 and increased $444,000, or 2%, compared to the second quarter of 2007. Our service margins were 19% in the second quarter of '08 compared to 21% in the first quarter of '08 and 21% in the second quarter of '07. The sequential decrease in service margins results primarily from a $1 million increase in outside contractor costs and a 2% increase in average head count due to our ongoing investment in the center of excellence. These costs were offset in part by the increase in services revenues and a lower incentive comp payout in the second quarter compared to the first. Worldwide utilization and realized billing rates were 54% and $195 per hour, respectively in the second quarter of 2008 compared to 59% and $189 per hour, respectively in the first quarter of '08.

Worldwide utilization and realized rates in the second quarter of 2007 were 53% and $205 per hour, respectively. We ended the second quarter of 2008 with 450 employees in service functions compared to 434 at the end of the first quarter of 2008 and 455 at the end of the second quarter last year. In the first half of 2008, we reduced our on-shore services headcount by 14 FTEs and increased our services headcount in our India Center of Excellence by 33 FTEs. We are on-track with our plan to development the center in order to offer more competitive rates in our consulting services business.

Product development expense decreased $444,000 sequentially to $13.2 million in the second quarter compared to $13.7 million in the first quarter of '08 and increased $1.2 million year-over-year. The sequential decrease results primarily from a lower incentive comp payout in the second quarter of '08 compared to the first quarter of '08. The increase in product development expense in the second quarter of '08 compared to the second quarter of '07 resulted primarily from a reduction in deferred costs for ongoing funded development efforts. Although the average product development headcount increased 18% in the second quarter of '08 compared to last year, salary and related benefits only increased 4% as the new and replacement positions were filled with lower cost resources, including those added in our Center of Excellence operation in India. We ended the second quarter of '08 with 503 people in product development compared to 478 at the end of the first quarter and 408 as of June 30 last year.

Sales and marketing expense decreased $379,000 sequentially to $15.7 million in the second quarter of '08 compared to $16.1 million in the first quarter of '08 and increased $627,000 compared to the second quarter of last year. The sequential decrease is due primarily to a decrease in commissions and other incentive comp resulting from the sequential decrease in software license sales. The year-over-year increase is primarily for higher costs incurred for our 2008 User Group conference.

We ended the second quarter of '08 with 214 people in sales and marketing compared to 221 at the end of the first quarter and 208 at the end of the second quarter last year. These numbers include quota carrying sales associates of 62, 67 and 64, respectively. General and administrative expenses were $10.4 million in the second quarter of '08 compared to $11.6 million in the first quarter of '08 and $10.6 million in the second quarter of '07. The $1.2 million sequential decrease in the second quarter of '08 results primarily from a seasonal decrease in accounting fees and lower incentive comp. In addition, the first quarter of 2008 included a non-recurring settlement charge related to a customer dispute inherited in the Manugistics acquisition. There was no bad debt provision required in the second quarter of 2008 compared to a $1.3 million provision in the first quarter of 2008.

Our overall tax rate was 35.7% and 37.3% for the three and six-month ended June 30, 2008, respectively. The overall tax rate in the second quarter of '08 is lower than the overall tax rate in the first quarter due to continued lowering of tax rates in many profitable foreign jurisdictions. The extension of the research and development tax credit has still not been approved by Congress. We are anticipating that it will get passed and will lower our annual effective rate to 35% to 36% for the full year 2008. The brightest spot in the quarter was our record cash flow from operations, which was $28.5 million and was largely attributable to an 11-day decrease in our day sales outstanding as well as our ongoing profitability.

In the first half we generated $51.9 million of cash flow from operations compared to $43.3 million in the first half of 2007. In the last 12 months we generated over $88 million in cash flow from operations and we ended the quarter with net cash of over $43 million after retiring an additional $13 million of debt. The company is in excellent financial shape as we enter the second half.

And with that, I'd like to open up the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes from the line of Kevin Oram from Praesidium Investment Management. Please go ahead.

Kevin Oram - Praesidium Investment Management

Hey, guys. If you look at it -- I mean obviously having the license revenue get pushed out and fall off at the end of the quarter is not what you wanted but, as you point out, everything that you can control, free cash flow and the operating expenses was very strong. I am just wondering if you look at now the enterprise value of your company has now dropped below 600 million and your free cash flow is now kind of in the range, well, I mean you analyzed probably at over 100 million this quarter but I realize it falls off a little bit seasonally in the second half of the year, so let's say 85 million in free cash flow on an enterprise value of something below 600 million, I don't know where the stock goes tomorrow, but -- and I know your number one choice for cash is acquisitions, but given the free cash flow yield in the 16% range, something like that, does it change the equation at all? Should a share buy back become more attractive to you? Is there any way you can kind of take us through kind of how you think about that going forward?

Kristen Magnuson

Yes. We think about it as when we do significantly acquisitions. It not only generates an increase in EPS, but it generates an increase in cash flow for the future as well. And at this -- we're constantly evaluating the balance between a buy back or a creed of acquisitions and at this point in time we still believe that there is potential for a creed of acquisitions out there that are more attractive to our cash investment at this point in time. We think that when times get tough, it's time to be -- take advantage of the situation and continue on our plan to acquire incremental companies that would be complementary to the JDA product footprint.

Hamish Brewer

I think just to add to that, Kevin, clearly as our net cash position expands over time, if for argument's sake we were for some period of time unable to find a suitable acquisition opportunity, then I think you're right, there would come a point where we could stop and say, well, doesn't it make sense to look at a buy back.

Kevin Oram - Praesidium Investment Management

Right. I guess presumably the companies you might be looking at are getting more attractive as well.

Hamish Brewer

That's right.

Kevin Oram - Praesidium Investment Management

-- evaluation-wise. The -- you may not have this at your fingertips, but the size of your NOL, Kris, you mentioned that your tax rate will come down. Do you have a sense of what cash taxes will be because the last year or two the cash taxes have been significantly lower than the reported taxes?

Kristen Magnuson

Yes, at any one point in time that depends on the mix of foreign versus domestic income and where it's coming from. We estimate over the next few years we'll get a cash tax shield of somewhere between $5 and $8 million in any one particular year.

Kevin Oram - Praesidium Investment Management

Annually?

Kristen Magnuson

Annually.

Kevin Oram - Praesidium Investment Management

Okay. Good. Alright. Thanks, guys.

Hamish Brewer

Thanks.

Operator

Thank you. Our next question comes from the line of Brad Reback from Oppenheimer. Please go ahead.

Brad Reback - Oppenheimer

Hey, guys, how are you?

Hamish Brewer

Hi, Brad. Very well, thanks. How are you?

Brad Reback - Oppenheimer

Great. Is it correct to assume, Hamish, as you talked about the pipeline building and the expectation and still having expectations on the back half of the year on the license side that your closed rate assumptions have actually gotten more conservative for the back half than they were for the entire year?

Hamish Brewer

Yes. Obviously you can imagine with having had a number of deals slip out right at the end of the second quarter, the first conversation that we had internally with our sales management team is, okay, guys, let's look at the pipeline and really scrub it and try to put together a pretty conservative assessment of what we think is going to happen in the next couple of quarters. So, yes, I think we have applied some additional conservatism to our pipeline, but even with the application of that conservatism, I think we still feel like we've got great cover and a sound basis to easily make back what we've fallen behind on in the second quarter.

Brad Reback - Oppenheimer

And as it related to the deal that did close in 2Q, the $3 million deals that you did, did they actually get down sized during the quarter, did they stay consistent? Any changes on the big deal side that you did close?

Hamish Brewer

No. We've been able to hold really well to our pricing, actually. And, in fact, I think the bottom line is we had some sizable deals. That three -- that number of $3 million plus deals could have been a larger number for the second quarter and we could have gone out there and said okay, we're really to massively discount this deal to try to pull it into the quarter and to be honest with you, I don't think it would have made any difference. The market is such now that really there is very limited ability for us to push or pull deals using price and so we just -- and that works both ways. I mean we just -- we don't see a reason to discount unnecessarily towards the end of the quarter to get a deal because what we're seeing is that even if we try that kind of technique, it's got a very low chance of success, the kind of due diligence and internal review processes that companies have to go through now to make a sizable purchase means there's very limited room for making those kind of deals.

Brad Reback - Oppenheimer

Okay. And could you, Kris or Hamish, could you remind us what the full year guidance is?

Hamish Brewer

On software it's between $75 and $85 million.

Kristen Magnuson

Total revenues is 382 to 395 million, EBITDA is 90 to 93 million and adjusted EPS is $1.40 to $1.45 and the original GAAP guidance was $0.76 to $0.78 per share and we're probably going to be pulling that down in the queue by $0.09 to $0.11 per share because of the higher restructuring charges.

Brad Reback - Oppenheimer

Okay. And finally, on the Center of Excellence, do you still expect to see some gain on the consulting side by the end of this year or is that more of an '09 event at this point?

Hamish Brewer

No. We've got a -- we were just reviewing it this morning and we've got a nice pipeline of consulting engagements lined up for the third and fourth quarter of this year. So we're hopeful that we're going to start to see some financial benefit in the back half of this year.

Brad Reback - Oppenheimer

Great. Thank you.

Operator

Thank you. Our next question comes from the line of Andre Glukhov from Brean Murray. Please go ahead.

Andre Glukhov - Brean Murray

Yes, thanks. I guess Hamish, you guys are fairly optimistic still on the outlook for the license for the back half of the year. As you look at deals, I guess what -- since we've seen slippage in North America more than you guys anticipated, what gives you comfort that that trend is not going to persist into like a seasonally weak Q3?

Hamish Brewer

Well, as I was saying a little bit earlier on to Brad, we haven't assumed necessarily that we're not going to continue to see the current buying environment, but what we have done is we've, I think, looked with a significant amount of scrutiny at the pipeline that we have, at the deals that we've got and where they are in the sales cycle and I think we've taken a pretty conservative approach to create our internal projections through the balance of the year.

As you can imagine, for this quarter it's pretty much baked. I mean it's unlikely that we're going to have major deals coming into the pipeline between now and the end of the quarter. So we know what those deals are and I think we've tried to take a very conservative approach on them. So I don't think that we're assuming that something is going to improve in terms of buying process for our customers. I think we're assuming it's going to stay the same and we're applying some probably additional conservatism to our list of deals that we've got sitting out there.

Andre Glukhov - Brean Murray

Okay. Kris, if I look at the Center of Excellence move, once that has worked for the system, basically, if we look at next year when it starts really helping the consulting revenue for the full-year basis, directionally, what should we expect from both the utilization and the bill rate? Is the bill rate kind of going to stay where it is now while the utilization should go up or how is that dynamic?

Kristen Magnuson

No, I think you'll see utilization go up quite a bit and you'll see some softening of the bill rate, but you'll also see some expansion of revenues because while it will be at a lower amount per hour, we are planning on getting some of the work back that we are just missing out. So you'll see an increase in available billing hours as well because we'll have higher head count in the center of excellence. And while it will be done at a lower rate, it will be work that we were missing out on before we built the Center of Excellence.

Hamish Brewer

And margins should improve as a result.

Kristen Magnuson

Yes. Right. Right.

Andre Glukhov - Brean Murray

So what do you guys think, if we look at next year, the peak utilization should be?

Kristen Magnuson

Well, I don't know how quick it will -- we'll get there in one year, but I mean over a period of time our goal is 70% to 75%.

Andre Glukhov - Brean Murray

Okay. And I guess lastly, you've been fairly active on the acquisition front for about a year now with starting to anniversary sort of heavy lifting on the Manugistics acquisition. Maybe talk to us about what are you seeing? Are you starting to see the valuation expectations from your targets adjust? Are you starting to see maybe an expansion of the pipeline of the potential targets? Any kind of update on that front would be helpful. Thank you.

Hamish Brewer

Sure. I think there's no doubt that there are a number of companies out there that are considering their alternatives right now and we're actually looking for the right opportunity for JDA in the marketplace. We have every reason to believe that we're going to be able to find an opportunity within a reasonable time frame. As I think I said some time towards the end of last year, while you can't really schedule these things and you can't really plan them, I would be disappointed if we got to the end of 2008 and we still hadn't found an opportunity for JDA so, I think the time frame of looking for an opportunity in 2008 is not unrealistic and I think that -- and that's certainly our internal goal. I don't know if it helps at all.

Andre Glukhov - Brean Murray

Okay. Thank you.

Hamish Brewer

Alright.

Operator

Thank you. (Operator Instructions). Our next question comes from the line of Richard Williams from Cross Research, please go ahead.

Richard Williams - Cross Research

Hi, guys, how are you doing?

Hamish Brewer

Fine, thanks.

Richard Williams - Cross Research

I wonder if you could give us a little more color on the slip deals, what vertical they were in, and also more color on the other geographic region?

Hamish Brewer

Well, as I had mentioned in my script, the majority of the flip deals that we experienced in the second quarter were in the Americas. I don't have the analysis in front of me for the other regions. I'm sure they had some flipped deals, but the impact overall to their performance wasn't that great. When I just kind of scanned down the list that I've got in front of me here, it looks like it was a mixed bag of retail and manufacturing. I don't see a strong trend towards one or the other. So hard for me to say. I don't have the analysis for exactly what you're asking for, but it doesn't look to me, just scanning down the list here, that there's a clear trend in one direction or the other.

Richard Williams - Cross Research

Okay. How is this quarter different than a couple of years ago? There was, I think, a third quarter that you had about a 15 million license quarter.

Hamish Brewer

That was last year and last year we had -- I think it's highly comparable. At the end of the third quarter last year, or in October, when we announced our earnings, we came out and we said, you know what, we had a bunch of good deals and they didn't get done at the time and the bases are loaded for the fourth quarter and we came in with a very strong performance for the fourth quarter. I feel the situation is highly comparable. I don't feel like there's some underlying gremlin in our business or in the market we're trying to sell to. I don't see evidence of that.

Kristen Magnuson

Yes, we haven't seen a shrinkage in the pipeline, we haven't seen failures in execution, it's -- we are still in a lumpy software business, always have been, always will be and it's just one of those quarters where things pushed out of one quarter and into another.

Richard Williams - Cross Research

Any color that you can give us on the customers, the retailing verticals as it relates to the larger economy?

Hamish Brewer

In terms of how their businesses are performing?

Richard Williams - Cross Research

Right. Because just thinking that retail appears to us at least to have windows of opportunity when the customer business slows down and the cash flow hasn't really turned negative yet where they tend to invest more than in other times in the cycle.

Hamish Brewer

Yes. And the message we got at our user conference from our retail customers who came along in record numbers was exactly that. They all recognize they're not going to make it this year with top line growth. Most of them are looking at downturn in [front line] sales and so they're coming along to our focus user conference ready to invest their money to solve some business problems that they've known they've had for some time and that they know they need to address because they've got to find a way to improve their operating margins and they're just not going to get it through the top line, so they've got to find a way to get it through getting more efficient and solving the operational inefficiencies they have. I agree with your assessment. That's definitely what we feel is going on. It's a little bit counter intuitive because you sort of think as things are going bad for retail, wouldn't they just clamp down on spending. I think there comes a point for a company we have seen a few examples of this where we've got some companies that we do business with where their business has really fallen off a cliff and they've kind of clamped down on spending, but that's not the majority at this point. The majority is still looking to ways to improve performance and they're interested in investing, especially in our kind of solutions where very often we've got a strong return on investment within a 12-month time frame which fits very well with, I think, the issues they're facing.

Richard Williams - Cross Research

Okay. And can you also give us a little color on the competitive environment and that will do it for me? Thank you.

Hamish Brewer

Yes. Well, I think competitively we feel -- we feel very good. Quite frankly, I think our win rates are overall extremely high. Even if I look at the deals that we were counting on in the second quarter, the number of deals that -- where we got surprised by a competitive issue one way or the other is a very small, very small number. So our win rates are running extremely high. I've got no concerns right now about the fact that we are getting -- we're having major competitive issues from any one source or another. It seems across the board, in fact, our win rates are running very well. So nothing bad to report there at all.

Richard Williams - Cross Research

Okay. Thanks.

Operator

Thank you. (Operator Instructions). We have a follow-up question on the line of Brad Reback from Oppenheimer. Go ahead.

Brad Reback - Oppenheimer

Just one question on the sales force headcount. I think it was down 3 or 4 people sequentially to about 62. What was going on there and what's the expectation around filling those positions?

Kristen Magnuson

With we actually increased our head count in North America. We had some involuntary turnover in the Asia/Pacific and [AMEA] regions because we're recruiting some new talent to beef up those regions. So I would view it as when we find replacement talent, you'll see the number go back up again.

Brad Reback - Oppenheimer

Great. Thank you.

Operator

Thank you. Our next question comes from the line of Kevin Oram from Praesidium Investment Management. Please go ahead.

Kevin Oram - Praesidium Investment Management

I don't know if you guys said this already. Is there an update in terms of the additional expenses tied to the Center of Excellence that you're incurring this year as you make the shift? I think it was 7 or 8 million you were saying last quarter?

Kristen Magnuson

Yes, we should be just about through the redundant expense part of our year. You will start to see some of the on-shore head count, the impact of lower on-shore head count trickle into the second half of the year now. The biggest swing factor on overall expenses now as we enter the second half will be incentive compensation, which is directly linked to how we're going to perform as a company from software sales and overall EBITDA.

Hamish Brewer

In terms of the amount -- the dollar amount we've spent, we said we were going to spend an incremental $7 to $8 million, I think we're running right now a little bit under our budget. We're a bit under spent at the moment, but it's running a little bit ahead of plan, but not very much.

Kristen Magnuson

You shouldn't see any significant changes on a quarterly basis in the second half.

Kevin Oram - Praesidium Investment Management

We shouldn't. In other words, it would seem like if you're done spending that money, then your expenses could drop related to that. I realize there are other variables there in the second half?

Kristen Magnuson

Yes. Yes, there are other variables. Right now I'm showing it to be fairly flat until the -- later in the fourth quarter.

Kevin Oram - Praesidium Investment Management

Okay.

Kristen Magnuson

Remember, we bring on all these resources and then it takes them a while to become productive.

Kevin Oram - Praesidium Investment Management

Yes, okay. And so the margin expansion that you get from that, I think somebody else alluded to it in their question, so that -- we really start to see that in the -- in your 2009 year, we'll start to see the real benefits on that?

Kristen Magnuson

Yes, because in the fourth quarter, it will be masked by increased incentive comps, so there will be margin expansion definitely as we enter 2009 and there will be some underlying in the -- probably in the fourth quarter of 2008, but that often gets offset by increased incentive comp because of the timing of incentive comp plans.

Kevin Oram - Praesidium Investment Management

I got it. Alright. Thanks, guys.

Operator

Thank you. That concludes the question and answer session. I would now like to turn the conference back over to Mr. Brewer. Please go ahead.

Hamish Brewer

Thanks, [McKayla] and thanks very much for taking the time to join us and I look forward to talking with you again in October.

Operator

Ladies and gentlemen, this concludes the JDA Software Group, Incorporated second quarter 2008 earnings conference call. This conference will be available for replay after 6:45 eastern standard time today through August 28, 2008, at midnight. You may access the replay system at any time by dialing 303-509-3030 or 1-800-406-7325 and entering and entering the access code of 3893162. Thank you for your participation. You may now disconnect.

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