JDA Software's Moving Pieces (JDAS)

There was a lot of news out of JDA Software Group Inc. (JDAS) in a remarkably short period of time. First the company announced that revenue and gross margin both dropped in Q1 06 compared to the Q1 05. Revenue went from $50.3 to $47.9 million and gross margin from $28.7 to $26.5 million. The company reported an operating loss of $290,000, about the same as a year ago.

The company's reason for the bad results was simply stated. "The first quarter was a disappointing start to 2006 with a significant number of deals failing to close in our projected timeframe," commented Hamish Brewer, JDA chief executive officer. The company maintained its guidance for the year. But obviously the prospects for hitting the numbers are statistically less likely than they would have been if JDA had turned in reasonable numbers in the first quarter. The company did generate $5.1 million in cash from operations in the period and now has $118 million on the balance sheet.

JDA's central product offering enables high performance planning, promoting, flowing, pricing, managing and selling of finished goods from the supplier warehouse to the consumer. The demand for the products has not grown for three years. In 2005, the company had revenue of $215.8 million and operating profits of only $1,865,000.

Investors could certainly make that argument that JDA is struggling a bit and the stock, which has been trading between $10 and $18 since early 2004 would confirm that. Shares change hands at about $14.50 now.

But, earnings were only the beginning of the story. The company also announced it was buying Manugistics (NASD:MANU), a leading global provider of synchronized supply chain and revenue management solutions, for $211 million in cash. Manugistics was trading for about $2.35 the day before the offer, which is for $2.50 a share.

Manugistics has some pretty ugly financial statements. In the last fiscal year, which ended on February 28, 2005, revenue was $193.1 million and the company had an operating loss of $47.2 million. The top line for the 2005 fiscal year was below 2004, which was below 2003. In the current fiscal year, revenue has dropped steadily by quarter. In the November 30, 2005 quarter it was down to $39.9 million. The operating loss was $3.6 million. On May 11, Manugistics will announce results of the quarter that ended February 28, 2006. The company said it expects to make between $2.5 and $3.5 million on revenue of $44 to $46.5 million. That revenue would be about flat with last year.

Manugistics has about $123 million in cash and long term debt of $187 million, most of it convertible securities. So, it would be hard to say that JDA is using the acquired company's capital to help finance the deal.

JDA trades at about two times sales. Manugistics has a ratio of 1.1 times. To that extent the metrics of the purchase make some sense. The fact that the companies are in closely related businesses, and that there are duplicate costs, is beyond dispute.

However, taking two companies, neither of which is doing terribly well, and putting them together may not solve the problems of either.

For the time being, investors should probably not expect JDA's stock to head much above $15.

JDAS 1-yr chart:

Douglas A. McIntyre is the former Editor-in-Chief and Publisher of Financial World Magazine. He is also the former president of Switchboard.com, which was the 10th most visited site in the world at the time, according to MediaMetrix. He has been chief executive of FutureSource LLC and On2 Technologies, Inc. and has served on the boards of TheStreet.com and Edgar Online. He does not own securities in companies he writes about. He can be reached at [e-mail].