JDA Software recently reported both its fourth quarter and full 2010 financial results, and the results imply both good and not-so-good implications from the recent acquisition of i2 Technologies.

The headlines of JDA’s 2010 financial performance included a 60 percent increase in total revenues to $617.2 million. Software license revenues in the fourth quarter increased to near 33 percent. However, JDA also incurred a 32 percent reduction in operating income and cash flow from operations, no doubt brought on by unplanned expenses related to the i2 acquisition. Deal sizes increased, with the average deal size climbing to $601,000.

These results also provide further quantitative evidence of the impact of the acquisition of i2 Technologies that was consummated in January of 2010.

The good news is that the acquisition is contributing rather positively to JDA results, amounting to an estimated 40 percent of revenues during the calendar year.  Readers may recall that when the first i2 deal was announced in 2008, JDA indicated that its plans for i2 included a software sales model reflected as a “CD replication”, meaning that potential customers would receive standard, un-customized software.  That was rather significant at the time, since i2 was known for its industry-centric innovation in supply chain technology, and was quickly transitioning to a customized software and service provider with some rather significant customers.  It seemed during the second and successful attempt in November 2009, JDA became more grounded in the reality of i2’s software business model.  The quantitative evidence, we believe, is reflected in both maintenance and consulting services revenues.  During Q4, maintenance revenues increased by 37 percent, and consulting revenues increased by an eye-popping 98 percent, no doubt brought about by the influence of i2’s installed base.

In the not so good category, JDA inherited the i2 lawsuit involving the alleged failed implementation at Dillard’s Department Stores, where a Texas jury awarded Dillard’s $246 million in damages in back in June.  There is also another patent related lawsuit involving Oracle. During Q4, JDA incurred $14 million in ongoing legal costs, and has now boosted its 2011 reserve for a possible settlement to $19 million, from a previous $5 million. The company also indicates that both ongoing litigations are expected to incur a further $10 million in ongoing legal expenses.

In essence, the i2 acquisition has brought a double-edged sword and it seems clear that JDA management wants to more forward with the positive, and quickly shed the litigation history it has inherited.

As was noted in a previous commentary at the time of JDA’s acquisition of i2, existing or prospective customers of JDA or i2 should insist on hearing plans for continued software integration, innovation and product development plans.

JDA has some hurdles to overcome in increasing profitability and insuring that ongoing litigation expenses are minimized.  There are very aggressive business plans in-place for 2001, including a goal to increase software revenues in a range of 32 to 45 percent.  That implies that JDA sales teams will be very busy knocking on doors, and readers should be prepared to ask the right questions.

Readers, share the highlights of some of your recent experiences with JDA in the Comments section related to this posting.

Bob Ferrari

Nearly one year after a similar attempt, JDA Software Group announced today that it has once again signed a definitive agreement to acquire i2 Technologies. 

When I first read the news, my mind jumped to recall those latest Southwest Airlines ads that exclaim: It’s On, It’s Really On! 

You just gotta love the supply chain software industry.

Supply Chain Matters readers may note our previous commentary last August regarding the last acquisition event, when i2 broke off the proposed marriage.  At the time, JDA had difficulty securing attractive financing in a very turbulent lending market that was in meltdown.  The investors and management of i2 at the end, also decided it was in their best interests to move on, pocketing a hefty $20 million termination fee from JDA.

Interesting enough, today’s announcement indicates an acquisition value of $396 million, about $50 million higher than the previous episode, but represents less than a 10% premium over yesterday’s i2 closing stock price.   A lot has changed in such a short period. For one, i2 has boosted its balance sheet and cash positions, building on the company’s previous positive $80 million litigation settlement with SAP.  Rigorous cost control has led to a generation of over $42 million of cash from ongoing operations.

One now gets the sense that both management teams want to insure that this latest marriage will have all likelihood of closing.  The terms of the transaction call for two different financing alternatives, one intended, and one a back-up alternative.  Since roughly 79% of the acquisition monies must be financed, it seems that much of this round of acquisition negotiations were clearly focused on insuring that the transaction will not be inhibited by financing.  Both financing arrangements call for up-front cash for existing i2 shareholders, which should make i2 employees more supportive of this deal than last time.  In either financial alternative, owners of i2′s convertible preferred stock stand to receive $1100 per share in cash, a handsome reward for holding out. The Board of Directors for each company have given approval to the transaction.

In the briefing call, JDA senior management noted that the acquisition would be revenue accretive as early as 2010, and JDA has already identified up to $20 million in cost synergies. They also pointed to the combined total of 6000 global customers, which will no doubt provide an attractive maintenance annuity revenue stream in the coming years.

Since this is a blog dedicated to supply chain strategy and information technology developments, I will focus remaining comments on the implications of this acquisition.  They are pretty much similar to those we penned during the last episode.  Many questioned the lack of synergies among these two companies.  The obvious business strategy synergy, which was again stated by JDA’s CEO Hamish Brewer on the briefing call, was the marriage of JDA’s market strengths in retail and process industry planning technology, with i2′s solid strength in discrete manufacturing sectors.  But both business cultures remain different.  i2 has been concentrating more on supporting customer-specific, highly specialized supply chain process needs.  I2′s marketing boasts that 19 of AMR Research’s designated Top 25 supply chains utilize i2 software.  One could argue that this software is not necessarily what one would find in a standard CD. 

If you are an existing or prospective customer of i2, insist that you get briefed on the closing schedules, and long-term strategies of the combined companies, particularly support, continued innovation and product development. If you have both existing JDA and i2 applications, you should be especially interested in product innovation plans.

No doubt, other competing software providers will be knocking at your door, providing all forms of incentives to either convert platforms or seek other software services approaches.  While this may not be an ideal environment to consider conversion cost options, it may pay to listen and be open-minded. It obviously helps in future discussion with the combined company.

As for JDA and i2, love is lovelier the second time around!

 Bob Ferrari

Readers may recall that in December, Supply Chain Matters updated our readers on the failed acquisition by JDA Software for i2 Technologies.  In this previous update post, I indicated my view that i2′s senior management had but two strategic options in light of the failed acquisition  I viewed those options as either a re-initiation of talks with other potentially interested acquirers, or decide to move-on with operations until the financial climate improves. The company also needed to find a way to appease existing investor’s debt, along with employees concerns.

It now appears that i2′s strategy is to generate as much cash as possible, from as many sources as possible.  On December 31, i2 closed the year with $243.8 million in cash vs.$228M in Q3, a hefty sum for any mid-sized software companies today.  Almost $100 million of this cash came from a previous $80 million patent infringement settlement with SAP, and a $20 million settlement with JDA Software for non-performance of the prior acquisition attempt. The company also announced an agreement to payoff certain bondholders.

The latest news from i2 is that they have filed yet another patent infringement suite, this time targeting Oracle. The company alleges that Oracle has infringed on 11 patents related to various aspects of supply chain planning software, and is filed with the same Texas friendly court as occurred with the SAP infringement lawsuit a few years ago. There were many who doubted that i2 would prevail in its IP lawsuit, and SAP ultimately decided that settlement was the best course.

So perhaps i2′s current senior management is embarking on a strategy to generate cash in many dimensions. Heck, if you can get $80 mil.from SAP, who knows what you can get from Oracle. 

What comes next for i2 will be interesting to observe since having lots of cash leads to rather interesting strategic options, especially if you get away with suing two of the biggest players in supply chain software.

Bob Ferrari

Since the inception of this blog nearly a year ago, I have penned over 50 separate commentaries on various incidents involving supply chain disruption and risk management.  Many of these incidents involved external incidents and threats. But supply chain risk can also originate internally, specifically within internal IT applications.

Supply chain systems integrator Bristlecone sponsored a research study titled The Hidden Risk in Your Supply Chain, (download link for PDF file) and I had the opportunity to speak with Anil Gupta, vice-president of marketing regarding the background and conclusions derived from the study.  For those readers not familiar with Bristlecone, they primarily specialize in the implementation of SAP based advanced supply chain applications. I first became aware of this firm’s capabilities in 2002 when I was global director of product marketing for SAP’s SCM applications suite. Since that time, Bristlecone has expanded its focus into the SAP SRM suite of applications to include spend analysis and strategic sourcing.

The study itself involves over 90 companies, with respondents primarily reporting their role as supply chain, procurement, or IT.  Corporate profile was weighted among companies with $1 billion to $10+ billion in sales. The responses to the survey questions reflect that respondents tend to focus on external supply chain threats (supply risk, price volatility, compliance and customer demand changes), while weighting IT system risk lowest.  While over 60% of respondents directly agreed that on the internal risk inherent in their supply chain management systems, the implication is that IT is “covering their back”.

Often, after an advanced APS application successfully goes live, the parameters of the application tend to remain static or placed on “auto-pilot”, even as the business experiences significant change.  There are many legitimate reasons. Users sometimes do not have the skills or expertise to understand the statistical modeling, optimization algorithms, or technical parameters of an application like SAP APO. They will tend to view it as a “black-box”, relying on either internal IT or a consultant to help when change needs to happen, or planning output tends to look abnormal. IT groups want to insure that users do not “mess” with the configuration and data structures, thus locking-out configuration parameters to specific IT support persons, or contracted consultants.  The problem may also not be solely limited to SAP shops.  Those companies who previously installed an i2 Technologies or Manugistics supply chain planning application are most likely not in any position to switch-out, and thus need to continue to configure and optimize these systems to support changes.

Putting biases aside regarding the fact that this study was sponsored by a systems integrator with business development intentions, this study does provide us a wake-up call for two specific reasons.  First, the current unprecedented downturn in the global economy has caused many larger companies to have to dramatically cut-back in headcounts, sometimes involving either experienced supply chain planners or IT support.  Second, the same forces of the economy are triggering dramatic shifts on either the product demand or supply sides of the supply chain.  Thus, those original configuration parameters may well need attention and modification. Of more concern, if these systems lose relevance, they become supplanted by those mischievous individual spreadsheets, negating all the previous effort and cost to implement an APS.

What about your advanced supply chain systems- has your company have a focus on fine-tuning?  Have certain facilities closed or been idled? Are you experiencing periods of lumpy or no demand?  Are support resources identified, or budgets identified to be able to address these needs?

Food for thought and action.

Bob Ferrari

On August 10^th, JDA Software announced its intention to acquire i2 Technologies at an estimated cost of $346 million.  Since that time, much turmoil has occurred in financial markets and the economy.  Today, a press release issued by i2 Technologies indicates termination of this merger agreement.

In my past posting back in August, More On What You Need to Know About the Pending i2 Technologies Acquisition, I highlighted some consensus industry analyst views regarding this acquisition, and urged i2′s current and prospective customers to make their own individual assessment as to the impact of this acquisition on their technology needs. At the time, industry analyst views pointed to a potential lack of synergy among the two companies and a fear of decreased product innovation. 

If you have been following the latest ongoing developments related to the proposed acquisition, JDA Software informed i2 management on November 4 that due to the adverse effects of the continuing credit crisis, available credit terms would render the acquisition cost too expensive without a significant reduction in cost for JDA, and requested a re-negotiation of the purchase price.  The next day, the management and board of i2 shrewdly went ahead with a meeting of i2′s stockholders to accept the original acquisition proposal and further indicated that i2 was ready, willing, and able to close the merger no later than November 10.   JDA Software then requested additional time to arrange some form of modified financing. Apparently JDA came to a revised decision on the value of the acquisition, and i2 is now demanding its $20M termination fee from JDA.

What does all of this mean?  If you are an existing or prospective customer of i2, you need to continue to do your due diligence. There is no question that i2 has previously been one of the premiere innovators both in standard as well as customized supply chain technology.  The investors in the company were obviously motivated towards this acquisition option in order to receive a financial return for their investments in innovation these past years. The morale among existing i2 employees also must be considered, since one could speculate that its not at its peak. Employees had very mixed reactions to the proposed JDA acquisition.  Many were anticipating a cash-in of stock-options for their efforts in sustaining the company.  Some employees probably packed their belongings only to discover their work must continue.

With these latest developments, the senior management of i2 must again evaluate strategic options, especially in light of the current economy.  Those options are to either re-initiate talks with other potentially interested acquirers, or decide to move-on with operations until the financial climate improves. In either case they need to find a way to appease existing investor’s debt, along with employees concerns.  In my view, cash or viability should not be an immediate issue. At the end of Q3, i2′s cash balance was $228M, a hefty sum for many software companies today.  The $20M termination fee from JDA, coupled with a previous litigation net settlement of $80M with SAP, should be able to cushion the company, provided existing cash flows from operations can continue amidst a very challenging economic climate.

It would be great to look to i2 Technologies to be an ongoing player and continued innovator in supply chain technology. I believe that there is truth to the statement from i2′s CEO Dr. Pallab Chatterjee that in these challenging economic times, supply chain management will be crucial to efficient business operations.  The decision of i2 being a player will be determined by the forces of i2′s senior management, its current employees and its customers.

Bob Ferrari