Conference Call, Oct. 22, 1998, i2 Technologies Q3

i2 Technologies Q3 Conference Call
A Fool Conference Call Synopsis^*
By Gregory Markus (TMF Boring)

i2 Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ITWO)") else Response.Write("(Nasdaq: ITWO)") end if %>
909 E. Las Colinas Blvd, 16th Floor
Irving, TX 75039
(800) 800-3288
http://www.i2.com/

ANN ARBOR, Mich. (Oct. 22, 1998) /FOOLWIRE/ — i2 Technologies announced record revenues and earnings for the quarter ended Sept. 30, 1998.

Income Statement Highlights

Total revenues of $94.2 million were 62% higher than third quarter 1997 revenues of $58.1 million. Operating profits were $10.9 million, or 11.5% of total revenues, compared to $5.3 million, or 9.1% of revenues in the year-ago period, excluding unusual items. Net profit was $7.8 million, versus $3.3 million in Q3 1997, excluding unusual items. EPS was $0.10 versus $0.05 a year ago -- a penny above the consensus forecast.

For the first nine months of 1998, revenues grew 69% to $249.2 million, compared to $147.6 million for the first nine months of 1997. Excluding acquisition-related expenses, year-to-date 1998 net income was $18.3 million, more than triple the income of $5.8 million for the same period of 1997.

For the third quarter, license revenues increased 57% over the year-ago period to $59.8 million. Service and maintenance revenues increased 73% to $34.4 million as compared with $19.9 million a year ago. License revenues accounted for 63% of total revenues, compared to 66% for the year-ago period. Repeat business accounted for 61% of license revenues (31 licenses), with the other 39% coming from new customers (25 licenses).

By industry, 51% of revenues came from high-tech industries, with another 12% from the furniture industry, 8% from metals, 8% from consumer package goods (CPG), 7% from automotive, and the balance from miscellaneous industries.

International revenues were in line with reduced expectations. The challenge internationally is not specific to i2 but reflects broader issues. The company expects to see improvement in Q4. The U.S. market generated 83% of total revenues, about where it was in Q2 1998.

Once again, sales in the quarter were back-end loaded, as is typical in the software industry. Days sales outstanding increased to 98 days, and they are expected to increase in Q4 but decrease in Q1 1999.

At the end of the quarter, headcount was 2003, including 687 in R&D. That compares with 1135 people at the end of Q3 1997, with 477 in R&D. i2 entered the quarter with 160 sales representatives. The company's ability to attract sales people is increasing.

License Agreements

A total of 56 license agreements were recognized at an average license of approximately $1.1 million. Fourteen licenses larger than $1 million were recognized in the quarter. The largest license agreement signed in Q3 was with Hewlett-Packard <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HWP)") else Response.Write("(NYSE: HWP)") end if %>, for about $11 million.

Sun Microsystems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SUNW)") else Response.Write("(Nasdaq: SUNW)") end if %> and the computer division of Toshiba (OTC: TOSBF) also signed license agreements with i2 during the quarter, as did Cisco Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %> and Casio (OTC: CSIOY). In the automotive sector, Visteon Automotive, a division of Ford <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: F)") else Response.Write("(NYSE: F)") end if %>, announced a worldwide agreement to license i2's RHYTHM solution, and i2 also closed a deal with Navistar <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NAV)") else Response.Write("(NYSE: NAV)") end if %>. In aerospace, Boeing <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BA)") else Response.Write("(NYSE: BA)") end if %> and General Electric's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GE)") else Response.Write("(NYSE: GE)") end if %> aircraft division chose i2 as a partner. In CPG, PepsiCo's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PEP)") else Response.Write("(NYSE: PEP)") end if %> Frito Lay division, Jurgens, and a large Japanese brewer signed licenses in the quarter. In the metals sector, Bethlehem Steel <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BS)") else Response.Write("(NYSE: BS)") end if %> signed additional licenses.

Competitive Environment

On the competitive front, i2 saw reduced competition from traditional supply chain management (SCM) vendors. From the ERP (enterprise resource planning) vendors -- such as SAP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SAP)") else Response.Write("(NYSE: SAP)") end if %> -- i2 faced increased rhetoric, but this did not affect deals significantly. Year-2000 issues or economic uncertainty did not appear to have any unusual impact on closing deals. i2 feels that its offerings are particularly critical for companies facing challenging economic or competitive environments.

PLANET 98

PLANET, an annual supply chain event, was held in September in Dallas and attracted over 3,400 participants from around the world -- nearly a three-fold increase over the previous year. i2 announced a new class of decision intelligence software called eBusiness Process Optimization (eBPO). The eBPO solution is made up of multiple planning engines acting in concert to analyze and optimize business processes across the enterprise, while enabling multi-enterprise collaboration with suppliers, customers, and partners. Traditional ERP software is not suitable for these processes.

Other Highlights of the Quarter

In August 1998, Gartner Group identified i2 as the overall leader in the supply chain planning field. The company continues to gain market share.

i2 established a network of independently operated dealers across North America that will be 100% dedicated to serving the supply chain management needs of mid-sized companies.

i2 also introduced RHYTHMWare, a prebundled group of i2's supply chain modules for factory planning and advanced scheduling. This optional offering is intended to address the most common planning and scheduling problems of mid-sized companies.

Option Repricing

In October 1998, i2's board of directors approved a stock option repricing program where all employees, excluding executive officers, can elect to have out-of-money options canceled and new stock options issued, resulting in a restart of the vesting period.

Outlook

Going into Q4, the pipeline appears stronger than it did going into Q3. Looking toward 1999, i2 is not yet complete with its plan for the year, and projections are complicated by factors largely outside of the company's control, particularly in Asia. Some analysts currently have models that project 1999 revenues above $500 million, and management is not comfortable with those projections. Although final planning has not yet been completed, management is considering guiding operating margins toward 10% for 1999 in order to invest more incrementally in product development and hiring.

Replies to Other Questions

The relationship with Oracle <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ORCL)") else Response.Write("(Nasdaq: ORCL)") end if %> is progressing well but is not yet yielding significant revenue. i2 believes that it will.

Deferred license revenues were essentially flat sequentially.

Many of i2's larger deals come from existing companies already familiar with i2's offerings. On the other hand, large deals are comparatively more difficult to close because they generally require more people or divisions to sign off on the deal.