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Tuesday, August 25, 1998
JDA Software Group, Inc.
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Phone: 602-404-5500
Website: http://www.jda.com
Price (8/24/98): $15 1/2
HOW DID IT FIND TROUBLE?
Software has led to unexpected hard knocks for this fast-growing company that Equities Magazine recently ranked the eighth most profitable on Nasdaq over the last five years. JDA Software is a leader in supplying retailers with software that makes supply chains operate more efficiently, but its shareholders have recently been bound in a chain of pain. The links include slowing sales, industry weakness, and growing competition.
Everything appeared hunky-dory until the last days of July. FY97 sales had soared by 92%, with the all-important software license revenues up a stunning 73%. JDA also came in just ahead of first quarter estimates, with overall sales up 83% and software license revenues up 53%.
Such good news sent the stock to an all-time high of $39 in late April. The shares dipped a bit following word that JDA would issue new shares in a secondary, but the offering of three million shares went off as planned around $31. In a show of confidence, a three-for-two stock split followed (numbers already adjusted for the split).
During this period, top supply-chain management software providers such as i2 <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ITWO)") else Response.Write("(Nasdaq: ITWO)") end if %> and Manugistics <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MANU)") else Response.Write("(Nasdaq: MANU)") end if %> started blowing up, and other enterprise software vendors, from DataWorks to the giant PeopleSoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PSFT)") else Response.Write("(Nasdaq: PSFT)") end if %>, fell under pressure. Investors skittish over the second quarter results started bailing out July 29.
Results announced the next day met estimates, with sales up 69% and net income excluding acquisition charges up 72%. Though lower-margin services accounted for a whopping 65% of revenues (up from 55% last year), higher billing rates and improved utilization pushed gross margins in this segment to 31% from 21% last year.
Service revenues looked so good, though, because software licensing revenues were unexpectedly weak, increasing just 29% to $12.3 million, about a million less than analysts expected. Worse, international license revenues actually plunged 20%.
This was bad news given that JDA is seeing increased competition from enterprise software vendors such as German giant SAP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SAP)") else Response.Write("(NYSE: SAP)") end if %>. Momentum investors jumped ship in a hurry, slicing JDA's share price in half in just a week's time.
BUSINESS DESCRIPTION
JDA Software provides enterprise software products and related services that help retailers track inventories and purchase orders. Its software includes merchandising, financial, and decision support systems at the corporate level; point-of-sale, back office, and distributed processing applications at the store level; and warehouse management and logistics at the distribution level.
The firm's older products operate on IBM AS/400 and DOS platforms while newer software runs on UNIX and Windows NT. In June, the company acquired Arthur, the retail division of Comshare, for $44 million.
JDA markets its products through a direct sales force, but it also has cooperative relationships with vendors such as IBM and Siemens Nixdorf. International business accounted for 55% of sales last year and 46% of first half '98 sales. The company has little direct exposure to Asia.
More than 540 retail clients use JDA's software, including Bed, Bath and Beyond, CompUSA, LensCrafters, and Williams-Sonoma. Insiders own 15% of the stock.
FINANCIAL FACTS
Income Statement
12-month sales: $120.4 million
12-month income: $15.5 million*
12-month EPS: $0.76*
Profit margin: 12.9%
Market Cap: $327.2 million
(*Excludes one-time charges)
Balance Sheet
Cash: $85.4 million
Current Assets: $136.8 million
Current Liabilities: $27.5 million
Long-term Debt: none
Ratios
Price-to-earnings: 20.4
Price-to-sales: 2.7
HOW COULD YOU HAVE SEEN IT COMING?
Services revenues provide a nice cushion, but software companies need robust growth in high-margin software license revenues to justify lofty multiples. Though the dip to 53% growth in the first quarter had to be expected given that last year's growth came from a small base, it still might have been cause for concern. Half of JDA's business comes from international markets, which have been increasingly weak outside of some strength in parts of Europe.
Given that it's hard to monitor enterprise software vendors between quarterly reports, investors needed to focus on the clues available. First, there was a steady stream of insider sales. Then there was the secondary offering, which often signals a short-term top since companies prefer to sell equity at premium prices.
The risk factors listed in the April prospectus mentioned that JDA's new client/server products (ODBMS, Win/DSS, Retail IDEAS and WCC) introduced over the prior 18 months had attracted only a limited number of customers. Meanwhile, SAP had introduced a competitive product, while PeopleSoft had a new deal with Intrepid to develop and market products to compete with ODBMS.
Shorter term, major acquisitions also tend to distract management, especially when a firm is already trying to keep up with rapid growth.
WHERE TO FROM HERE?
In early August, JDA issued a barrage of upbeat press releases, no doubt in part to cauterize the stock's bleeding. One noted that a number of senior officers and directors had acquired a total of more than 20,000 JDA shares in a series of open market purchases from June 8 to August 10 at prices ranging from $15.12 to $29.42. That's a small but nonetheless bullish sign.
The company also gets high marks for working with Vcall, which has posted both the second quarter conference call and a transcript. During the call, management said that while the domestic license revenues were up a very healthy 90% in the quarter, the weak international performance stemmed mainly from some top-level management reassignments partly related to the Arthur acquisition.
CEO Brent Lippman said the international pipeline remains strong and that the company could see a robust September quarter as international sales pick up. Meanwhile, revenues from consulting, maintenance, and other services are just above the long-term range of 55% to 60% of total sales, but with gross margins already at the targeted 30% to 32% level.
A few analysts have cut their earnings estimates. The current lowball numbers call for $0.88 a share for FY98 and $1.13 a share for FY99, suggesting annualized growth of 34% from last year's $0.63 per share. That's in line with the long-term growth projection, and a reasonable target given that JDA's sales have grown at 74% a year over the last two and a half years.
Companies working the enterprise software space have recently traded at P/E multiples above their growth rates. Yet these markets are relatively difficult for individual investors to follow, which suggests that investors would do well to look for companies with strong track records suffering through difficult periods where the P/E multiple is depressed far below the growth rate. In that light, JDA looks worth further investigation.
-- Louis Corrigan
([email protected])
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