Covering Analyst: Liam Bain Email: [email protected]
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JDA Software Group Inc.
HOLD
BUSINESS OVERVIEW
JDA Software Group, Inc. is a provider of enterprise software solutions designed to enable planning, optimization and execution of supply chain processes for manufacturers, wholesale/distributors and retailers, as well as
government and aerospace defense contractors. In addition, the Company provides pricing, yield management and demand management solutions for travel, transportation, hospitality and media organizations. Its solutions enable customers to manage and optimize the coordination of supply, demand and flows of inventory throughout the supply
Stock Data
Price (52 weeks) $9.04-$28.06
Symbol/Exchange JDAS / NASDAQ
Beta 1.44
Shares Outstanding 314,515,000
Average daily volume
(3 month average) 422,209
Current market cap = $879.1 M
Current Price Dividend Dividend Yield $26.61 $0.00 N/A
Valuation (per share)
DCF Analysis $24.10 (50%) Comparables Analysis Target Price Current Price (as of 01/21/2010) $28.35 (50%) $26.22 $26.61
Summary Financials (in thousands)
2008A
Revenue
Net Income $390,332 $3,125
Operating Cash Flow $46,741
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chain to the consumer. Its product suites include Demand Management solutions, Allocation, Replenishment & Fulfillment solutions, Merchandise Planning solutions, Space and Category Management solutions, Revenue Management solutions, Transportation and Logistics Management solutions, Contract Manufacturing solutions and Store Systems.
The company has three revenue generating business segments organized by type of customer: Retail, Manufacturing and Distribution, and Services Industries.
Retail – 53%
This reportable business segment includes all revenues related to applications sold to retail customers.
Manufacturing and Distribution – 35%
This reportable business segment includes all revenues related to applications sold to manufacturing and distribution companies, including process manufacturers, consumer goods manufacturers, life sciences companies, high tech organizations, oil and gas companies, automotive producers and other discrete manufacturers involved with government, aerospace and defense contracts.
Services Industries – 12%
This reportable business segment includes all revenues related to applications sold to customers in service industries
such as travel, transportation, hospitality, media and telecommunications. The Services Industries segment is centrally
managed by a team that has global responsibilities for this market.
PRODUCTS AND SERVICES OVERVIEW The company’s products are listed below:
Platform
The JDA Enterprise Architecture provides a common platform for master and operational data, security, exception management, workflow, analysis and reporting. JDA Integrator facilitates the initial load of data, as well as the dynamic and daily data updates between JDA applications. JDA Monitor enables a customer to monitor and manage pre-defined critical planning and event information.
Demand Management
The Demand Management solution uses multiple forecasting algorithms and methodologies to drive forecast improvement across all types of products. The solution supports forecasting for different product sales behavior; responds to shifts in demand from new product introduction to end of life, and leverages multiple history streams, promotional information and event data to improve forecast accuracy to drive optimized inventory levels that reduce carrying costs and lost sales. The Demand Management solution suite includes Demand Classification, Dynamic Demand Response, Seasonal Profiling, Demand Decomposition and Market Manager.
Allocation, Replenishment & Fulfillment
The Allocation, Replenishment & Fulfillment solution provides a core planning and replenishment solution for developing a time-phased plan of all inventories, shipments and receipts in a multi-tiered distribution network. The solution optimizes plans, order management and execution, and manages product promotional flow, multi-level bill of material management, component replenishment, replacement and substitutions, new item introductions and phase
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in/phase out transitions. The JDA Fulfillment suite includes JDA Order Optimization, JDA Allocation, JDA
Advanced Warehouse Replenishment, JDA Advance Store Replenishment, JDA Vendor Managed Inventory and JDA Network Optimization.
Space and Category Management
The Space and Category Management solution enables manufacturers, distributors and retailers to plan and execute category and merchandise plans designed to achieve demand-based optimized assortments and precision
merchandising. The solution tailors assortments for product launches and go-to-market strategies; improves space productivity while lowering carrying costs and decreasing out-of-stocks and excess inventory, as well as streamlining space and floor planning activities. The Space and Category Management suite includes JDA Efficient Item
Assortment, JDA Space Planning, JDA Floor Planning, JDA Shelf Assortment, JDA Intactix Knowledge Base, JDA Space Automation, JDA Planogram Generator and JDA Channel Clustering.
Merchandise Planning
The Merchandise Planning solution is a collaborative and configurable, workflow-driven planning solution that synchronizes all planning metrics, including sales, margins or turns, across functional organizations and reconciles them down the enterprise hierarchies. The solution supports strategic financial and operating planning activities, and provides a single, integrated solution for financial, merchandise, channel and key item planning to better manage inventory. The Merchandise Planning solution includes JDA Enterprise Planning, JDA Assortment Planning, JDA Performance Analysis and JDA Size Scaling.
Revenue Management
The Revenue Management solution is designed for service-based industries. These products enable airlines, railroads, cargo operators, hotels and tour operators to optimize capacity utilization and develop processes for using demand, pricing, revenue and capacity management to enhance revenues. The Revenue Management suite includes JDA Airline Revenue Optimizer, JDA Price Optimizer, JDA Tour Revenue Optimizer, JDA Rail Revenue Optimizer, as well as many more.
Price Optimization & Management
The Price Optimization & Management solution optimizes pricing, promotional spend and promotional planning and execution to generate sales and margin dollars. The solution facilitates the determination of the best mix of price and promotion to help drive revenues; improves utilization of promotional dollars; optimizes the pricing and promotion process to reduce inventory costs while improving sell-through, and generates value from end-of-life, end-of-season and excess inventory. Price Optimization & Management suite includes JDA Trade Event Management for Retail, JDA Trade Promotions Management, JDA Advertising, and JDA Promotions Management.
Manufacturing & Supply Management
The Manufacturing & Supply Management solution delivers a demand-driven manufacturing planning and scheduling solution that addresses the problems across process and discrete manufacturing. The solution enables network design and optimization, business workflow and analysis of supply and demand plans, and the recommended actions from summary to detail, and drives material and capacity allocation to fulfill prioritized customer demand. The
Manufacturing & Supply Management suite includes JDA Strategy, JDA Inventory Policy Optimization, JDA Master Planning, JDA Sequencing, JDA Supply and JDA Order Promising.
Contract Manufacturing
The Contract Manufacturing solution is specifically designed for enterprises engaged in standard and contract-oriented manufacturing and re-manufacturing. The solution provides production control, financial management and
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resource planning tools and the access to information needed to speed delivery, increase effective capacity and reduce costs in a discrete manufacturing or repair and overhaul operation, and facilitates better resource utilization and full life cycle support capability. The Contract Manufacturing suite includes JDA Maintenance Repair & Overhaul, JDA Make-to-Order and JDA Procurement Management.
Transportation and Logistics Management
The Transportation Management applications enable manufacturers, distributors, retailers, shippers, carriers and transportation service providers to manage the complexities of a multi-modal logistics network. Functionality includes synchronization of the global movement of goods and information, automated freight payment processes, proactive management of supplier and carrier relationships, and ability to generate a plan based on real business constraints. The Transportation and Logistics Management includes JDA Transport, JDA Transport RFQ, JDA Carrier, JDA Freight Pay, JDA Delivery Management, JDA Routing, and JDA Logistics Event Management & Visibility.
Merchandise Operations Systems
The Merchandise Operations Systems applications manage inventory and the movement of merchandise, including buying and receiving, tracking and controlling inventory, transferring between locations, customer sales and returns, executing price strategies and returning goods to vendors. The Merchandise Operations Systems suite includes JDA Portfolio Merchandise Management, JDA Merchandise Management System and JDA Merchandise Performance Analysis.
Store Systems
The Store Systems applications provide point-of-sale functions, including sales, returns, exchanges, layaways and special orders and visibility into merchandise operations systems; back office functions for inventory movement and transaction management, and a centralized repository for customer demographic and transaction information, target marketing, customer scorecarding and customer loyalty. The Store Systems suite includes JDA Point-of-Sale, Distributed Store System for Windows, JDA Back-of-Store and JDA Customer Relationship Management.
Workforce Management
JDA Workforce Management application provides capabilities for budgeting, forecasting, scheduling, time and
attendance. It also provides capabilities for labor tracking, operations management, corporate reporting and workforce interaction via Web portals.
Performance Management
The Performance Management solution delivers business intelligence capabilities, unifies business process workflow, integrates security and leverages pre-configured key performance indicators to help analyze and predict the impact of changes. The Performance Management includes JDA Reporting and JDA Analytics.
Collaboration
The Collaboration solutions enable collaboration internally on supply chain decisions and externally with trading partners to streamline decision making throughout an extended network. The solutions enable real-time
communication and facilitate the sharing of strategic, operational and tactical plans allowing companies to elevate the scope and effectiveness of their supply chain sales and operations planning (S&OP) processes. The Collaboration suite includes JDA Marketplace Replenish, JDA Collaborate, JDA Marketplace and JDA Executive S&OP Workbench.
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Maintenance Services
Customer Support Solutions. JDA Software offers comprehensive customer support solutions to help customers optimize their investment in its products. The company’s standard maintenance services agreement entitles customers to receive unspecified new product releases (exclusive of those that introduce significant new functionality), comprehensive error diagnosis and correction, global phone, email and internet support, a customer relationship management portal that provides 24/7 self-service for managing and reporting issues, and access to an online user community and searchable solution knowledge-base. Customers have the option of choosing maintenance service programs that extend hours of coverage, incorporate support for custom configurations, or provide special attention through periods of high activity or upgrade processing. JDA also offers enhanced support services that provide customers with difficult to find technical and database administration skills, and an outsource alternative to help desk and other information technology services.
Consulting Services
Implementation Services. JDA’s implementation services group consists of project managers, business consultants, systems analysts and technical personnel with extensive retail, manufacturing, and distribution industry experience. The implementation services group assists customers in all phases of systems
implementation, including program and project management, business process analysis and design, systems planning and design, customer-specific configuration of application modules and on-site implementation or conversion from existing systems.
Strategic Business Services. JDA offers strategic business services that provide high level strategic
consulting and assistance to customers before, during and after the implementation of technology by aligning and integrating business activities, organizational structure, performance measures and systems processes to achieve maximum effectiveness.
Technical Services. JDA provides a range of technical services that enable customers to optimize the interactions between software solutions and industry standard technologies including database software, operating systems, middle ware, and hardware and networks.
Training Services. The company offers a comprehensive education and training program for customers,
associates and business partners through its Education Services. Education Services include multimodal
process and solution training, role-based certification tracks, benchmarking surveys and services and best
practice/business strategy information. Education Services features a curriculum for each of its software
solutions, and prepaid bundled training packages that range from basic overviews, implementation and technical/developer classes to business process education and key topics and techniques for the supply chain. Courses are offered at in-house classroom facilities, and through customized on-site classes. In addition, JDA
offers JDALearn.com, a web-based education alternative sold on a subscription basis.
Managed Services. A primary initiative in 2009 will be the further development of JDA’s Managed Services offering which expands its existing hosted services and will include: (i) outsourced operations for information technology, data and application management and hosting; (ii) workforce augmentation; (iii) management of process and user information; (iv) business process execution services including analysis and recommendations; and (v) business optimization services such as network design, demand classification,
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inventory policy and channel clustering. A significant portion of these services will be performed by the
resources in the Center of Excellence. The company believes the Managed Services offering will provide
customers with effective alternatives, particularly during the current economic environment, to reduce their costs of operation, operate effectively with constrained resources, leverage outside domain expertise to augment their personnel and to improve the value they derive from their JDA products.
BUSINESS AND GROWTH STRATEGIES
For many years JDA Software’s primary driver for growth has been through:
Organic Growth. JDA believes that organic growth can be achieved through cross-selling acquired solutions within its existing customer base and through sales to new customers in target markets. The company has established long-term business relationships with many major customers, and as its product offering grows, JDA believes that it can successfully leverage those relationships to crease follow-on sales opportunities. In
fact, 70% to 75% of annual software license sales come from existing customers.
Acquisitions. JDA has a proven track record of successfully integrating software companies and creating profitable growth for both JDA and the acquired businesses post acquisition. The company’s future growth plans include additional acquisitions to further expand its markets and improve its offering, revenue, and profitability.
JDA’s specific strategy for growth and profitability in fiscal year 2009 can be summarized as follows:
Capitalize on Market Demand for Supply Chain Planning, Optimization and Execution Solutions. JDA believes its leadership in the supply chain planning market, combined with the market’s current focus on these kind of high ROI solutions creates a near term growth opportunity.
Expand the Services Offerings. JDA believes most companies will implement plans to further reduce their operating costs in 2009. As such, the company plans to help customers achieve this goal through compelling
service offerings such as the Managed Services initiative, that enable customers to maximize the potential of our
software solutions at a lower total cost of ownership.
Continue Margin Improvement Plans Through Center of Excellence. In 2008, JDA outlined a strategy to
expand operations in India and create a comprehensive Center of Excellence (―CoE‖). The CoE is designed to
complement and enhance the company’s existing on-shore business model, not replace it, and its goal is to achieve operational and cost benefits without sacrificing JDA’s capability to work face-to-face with customers, most of
which are in the Americas and Europe. The CoE encompasses additional product development activities,
customer implementation services, customer support services and internal administrative services that enable JDA to expand operations and achieve growth goals, while reducing total operating costs.
Leverage Brands. JDA plans to increasingly promote its four major brands that were acquired through acquisitions — Arthur, E3, Intactix and Manugistics. In the past the company has retained these brands in its products names only. In the future JDA will elevate these brands by emphasizing the brand names in its broad-based marketing efforts, rather than associating them with current product names.
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Expand Partnerships. JDA will continue to develop and expand its network of partners and value-added resellers (VARs) which help promote JDA solutions globally. It will also leverage the success of the JDA Alliance Connection program, first launched in 2007, that is designed to provide increased value to partners and to maximize their ability to generate additional revenues for both themselves and JDA.
MANAGEMENT AND EMPLOYEE RELATIONS
Currently, JDA Software Group is led by Chairman of the Board James D. Armstrong. He has occupied this position since he co-founded the company in 1985. He also served as Chief Executive Officer from 1985 to July 2003. Under Mr. Armstrong is Hamish N.J. Brewer who has served as President and Chief Executive Officer since 2003. He joined the company in 1994 as a Marketing Representative and was soon promoted to Director of European, Middle Eastern, and African Operations. He then became Director of Sales and was promoted several years later to his current position.
As of December 31, 2008, JDA had 1,718 employees: 960 were based in the Americas region, 193 were based in Europe, and 565 were based in the Asia/Pacific region, including 453 in India. Of the total, 215 were engaged in sales and marketing, 438 were in consulting services, 296 were engaged in client support services, 531 were in product development, and 238 were in administrative functions. JDA believes that its relations with employees are good. The company states that its employees have never had a work stoppage and none of its employees are subject to a collective bargaining agreement.
RECENT NEWS
12/07/09 - JDA Software sells $275 Million in 5-year notes
Although JDA Software currently has no long-term debt, it has issued a set of 5-year notes with coupons of 8%. The company has stated that it is raising this debt in order to finance the recent acquisition of i2 Technologies Inc. After speculative-grade bond yields fell the most since October relative to Treasuries, I feel that this is the perfect time for the company to issue these notes. The notes are guaranteed by the company’s existing and future domestic subsidiaries.
11/05/09 - JDA Software acquires i2 Technologies Inc. (ITWO) for $396 Million
JDA Software has decided to acquire its main competitor in order to strengthen its business. I2 Technologies makes supply chain management software used by manufacturers as they deal with customers and suppliers. It also offers consulting and other services. This product and service offering is very similar to that of JDA Software. Under terms of the signed deal, JDA said it would pay a combination of cash and stock valued at $18 a share for i2 Technologies, which is based in Dallas. That is a 9% premium over i2's closing price the day before the announcement of this acquisition.
The deal’s financial structure includes the purchases of the shares for $434 million, along with an agreement to retire about $121 million in debt. JDA would then get back about $160 million in i2’s cash on hand when the deal closes, putting the value of the deal at $396 million, officials said.
I feel that the acquisition of i2 Technologies will help JDA Software greatly expand its business. The company has a strong financial position and the acquisition will contribute additional revenues of $200 million per year and net annual cost savings of nearly $20 million.
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The following chart, provided by JDA Software, illustrates the company’s financial position after acquiring i2 Technologies. As you can see, the resulting company will have significantly improved operating leverage and a strong financial position.
INDUSTRY
JDA Software Group Inc. operates internationally in the information technology industry and in the application software sub-industry. Its focus is on providing integrated software products and services for the retail industry and its suppliers.
The fundamental outlook among most analysts for the Application Software sub-industry for the next 12 months is neutral. Sales will likely keep pace with growth in the broader economy and I, therefore, expect that there will be only modest growth in 2010. I feel that companies operating in this international industry will also be affected significantly by foreign exchange volatility.
Corporate spending on software is expected to rise in the low to mid single-digits in 2010, as modest license growth is underpinned by maintenance revenues, which are more stable and recurring. I expect sales for licenses to grow modestly in 2010 as customers remain cautious until early signs of global stabilization and recovery become more certain. Despite this, I think
maintenance renewal rates will remain high. Before the recent economic downturn, software was not coming out of a boom/bust cycle. Rather, purchasers of software have for some time maintained a focus on return on investment and cost of ownership. In this buyers' market, software vendors face competition and pricing pressure. In recent years, buyers have added to their leverage by purchasing more from fewer vendors. Many vendors in this sub-industry have regained leverage through Mergers and Acquisitions.
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Productivity enhancements offered by investments in software make it an attractive investment for IT buyers. I expect growth for analytical software that enables informed decision-making or helps operational efficiency. Software sales will likely be aided in 2010 by anticipated PC replacement. On the whole, however, it is likely that sales will remain stagnant without an economic recovery. I believe that the indispensable role of the Internet within the enterprise has created demand for applications that take advantage of this platform. Many vendors are delivering more value to customers by assuming more of the risk associated with an investment in software.
As you can see from the stock performance chart, historically companies operating in the application software industry have marginally outperformed both the S&P 1500 and firms in the information technology industry.
There are many interesting areas of growth for the information technology industry, especially companies like JDA Software that are involved in the development of application software. The following are areas of growth for the industry:
S.W.O.T.ANALYSIS Strengths
International Exposure: Historically, JDA’s international operations have accounted for approximately 40% of total revenues.
Powerful Strategic partnerships: JDA has partnered with many firms in the information technology to bring innovative products to the market. For example, the company recently created an integrated software solution with Hewlett Packard (HP) that gives firms a single, real-time view of the value chain across their entire organization.
Strong Customer Base: Historically, JDA receives 70% to 75% of its annual software license sales
from existing customers.
Weaknesses
Rising debt burden: To help finance the acquisition of i2 Technologies, the company has taken on nearly $300 million of 5-year treasury notes.
Opportunities
International Growth
Acquisitions:There are plenty of small companies that could contribute well to JDA’s operations. Threats
Currency Risks: International operations expose the company to currency fluctuations.
PORTER’S 5FORCES ANALYSIS Supplier Power – Low
Supplier power is negligible in the software industry because the products’ value doesn’t come from outside sources. Value comes from the innovative employees and compatibility with existing systems
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Barriers to Entry – Low
The application software industry has always been characterized by a low barrier to entry. Against that background, anybody with a new idea, a PC, and some programming skill is able to start a software business.
Buyer Power – Low to Moderate
Even though there are many substitute products in the application software industry, it is difficult for a company to convert to another software suite without spending a lot of time and incurring high costs.
Threat of Substitutes – High
The application software industry is highly competitive. There are many companies producing a diverse range of software suites that are comparable to that offered by JDA Software.
Degree of Rivalry – High
There is a great deal of competition among firms operating in the application software industry. These firms offer comparable software suites and offer similar services. This is likely to continue into the forseeable future as the companies come out with new software solutions.
COMPARABLES ANALYSIS
To identify JDA’s competitors, I searched for companies that operate using similar business models. I mainly researched information technology companies that are directly competing with JDA Software in the sub industry of application software. I2 Technologies, formally the main competitor of JDA, was excluded due to the fact that it is in the process of being acquired by the company.
SAP AG (SAP) – 35%
SAP AG develops, markets, and sells enterprise application software products for corporations, government agencies, and educational institutions in Europe, the Middle East, Africa, North America and Latin America, and the Asia Pacific Japan region. The company offers preconfigured industry-specific solutions for midsize companies. The company also provides capabilities for various work involved in managing a small business, such as financials, sales, and customer support. The company also offers software-related services, which are support services provided by the SAP support units, such as SAP Active Global Support, SAP BusinessObjects, and SME Services; and custom development provided by the SAP Custom Development organization, as well as professional services and other services, including consulting, education, and managed services. It serves process, discrete, consumer, service, financial services, and public services industries. SAP AG was founded in 1972 and is headquartered in Walldorf, Germany.
Oracle Corp. (ORCL) – 35%
Oracle Corporation (Oracle) is an enterprise software company. The Company develops, manufactures, markets, distributes and services database and middleware software, as well as applications software that help its customers manage their businesses. Oracle is organized into two businesses: software and services. These businesses are further divided into five operating segments. Its software business consists of two operating segments, new software licenses, and software license updates and product support. Its services business consists of three operating segments,
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consulting, On Demand and education. The company was founded in 1977 and is headquartered in Redwood City, California.
I have chosen SAP AG and Oracle as the main competitors of JDA Software for several reasons. First, these two large software companies have increased their presence in the retail and manufacturing marketplace over the past few years. They compete head-to-head in the same markets and offer the same products as JDA. Into the future, I expect Oracle and SAP AG to provide more aggressive competition for the company due to the strengthening of their brands, financial size, and overall market positions. As such, I have weighted both at 35% each.
TIBCO Software Inc. (TIBX) – 30%
TIBCO Software, Inc. provides infrastructure software solutions in the Americas, Europe, the Middle East, Africa, Asia Pacific, and Japan. The company offers various software products in the areas, including service-oriented architecture (SOA), business optimization, and business process management (BPM). Its SOA product line turns information and functions into discrete and reusable components that can be invoked from across the business and aggregated with other such services to create composite applications; and delivers capabilities in the areas of service mediation, orchestration and communication, and the development of Internet applications. The company’s business optimization product portfolio helps organizations convert and analyze data to create information and deliver it to employees, customers, and partners. The company also provides various professional services, including systems planning, design, installation, and integration, as well as offers various maintenance and support services. It serves various industries, such as financial services, telecommunications, retail, healthcare, manufacturing, energy, transportation, logistics, government, and insurance. The company was founded in 1985 and is headquartered in Palo Alto, California.
I have chosen TIBCO Software as a small competitor of JDA Software. Although the company serves similar industries and is subjected to the same risks, I don’t believe that it is as strong a competitor as Oracle or SAP AG.
Metrics Used in Comparables Analysis
EV/Revenue – I chose this metric to determine the size of the company relative to its ability to produce revenues.
EV/EBITDA – I used this metric to assess the profitability of the company against its competitors because it limits the effect of differences in accounting and financing.
EV/Operating Cash Flows – I used this measure to compare the firm’s total value to how much cash it generates.
DISCOUNTED CASH FLOW ANALYSIS Revenues
In order to project JDA Software’s future revenues, I looked at the business segments that the company has
traditionally generated revenue from and projected future growth on each of the business segments. There were three main trends that I wanted to illustrate with my revenue projections
Taking fiscal years 2005-2009 into account, JDA’s retail segment has accounted for 52.45%-78.74% of their
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supply chain and also sees manufacturers increasingly focused on becoming consumer centric. However, the current economic downturn is causing declines in certain areas of the consumer products supply chain. In particular, companies operating in the software applications market are experiencing increased cancellations and deferrals of software projects in the retail segment of the supply chain. This is likely the reason that the retail segment accounts for a significantly smaller percentage of total revenue than it did just a few years ago. As such, I’m predicting that revenue coming from the retail segment will decrease to approximately 50% of revenue for the next several years (2010-2012) before gradually increasing to and stabilizing at 53% by the terminal year as consumer confidence returns and retailers recover.
Historically, JDA’s Manufacturing and Distribution segment has accounted for 21.26%-43.13% of total
revenues. Revenue coming from this segment has been somewhat volatile over the past few years. Ever since the economic downturn began, the percentage of revenue coming from this segment has decreased. The company has stated that large orders have dropped significantly in this segment and will likely continue well into 2010. Service Industries are also taking away from this segment’s revenues. As such, I’m predicting that this segment will gradually be reduced to only 35% of revenues.
JDA’s Services Industries segment has been the company’s fastest growing segment. This segment went from
contributing nothing to total revenues back in 2005 to providing over 8.50% in the past year. Even though this growth is astounding, it is still relatively small compared to the company’s other two segments. However, I believe that this segment will grow as Services Industries continue to place large orders with JDA. As such, I predict that this segment will gradually contribute more to total revenues each year before finally stabilizing at 12%.
Through examining FactSet and a variety of other sources, I determined the following: JDA’s revenues should increase significantly in years 2010-2012 as the global economy recovers and the acquisition of i2 Technologies is completed. I predict that revenues should gradually increase through the terminal year due to the release of new products and services, continued mergers and acquisitions, and a much stronger economy. I project revenues to decrease slowly as a percentage into the terminal year.
The large jump in total revenues of 61% in fiscal year 2010 is due to the acquisition of i2 Technologies. I have determined that by itself JDA Software will provide $401.1M in 2010, which is a 6.2% jump compared to 2009. I also determined that i2 Technologies will experience revenues of $216.9M, which is a decrease of 2.5% compared to 2009. (Please see Appendix 6)
Taking all of this information into account, JDA Software, coupled with revenues provided by the acquisition of i2 Technologies, will experience revenue growth of 61.25% to a total of $618M in 2010.
Cost of Revenues
I have projected cost of revenues for both JDA Software and i2 Technologies as 37% decreasing by .25% per year before finally leveling off at in the terminal year. I have this figure decreasing due to the fact that both companies have become more efficient in recent years.
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I decided not to account for these items because the net effect of these on free cash flow is zero when they are added back to income net of taxes.
Product Development Expense
As a percentage of revenue, JDA’s product development expense has been decreasing. This decrease is likely to continue as redundant development positions in connection with the company’s decision to standardize future product offerings are eliminated. As such, I have projected product development expense at 12% of revenues and decreasing by .1% every year thereafter.
Sales and Marketing Expense
I also expect sales and marketing expense to gradually decrease into the future as the company begins to focus more on maintaining its current set of customers. This is mainly due to the fact that JDA has just acquired i2 Technologies, along with its customers, and now will not need to spend as much attracting customers
General and Administrative Expense
As a percentage of revenue, general and administrative expenses have historically fluctuated between 11-12% of revenues. Moving forward, I don’t believe this figure will change significantly. However, JDA views strategic acquisitions as a way of cutting costs. In fact, the acquisition of i2 Technologies is projected to result in noticeable annual cost savings. As such I have this figure at 12% in 2010 and decreasing at .1% annually.
Beta
First, I ran a five-year monthly regression of JDA’s returns versus the S&P 500 index which yielded a beta of 1.57. Because the company just acquired its main competitor i2 Technologies, I feel that this beta will soon fail to be accurate. Therefore, I ran the Hamada formula to determine the company’s beta relative to competitors. This gave me a beta of 1.33. I averaged the 5-year monthly beta against the Hamada beta, which yielded 1.44.
Capital Expenditures
Capital expenditures for JDA have historically been between 2-3% of revenues. However, the company historically has made a major acquisition every few years. Averaging this out, I have projected capital expenditures at 4% into the terminal year.
Depreciation
Historically, depreciation has been between 7-10% of revenues. Because the company is in the process of acquiring i2 Technologies, I must also consider its contribution to this line item. Historically, ITWO’s depreciation has accounted for only approximately 1-2% of revenues. As such, I have projected depreciation out starting with 10% in 2010 and averaging out at 4% by the terminal year.
Taxes
Historically, the tax rate for JDA Software has been approximately 37%. Taking the acquisition into account I have projected a tax rate of 40% going into the future.
Cost of Debt
The company recently issued $275M of 5-year notes payable at 8%. This is the only long-term debt on record.
RECOMMENDATION
The Discounted Cash Flow and Comparables Analysis, weighed at 50% each, produces an implied price of $25.09. This suggests an overvaluation of 5.7% or roughly a fair valuation. I believe that there is great potential for growth in
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the application software industry. More importantly, I believe that JDA Software is a leader in this fiercely competitive sector. Its strategy of organic growth and strategic acquisitions is what has made it successful in the past and what will lead it to success in the future. The company doesn’t place a great deal of reliance on financing. Only recently did it take on long term debt to assist in the financing of the i2 Technologies acquisition. I am confident that this
acquisition will greatly strengthen the company into the future.
However, based on my quantitative analysis I simply cannot recommend a buy at this time. Given this valuation, I am recommending a HOLD on JDA Software for all three UOIG Portfolios.
We are currently underweight small-cap in the Tall Firs and Svigals Portfolios and roughly equal weight in the Dadco Portfolio.
15 APPENDIX 1–COMPARABLES ANALYSIS
JDA Software SAP AG Oracle TIBCO Software Weighted Average
(JDAS) (SAP) (ORCL) (TIBX)
Weight 0.35 0.35 0.30 100%
Beta 1.45 1.12 0.91 1.27 1.1000
Price $26.61 $46.57 $24.83 $9.52 $26.97
Shares 34,514,874 1,189,900,000 5,011,200,000 174,455,500 $2,125,185,167
Market Cap $918,440,797 $55,413,643,000 $124,428,096,000 $1,660,816,360 $60,500,851,787
Long Term Debt $275,000,000 $50,000,000 $13,751,000,000 $40,925,000 $4,613,975,000
Enterprise Value $1,193,440,797 $55,463,643,000 $138,179,096,000 $1,701,741,360 $65,114,826,787 Revenue (ttm) $382,277,000 $15,200,000,000 $23,226,000,000 $621,000,000 $13,015,666,667 EBITDA (ttm) $38,776,000 $2,772,000,000 $8,149,000,000 $90,000,000 $3,670,333,333 OCF (ttm) $63,777,000 $10,851,000,000 $22,629,000,000 $107,137,000 $11,195,712,333 Net Income $24,472,000 $2,299,000,000 $8,001,000,000 $62,302,000 $3,454,100,667 EV/Revenues 3.12 3.65 5.95 2.74 4.18 $46.31 0.35 EV/EBITDA 30.78 20.01 16.96 18.91 18.61 $20.91 0.35 EV/OCF 18.71 5.11 6.11 15.88 8.69 $16.06 0.30 Implied Price $28.35 Current Price $26.61 Undervalued 6.52%
16 APPENDIX 2–DISCOUNTED CASH FLOWS ANALYSIS
(in thousands) 2005A 2006A 2007A 2008A 2009Q1-Q3A 2009Q4E 2009 A + E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E
Revenues:
Retail 169,949 175,152 195,940 210,624 151,562 56,892 208,454 330,648 340,660 350,487 395,174 431,087 463,470 493,618 525,715 541,486 557,731 % of Revenue 78.74% 63.13% 52.45% 53.96% 54.39% 54.39% 54.39% 53.50% 52.00% 50.00% 51.25% 52.25% 52.50% 52.75% 53.00% 53.00% 53.00%
Manufacturing and Distribution 45,874 96,755 161,117 159,323 103,430 38,817 142,247 231,763 252,220 280,390 294,935 303,205 317,808 329,858 347,170 357,585 368,313 % of Revenue 21.26% 34.87% 43.13% 40.82% 37.11% 37.11% 37.11% 37.50% 38.50% 40.00% 38.25% 36.75% 36.00% 35.25% 35.00% 35.00% 35.00%
Services Industries 5,560 16,518 20,385 23,685 8,891 32,576 55,623 62,236 70,097 80,963 90,755 101,522 112,292 119,030 122,601 126,279 % of Revenue 0.00% 2.00% 4.42% 5.22% 8.50% 8.50% 8.50% 9.00% 9.50% 10.00% 10.50% 11.00% 11.50% 12.00% 12.00% 12.00% 12.00%
Total Revenues 215,823 277,467 373,575 390,332 278,677 104,600 383,277 618,034 655,116 700,974 771,072 825,047 882,800 935,768 991,914 1,021,672 1,052,322
% Growth 28.56% 34.64% 4.49% -1.81% 61.25% 6.00% 7.00% 10.00% 7.00% 7.00% 6.00% 6.00% 3.00% 3.00%
Cost of Goods Sold 86,226 114,973 148,134 146,982 106,693 40,051 146,744 228,673 240,755 255,856 279,514 297,017 315,601 332,198 349,650 357,585 365,682
% of Revenue 39.95% 41.44% 39.65% 37.66% 38.29% 38.29% 38.29% 37.00% 36.75% 36.50% 36.25% 36.00% 35.75% 35.50% 35.25% 35.00% 34.75% Gross Profit 129,597 162,494 225,441 243,350 171,984 64,549 236,533 389,362 414,361 445,119 491,558 528,030 567,199 603,570 642,264 664,087 686,640 % of Revenue 60.05% 58.56% 60.35% 62.34% 61.71% 61.71% 61.71% 63.00% 63.25% 63.50% 63.75% 64.00% 64.25% 64.50% 64.75% 65.00% 65.25% Operating Expenses: Product Development 44,351 56,262 51,173 53,866 37,732 14,163 51,895 74,164 77,959 82,715 90,215 95,705 101,522 106,678 112,086 114,427 116,808 % of Revenue 20.55% 20.28% 13.70% 13.80% 13.54% 13.54% 13.54% 12.00% 11.90% 11.80% 11.70% 11.60% 11.50% 11.40% 11.30% 11.20% 11.10%
Sales and Marketing 40,386 48,153 63,154 66,468 46,310 17,385 63,695 98,885 104,163 110,754 121,058 128,707 136,834 144,108 151,763 155,294 158,901
% of Revenue 18.71% 17.35% 16.91% 17.03% 16.62% 16.62% 16.62% 16.00% 15.90% 15.80% 15.70% 15.60% 15.50% 15.40% 15.30% 15.20% 15.10%
General and Administrative 25,471 33,363 41,515 44,213 35,001 13,138 48,139 74,164 77,959 82,715 90,215 95,705 101,522 106,678 112,086 114,427 116,808
% of Revenue 11.80% 12.02% 11.11% 11.33% 12.56% 12.56% 12.56% 12.00% 11.90% 11.80% 11.70% 11.60% 11.50% 11.40% 11.30% 11.20% 11.10%
Other 17,524 17,421 20,822 58,495 24,585 9,226 33,811 49,443 52,409 56,078 61,686 66,004 70,624 74,861 79,353 81,734 84,186
% of Revenue 8.12% 6.28% 5.57% 14.99% 8.82% 8.82% 8.82% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00%
Total Operating Expenses 127,732 155,199 176,664 223,042 143,628 53,911 197,539 296,656 312,490 332,262 363,175 386,122 410,502 432,325 455,289 465,882 476,702
Operating Income (Loss) 1,865 7,295 48,777 20,308 28,356 10,638 38,994 92,705 101,871 112,857 128,383 141,908 156,697 171,246 186,976 198,204 209,938
% of Revenue 0.86% 2.63% 13.06% 5.20% 10.18% 10.17% 10.17% 15.00% 15.55% 16.10% 16.65% 17.20% 17.75% 18.30% 18.85% 19.40% 19.95%
Interest Expense 162 7,645 11,836 10,349 971 366 1,337 0 0 0 0 0 0 0 0 0 0 % of Revenue 0.08% 2.76% 3.17% 2.65% 0.35% 0.35% 0.35% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Acquisition Finance Costs 0 0 0 5,292 0 0 0 0 0 0 0 0 0 0 0 0 0 % of Revenue 0.00% 0 0 1.36% 0 0 0 0 0 0 0 0 0 0 0 0 0
Interest Income 2,799 3,857 3,476 2,791 886 335 1,221 0 0 0 0 0 0 0 0 0 0 % of Revenue 1.30% 1.39% 0.93% 0.72% 0.32% 0.32% 0.32% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Change in Stock Fair Value (3,086) 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 % of Revenue -1.11% 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
EBITA 4,502 421 40,417 7,458 28,271 10,606 38,877 92,705 101,871 112,857 128,383 141,908 156,697 171,246 186,976 198,204 209,938
% of Revenue 2.09% 0.15% 10.82% 1.91% 10.14% 10.14% 10.14% 15.00% 15.55% 16.10% 16.65% 17.20% 17.75% 18.30% 18.85% 19.40% 19.95%
Tax Rate 30.80% 213.80% 34.80% 58.10% 37.00% 37.00% 40.00% 40.00% 40.00% 40.00% 40.00% 40.00% 40.00% 40.00% 40.00% 40.00% 40.00%
Income Tax Provision -2,458 867 13,895 4,334 10,429 3,912 14,341 23,485 25,222 26,988 30,843 33,002 37,519 39,770 42,156 45,975 47,354 % of Revenue -1.14% 0.31% 3.72% 1.11% 3.74% 3.74% 3.74% 3.80% 3.85% 3.85% 4.00% 4.00% 4.25% 4.25% 4.25% 4.50% 4.50%
Net Income 6,960 (446) 26,522 3,124 17,842 6,694 24,536 69,220 76,649 85,869 97,541 108,906 119,178 131,475 144,819 152,229 162,584
% of Revenue 3.22% -0.16% 7.10% 0.80% 6.40% 6.40% 6.40% 11.20% 11.70% 12.25% 12.65% 13.20% 13.50% 14.05% 14.60% 14.90% 15.45%
Add Back: Depreciation and Amortization 17,764 24,433 31,646 39,280 28,043 10,523 38,566 61,803 26,205 28,039 30,843 33,002 35,312 37,431 39,677 40,867 42,093 % of Revenue 8.23% 8.81% 8.47% 10.06% 10.06% 10.06% 10.06% 10.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00%
Add Back: Interest Expense*(1-Tax Rate) 112.10 (8,700.01) 7,717.07 4,336.23 611.73 230.12 841.85 0 0 0 0 0 0 0 0 0 0 % of Revenue 0.05% -3.14% 2.07% 1.11% 0.22% 0.22% 0.22% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Cash Flow from Operations 24,836 15,287 65,885 46,740 46,497 17,447 63,944 131,023 102,853 113,908 128,383 141,908 154,490 168,906 184,496 193,096 204,677
% of Revenue 11.51% 5.51% 17.64% 11.97% 16.68% 16.68% 16.68% 21.20% 15.70% 16.25% 16.65% 17.20% 17.50% 18.05% 18.60% 18.90% 19.45%
Current Assets 167,638 166,797 194,538 149,507 189,524 200,987 200,987 325,987 347,212 371,516 408,668 437,275 467,884 495,957 525,715 541,486 557,731
% of Revenue 77.67% 60.11% 52.07% 38.30% 68.01% 52.44% 52.75% 53.00% 53.00% 53.00% 53.00% 53.00% 53.00% 53.00% 53.00% 53.00%
Current Liabilities 48,606 125,694 126,675 117,368 119,807 134,341 134,341 250,341 281,700 301,419 331,561 354,770 379,604 402,380 426,523 439,319 452,498
% of Revenue 22.52% 45.30% 33.91% 30.07% 42.99% 42.99% 43.00% 43.00% 43.00% 43.00% 43.00% 43.00% 43.00% 43.00% 43.00% 43.00%
Net Working Capital (NWC) 119,032 41,103 67,863 32,139 69,717 66,646 66,646 75,646 65,512 70,097 77,107 82,505 88,280 93,577 99,191 102,167 105,232
% of Revenue 55.15% 14.81% 18.17% 8.23% 25.02% 63.72% 17.39% 12.24% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00%
Change in NWC -77,929 26,760 -35,724 37,578 -3,071 -3,071 9,000 -10,134 4,586 7,010 5,398 5,775 5,297 5,615 2,976 3,065 Subtract: Capital Expenditures/Acquisitions 4,860 80,915 7,408 8,594 5,540 2,082 7,622 138,541 32,756 35,049 38,554 41,252 44,140 46,788 49,596 51,084 52,616 % of Revenue 2.25% 29.16% 1.98% 2.20% 1.99% 1.99% 1.99% 22.42% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00%
Free Cash Flow 19,976 12,301 31,717 73,870 3,379 18,437 21,815 -16,518 80,232 74,274 82,820 95,258 104,575 116,821 129,286 139,037 148,995
17 APPENDIX 3–DISCOUNTED CASH FLOWS ANALYSIS ASSUMPTIONS
Tax Rate 40% Terminal Growth Rate 3%
Risk-free Rate 3.79% Terminal Value $1,741,122
Beta 1.45 PV Terminal $554,290
Market Risk Premium 7.00% Sum of PV Free Cash Flow $474,576
% Equity 76.96% Long Term Debt $275,000
% Debt 23.04% Firm Value $1,028,866
CAPM (rEquity) 13.91% Equity Value $753,866
WACC 11.81% Shares Outstanding (in thousands) 34,515
Cost of Debt (rDebt) 8.00% Implied Price $21.84
Market Cap (in thousands) $918,444 Current Price $26.61
Undervaluation -17.92%
Comps Implied Price $28.35
DCF Implied Price $21.84
Current Price $26.61
Weighted Average Price $25.09
18 APPENDIX 4–BETA SENSITIVITY ANALYSIS
Beta Standard Deviation Implied Price Undervalued
2.30 3σ 18.18 -31.66% 2.02 2σ 19.65 -26.17% 1.73 1σ 21.54 -19.05% 1.45 24.10 -9.43% 1.16 -1σ 27.75 4.27% 0.87 -2σ 33.35 25.34% 0.59 -3σ 43.08 61.91%
CAPM WACC PV of Terminal Value Equity Value
19.92% 16.44% 389,210 627,638 17.92% 14.90% 439,643 678,072 15.92% 13.36% 505,093 743,521 13.91% 11.81% 593,438 831,867 11.91% 10.27% 719,239 957,668 9.91% 8.73% 912,725 1,151,153 7.90% 7.19% 1,248,622 1,487,050
APPENDIX 5–HAMADA BETA
Company Name Beta Debt/Equity Ratio Standard Error Weight
TIBCO Software (TIBCO) 1.347 0.00 0.224 33.3%
SAP AG (SAP) 1.136 0.11 0.163 33.3%
Oracle Corp. (ORCL) 0.934 0.02 0.144 33.3%
Mean 1.139 0.045 0.180
Median 1.136 0.025 0.163
Pure Business Beta (Sample BL) 1.14
Sample D/E 0.04
Unlevered Business Beta 1.11
JDA Software D/E 0.29
JDA Software Beta 1.32
19 APPENDIX 6–DISCOUNTED CASH FLOW ANALYSIS FOR I2TECHNOLOGIES
(in thousands) 2005A 2006A 2007A 2008A 2009Q1-Q3A 2009Q4E 2009 A+E 2010E
Revenues: Software Solutions 89,937 76,243 47,721 46,852 40,689 13,170 53,859 52,057 % of Revenue 26.70% 27.26% 18.33% 18.31% 24.21% 24.21% 24.21% 24% Services 103,792 106,493 122,682 123,564 71,357 23,098 94,455 93,269 % of Revenue 30.81% 38.08% 47.13% 48.30% 42.46% 42.46% 42.46% 43% Maintenance 100,612 92,828 87,457 85,397 56,021 18,132 74,153 71,579 % of Revenue 29.87% 33.19% 33.60% 33.38% 33.33% 33.33% 33.33% 33% Contract 42,526 4,113 2,450 0 0 0 0 0 % of Revenue 12.62% 1.47% 0.94% 0.00% 0.00% 0.00% 0.00% 0% Total Revenue 336,867 279,677 260,310 255,813 168,067 54,400 222,467 216,906 % Growth -16.98% -6.92% -1.73% -13.04% -2.50%
Cost of Goods Sold 120,053 111,154 117,063 109,387 59,760 19,345 79,105 75,917
% of Revenue 35.64% 39.74% 44.97% 42.76% 35.56% 35.56% 35.56% 35%
Gross Profit 216,814 168,523 143,247 146,426 108,307 35,055 143,363 138,820
% of Revenue 64.36% 60.26% 55.03% 57.24% 64.44% 64.44% 64.44% 64%
Total Operating Expenses 161,450 139,128 118,109 36,583 30,906 10,059 40,965 39,043
% of Revenue 47.93% 49.75% 45.37% 14.30% 18.39% 18.49% 18.41% 18%
Operating Income (Loss) 55,364 29,395 25,138 109,843 77,401 24,997 102,398 99,777
% of Revenue 16.43% 10.51% 9.66% 42.94% 46.05% 45.95% 46.03% 46%
Interest Expense 16,315 6,069 4,948 4,947 899 288 1,187 0
% of Revenue 4.84% 2.17% 1.90% 1.93% 0.53% 0.53% 0.53% 0%
Interest Income 13,624 5,561 4,810 2,177 261 87 348 0
% of Revenue 4.04% 1.99% 1.85% 0.85% 0.16% 0.16% 0.16% 0%
Other Non-Operating Income -4,564 -850 -1,134 11,114 -175 -54 -229 -217
% of Revenue -1.35% -0.30% -0.44% 4.34% -0.10% -0.10% -0.10% -0.10%
EBITA 48,109 28,037 23,866 118,187 76,588 24,741 101,329 99,994
% of Revenue 14.28% 10.02% 9.17% 46.20% 45.57% 45.48% 45.55% 46.10%
Tax Rate 5.10% 13.60% 25.70% 7.10% 14.80% 14.80% 14.80% 15%
Income Tax Provision 4,664 3,821 6,133 8,382 4,180 1,355 5,535 5,423
% of Revenue 1.38% 1.37% 2.36% 3.28% 2.49% 2.49% 2.49% 2.50%
Net Income 43,445 24,216 17,733 109,805 72,408 23,387 95,795 94,571
% of Revenue 12.90% 8.66% 6.81% 42.92% 43.08% 42.99% 43.06% 43.60%
Add Back: Depreciation and Amortization 0 17 78 100 25 70 95 108
% of Revenue 0.00% 0.01% 0.03% 0.04% 0.01% 1.27% 0.04% 0.05%
Add Back: Interest Expense*(1-Tax Rate) 15,483 5,244 3,676 4,596 766 250 1,016 1,084.53
% of Revenue 4.60% 1.87% 1.41% 1.80% 0.46% 0.46% 0.46% 0.50%
Cash Flow from Operations 58,928 29,477 21,487 114,501 73,199 23,707 96,906 95,764
% of Revenue 17.49% 10.54% 8.25% 44.76% 43.55% 43.58% 43.56%
Current Assets 163,072 148,953 162,288 279,113 222,040 225,000 225,000 221,244
% of Revenue 48.41% 53.26% 62.34% 109.11% 101.14% 102%
Current Liabilities 197,408 131,585 98,723 91,678 76,150 74,000 74,000 71,579
% of Revenue 58.60% 47.05% 37.93% 35.84% 33.26% 33%
Net Working Capital (NWC) -34,336 17,368 63,565 187,435 145,890 151,000 151,000 149,665
% of Revenue -10.19% 6.21% 24.42% 73.27% 67.88% 69.00%
Change in NWC 51,704 46,197 123,870 -36,435 -1,335
Subtract: Capital Expenditures 3,162 2,386 1,341 1,253 1,395 451.52 1,847 1,844
% of Revenue 0.94% 0.85% 0.52% 0.49% 0.83% 0.83% 0.83% 0.85%
Free Cash Flow 55,766 -24,613 -26,051 -10,622 71,804 23,255 131,494 95,255
20 APPENDIX 7–SOURCES JDAS 10-K and 10-Q Yahoo! Finance Google Finance Reuters
University of Rhode Island – Ram Fund Research
Charles Schwab Equity Ratings Report
Ned Davis Research
Market Edge Second Opinion
