No More Mr. Nice Guy With J.D. Edwards

No More Mr. Nice Guy With J.D. Edwards
P.J. Jakovljevic - June 30, 2000

Event Summary

On May 24, J.D. Edwards & Company reported financial results for the second quarter ended April 30, 2000. Total revenue for the second quarter of fiscal 2000 was $231.0 million, compared to revenue of $231.6 million in the second quarter of fiscal 1999 (See Figure 1). License fee revenue grew 22% over the same period last year, to $81.7 million. Services revenue was $149.3 million, compared to $164.4 million in the second quarter of fiscal 1999. Net loss for the quarter, including acquisition-related charges, was $2.3 million, or $0.02 per share, compared to net loss of $10.4 million, or $0.10 per share in the second quarter of fiscal 1999. At the end of the second quarter of fiscal 2000, the Company had over $400 million of cash and investments.

Figure 1.

Earlier in the same week, J.D. Edwards announced a strategic restructuring aimed at reducing costs and strengthening the company's position as a leading provider of software solutions for collaborative commerce. Under the restructuring, the Company plans to realize savings from areas such as consolidating and reducing office space, improving the cost-effectiveness of training customers and reducing the number of personnel. The Company believes that this restructuring will free up the necessary resources to continue building its leadership position in the collaborative commerce market. Overall, payroll costs are expected to be reduced by 15%.

Since the last earnings release, J.D. Edwards has generated significant license revenue growth and it claims to have demonstrated success in the supply chain and customer relationship markets.

Market Impact

While the significant increase in license revenue seems very plausible and represents an improvement in the company's traditionally inefficient sales & marketing effort, the rest of JD Edwards' situation remains lackluster. It has long maintained a significantly higher number of general & administrative employees (15 % of the total number of employees compared to the industry benchmark of 11%). The wariness to tackle this sensitive issue was regarded as one of the major flaws of the former JD Edwards' CEO in 1999.

While these layoffs may aggravate concerns and market perception that this may be an onset of the Baan and SSA syndromes, continuation of JDE's bloated expense structure was no option. Nonetheless, the company will have to conduct a thorough soul searching in order to answer its failure to sustain the business in important German and Japanese markets.

The greater reason for concern may be the company's continuation of maintaining its portfolio through a number of alliances, which was also a part of the controversial strategy of its ousted CEO. It appears that J.D. Edwards has no other choice since its income continues to be so constrained. The market is demanding more and more from vendors and broadening a product offering through R&D or acquisition is very expensive. We believe J.D. Edwards, having spent a hefty amount of its R&D expenses on resolving inconsistent functional quality, missed functionality, poor performance, and Web-enablement of its OneWorld flagship product, must be reluctant to undertake any internal development or acquisition of CRM and e-commerce functionality.

However, this is not necessarily an insurmountable obstacle, given the fact that even SAP had to abandon its 'one-stop-shop' product strategy. To allay any negative publicity, the company must emanate a convincing e-commerce message to assure the market and its customers that it will continue to be viable. The 'freedom to choose' message may strike chords with some more aggressive CIOs. The increase in new licenses seems to speak in that regard.

User Recommendations

We generally recommend including J.D. Edwards in an enterprise application selection long list for mid-market and low-end Tier 1 companies (with $100M-$2B in revenue). Organizations whose requirements fall within the scope of the standard ERP offering, where manufacturing, logistics and financial modules are main pillars of an enterprise application, would do well to consider J.D. Edwards.

The company's proven fair treatment of customers as well as its expertise within some industries like automotive, consumer packaged goods, electronics, manufacturing & distribution makes it a good option. However, any organization evaluating J.D. Edwards should only consider existing functionality, and, in case of final selection, should negotiate the incorporation of new applications components now. Future clients are also advised to request the company's written commitment to promised functionality, length of implementation, and seamless future upgrades, particularly for recently announced partnered offerings.

Improved technological integration is seldom guaranteed by joint marketing arrangements, and only comes after the arrangement yields considerable implementation experience. The company's readiness to provide a number of reference sites where the installation of its partnership-enhanced product has gone without major glitches would also alleviate existing anxieties within the user community.

Nonetheless, if a complementary product beyond core ERP (e.g., CRM, e-commerce, etc.) is of a critical importance, users should think carefully about the possible implications and may benefit from considering J.D. Edwards competitors' value propositions also, on a component basis.

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