i2 Bleeds In Shark-Infested Waters

  • Written By: Steve McVey
  • Published On: May 8 2001



i2 Bleeds In Shark-Infested Waters
S. McVey - May 8, 2001

Event Summary

i2 Technologies deflated investor confidence last month when it announced lower than expected first quarter earnings. The once infallible vendor of supply chain management solutions warned the Street that pro forma earnings would miss the projected $0.04 per share by two cents. License revenues of $211.1 million fell from an all-time high of $244 million in the fourth quarter of 2000 while services revenue edged slightly upward to $145.4 million from $134 million in the fourth quarter. Overall, revenues declined by less than 6%, not a bad showing considering the mass extinction of many of its smaller e-business software rivals. Still, the drop in license revenues is a first for i2, which has enjoyed nothing but increases throughout its operating history.

Figure 1.

In spite of the unhappy news, i2 senior management offered a predictably optimistic interpretation of customer reticence. "i2 performed well this quarter despite the beginning of a down cycle in the economy," said Sanjiv Sidhu, i2 chairman and CEO. "In this slowing economy, where companies are more focused on bottom-line results and profitability, our customers are realizing the value and efficiencies i2 solutions can create for themselves and their trading partners." Unfortunately for i2 and its competitors, focus on profitability (or lack thereof) over the past few months has made customers all the more reluctant to sign multi-million dollar software deals.

Faltering demand for supply chain management software and allied products can be linked to an unsteady economy, but i2's problems stem from some internal factors that, if not adequately addressed, will lead to further decline.

Market Impact

A couple of significant problems, one in strategy and the other in execution, are making it even harder for i2 to weather the unfavorable market conditions.

First, a series of acquisitions has left i2 a bewildering slate of applications in need of reconciliation and a marketing strategy. i2 has proven itself adept at constructing a resonant message in the past, but new forces are at work that demand a new tack. Vendors from outside SCM have been buying up niche vendors and changing the competitive landscape. Examples are Adexa, bought by sourcing solutions provider FreeMarkets, and Speedchain, which was just recently acquired by Vastera, a global trade management solutions vendor. These companies are challenging the traditional SCM delivery model, one that i2 has yet to wholly abandon. i2 sorely needs a spring housecleaning to eliminate wallflower applications. It then needs to craft a new marketing strategy around what remains.

Second, i2 suffers from a premature case of big company excess. We expect its recent ten percent staff reduction to deliver the projected decrease in expenses, but i2 should seek other ways to cut down on overhead. One way is to rely more on implementation partners to reduce spending on services and maintenance delivery, which have increased at a faster pace than revenues over the past year. Without action, i2's big company problems will only get worse.

Ironically, fallout from the slowing economy may actually help i2 regain its bearings. Scores of flimsy dot-coms collapsed last year following the market bubble contraction. Many of these startups bet their hopes (and billions in venture capital) on business plans that often failed to address critical process and technology needs. Instead, they hoped for huge ad revenues to compensate for competition-induced low prices and poorly run logistics operations. For years, i2 and its SCM brethren have preached to Internet retailers the necessity of matching Internet storefronts with optimized back-end supply chains to minimize expenses while ensuring on-time deliveries and happy customers. The failure of some dot-coms to implement cost-efficient back-end fulfillment contributed in no small part to the recent market melee.

As i2 acknowledges, 2001 will continue to be a challenging year. License revenues should begin to recover by the third quarter barring a recession although the rate of growth will be less than in 1998 and 1999. The supply chain management market overall is strong with Manugistics and new players like FreeMarkets picking up the slack in i2's business.

User Recommendations

The first quarter knocked some of the wind from i2's sails, but this is inevitable given the vendor's breakneck pace over the past few years. i2 does have some significant housekeeping to perform in the way of staff reduction, portfolio rationalization, and customer reeducation, but all growing companies must face these issues and deal with them. Certainly, no one should fear for i2's viability in either the near or longer term. Finally, the specter of litigation hanging over i2 and other enterprise software companies should not discourage users who have IT dollars to spend. Securities fraud lawsuits are usually settled out of court for significantly less money than plaintiffs originally demand. Users concerned that litigation costs may be passed on to them in the form of license and service fees can depend on market competition to keep prices in check.

 
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