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.
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
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.
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.
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.
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
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
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.
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.