Event Summary
In the approaching SCM showdown, i2 Technologies emerges as the ailing but defiant market leader who must defend its throne from SAP, Oracle, and a resurrected Manugistics. The last two quarters have left high-flying i2 in the unusual position of suffering losses. In the first quarter of 2001, i2 shocked its customers and market watchers by posting pro forma earnings beneath projections of $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. The drop was a first for i2, which has enjoyed nothing but increases throughout its history. If that wasn't bad enough, the second quarter is projected to be even worse with the company announcing a pro forma loss of $0.16 per share, an unthinkable event just one year ago. License revenues are expected to break $100 million, the lowest since 3Q of 1999.
New CEO Greg Brady, a former Oracle exec known for straight talk, didn't try to spin the preliminary results. "Market conditions were much more difficult than we had anticipated this quarter - even more difficult than we experienced in the first quarter. These conditions prevented us from achieving what we believed were conservative estimates for the quarter."
"One positive spot this quarter was expense control," said Bill Beecher, CFO of i2. "We made better than expected progress at reducing our operating cost structure. Total estimated operating expenses, exclusive of the special charge for bad debt and other pro forma adjustments this quarter, are expected to be less than $325 million - under the low end of our guidance. We are focused on further reducing our operating cost structure."
"I'm confident in i2's long-term outlook, as the best positioned company in a market with enormous potential," Brady stated. "I'm disappointed with our recent results, and am committed to making the necessary adjustments to continue our leadership and the achievement of our vision." Other vendors will not be easily daunted, however, as they vie against i2 to claim the supply chain kingship.
Market Impact
i2's ability to reverse its losses and fight off rivals will depend in large part on how well the SCM segment performs as a whole. In a Lehman Brothers survey of global manufacturing companies, over 75% of respondents expected their spending on SCM in the third and fourth quarters of 2001 to increase over the first half of the year. This result bodes well for i2, which at 15%, retains the largest percentage of SCM revenues among all software companies. i2 should not allow its former standing to lull it into complacence, however.
Since the faltering economy ended the last boom in supply chain sales, ERP vendors SAP and Oracle have worked tirelessly on improving their products, adding functionality and building stronger links to financials and manufacturing transaction processing. The successor to SAP APO, mySAP.com Supply Chain, now sports event management, collaborative planning, and mobile device communicability, three areas where i2 is perceived as less prepared. Oracle's supply chain management suite centers around Oracle APS, a more recent entrant in the advanced planning and scheduling market. In spite of the slow start, Oracle has received rave reviews for the collaborative planning aspects of E-business Suite 11i.
In addition to horizontal areas like collaboration and event management, we expect to see the vendors offer enhanced products in supply chain execution, product lifecycle management, direct/indirect procurement, and sell-side e-commerce.
Supply chain execution (SCE) is gaining mind share among companies who realize that all the planning smarts in the world may not avail them unless decisions can be implemented at the shop floor and warehouse levels. i2 currently partners with third party vendors like EXE Technologies to supply SCE, giving it a disadvantage against SAP and Oracle, who can offer planning and execution from a single source.
Product lifecycle management (PLM) has become more desirable as companies strive to control products from cradle to grave. PLM has graced product announcements for years but is only beginning to define a class of applications distinct from existing production planning & scheduling, procurement, and sales applications. Some of the hype over indirect and direct material procurement has died down in recent months, although the cost savings and convenience brought by efficient purchase of MRO and raw materials are undeniable. Like procurement, sell-side e-commerce does not represent any of these vendors' strong suits, which will force them to seek help from third-party vendors like Ariba and Commerce One.
Much of the battles will be fought in the small to mid market, where vendors have been focused for the last few years. Initially, vendors looked to application hosting as the way to court smaller enterprises by offering business automation without the hassles of on-site implementation. Although the ASP model continues to hold potential, vendors are finding it prudent to offer alternative delivery mechanisms for users who are wary of security issues. These include stripped down versions of their full-complement suites and i2, SAP, and Oracle all have strategies for stripping away core SCM capabilities from their full-complement suites, but i2 has made better progress than the others.
Once the first choice for tier one high-tech companies, i2 has become more proficient at courting middle tier businesses largely through success in selling Factory Planner, the earliest product in its arsenal that often serves as the cornerstone application in mid market manufacturing. In spite of their initiatives, SAP and Oracle still lag behind due to the old perception that their solutions will fit only in large companies.
And what of Manugistics? No one can deny the startling turnaround accomplished by Greg Owens and his team of former Accenture colleagues, but Manugistics still commands only about 2% of the total SCM market, placing it fourth behind i2, SAP, and Oracle. Manugistics will remain a contender only if it can continue the momentum that carried it from near-collapse in 1999. It will need to step lively come October if it is to find its way into the title fight.
User Recommendations
Users stand to benefit tremendously from the competitive forces at work in the SCM and ERP marketplace. The drop in software sales has created a "buyer's market" where vendors are eager to cut deals and are pumping every available dollar into their research and development organizations. In selections where i2, SAP and Oracle occupy a shortlist, users have an excellent opportunity to exploit the weaknesses these vendors have to gain concessions on price, services, and third-party add-ons. For example, users should approach the ERP vendors with concerns of a lack of detailed schedule optimization features while i2 should be asked how difficult it is to track inventory costs arising from WIP (work-in-process). In the coming battle for supply chain mastery, the only assured winners are customers who understand the strategies at work behind the scenes.
For more information on the recent developments with SAP and Oracle see Oracle Claims The Worst Is Over And Turns To KISS For A Boost and SAP - A Humble Giant From The Reality Land?