J.D. Edwards Saved By SCM, Narrowly, And Only For Now

Event Summary

On March 5, J.D. Edwards & Company (NASDAQ: JDEC) reported financial results for the first quarter ended January 31, 2001. Revenue for Q1 2001 was $217.7 million, a 6% decline compared to revenue of $231.7 million in Q1 2000. License fee revenue was $82.7 million, almost flat compared to $83.3 million in the same period last year. Net income from normalized operations was a symbolic $191,000, compared to a net loss from normalized operations of $31,000 a year ago. Amounts from normalized operations exclude amortization of acquisition-related intangible assets, restructuring and other related costs, and gains on sales of equity investments and product line.

"I am very optimistic about the future of J.D. Edwards," said C. Edward McVaney, President and CEO. "I am pleased with the changes made to build our leadership team and I am confident we are moving in the right strategic direction, as evidenced by the strength of our collaborative solutions. We are rapidly bringing customers live on our 100% web-enabled product, OneWorld Xe, with over 80 live customers after just a few months of general availability."

For the third consecutive quarter, the company's collaborative supply chain solutions were a driving force in the license revenue (approximately 45% in Q1 2001). J.D. Edwards claims to hold a unique position in the supply chain market, providing fully integrated Advanced Planning and Fulfillment solutions. As the quarterly highlights, the company also touts a significant number of live OneWorld Xe customers (over 80 customers), which is a commendable achievement as the product was just released in September 2000.

Figure 1.

However, betting its fate on recently released XPI (Extended Process Integration) for general availability, which "any-to-any" integration capability should enable companies to collaborate with multiple suppliers, customers and business partners by linking their disparate systems and applications, has yet to bear fruit. Hoping to boost its moderate top- and bottom-line results, the company recently named Hank Bonde, Chief Operating Officer and Les Wyatt, Chief Marketing Officer. Bonde is an experienced technology industry leader with a solid track record of driving strong revenue and profit growth. Wyatt is a strategic marketing executive with many years of experience with technology companies.

Market Impact

In contrast to its main competitors that have mostly blossomed during the last quarter, J.D. Edwards' revival has all but stalled. We only partly subscribe to management's attempt to attribute the lack of progress to poor sales & marketing execution as well as to service & support issues. The last 18 months have been indisputably bittersweet, marked with a significant business model change, soul searching, staff departures and the shift of the company's focus.

In its attempt to shed the image of a traditional ERP vendor, J.D. Edwards has focused on Internet collaboration and extended-ERP applications, much of them coming from 3rd parties. The company has also differentiated itself from competitors by embedding Enterprise Application Integration (EAI) into its OneWorld Xe product through its XPI integration layer. The idea - to spare customers from investing in 3rd-party EAI products to link disparate best-of-breed systems together - is attractive, but mostly to more agile and risk-taking companies. This is a more sophisticated approach than the traditional EAI one given that most other vendors only enable users to integrate 3rd-party packages by providing them with application programming interfaces (APIs) that then require further coding. The Catch 22 is whether this will sustain the company's business in the long term.

While J.D. Edwards' move into the EAI arena is risky, we commend its determination to take the plunge and include integration systems into the core product offering. However, one should be careful not to make virtue out of necessity. OneWorld has long featured the open infrastructure, called Foundation, which is a componentized, event-driven architecture consisting of integrated tools and business objects that provide for flexibility. The more crucial factor in the company's license revenue revival, nonetheless, could be its strong native extended-ERP functionality, supply chain planning and collaboration, warehouse management, and plant and fleet management functionalities. This only enforces our belief that being only a glorified enterprise applications integrator will not suffice in the long run.

While its competitors have worked diligently over the past few years to develop strong products in ERP-adjacent areas like CRM, business intelligence and e-procurement, J.D. Edwards has almost completely relied on partnerships to deliver all the ERP extensions needed for today's e-business environment. The alliances with Ariba, Atlas Commerce, Extensity, Microstrategy, and Siebel Systems, as well as with integration vendors such as NetFish and webMethods are only the most prominent among a dozen others.

While well-defined partnership agreements may work well once established and although the company is recognized for its congenial approach towards customers and partners, managing the large application portfolio, much of which may involve extensive integration and customization, is intricate and a challenge in itself. To that end, many prospective clients, especially in the small-to-mid-market, may be deterred from the complexities of multiple-vendors solution in favor of vendors that can offer close to a turnkey solution.

By the same token, the company's hosting offering may be flawed with the same caveats, and other vendors' offerings might be attractive straight away. In addition to all apparent and hidden difficulties of integrating disparate products, the cost of this strategy is also growing. Namely, the cost of the myriad third-party licenses that the company has to purchase to provide this end-to-end solution more than doubled recently compared to previous years and is eating heavily into the bottom line. Also, the challenge will be to maintain the roster of available service & support staff that will be proficient in a plethora of offered applications and in XPI integration. Therefore, J. D. Edwards, more than its direct competitors, will have to prove that it has the means to support its customers in the future. The OneWorld Xe release along with new XML-based XPI interoperability engine show only the potential, however without guaranteed widespread acceptance success.

J.D. Edwards' predicament has also long been the release quality of its flagship OneWorld application suite. The new implementations and/or migrations from its older World software release have been a daunting experience for many users, especially for early adopters from 1999. The company patched and upgraded its way through the process, which took considerable time and human resources and possibly prevented the company from delivering its native extended-ERP functionality. One can hope that the latest release, OneWorld Xe, will finally deliver on the vision it had for the OneWorld product.

Some Positive Signs

During some software selection gigs that TEC conducted, we experienced some prospects' delight with the product's agility, which is enabled in part by "category codes" - the soft coded database table fields that accommodate many of future changes (i.e., mergers & acquisitions) within the customer's organization. Further, the company provides an integrated toolset to let users customize the system by applying business logic rather programming languages. Since the toolset is the same software upon which OneWorld was built, most of customizations will be automatically incorporated during future upgrades/migrations. Also impressive is Xe release's wide interoperability options set that includes application access via COM, CORBA, and Java standards.

Hence, J.D. Edwards has no choice but to remain focused on executing its current strategy, since it might be a bit late in a day for developing its own CRM or e-commerce functionality. However, to allay any negative publicity, the company must concurrently continue to convey a message that assures the market and its customers that it will remain viable. While the above-mentioned restructuring and other changes at J.D. Edwards are necessary and on target, they inevitably mean customers and/or prospects anxiety. It is also needless to say that the execution, particularly the service & support will have to be flawless, and the company should make every effort to beef up its currently insufficient consulting and support force.

User Recommendations

Potential and current J.D. Edwards' users can be assured about its viability and the future. The company remains a Tier 1 vendor and still has a few aces up its sleeve. More important will be how well its global sales, service and support forces can demonstrate the touted collaboration benefits to the prospect or customer. One would be hard pressed to justify not including J.D. Edwards on at least an initial long list of vendors in a global manufacturing and distribution enterprise applications selection.

More comprehensive recommendations for both current and potential J.D. Edwards' users can be found in J.D. Edwards - A Collaboration Thought Leader Or A Disguised ERP Follower? Part 2: Evaluating J.D. Edwards.