Event
Summary
In August, J.D. Edwards & Company reported financial results for the third
quarter ended July 31, 2000. License fee revenue grew 56% over the same
period last year, to $116.7 million (See Figure 1). Transactions over
$1 million represented half of the license fee revenue in the third quarter
of fiscal 2000 and led to a substantial increase in the average sales
price of license transactions. Services revenue was $144.4 million, compared
to $157.1 million in the third quarter of fiscal 1999. Total revenue for
the third quarter of fiscal 2000 was $261.1 million, compared to revenue
of $232.1 million in the third quarter of fiscal 1999. Net loss for the
Q3 2000 was $22.6 million, compared to a net loss of $33.2 million, in
the same period last year.
Figure
1.
J.D. Edwards has also begun its strategic restructuring aimed at reducing
costs and strengthening the company's position as a leading provider of
software solutions for collaborative commerce. The company recorded a
charge of $30.1 million in the third quarter of fiscal 2000 for restructuring
and related items.
J.D.
Edwards claims it has been targeting its software at integrating customers'
supply chain operations with digital marketplaces. More than 45 such electronic
exchanges now use J.D. Edwards' software, the company touts. In September,
the company plans to introduce a new version of its OneWorld Xe software,
which can also be used in electronic exchanges.
Market
Impact
While the significant increase in license revenue seems very encouraging
and represents a continued improvement in the company's traditionally
inefficient sales & marketing effort, the rest of J.D. Edwards' situation
remains lackluster. The restructuring moves have been aimed at adjusting
its significantly higher number of general & administrative employees
(15 % of the total number of employees) to the industry benchmark of 11%.
The wariness to tackle this sensitive issue was regarded as one of the
major management flaws in 1999.
While
we condone J.D. Edwards' move to position itself as an ERP vendor to persuade
enterprises to extend their activities into e-collaboration, we also believe
that managing this large application portfolio, much of which involves
partnering or extensive integration and customization, will be cumbersome
despite its highly marketed flexible EAI product strategy. In addition
to all apparent and/or hidden caveats of disparate products integration,
the issue of increased costs of license sales (almost doubled over a year)
due to an exorbitant number of 3rd-party software sales and subsequently
less profit margins has been burdening the company's P&L statements. Therefore,
further cost reduction by laying off staff can help only so much. Having
known the company's quality difficulties with earlier releases of OneWorld
as well as having witnessed the recent staff attrition, the market may,
with a good reason, have serious reservation regarding the company's capabilities
to successfully deliver and support its new, significantly more intricate
product set.
However,
this is not necessarily an insurmountable obstacle, given the fact that
even SAP had to abandon its 'one-stop-shop' product strategy. E-commerce
trends are by nature very dynamic, and no single vendor can provide all
required components. Native integration is becoming less of an issue,
particularly in the higher end of the market - acquiring the best products
at the acceptable price to meet an e-business strategy is the major issue.
J.D.
Edwards should also consider having notably different marketing approaches
for the higher end of the market and for its smaller and mid-market fragments,
given the different requirements and mindset of decision makers in these
respective niches. The 'freedom to choose' message will most likely strike
chords with some more aggressive CIOs of larger global companies, who
would be unwilling to get locked into the inflexible, proprietary technology
that, for example, Oracle's value proposition seems to inherently offer.
The increase in new licenses within the higher-end of the market seems
to speak in that regard. However, this should be backed up with much more
vigorous marketing and market awareness creation than it has been done
so far.
Also,
to allay recent 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 recent departure of Mike Schmidt, its outspoken
e-commerce business unit leader and the proponent of the company's latest
questionable but brave EAI strategy, may seriously undermine the company's
marketing endeavors.
User
Recommendations
Existing J.D. Edwards' customers should certainly consider the new offering,
but avoid selecting it without looking at what the other vendors have
to offer. We recommend identifying your clear e-business strategy and
conducting a thorough comparison-shopping, at least for the negotiation
leverage sake.
As
for potential customers, 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 and SCM offering, where manufacturing,
supply chain & collaboration and financial modules are main pillars of
an enterprise application, would benefit from considering J.D. Edwards.
One should bear in mind the company's expertise within some industries
like automotive, consumer packaged goods, electronics, manufacturing &
distribution.
Current
and potential users may want to inquire about the company's plans regarding
Internet marketplaces in their respective industries. Which specific market
places does (or will) J.D. Edwards connect with, what methodology does
(or will) the company prescribe to are some of the necessary inquiries
in that regard.
Nonetheless,
if a complementary product beyond core ERP and SCM (e.g., CRM, e-Commerce,
BI, etc.) is of a critical importance, users should think carefully about
the possible EAI implications and may benefit from considering competitors'
value propositions too. As with all new releases, users should employ
a critical approach in their evaluation of OneWorld and require all potential
vendors to demonstrate specific business processes. 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.