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.