Shall Bifurcated Tack Reverse J.D. Edwards’ Bad Spell?

Event Summary

On September 4, J.D. Edwards & Company (NASDAQ: JDEC), a provider of collaborative enterprise applications, and Vitria Technology (NASDAQ: VITR), a leading enterprise applications integration (EAI) provider, announced that Vitria has been named a product alliances partner with the goal of integrating J.D. Edwards' supply chain solutions with other enterprise applications using Vitria's BusinessWare Integration server. For example, an enterprise can improve its manufacturing process by using BusinessWare to automatically communicate new orders from a J.D. Edwards supply chain and inventory control system to a third-party manufacturing execution system (MES). The agreement is in effect immediately. Adapters enabling J.D. Edwards' software are available from Vitria. J.D. Edwards and Vitria have reportedly previously collaborated in providing e-business infrastructure to a variety of clients.

This move that backs up the company's strategy of pursuing partnerships comes only a few weeks after J.D. Edwards announced plans to acquire YOUcentric, a provider of Java-based customer relationship management (CRM) software, after a lackluster partnership with Siebel Systems (for more information, see J.D. Edwards Fires Siebel, Hires YOU). The company believes the acquisition will position it to capture demand in the high-growth CRM applications market, and thereby improve its sagging top line.

On August 22, J.D. Edwards reported financial results for the third quarter ended July 31, 2001. Total revenue for Q3 2001 was $204.2 million, a 22% decline compared to $261.1 million in Q3 2000. While service revenue rose 7% to $154.2M, from $144.4M a year ago, the license revenue plummeted sharply (57%) to $50M, from $116.7M a year earlier (See Figure 1). The net loss from normalized operations was $3.2 million, compared to a $2.3 million profit a year ago. The loss from normalized operations for the third quarter excludes certain items such as acquisition-related charges, restructuring charges and a one- time valuation allowance for deferred tax assets. Without these, the net loss for Q3 2001 would have been $185.9 million, compared to a year-earlier loss of $22.6 million. The valuation allowance, required under current accounting rules, had a significant impact on the loss, but had no cash impact. The total tax adjustments from actual results to normalized results were $137.5 million.

Figure 1.

"J.D. Edwards is making great strides in our corporate revitalization, resulting in a lower-than-expected loss for the quarter," said J.D. Edwards CEO, Chairman and President C. Edward McVaney. "We still see softness in our core manufacturing and distribution sector, which reflects an overall market downturn, but I'm pleased with our improving services business and excited about our planned acquisition of customer relationship management vendor YOUcentric. I feel we are in a strong position to capture growth in the collaborative applications market."

Market Impact

J.D. Edwards has been at the crossroads for some time. Contrary to its main competitors that have by and large been bullish recently, J.D. Edwards' revenue slump has not been a pretty scene (See Figure 1). To attribute that to the current economic downturn, and to poor sales & marketing execution, would only be a fraction of the truth. The last two years have been marked with a frequent business model change, soul searching, staff departures and the shift of the company's focus. Using cost cutting, frequently recurring restructuring, and the 'magic' of financial accounting (e.g., tax adjustments) as means to embellish the income statement, can only help so much, and will likely be perceived by the market as desperate moves. The company, therefore, faces the challenge of overcoming the perception of internal disruption and the difficulty of regaining confidence.

In its attempt to shed the image of merely an ERP vendor, J.D. Edwards has initially focused on e-collaboration and extended-ERP applications, with much of them coming from third parties. The company has also differentiated itself from competitors by embedding Enterprise Application Integration (EAI) into its OneWorld Xe product through its eXtended Process Integration (XPI) integration layer. XPI is an eXtensible Markup Language (XML)-based interoperability engine and architecture that handles data, process, and workflow integration between enterprises. XPI manages the 'publish-and-subscribe' process used in sending and receiving transactions, and includes a message broker to format messages using multiple formats. The idea - to spare customers from investing in third-party EAI products to link disparate best-of-breed applications together - is attractive, but mostly to more agile and risk-taking companies, whose number has been dwindling lately.

While it is a more sophisticated approach than traditional EAI, given that most other vendors only enable users to integrate third-party packages by providing them with application programming interfaces (APIs) that then require further coding, it is nonetheless complex and may likely deter smaller enterprises to venture into it particularly during the current slow economical times. Since the increased focus on the mid-market makes sense, J.D. Edwards will have to make every effort to simplify not to overwhelm the prospects with complex, obscure terminology and/or technology (e.g., Xe, and XPI).

Further, while J.D. Edwards' move into the EAI and the product openness arenas has been vindicated by Oracle's recently announced interconnectivity strategy (see Oracle Makes A U-Turn At The "All Things To All People" Exit), the company must also continue to widen the breadth of its natively provided applications. The crucial driver of its license revenue revival, will be J.D. Edwards' client base's adoption of its strong native extended-ERP functionality such as supply chain planning, collaboration and execution, and warehouse management, which have recently often been the order winners.

A small enterprise simply wants to manufacture and deliver a product in a most efficient way, utilizing minimal necessary resources. Therefore, smaller companies consider planning and execution as one process. J.D. Edwards has resolved many pieces of the puzzle by delivering the real-time integration of Advanced Planning and Scheduling (APS) and OneWorld with event-driven product architecture.

Even as we are positive regarding the YOUcentric acquisition (see J.D. Edwards Fires Siebel, Hires YOU), as the move puts some substance in J.D. Edwards' long confused and wandering CRM strategy, it will take some time for the acquisition to be consummated and to bear fruit despite the products compatible architectures, data mapping technology and therefore potentially expedient integration. J.D. Edwards' collaborative commerce product set brings together ERP, APS, and Supplier Relationship Management (SRM) with traditional CRM functions, which should enable a customer-oriented, collaborative B2B solution for optimizing a company's planning, marketing, sales, order fulfillment, delivery, and service operations. However, the fact that the company has long been dormant pursuing technology strategies beyond the core ERP, will have far reaching consequences in the company's ability to gain traction in its effort to reverse a downward slide.

J.D. Edwards, however, still lacks much of desired functionality for solid e-procurement, Product Lifecycle Management (PLM), and private trade exchanges (PTX) products' offering and strategy, which are potentially attractive modules even during the down economy. Further, the assimilation of the YOUcentric product bundled with likely limited investments in R&D and sales & marketing due to recent poor financial performance, may take a toll in narrowing J.D. Edwards' delivery of vertical solutions.

J.D. Edwards has enhanced its solutions and expertise in the consumer products goods, automotive, pharmaceuticals, and manufacturing project management markets to deliver vertical industry functionality, and it had plans to release a series of collaborative solutions, focusing on specific industries such as high-tech/electronics. 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.

On a more positive note, J.D. Edwards can let go a sigh of relief as the Xe release extends the life of its older World software that still has a large user base. This should significantly ease both new implementations and/or migrations from a World software release, which have been a daunting experience for many users, especially for early adopters in 1999. Both products now can continue their own development cycles separately but interdependently as products can communicate via Xe's XPI interoperability technology. Trying to resolve this predicament has plagued J.D. Edwards' ability to move more aggressively into developing more needed functionality.

By opting now for a "best of both worlds strategy," J.D. Edwards might finally have a formula of getting out of the doldrums it has been in for some time. While maintaining product flexibility, it can now provide its own 'must have' applications (e.g. SCM and CRM), and offer, through partnerships, the secondarily important bolt-on's (e.g., transportation procurement via Logistics.com or Contract Administration and Reporting System (CARS/IS) via I-many.

As a summary, the new initiatives are steps in the right direction, but the market will have a close eye on new license sales. Not many will feel comfortable striking a long-term partnership with a vendor that has a broadened product offering but declining sales growth. The time window may be closing for J.D. Edwards to turn around its business given the competition flying from all directions (e.g, Lawson Software, IFS, Baan, and Intentia, in addition to its bigger, currently unstoppable Tier 1 competition - SAP, Oracle, and more recently PeopleSoft.

User Recommendations

Potential and current J.D. Edwards' users should not overly dwell on its viability and the future. The company remains a major applications vendor and will continue to deliver exciting products. However, some risk should be taken into account during the selection process until the company returns to consistently profitable quarters and growth of license revenue. Question the company's ability to deliver promised vertical enhancements both in short and medium-to-long term. Existing users of the IBM iSeries-based World software should be aware that the YOUcentric CRM product will be interfaced to their product through the XPI technology, and should inquire about a more detailed product integration strategy

Existing J.D. Edwards' customers should certainly consider the new offering bearing in mind the immaturity of recently released products, and the fact that the company's strategy is still a moving target.

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. Evaluate J.D. Edwards if you are a mid-market or a low-end Tier 1 enterprise (with $100M-$2B in revenue) and if your requirements fall within the scope of the traditional ERP and SCM offering, with manufacturing, logistics and financial modules as main pillars of an enterprise application. One should also bear in mind the company's expertise within some industries like automotive, consumer packaged goods (CPG), electronics, manufacturing & distribution. Nonetheless, if CRM or e-Procurement are of a critical importance and immediate need, question the company's currently available offering and consider competitors' value propositions too.

J.D. Edwards' value proposition is for rapid change environments that value system flexibility and openness and/or have data scattered over several different systems/platforms, and the need to integrate those into a single solution.

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.