OS/400 Edition
Volume 11, Number 51 -- December 9, 2002

JDE Finishes 2002 Decently, Takes Hit for 2003 Guidance

by Timothy Prickett Morgan

J.D. Edwards finished off its fiscal 2002 year with a big push, driving sales up to $247 million in its fourth quarter ended October 31 with a big increase in software license sales and decent growth in services and getting overall sales to $904 million for the full year. Considering the tough times JDE has seen in the past three years, you would think everyone would be happy. But when you finish one quarter, Wall Street starts worrying about the next four.

After JDE announced its financial results for the fourth quarter and full year early last week, the company's stock was hammered down from $15 a share to $12 a share, which JDE's top brass attributed to profit taking on the part of some JDE investors. During a conference call with analysts, JDE's chief financial officer, Rick Allen, said services revenues were expected to be up to around $164.4 million in the fiscal first quarter of 2003 ending in February, and said further that software license revenues would be flat from last year's first quarter, when JDE sold $43.9 million in applications. That puts total sales for the quarter at a little more than $208 million, and when Allen said that earnings per share would be flat, that was more than some investors could take. Late last week, JDE stock was trending higher as some investors believed that others were overreacting to the news. The fact is, JDE is still one of the biggest software companies in the world, with a market capitalization of $1.7 billion, and despite the adversity that it knows it is facing next year, the company has a vast installed base that it can sell its products to, and quite frankly, it seems to have finally figured this out under new CEO Bob Dutkowsky.

Allen said license revenues in the fourth quarter were up 35 percent sequentially from the third quarter to $74 million. This is a big jump. He also said the drop from this level by 40 percent in the first quarter was absolutely a seasonal historical trend, but that didn't calm some people. Services revenues in the quarter were $173 million, up 5.5 percent from the same quarter of last year. Overall sales in the quarter were up 2.6 percent to $247 million. The company brought $37 million of that to the bottom line--a healthy 14.9 percent--and reported earnings per share of 31 cents, which was almost double that of profits reported in the same quarter last year. For the full year, however, license revenues were down 16.5 percent to $227 million while services revenues rose 8.8 percent to $677 million. Sales for fiscal 2002 were up 1.1 percent to $904 million, and the company reported profits of $46 million (30 cents a share) versus losses of $180 million ($1.61 a share) in fiscal 2001. The company has $303 million in cash in the bank, up 30.6 percent from last year. This is pretty good, all things considered.

Allen said the company had 15 deals worth over $1 million in the fiscal fourth quarter (compared to 16 in the same quarter last year and nine in the third quarter of fiscal 2002). He added that 60 percent of software license sales were to its existing installed base, up from 53 percent last year and from 55 percent in the third quarter. Allen said 35 percent of the deals JDE closed were associated with its Advanced Planning applications, 80 percent involved its supply chain management (SCM) applications, and 20 percent involved its customer relationship management (CRM) applications. (These numbers add up to more than 100 percent since many deals involve multiple categories). The average selling price of the JDE deals during the quarter was also up to $220,000 compared to $195,000 in the third quarter. The company did not elaborate on how sales broke down on different platforms, but may do so in its SEC filings in the coming weeks.

JDE is a bellwether for the IT industry in general and the iSeries market in particular. The company is the largest supplier of OS/400 applications in the world, although it does increasingly sell code on Unix and Windows platforms. So how JDE does in the present, or thinks it will do in the future, is somewhat of an indicator of the health and wealth of the OS/400 ecosystem. That's why we listen to what it says about the future. Allen told the Wall Street analysts that future visibility is extremely limited--something just about every IT supplier says these days--and that it would give no official guidance for fiscal 2003 beyond the guidance for the first quarter it gave above. However, Allen did do a review of the analysts' own estimates for JDE's sales in fiscal 2003, and gave a critique of them. He said that estimates in license revenues were in the range of $220 million to $260 million, and that without a substantial boost from a recovering economy, it would be very difficult for JDE to hit above the mid-point of this range, which is $240 million, in fiscal 2003. For services revenues, he said analysts are predicting between $690 million and $740 million in sales, and that going beyond the middle to upper end of this range would be similarly difficult without the help of a rebounding economy. That puts expected revenue in the range of about $950 million for fiscal 2003, which is a pretty decent improvement. Profits better than about 34 cents to 35 cents a share will be hard to achieve without a significant rebound, Allen said. And Dutkowsky pretty much quashed any hope of a recovery. "We don't see the IT spending trend changing a whole lot. We are not seeing a budget flush," by which we presume he meant a flood of incremental IT spending for 2003.

In a separate announcement, JDE said that it had announced an independent software vendor development program that would allow participating companies to license JDE's software so they could create interfaces between their programs and JDE's. While companies do not need JDE's permission to build such interfaces, getting their hands on JDE's most recent programs (and in advance of launch) is problematic if not impossible. Under the program, ISVs can license JDE applications at a discounted price and then develop and sell interfaces into those applications to their own customer bases along with their own products.

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Managing Editor
Shannon Pastore

Contributing Editors:
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Joe Hertvik
Kevin Vandever
Shannon O'Donnell
Victor Rozek
Hesh Wiener
Alex Woodie

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Last Updated: 12/08/02
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