M&A Impact: JD Edwards Makes Numetrix Acquisition No 2.
JD Edwards has followed the ERP herd instinct into supply chain planning by finally announcing the widely anticipated takeover of Numetrix last week. The $80m cash acquisition is primarily a technology purchase designed to boost Scorex - the supply chain optimization and real-time extended execution initiative it first announced a year ago. "Vendors with supply chain planning (SCP) products and customer relationship management (CRM) software were beginning to take away our revenue stream and we needed to enter the market quickly," says Paul Covelo, senior VP of development, outlining the primary motivation behind the supply chain planning acquisition.
SCP and CRM suites have become new breed applications that can squeeze profitability out of ERP systems. And, in a market where new ERP implementations have slowed in the past nine months, these software products have become the ERP suppliers' savior, due to their ability to potentially produce incremental revenues streams within an installed base. And, in so doing, sales could help temper the damage being wrought from a slow-down in new ERP business.
But in the fight to milk revenues from ERP customers, each vendor has gone beyond its own accounts to those of its rivals by offering CRM and SCP interfaces to its own, rather than its rivals, ERP back-bone. This strategy has hurt JD Edwards. A lack of product offering beyond the ERP core has left it wide open to attack particularly from Oracle, say analysts, which has been busy building bridges between its CRM and SCP modules that will hook into JD Edwards ERP packages.
Acquisitions, therefore, are proving vital for it to regain some lost ground from rivals, SAP, PeopleSoft, Oracle and Baan, which have all been working on supply chain and CRM initiatives for at least two years. And, they are all now beginning to target JD Edwards' fledging One World client/server installed base.
JD Edwards is playing catch-up. Earlier in the year, the company kick-started the front office play of its CRM strategy through the purchase of sales configurator company, Premisys. The acquired configurator, together with OEM agreements with Siebel and Ariba, form JD Edwards' bid into CRM. But this will not be rolled out fully until early 2000. Numetrix bolsters the execution piece of the supply chain puzzle and will be optimized for the company's ERP transactional system. But that is not likely to happen before some time in 2000 either.
However, as has been proved before by PeopleSoft and SAP, the procurement of supply chain software does not necessarily guarantee the delivery of integrated product. Analysts are still recommending that businesses choose a best of breed SCP suite from market leader i2 or a CRM suite from Siebel, rather than rely on the first releases of the ERP suppliers.
So if JD Edwards is behind the cycle in getting into these markets, why does it think it can produce fully integrated mature suites when rivals, with at least a 12-month lead, still haven't reached that point? "You need to have supply chain optimization in place before you consider execution. You can't manage the flow of orders and goods if you haven't carried out some optimization work first," says Ray Rubello, VP of product marketing. He argues that JD Edwards has all the optimization modules in place and will therefore be able to deliver a credible SCP suite within the next 12 months.
The Numetrix software also has web collaboration enabling real- time supply chain planning over the internet. "Numetrix is the only vendor out there with live product at customer sites," says Rubello, who argues that supply chain planning over the internet is a vital component for e-business and one that will give it an edge over rivals who have still to reach that point.
"There is still a low penetration of seats within an existing account. Typically less than 12% of employees use the ERP back bone but we believe 80% of the company need some level of access," says Rubello. Clearly, JD Edwards is still sticking to the theory that it can leverage new sales with existing customers when the full supply chain planning and CRM suites it is offering with partners are released later in the year.
But will this be too little too late? There is one fundamental flaw in the company's short-term partnering logic which, if not rectified by the swift delivery of suitable SCP and CRM software, could make a large dent in future installed base business. "The biggest risk is that the new partner products only appeal to a small fraction of all customers. Almost entirely all new customers are on the One World open systems platforms," says George Gilbert at Credit Suisse First Boston, "well over 90% of the company's installed base is on AS/400 and can't run the partner products."
Aware of this, the company has already begun delivering homegrown CRM modules with the first releases of call tracking and service desk modules released in February and March. These products interoperate with OneWorld and World, its AS/400 ERP main stable, according to Rubello. The Numetrix software will also be optimized to work with both systems and will also be geared to the company's mainstay of customers in consumer goods. "i2 is strong in industrials but Numetrix is geared to the CMPG market place so at least JD Edwards will have one less company to compete against head-on," says Jim Holincheck at Giga Information Group.
However, there has been some suggestion that the company should consider buying additional mid range CRM modules in order to protect its AS/400 customers. Further acquisitions are not out of the question. Numetrix and Premisy were safe, relatively inexpensive purchases.
Privately held Numetrix had declined from a profitable $50m business two years ago, to an unprofitable company with reduced revenues of $30m in 1998. J D Edwards was therefore able to pay $80m and still satisfy the 2-3 times revenue metric that has become the standard premium for small software deals. And with a cash balance of $450m still left from its 1997 IPO, it still has the currency to make further acquisitions. "We will continue with cash acquisitions but I won't let go of more than 10% of the company's worth," says Covelo.
But, in the meantime, financial prospects look grim. JD Edwards, rather like many of its competitors, is issuing a profit warning for the second consecutive quarter. When second quarter 1999 results are released on Wednesday, the company expects to report an operating loss of more than $25m, on revenues of between $215m and $235m. A First Call survey of 16 analysts predicted the company would earn $0.05 a share in the second quarter, having earned over that double in the same quarter last year when the EPS was $0.11 a diluted share.
JD Edwards' share price and subsequent market valuation has suffered accordingly as analysts have either downgraded stock or maintained a hold rating. "We are not out of the woods, even though it's looking brighter: maintain hold," says Gilbert at CSFB.
Chuck Phillips at Morgan Stanley cut JD Edwards to neutral from outperform, citing weakness in the software company's sector. Phillips cut his fiscal 1999 earnings estimate to $0.13 a share from $0.59 and reduced his fiscal 2000 earnings estimate to $0.22 from $0.74 cents. While JD Edwards is "one of the stronger companies" in the enterprise resource planning software sector, "the company has to manage through the downturn and return to profitability by Q4," Phillips concludes in his recent research note.
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|Date:||May 24, 1999|
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