The picture that emerged from the release of Manugistics Group Inc.'s fiscal third-quarter results was frighteningly familiar: Shrinking revenues from software licenses, narrower losses on a General Accepted Accounting Practice (GAAP) basis, smaller average deal sizes, a looming deadline to restructure debt, and a prolonged march to diversify its revenue stream and bolster margins by focusing on new niche products.
Not insurmountable issues unto themselves. But the problem is that they were identical to themes highlighted by CEO Joe Cowan during the Rockville, MD company's second-quarter conference callwith financial analysts.
"Joe is working a strategy that you can argue is right or not," says Lora Cecere, an analyst at AMR Research Inc. (Boston) who previously worked at Manugistics. "There's not a lot of bravado; it's real honest stuff."
For all his frank talk, however, Cowan is between a rock and a hard place -- despite resurgent spending for SCM software that other vendors and research analysts are seeing. The struggling supply chain management software vendor has trimmed expenses to the bone, but has yet to find fertile growth patches amid an aggressive push into the SCM space by ERP vendors such as SAP AG -- with whom Manugistics shares a preponderance of customers. Also complicating matters is a preference among manufacturers for tackling supply chain projects in more digestible chunks to show faster ROI, which tends to favor Manugistics' smaller, more agile competitors.
Manugistics' financial report for the fiscal third quarter ended November 30 makes this painfully clear. The company reported revenues of $39.9 million, down 11% from the like quarter of fiscal 2005. Software license revenue in the period dropped a whopping 39% to $4.1 million from the third quarter of fiscal 2005. The lone bright spot was support revenue, which inched up 2% to $21.1 million from the same period last fiscal year.
To its credit, Manugistics reduced its net loss in the quarter by almost two-thirds to $4.6 million on a GAAP basis from the corresponding period in fiscal 2005. The company's operating loss on a GAAP basis declined at a similar rate to $3.6 million from the corresponding quarter last fiscal year.
Cowan, who joined Manugistics in July 2004, told analysts that the company didn't push its sales force to close business in the period if it wasn't in its best financial interest. "We will not give the farm away in last days of the quarter to get deals across the final finish line," he said. Part of the problem, Cowan acknowledged, is that it's taking Manugistics much longer than he initially expected to rebuild its pipeline, although the situation is improving, thanks in part to recent marketing investments. "For the first time since I've been at Manugistics, we're seeing $1 million opportunities," he said. "The pipeline is the strongest it's been since I joined company -- both in existing and new opportunities."
Still, AMR's Cecere says poor sales and product strategy execution have conspired to undermine Cowan's turnaround efforts. "It's all about sales and pipeline effectiveness for revenue generation," she notes, taking issue with Cowan's claims of demand weakness. "It's not clear if it's basic blocking and tackling or that financial viability eliminates [Manugistics] from [deal] consideration."
Exacerbating the problems, Cecere notes, are difficulties encountered with Release 7.0 of Manugistics' software. The release is built on a new data model that forces users to reinstall the software. That, she says, has opened up opportunities for SAP to cherry pick customers with its improved SCM offering, and kept wary users on Release 6.0.
Moreover, Manugistics is suffering from the perception that it isn't innovating as quickly as SAP and other SCM vendors, Cecere notes. "They need to react quickly and capitalize on the surge in interest manufacturers have in improving supply chain planning processes," she contends, noting, for instance, that 70% of forecasting systems will be redeployed in the next year. "These companies are looking for demand visibility; they should be calling Manu, but they are not."
Manugistics' new S&OP and pricing optimization software could help speed its turnaround if the products are really differentiated. But, Cecere says it will take time for these niche products to make meaningful contributions. Cowan, however, indicates that the pricing optimization product is already helping Manugistics bolster its sales pipeline. And despite a draconian cost containment plan, Manugistics is adding sales and marketing resources to advance the cause.
Down the road, Manugistics plans to bolster its presence in transportation and logistics -- an area in which the company had lost focus before Cowan arrived. New product and functional capabilities are expected to roll out later this year, which will be championed by a "visionary" product manager who is being recruited, Cowan maintained.
All told, Cowan believes these targeted investments are starting to pay off, as he continues to "take cost from the business" and to "evaluate where we are not getting good results and consider appropriate measures." With new product initiatives under way and a renewed emphasis on complementary services, Cowan is not waiting for the market to turn around. Instead, he said, he's "taking the company to where the business is."