A week after the announced acquisition of its rival Manugistics by JDA Software, i2 Technologies Inc. saw the trajectory of its turnaround waver as the supply chain management software vendor yesterday reported significantly lower first-quarter revenues and was forced to scale back its top-line guidance for the rest of 2006.
Still, thanks largely to significant cost-cutting, the Dallas-based company was able to report its fourth consecutive quarter of operating profitability and net earnings of $2.4 million compared to a net loss of $24.5 million in the same period a year ago.
For the quarter ended March 31, i2's revenue of $64 million was down 21.8% compared to the $81.9 million reported in the first quarter of last year. Falling hardest was i2's revenue from software solutions -- a combination of software licenses, recurring licenses, and development fees -- which, at $16.9 million for the quarter, was down 33.4% from the like period last year.
Last year's first-quarter software solutions' revenue included a one-time $8.5 million settlement from a customer. Removing that transaction from the equation, i2's software solutions' revenue for the quarter was nearly flat compared to the year-earlier period, according to CFO Michael Berry.
i2, however, also saw declines in both its services and maintenance revenue lines for the quarter. Services revenues, at $23.9 million, were down 13.6% compared to the year-earlier period, and maintenance revenues, at $23.2 million, fell 10%.
As a result of the first-quarter results, i2 revised its top-line guidance for the remainder of 2006. Previously, the company had predicted that its 2006 operating revenue would be equal to or slightly above operating revenue results for 2005. Now, however, i2 officials said they expect the company's 2006 operating revenue to fall below 2005 levels, due to lower-than-expected software solutions and services revenue.
Thanks to expected lower operating costs, i2 said it is not changing its earnings outlook for 2006. The company has said it expects 2006 non-GAAP earnings of between $1 and $1.20 per diluted share. In the first quarter, i2 reported $59.8 million in costs and expenses, down 41% from the year-earlier period.
i2 CEO Michael McGrath blamed the company's transition to a new, next-generation set of supply chain management applications and a shortage of internal consulting resources for the first-quarter slump in top-line results. Still, McGrath attempted to give them a positive spin, telling financial analysts on a conference call, "We are off to a great start in 2006."
He noted the company's continuing profitability and what he said has been good momentum for i2's next-generation products. In the first quarter, i2 recorded $61.5 million in new bookings, with software solutions bookings rising 30% compared to the first quarter of 2005. More than half of the quarter's bookings included elements of i2's next-generation products, according to McGrath.
"Next-generation solutions are beginning to drive bookings," he said.
Wall Street did not necessarily share McGrath's enthusiasm, however. In late trading on Thursday, i2's share price was down 22% to $13.99. The stock rebounded on Friday, amid a broad upturn in the equities markets.
The rapid shift to next-generation products is impacting i2's top-line results in a couple of ways, McGrath told analysts. Deployment of the new products -- which are built around the company's SOA-based Agile Business Process Platform and a series of workflows and functional solutions -- is requiring a higher degree of consulting services than earlier generations of i2 products, said McGrath. And that is causing recognition of more revenue to be deferred as contracts usually call for incremental payment as deployment milestones are met.
"Because much of the revenue is deferred on these deals, bookings can be strong, but revenue can lag," said McGrath.
At the same time, McGrath said, i2 had difficulty in the first quarter meeting the growing demand for consulting services. As part of its aggressive cost-cutting measures, i2 reduced the size of its consulting staff by about 12% over the past year. However, he said, i2's SOA-based next-generation products are requiring new skills not possessed by some of i2's current consulting staff.
In response, i2 has been hiring consultants and has rolled out a new training and certification program for i2 consultants.
i2 also continues to roll out its next-generation software strategy. In March the company released version 3.0 of its Agile Business Process Platform, and next week at its Planet user group meeting in Las Vegas, the company will unveil the foundation for its next-generation transportation management products, McGrath said. The company also will introduce the platform for its next generation of planning products, he said.
i2 also is attempting to take advantage of shifts in the supply chain software market. The company last week announced a program to recruit current Manugistics customers. And, next week, the company will announce a similar campaign to attract current SAP supply chain management software customers.