JD Edwards Reports
JD Edwards reported earnings for FY '02 above analyst estimates.
How? Sales execution seems the most likely answer.
Introduction
JD Edwards reported revenue and earnings numbers for fiscal 2002
that beat analyst estimates. They did this despite an anemic worldwide
economy, a corporate environment that is positively hostile towards
software investment, and an avowed focus on a mid-market that is
notoriously expensive to sell into.
How? The meager facts given on the earnings leave way too much
scope for speculation, but here's a simple theory that covers the
facts. It was pretty much sales and marketing execution. On the
marketing side, we saw some canny identification of open micro markets.
On the sales side, we saw some discipline where there had been none,
enough discipline to convert some of the new leads that marketing
brought in.
All this was enough to carry JD Edwards from loss to profit, from
goat to hero. The message for the market is equivocal. On the one
hand, it suggests a way for competitors to do better even with limited
resources and a tight market. On the other hand, you have to ask,
"If 3% growth and 10% margins are success these days, is this
a business you want to be in?"
How They Did It
Disclaimer. I have a long history with JD Edwards, but I have very
little information about this last quarter, despite some digging.
So this is based only on information that all of you have.
What could be the explanation? It's not a change in the overall
climate; there's no evidence of that. And it's not a sudden demand
for great new products; JD Edwards doesn't have any. It can't even
be normal execution on extension and infill; JD Edwards' pricing
policies foreclosed that years ago. So it has to be execution on
the demand side.
And that's what the call said. Marketing is generating leads. The
leads are being turned into sales. The sales are generating service
revenue.
This execution is by no means razor sharp. There is every sign
that many of the sales are opportunistic and that service revenue
increases are simply a return to normalcy.
Rather, the improvement seems to come from two simple strategies:
sell the old stuff into new markets, and sell new stuff into old
markets. The combination seems to be the difference between the
success that JD Edwards is seeing and the (relative) lack of success
that, say, Oracle applications or i2 are seeing.
Old Things Into New Markets
Significant sales are now coming from sectors, large and small,
that JD Edwards has always had a toe-hold in, but is now penetrating
effectively. Sectors mentioned on the call include real estate management
(big sale to Wal*Mart), construction and engineering, and beverages.
But these are not the only ones; apparently, JD Edwards has, at
long last, embarked on a coherent and successful verticalization
strategy.
This point is worth dwelling on. Historically, JD Edwards has
been almost as bad at understanding and managing verticals as PeopleSoft.
I have personally been involved in identifying several different verticals
(some micro-verticals, some quite broad) for JD Edwards, watching them develop products for those verticals,
and then lose heart.
Suddenly, big verticals like project and service or asset-intensive,
and even small verticals, like medical devices are identified on
an earnings call—and there are actual sales to these verticals.
A revolution.
In the past year, only PeopleSoft has been similarly successful at finding
and pushing into "new" verticals (in their case, government and education). For
both companies, it's made a difference.
New Things into Old Places
No, not CRM. Despite a considerable amount of investment
in "integrating" the product, there has been little indication that actual seat sales and
actual use is occurring outside of Youcentric's original target customer base (people
who need a highly flexible, special-purpose customer relationship management system).
But there are other products. There is the APS product, the old
Numetrix, which was "involved" in 1/3 of the deals last quarter.
Aside. Numetrix
has had a good reputation in the beverage industry ever since Bass committed to
it in the mid 1990's. Nevertheless, management made a big deal of a competitive
win in this industry for Numetrix over SAP. This is about as surprising as news
that Tiger Woods has a better handicap than I do, but hey, you have to get your
news where you can.
There are other new modules: a weak configurator, a fairly good maintenance
product, some field service, all special-purpose products,
but useful to some percentage of the installed
base. With JD Edwards V (and the new pricing policies), Edwards should be able to make
more from new product development; nevertheless, they seem to be 1-2
years behind the rest in any number of areas, so don't look to this
as an area of growth any time soon.
Opportunism
Do these two strategies smack of opportunism? Yes. Clearly, JD Edwards is going
after sales, even if they are not part of the "core." Almost sell Youcentric
to Fidelity? Time for a new
CRM for Financial Services strategy.
Then again, maybe opportunism is exactly the right response to
these market conditions. Don't call it opportunism; call it canny
identification of micro markets and focused pursuit of new sales
opportunities. Whatever you call it, JD Edwards has created a competitive
edge out of thin air.
The problem with opportunism, however, is that you incur significant
risk. Unless you are very deft or very lucky, the strategy will
eventually force you to swallow high sales and marketing costs,
when your experiments don't work. And it forces you to incur high,
but hidden this year post-sales support costs, whenever somebody
oversells.
Clearly, JD Edwards has managed the first risk; sales costs are
not excessive (though this could be argued) and should be reduced
next year. One reason, I think, is JD Edwards Total Value Management
sales method (I confess a bias here, because I know the developers),
which now seems to have taken hold in the sales force and should
produce even better results next year.
As for the second risk, we shall see. JD Edwards is now coming
off several years of investing development and service dollars in
mollifying unhappy customers. (Margins on services went from 35%
in '01 to 50% in '02.) Without the opportunism that I am describing,
these service revenues and margins would improve even more next
year, because the product is more stable. The great unknown, though
is whether management is able to control the promises of the sales
force. Unknown to me, of course, but also probably unknown to
management. We'll just have to see.
Lessons To Be Learned
The most striking comment in the call: Bob Dutkowsky's statement that marketing
had generated 7000 leads this year and zero the year before. And, from what I
know about the year before, this could actually be
true.
Lesson 1. You don't have to be great to be good.
Bob, Hank Bonde (COO), and Les Wyatt (CMO) all have a very conservative, IBM-based
attitude toward standard business practices. They hire McKinsey for strategy; they
fire salespeople who don't perform (highly unusual at JDE); and they use a stodgy, but
well-known
advertising agency (no names, because no arrows where they're not needed). They're not
trying to rewrite the rules. They're not coming up with sharp new visions. They're
not proving they're an e-business by eating their own dog food. So what?
What they are doing is enough.
A side note. If Bob, Hank, and Les have
done all this simply by doing normal stuff, like putting in normal operational controls,
analysis of software companies will get much harder in the coming years.
Until now, you could judge just by reading the marketing material.
Now, you'll have to figure out how operationally effective they are. With the
kind of reporting that is currently done by software companies (and the general level of
probity and clarity), figuring that out is virtually impossible even after the numbers come in.
I could suggest some ways that reporting could improve, but not
in this issue.
Lesson 2. There is still plenty of play in this market. The announcements
about customers were startlingly unexciting. Medtronics (long-time JDE customer)
buys some more. Fidelity still hasn't actually provided any
revenue from the deal so loudly trumpeted
back in June. New Zealand Dairy is a customer. It's the kind of news
that can put even an anxious child to sleep. Yet it still adds up to $900 million
in revenue for 2002.
Lesson 3? Yuck. Guidance was y/y flat for the first quarter next year on earnings
and revenues. Margins are well below what anyone would want (15-18% is the announced
goal). Unless there is help from the economy, no big change is in sight. This sounds
like a utility, not a software company. But it's a utility whose earnings-producing
assets are stored in bits and bytes and whose life span is (I think) shorter
than your typical nuclear power plant.
Can Growth Return?
With few new products and new markets created by adroit analysis, rather
than a tectonic shift in customer demands, where is the growth coming from?
For next year, I think the best chance is to increase service revenues and
margin. The current 50% doesn't appear to be fabulous, especially when you consider that JD Edwards
can cherry-pick consulting revenue. But better margins may be by no means
easy to achieve. The
services business is going through a massive change right now, where
"normal" margins could end up almost anywhere. In a year, 50% may look great.
What about license revenue? Given that JD Edwards installed base already bought
most of the product on the first go-round, the best chance seems to be
the "new" supply chain planning product. The fit is still only mediocre for
much of the installed base, but JD Edwards does seem to have learned how to sell it. So maybe
there is some hope there. There is also some real opportunity for license
revenue in new geographies. Too often, JD Edwards has gained an expensive toehold
in a country, but never gone farther (and, as in Japan, made a bad reputation
for itself in the process.) With better execution, there could be more opportunity.
Congratulations and Implications
This is a big improvement, and credit is due to all the people
there who created that improvement. Admittedly, the improvement is no more than
up from abysmal. But it is real.
What about the rest of the industry? Does the fact that JD Edwards made its
numbers say that SAP or PeopleSoft can make their numbers?
I've already stated my position on PeopleSoft
What about SAP?
Over the past year, we have seen little evidence that SAP has been
able to put in a similar amount of operational improvement. But
SAP has underlying strengths: more new products and a gigantic installed
base on which to work a better infill and extension strategy. So
it doesn't have to do as much. After all, it was able to make its
numbers last quarter (apparently) just by cutting out travel and
consulting contracts.
So it's hard to see that they won't make their numbers, though just how will
always remain shrouded in mystery. We have recently seen SAP
backpedal internally from a policy of cutting bonuses in order to make
its earnings. Perhaps this is an indication that sales are going better
than expected. (Thanks, European Correspondent, for this last piece of news.)
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