in search of Value

JDA Software Group, Inc. (JDAS) reported its first quarter earnings on April 20th.  Particularly notable on the earnings call was management’s renewed confidence in the company’s sales pipeline.  I am keeping my 12-month price target at $18.00, but I have more confidence in this figure now, and believe there is more upside than downside.

This was a much better call than the Q4 call.  On the Q4 call, it seemed that the bulk of the large deal prospects in the sales pipeline had been realized in 2008, and that with a diminished pipeline and the economy in turmoil, management had little visibility into 2009.  Management said they would no longer provide annual guidance – just guidance on the coming quarter – saying they would rather do this “than set potentially unnecessarily pessimistic [full year] expectations, which as a financially conservative company we might otherwise feel inclined to do.”

Management sounded much more confident this time, stating that they have now “rebuilt” their “large deal pipeline.”  In a bit of chest thumping, JDA’s CEO twice made a point of bashing the competition, going so far as to say that they believe the quarter was a “disaster” for a number of their competitors.

Upside Opportunities

The primary opportunities for growth and value creation beyond the forecast figures appear to be:

• Large deal wins: JDA’s solutions for retailers and CPG companies continue to be recognized as best-in-class.  JDA should win its share of new deals, so there is upside if industry demand picks up more than expected.
• Recovery of sales momentum in Pacific Asia and EMEA: JDA has been “retooling” regional management for some time and last year was hopeful that these actions would pay off in 2009.  Q1 was still weak in these regions, so it seems there is more work to be done.  The projections do not assume any significant progress, so this remains an opportunity.
• Increased sales to manufacturing companies: This was supposed to be one of the benefits of the Manugistics acquisition, but JDA has not yet fully leveraged the acquired products and brands.
• New Managed Services offering: This was barely mentioned on the call, but in its new investor presentation, dated as of today, the company states that it believes that its clients spend over $2 billion per year managing JDA solutions.  JDA now wants to capture a percentage of this services business, leveraging its new CoE infrastructure.  With targeted operating margins of 30%-40%, this could have a significant impact on JDA’s business in the coming years.

Financial Summary and Projections

The forecast below assumes revenue near the low end of management’s guidance in Q2, and modest growth in the second half.  The resulting adjusted EBITDA for Q2 is also at the low end of the guided range.  Forecast cash flow from operations is a rough estimate, factoring in the seasonality of deferred revenue (40% of maintenance fees are generally collected in Q1, contributing to the high cash flow from operations for the quarter).

The resulting $17.41 projected share price is based on year-end results, so an $18 12-month price target still seems conservative.  This target is not materially different from the consensus target of $17 published by analysts Andrey Glukhov of Brean Murray, Brad Reback of Oppenheimer, and Richard Williams of Cross Research.  However, by going through the forecasting process independently, I gained more insight into the likely range for full-year financial results, and into the upside and downside around the price targets.  My sense is that analysts are erring on the conservative side, given that Q1 came in at the low end of prior guidance.  However, management seems to have more data on which to base its guidance this time around, so the conservatism may be unwarranted.

(Disclosure: The author is long JDAS)