Fourth quarter earnings give i2 the B2B lead
By Lisa Meyer
Redherring.com, January 19, 2001
herring.com
Call it a case of bait and switch, but executives at i2 Technologies (Nasdaq: ITWO) don't seem to care if the company's supply-chain management software is the initial hook to lure customers to a full suite of other business-to-business (B2B) services. At a time when other single-solution competitors are complaining of slower IT expenditures, analysts are pointing to i2's fourth-quarter results as evidence that the company is separating itself from a rather crowded field.
"It's not a question that i2 pulled ahead, but that its lead is becoming solidified," says William Gramas, an analyst at Gruntal & Company. "If you add the supply-chain management revenues of the companies in second, third, and fourth place [Oracle (Nasdaq: ORCL), SAP (NYSE: SAP), and Manugistics (Nasdaq: MANU)], they don't equal half of i2 revenues; and if there is no supply chain, then there is no need for a market or an exchange."
Indeed, in beating Wall Street's fourth-quarter expectations, i2 appears to be gaining traction at a time when others are slipping. For the fourth quarter, the company earned 9 cents per share, up from 6 cents in the third quarter, and a penny ahead of the First Call/Thomson Financial consensus estimate. More important to future bottom-line results, in our opinion, revenue grew sequentially by 18 percent to $378 million, driven by a 21 percent increase in licensing fee growth. For the year, the company posted earnings per share of 26 cents on revenue of $1.1 billion.
As a result, investors bid up the company's stock 12 percent on Wednesday in anticipation of strong numbers, which were released after the market closed, but then did some profit-taking the next day. I2 lost 5.6 percent on Thursday to close at $50.88.
OLD-SCHOOL TIES
One key to the company's fourth-quarter success, say analysts, has been its ability to attract marquee traditional clients such as Hitachi and Kmart. Evidence of growing acceptance of the company's services by old-school customers can be seen in the larger average transaction size.
The average customer spent $1.9 million in the fourth quarter of 2000, up from $1.8 million in the third quarter, and $1.5 million in the fourth quarter of 1999. To add to the good news, 50 of the transactions during the fourth quarter had a sales price of more than $1 million and 15 had values of over $5 million. And not only has i2 been getting larger commitments, it is attracting more customers. The company logged 122 transactions in the fourth quarter of 2000 and 392 for the year overall, up from 74 and 252 transactions over the same periods in 1999, respectively.
The increasing number of deals can be traced back to i2's strategy of becoming a one-stop shop for e-business software. While most of its competitors offer only point solutions, i2 now offers solutions at each stage in the delivery of a product to market: design, sale to buyer, shipment, sale to customer, and follow-up service. The company's suite of solutions includes customer-relationship, supply-chain, and supplier-relationship management. The i2 TradeMatrix platform integrates these three solutions and provides transaction automation and decision support. I2's Infinite Content division provides content management and publishing capabilities for suppliers. And the company's TradeMatrix Network offers services such as connectivity and commerce to support its solutions.
Even though i2's supply-chain management solution is the initial hook, many customers are expanding their relationship with the company by buying other products, says chief marketing officer Katrina Roche. I2's one-stop shop not only simplifies conversion to the Internet for companies, but also keeps their integration costs down.
PARTNERSHIPS A KEY TO SUCCESS
But by no means does i2 plan to run this one-stop shop alone. Its success is due in large part to its partnerships. For example, i2 uses Ariba (Nasdaq: ARBA) as a link to the indirect electronic procurement market. It also utilizes its alliance with A.T. Kearney, the management-consulting subsidiary of IT service provider EDS (NYSE: EDS), to build a technology-enabled strategic sourcing product that will help customers know the best way to buy materials. As i2 president Gregory Brady suggested in a conference call to analysts on Wednesday, the company is trying to create an ecosystem that includes so many valuable products and services that its competitors will have to partner with i2 in order to survive.
But some competitors aren't willing to give i2 the upper hand just yet. Earlier this week, Oracle, a former partner of i2, unveiled an expanded suite of e-business applications focused on supply chain, transportation, and product development. "We don't underestimate Oracle as a competitor, but we don't see them in deals today," says Ms. Roche.
Ariba also is expanding. Early next week, it is expected to announce a new product that will manage a company's suppliers. The needs of suppliers will generate the next large wave of growth for the B2B market, analysts say. But despite the fact that it crushed analysts' expectations in its fourth quarter, Ariba's stock took a 19 percent hit following the company's earnings release last week. Management indicated that, in response to customer demand, Ariba would increasingly focus on selling term license deals, making it hard for analysts to forecast growth.
However, i2's greatest challenge is meeting the demand of the rapidly growing market. According to Forrester Research, B2B e-commerce will grow to $6.3 trillion by 2004; the business-to-consumer (B2C) e-commerce market is expected to reach $454 billion. To keep pace with this growth, i2 needs to beef up its sales staff, says Mr. Gramas. "But the good news is that the company can now bring more profit to its bottom line."
Indeed, i2's management has the unique problem of ramping up to meet demand. During the conference call, management issued guidance that called for a 45 percent year-over-year increase in total revenue to $1.64 billion for 2001. And although first-quarter guidance suggests revenue will drop 4.5 percent sequentially, analysts are quick to point out that the first quarter is seasonally weak. "The number of deals and size of those deals provide evidence against the perception that a reduction in IT spending will hurt all categories," points out David Garrity, an analyst at Dresdner Kleinwort Benson.
With a full product offering and a strong customer base, i2 can now cut back on research and development, and marketing expenditures, thereby driving expected top-line growth down to the net income line. That makes i2 an attractive bet for both long- and short-term investors. Although its stock trades at a lofty 150 times estimated 2001 earnings of 34 cents, we believe in paying a premium for growth.
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