INITIATING COVERAGE: COMEBACK KID, SEARCHING FOR GOLD
After a spectacular rise and fall, Manugistics is on the comeback trail,
looking for gold in supply-chain management. IDC recently forecasted this
market to grow to over $30 billion by 2004. In addition, the company’s recent
acquisition of Talus and its price and revenue optimization solutions present
Manugistics with the unique opportunity to expand that business into new
markets. With management and its sales team in top form, the company has
steadily improved its competitive position. We think a growing market
presence and new products will help Manugistics beat our estimates in coming
quarters. If the company continues to perform, we see potential the for 20%
annual appreciation over the long-term. We recommend that investors
accumulate the shares with one eye on company fundamentals and the other on
the broader economy.
* Large, Rapidly Growing Supply-Chain Market. Supply-chain solutions are
a high priority for both IT managers and executive management because of
their strong return on investment. IDC estimates that the supply-chain
opportunity will grow more than 45% per year and comprise 27% of the total
business-applications market in 2004.
* Increasingly Visible in the Market. Recent high-profile customer wins
show the value of Manugistics’ growing mindshare. In the past, the company
has not always made that crucial shortlist.
* Unique Pricing Applications. The company intends to extend its
pricing-optimization applications into additional markets. We believe this
strategy will drive significant incremental business.
* Strategic Risks Created by Talus Acquisition. For Manugistics’
enterprise profit-optimization strategy to succeed, three things must happen.
First, Talus must be organizationally integrated into Manugistics. Second,
the Talus solution must be converted from a services sale to a software sale.
Third, Manugistics’ customer base must embrace the integrated offering.
* Competition on Many Fronts. Manugistics faces intense competition from
many vendors, including well established players like i2, Oracle, and SAP.
Investment Positives
* Large and Rapidly Growing Market. The market for supply-chain
solutions, though fragmented due to various point and industry-specific
solutions, is among the largest and fastest-growing opportunities in business
software applications. B2B initiatives are driving continued interest in
supply-chain solutions. IDC now estimates the market will grow to more than
$30 billion by 2004, representing a 45% compound annual growth rate (CAGR)
from 2000 estimates. Given its enormous size, this market has more than
enough room for two “pure play” vendors, in our view. We think that, as the
No. 2 player (behind i2), Manugistics will be able to grab increased market
share, which translates into strong long-term growth prospects.
* Strong ROI Value Proposition. Information technology (IT) spending
at Fortune 1,000 companies focuses on solutions that deliver the highest
return on investment (ROI) in the most strategically critical areas of the
company. For manufacturers, the area of strategic importance is the supply
chain. Mishaps there can materially affect a company’s financial performance.
Manugistics’ solutions therefore sit front-and-center on both information
technology and executive management agendas. In a cooling U.S. economy, we
expect companies to continue to adopt these solutions since doing so cost far
less than inventory and other supply-chain costs. Further, Manugistics
positions itself as quicker to install than many of its competitors. This
efficiency should play well in the current economic environment, where
extended rollouts have become much less desirable.
* Increasing Mindshare with Customers and Integrators. We believe
Manugistics is gaining mindshare among customers and systems integrators,
which shores up its opportunities for major sales. Historically, lackluster
sales execution has stunted the company’s growth in licenses, but its
newfound mindshare -- reflected in recent performance -- is encouraging.
Increasingly fruitful consulting partnerships reinforce this marketplace
traction. Manugistics trained 250 consultants on its solutions last quarter,
and we expect this number to rise in future quarters. Further, Manugistics is
booking higher win rates against competitors in key verticals such as
electronics and high technology. It recently added high-profile customers
such as Cisco, Texas Instruments (a longtime stronghold of i2), and 3Com.
* Unique Pricing Applications. Through its Dec. 2000 acquisition of
Talus, Manugistics now offers applications designed to optimize pricing
across the enterprise. Originally developed for the travel and hospitality
industries, these pricing solutions, when integrated with supply-chain
intelligence, would be useful across a broad range of industries, including
retail and manufacturing. These applications differentiate Manugistics in the
marketplace, are not easily replicated, and could be a big driver of
additional growth.
Investment Risks
* Intense Competition. The market for Manugistics’ supply-chain
solutions is intensely competitive. Supply-chain pure plays like i2,
enterprise resource planning (ERP) suite vendors like Oracle and SAP, and
electronic-procurement players such as Ariba and Commerce One all vie for a
piece of the market. Furthermore, Manugistics has fewer sales people (125
versus 580), trained consultants, and referenceable accounts than its most
direct competitor, market-leader i2. We believe Manugistics has a competitive
solution, but its sales performance must be crisp to swipe deals from larger
players.
* Risks Associated with Talus Integration. Talus is Manugistics’
largest purchase (expected to comprise approximately 15% of revenues in FY02)
and will take time to integrate. First, a newly integrated product suite
poses a challenge to the sales force, which must handle a product transition
and a shift from a services-based model to a license-sale model. Second, the
company’s newly integrated product suite’s ability to gain traction has yet
to be proven outside the travel and hospitality industries (where there is
decidedly little overlap with Manugistics’ existing installed base of
customers). Finally, the management attention demanded by integration is an
ongoing concern.
* Shifting Industry Focus. To successfully increase market share,
Manugistics needs to continue its expansion into key industries such as
electronics and high technology. While win rates in these verticals are
improving, many customers are just coming live and expertise is less proven.
Since each vertical demands its own industry-specific knowledge, Manugistics’
ability to expand its sales and consulting forces will be put to the test as
this footprint expands.
* Risk in the Growth Story. Like all growth companies, Manugistics’
valuation hinges upon its ability to achieve scale in operations over the
next few years. If the company cannot achieve strong growth either because of
economic or execution difficulties, much of its value could disappear.
Recommendation
Manugistics is demonstrating strong execution in a large and rapidly
growing market. We think the company is well positioned to capture more
market share, which should fuel long-term growth even in the face of near-
term slowing in IT spending. Further, we see respectable long-term upside if
the company can execute. We view Manugistics as a recommended holding for
investors focused on the enormous supply-chain management opportunity.
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COMPANY PROFILE
Manugistics is a leading vendor of supply-chain management solutions that
enable firms to optimize the production, pricing, and procurement of goods
and services. The company’s solutions enable customers to better understand,
plan, and react to their supplier networks.
Epoch Research
A team of industry-focused analysts creates Epoch’s proprietary Research. This team covers four technology sectors including Broadband and IP Data Services, Communications Equipment, Software and Internet. In addition to providing analysis of company and industry fundamentals and valuation, Epoch also filters and aggregates third party information. This third-party information includes hyper links to news including articles, company slide presentations and press releases, and multimedia content including audio and video clips of conference calls and interviews with company management. |
