Innovation Sets i2 Apart -- Supply-Chain Management Vendor Thrives By Helping Companies Compete In The World Of E-Commerce
William Schaff
techweb.com
If you've been an IT software or services company in 1999 and your name isn't Microsoft, you probably haven't enjoyed the technology rally this year as much as Internet, communications, and semiconductor companies have.
Still, i2 Technologies (ITWO-Nasdaq), a maker of supply-chain management software, is one of the few software vendors enjoying growing sales. Its first-quarter revenue is up by 64% year over year to $117 million.
What makes i2 unique? True, i2 provides services such as consulting, training, and maintenance related to its products. But that alone isn't enough to differentiate it. IT managers have enjoyed the benefits of supply-chain management for quite some time (supply-chain management encompasses the planning and scheduling of manufacturing, supply and demand forecasting, purchasing, distribution, and transportation across the enterprise).
The Rhythm line from i2 has been a market leader in client-server. But Manugistics, a former market leader in this segment, is now treading water. For its 1999 fiscal fourth quarter, ended March 31, Manugistics' sales were down 36% year over year to $40.6 million-not exactly robust business. The result for Manugistics was a loss of $2.66 per share.
Many expected i2 to plummet when SAP, the 800-pound gorilla in the market, introduced its own planning and optimization software. But i2 didn't.
How has i2 done it? First, it's been a little more innovative than its peers. For example, i2 recently talked about Rhythm, its electronic business-process optimization software that helps companies compete in E-commerce by integrating key business processes such as product life-cycle management, supply-chain management, and customer management. Because the end game of E-commerce is to minimize the cost of sales and offer better and more timely customer service, I have no doubt that optimizing these critical back-end segments does exactly that.
A lot of key i2 customers apparently agree. Big names such as IBM and Compaq are leading i2's strength in sales. New customers include Canon, Mercedes-Benz, and clothing maker Russell Corp. Existing clients account for 54% of license revenue, with the balance from new customers. In fact, i2's average deal size is about $1.3 million, with 12 of the 57 deals in the latest quarter worth more than $1 million. International sales represented 35% of total sales.
Technology represented about 72% of sales, while consumer packaged goods and apparel accounted for about 10%. Sales are well supported by a direct sales force, which is expected to grow by 50 over the year-end 1998 headcount of 179.
The biggest risk in the near term remains the weak market for enterprise resource planning implementation in light of the Y2K computer date-field problem. However, i2 has managed to overcome this obstacle in the near term. By choosing an aggressive sales and marketing strategy, it seems to be gaining market share and positioning.
Of course, you can never count out SAP.
For 1999, I project that i2's revenue will be about $520 million, with earnings per share of about 48 cents. This assumes operating margins hold at around 10%. In the latest quarter, revenue was $117.2 million, with license revenue of $73.9 million. Services and maintenance made up the balance. Quarterly earnings were 5 cents a share. There's no debt on the balance sheet, and i2 had about $176 million in cash at the end of the latest quarter. Receivables are under control at 95 days sales outstanding, down from 103 days a year ago. With 76.4 million shares outstanding, the market capitalization is about $2.1 billion.
As you would expect, companies that fundamentally outperform competitors cost more. It's no different for i2, as it currently trades at $30-or 63 times its 1999 earnings per share.
William Schaff is chief investment officer at Bay Isle Financial Corp. in San Francisco, which manages the InformationWeek 100 Stock Index. You can reach him at bschaff@bayisle.com.
Copyright ® 1999 CMP Media Inc
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