ITWO analysis. Lazy & didn't try to convert to G&K analysis.
Perhaps Buckley has a first impression.
JohnG
To: WTSherman who wrote (1515)
From: George Thompson
Saturday, Jan 15, 2000 12:46 PM ET
Reply # of 1588
I found an interesting I2 analysis that seems to support the price at these levels. Then again, I am not a day
trader playing the flux in valuations. I got in early and expect even more valuation in this stock. (I'm not crazy
either, if I sense the stock is in a real nosedive, I'll bail)
Here is the analysis,
George
Here is an analysis of i2 using Philip Fisher's 15 Points Framework. Philip Fisher is a favorite of Warren Buffett.
(Buffett actually attributes a lot of his thinking to Philip Fisher.) Fisher was one of the first investors to realize the
glories of true growth stocks. He suggested holding great companies for life, and never selling.
I highly recommend reading Philip Fisher's 3 books. They are very short (50-100 pages) but extremely insightful.
Fisher goes over the "Scuttlebut" method of investing that he advocated (and largely invented).
He also goes over in detail, the 15 points to look at when evaluating a growth stock...
His books are:
1) Common Stocks and Uncommon Profits
2) Conservative Investors Sleep Well, and
3) Developing An Investment Philosophy
Here is the analysis...(It is somewhat dated, (a couple months old). And, to avoid being redundant -- since there
are very good previous posts on such matters -- I didn't give a large description of i2's business and their
products.)
*********************************************
(ITWO) i2.com
Background: i2 is the leading supply chain management software company -- the company who largely designed
and executed Dell's manufacturing and supply chain. They have a close working relationship with Dell [the CFO
of Dell is 1 of only 2 outsiders on i2's board]. If one considers Dell's supply chain as a prototype for the future of
collaborative manufacturing, then one must be intrigued with i2.
Key Points:
Great management team ? see Point 15 (one that looks out for the shareholder)
Terrific sales force ? see Point 4
Industry best technology ? see nearly all points (Trade publications Traffic World, Information Week, and
ComputerWorld support this assertion.)
Conclusion: i2 is the industry leader and a company worth investment consideration.
Philip Fisher's 15 Points Analyzed (Rough Sketch / Notes) (The points are summations and do not use Philip
Fisher's wording verbatim.)
1) Does the company have the products to generate a sizable increase in sales? i2's products include supply
chain management software and eBPO (e-business process optimization) applications for Internet transactions.
i2 is the brains behind ?dellification? of industry. Their products reduce lead times and inventory by replacing
inventory with information. Their products also support ?collaborative manufacturing?, or cooperation between
suppliers and customers to create value in the supply chain.
2) Does management have the determination to continue to develop superior products? Yes, they own a lot of
stock. Executive officers hold 55.2% of stock with Sanjiv Sidhu holding 44%. Their motivation to stay ahead
translates into action; they funnel 24% of sales to R&D and one-third of i2's employees are in R&D roles. Also,
Forbes ASAP magazine named i2 Technologies as the most dynamic company in 1998 (Microsoft ranked # 5).
Another Forbes article on CEO Sanjiv Sidhu stated that, ?His IQ is double that of most very smart people?He
has a fanatical passion for the business.? As an example, i2 recently introduced the Rhythm Internet Fulfillment
Server and eXchange, a virtual trading community for the high tech community. Private and public trading
communities developed by i2 (such as the public one recently developed for Hewlett-Packard) will create
annuity-like revenue streams in the near future. i2 is also broadening its product lines to offer a complete back
end fulfillment solution. (1) Purchased transportation specialist, InterTrans, of Ontario, in mid-1998. (improved
i2's position with consumer goods manufacturers.) (2) Decided to co-market with EXE technologies
(Warehouse Management Software).
3) How effective are the company's R&D efforts: Customer list:
The Company has licensed RHYTHM products to over 600 customers since inception. The following is a partial
list of companies that have licensed more than $1.0 million of RHYTHM products:
3M
Abbott Laboratories
Acer
Altera
Amazon.com
Applied Materials
AST Research
Bethlehem Steel
Boeing
Bristol-Myers Squibb
British American Tobacco
British Steel
Broken Hill Proprietary
Canon
Casio
Compaq Computer
Con-Way
CSS Industries
Daimler-Benz
Dell Computer
Dole
Dresser Rand
E&J Gallo Winery
EMC
Fletcher Challenge
Ford
Frito-Lay
Fujitsu
Gateway 2000
GE Capital
GE Plastics
Haworth
Herman Miller
Hewlett-Packard
Home Depot
IBM
Integrated Device
Iomega
Iscor Limited
Johnson & Johnson
LFI
Lipton
Lucent Technologies
Maxtor
Medtronic
Microage
Motorola
National Steel
Navistar
Newport News
Occidental Chemical
Philips Semiconductors
Polimeri
Quantum
Ryder Logistics
Samsung
Sara Lee Knit Products
Sherwin Williams
Sidmar
Siemens Semiconductors
Silicon Graphics
Sonoco
ST Microelectronics
Steelcase
Sun Microsystems
Texas Instruments
Thomson Consumer
Timken
Toshiba
US Steel
VF Services
This impressive list of customers indicates that i2's R&D efforts have been extremely impressive to date. Also,
an article appearing in Information Week noted: ?How has i2 done it? First, it's been a little more innovative than
its peers.?
4) Does the company have an above average sales force? See customer list above. Also in 1998, a marketing
trade publication, Sales & Marketing Management, named i2's sales forces #24 in the US for all industries. i2
recently signed an agreement with IBM sales force to have i2 products included in IBM turnkey offerings for
manufacturing and retail sales. (e-business) Also, i2 is implemented by Andersen Consulting, Price Waterhouse
and all other Big-5 consulting firms. Q2 conference call noted that recently there has been an even greater
increase in interest in i2's products by Big-5 consulting firms. 59% of revenue came from existing customers in
Q2 '99. i2 has a unique sales method that shows customers the benefit in their terms (i2 gets a percentage of the
value created by its software implementation if it achieves a hurdle rate.)
5) Does the company have a worthwhile profit margin? i2 had a net profit margin in LFY of 5.5% while
supporting 24% R&D. In addition, if one adjusts for i2's very large cash position (cash and S-T Investments is
equal to about 65% of shareholder's equity), i2 has a very high Return on Invested Capital.
6) What is the company doing to maintain or improve its profit margins?
a) i2 actively considers acquisitions. With founder owning 44% of stock, one knows that i2 will not participate in
inefficient and empire expanding acquisitions for the sake of doing them. Over the long-term, one can be quite
confident in i2's acquisitions and that they are truly ?synergistic? and strategically compelling. Warren Buffett
notes that when you make an acquisition, you are actually selling part of your own business (issuing stock, debt
or cash) to acquire another business. I believe that Sidhu will look at things in this manner and approach
acquisition targets only when i2 receives as much intrinsic value as it gives by selling part of his company in an
acquisition.
b) i2 is introducing many new products or modules to expand the utility of the Rhythm and eBPO suites.
c) i2 is increasing its already large installed base. As i2 moves into e-commerce applications, positive customer
relationships should pay off with increased business.
d) It appears that i2 is more focused on increasing its installed base than on increasing its margins on a
short-term basis. An increased installed base should bode well for margins in the long run.
7) Does the company have outstanding labor and personnel relationships? Yes, says so explicitly in 10-K.
(Shouldn't take that for granted though.) Closer and less biased look shows that good relations are fostered
through ESOP.
8) Does the company have outstanding executive relations? Yes, they are all significant owners, tying them to i2.
The management has been expanded to include Mr. Gregory Brady, who came to i2 in 1994 after holding many
positions at Oracle. Mr. Brady, the President, is paid twice as much as the founder, Sanjiv Sidhu. This hints at
the founder's integrity and his business acumen. (He knows his specialties do not lie in business execution but
rather in technological development. By recognizing his own limitations, he adds value to i2. Plus, his ego doesn't
dictate that he has to be paid the most.)
9) Is there depth to management? Yes, although Mr. Sidhu is vastly important, he has surrounded himself with
quality people. However, Mr. Sharma, the No. 2 man, has a brain tumor although he is still active in day to day
operations (10-K). This point could be a criticism though. (Need more in depth look at this.)
10) How good are the cost analysis and cost control functions? Need ?due diligence.? I would suspect they are
rather good considering every dollar spent is essentially a dollar out of founder's pocket. i2 has no agency
problem. Also, they specialize in helping companies utilize every asset efficiently, making one think that they
would have a similar focus themselves.
The company does not appear to be flashy either. One Forbes article mentioned the CEO saying, ?We'd rather
be a bunch of techno nerds and geeks. People here don't look pretty. There are no Armani suits. No Gucci.?
11) Are there other aspects of the company that will provide clues as to how outstanding the company may be in
relation to its competitors?
a) Partnerships with tech gorillas including HP and IBM. They also work closely with Big-5 consulting firms.
Finally, as Microsoft becomes more interested in e-business, it has eyed i2 as a partner. Steve Ballmer is
speaking at Planet99, i2's industry trade conference. In i2's Q2 conference call, i2's CEO responded to
someone questioning this by saying that both i2 and Microsoft are interested in increasing their collaboration.
Microsoft is consequently sending more engineers to work with i2 in Dallas.
b) First to make inroads into Japan among supply chain software companies.
c) No Y2K sales slowdown shows consistent demand for product and possibly even more demand once IT
budgets don't have Y2K to worry about. Oracle blamed recent results partly on Y2K and said financial services
and airlines will be adding databases once Y2K passes. i2 hasn't used that excuse.
d) A purchaser from Lucent mentioned in ComputerWorld that i2 is ?so far ahead of SAP on functionality.?
e) i2 is part of the consulting value chain, meaning that their business should not slow down too much in a
recession. They bring immediate productivity improvement and tangible savings to the customer (unlike ERP
implementations), which should help in times of corporate downsizing. i2's product increases inventory velocity,
reducing lead times and production waste. Timken Co. saw inventory fall 25% and lead and cycle times drop by
35%. Another company saw an increase in on-time delivery to 97% from 80%.
f) CFO of Manugistics (i2's primary competitor) resigned amid difficulties on 9/15/99. This hints that i2 is
winning the battle with its major competitor. According to two articles in Traffic World, a logistics trade
publication, i2 is beating Manugistics because it developed multiple location models and worked with ERP
vendors to create advanced app add-ons. While Manugistics is tripping up, i2 is still succeeding. The conclusion
must be that i2's product is more accepted in the marketplace and is having an easier time fighting off the big
ERP vendors.
g) Recent announcement that their retail division saw sales skyrocket. (see news at quote.yahoo.com) I believe
they tripled. This was traditionally MANU's strength. This really proves that MANU, who used to be i2's
primary competitor is dead and ITWO is swallowing all of their business.
12) Does the company have a short-range or long-range outlook in regards to profits? Long range. Consistent
spending of 24% of sales on R&D. They have significant technology partnerships with industry heavyweights. i2
is probably increasing installed base while sacrificing short-term margins to enhance future profitability.
13) Will growth require additional equity financing? That is doubtful, although acquisitions may be made by
issuing equity. Positive operating cash flow should be used to fund expansion. Finally i2 is not in a
capital-intensive business.
Ahhh....since I wrote this they announced that they were going to issue convertible debt to certain institutional
investors. This is funny if one really looks carefully at i2's financial statements. They have strong operating cash
flow, and a huge amount of cash on the balance sheet. Cash on the balance sheet actually equals $189 million
(ST investments -- which are usually treasuries, plus actual cash.) What this says to me, if they are raising more
cash -- and I heard a rumor to this effect -- is that they are building a war chest for a number of acquisitions, or
a very large acquisition...Don't let 'em fool ya...they don't need more cash for working capital needs...Cash is
42% of the balance sheet for heaven's sake.
14) Does management get quiet when things are not going well? We don't know yet, but it is doubtful given their
general candor and integrity (see below).
15) Is management of unquestionable integrity? Yes. According to the aforementioned Forbes article, CEO
Sanjiv Sidhu is ?Egoless.? Sanjiv for the past 3 years has paid himself $225,000 a year, including bonus. Mr.
Sharma is also on the same pay schedule. However, Mr. Sharma has taken home a fairly sizable "other income"
of $59,000-$193,000 in addition to his bonus over the past three years. However, these two men have not even
given themselves one stock option. For the founder and No. 2 man of a fabulous tech company, this isn't that
high of pay. It's really nothing for the value they provide the shareholders.
Compare this to Mr. Siebel of Siebel Systems. Siebel Systems is a good comparable company since Mr. Siebel,
like Mr. Sidhu, founded the company and owns a large portion of the firm. Moreover, the firm is growing rapidly
and is considered a leader in its market niche.
Mr. Siebel took home $800,000 last year in salary and bonus and an additional $2,000,000 in stock options.
The year before that, he took home $320,000 and $1.4mm in stock options, and the year before that $320,000
and $4mm in stock options. The $7.4mm in stock options Mr. Siebel has granted himself comes directly out of
shareholders' pockets, diluting their stake in SEBL.
The co-founder of Siebel Systems, Ms. House, has also been pretty liberal in this regard. Ms. House earned
$675,000 last year and $500,000 in options. (97- $310K & $800K, 96 - $282K & $800K) This liberal
granting of options and pretty decent pay comes out of the pockets of shareholders.
The CEO of i2 has refused to issue tons of options to himself and instead takes his pay in the form of the capital
appreciation in his shares. By doing this, he is doing a service to his fellow shareholders. I think this provides a
testament to the integrity of i2. It also provides shareholders a feeling of comfort while investing in this company,
knowing that the founder isn't slowly going to dilute their stakes while he fattens his. Warren Buffett and Philip
Fisher consistently talk about finding good people with integrity to get into business with or invest behind. I
would say i2's management fits the bill. |
