JDA Software Group (JDAS)

Q2 2011 Earnings Call

July 26, 2011 4:45 pm ET


Mike Burnett - Group Vice President of Treasury & Investor Relations

Peter Hathaway - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Hamish Brewer - Chief Executive Officer, President and Director


Jeffrey Rhee - Craig-Hallum Capital Group LLC

Mark Schappel - The Benchmark Company, LLC

Richard Williams - Cross Research LLC

Greg McDowell - JMP Securities LLC

Brian Murphy - Sidoti & Company, LLC

Sean Barrett



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Good day, ladies and gentlemen. Thank you for standing by. Welcome to the JDA Software Group Inc. Second Quarter 2011 Earnings Conference Call. [Operator Instructions] This conference is being recorded today, Tuesday, July 26, 2011. I would now like to turn the conference over to Mike Burnett, Vice President of Investor Relations. Please go ahead.

Mike Burnett

Thank you. Good afternoon, and welcome to the JDA Software earnings call for the second quarter ending June 30, 2011. On our call today, we will discuss the operational and financial results for the second quarter. With me on the call is Hamish Brewer, Chief Executive Officer of JDA Software; and Pete Hathaway, our Chief Financial Officer.

Before we begin discussing our results, let me remind you that our comments today will contain certain forward-looking statements that often involve risks, uncertainties and assumptions. All statements, other than statements of historical facts, are statements that could be deemed to be forward-looking. These risks are described from time to time in our SEC reports including, but not limited to, our annual report on Form 10-K for the year ended December 31, 2010.

Our presentation also includes certain non-GAAP measures, which JDA uses internally in budgeting and performance monitoring activities to gauge our business performance. We believe these measures provide useful information to our investors in evaluating JDA's ongoing business results. We prepared a reconciliation of each of these measures to the most directly comparable GAAP measure in our press release, which is posted on our website at jda.com. Additionally, we have posted a supplemental presentation slide deck on our Investor Relations website to accompany the review of our results.

With that, I will now turn the call over to Hamish Brewer for a discussion of the operating results and trends. Hamish?

Hamish Brewer

Thank you, Mike. I'm sure that 2011 is going to be an exciting year for JDA. The first quarter was a record quarter, the second quarter was not as good as we were expecting. And as we look forward, we have the potential to deliver dramatic organic growth in the second half. Of course, I appreciate that the focus now will be on the results of the second quarter, trying to understand if there are underlying forces in play that will slow JDA's progress. Now let me share with you my understanding of the trends that I see.

First, let's focus on license sales. As a leading indicator for this company, this revenue line we're paying a significant amount of management focus. In the same time this year, we've seen a very strong first quarter with year-over-year growth, 27%. The second quarter showed a year-over-year decline of 19%, leaving us effectively flat year-over-year for the first half.

We knew the second quarter contribution to annual software is going to be weaker than typical going into the quarter, but we were impacted on the downside with a few transactions in North America failing to come through as expected. We spent significant time internally analyzing and discussing whether there's a reason to be concerned about an underlying issue in this important market. And at this stage, I don't think that we can mostly state that this is the case.

And the reason are as follows. First, did we see some softness in closing key transactions in the second quarter? The answer to that question is yes, although, this is limited to a handful of transactions. So I think it would be premature to declare that we are facing an industry trend. Second, did we manage to close a significant number of large license deals indicating the vast willingness in the market place to invest significantly in IT spending? The answer to this question is also yes. Third, is the pipeline for the second half strong enough to support the run rate increase necessary to hit the midpoint of our guidance? We believe the answer to this question is also yes.

So on balance, when we consider our prospects for 2011 in respect of licenses and subscription revenues, consider the composition on overall maturity of our pipeline at new business opportunities. It seems most likely to us that we'll ran somewhere in the existing range of software and subscription prediction of the sell-side analysts, where we're seeing numbers from $151 million to $155 million for the full-year

One unusual characteristic that I'd like to point out, which increases our confidence in this projection, is that the third quarter pipeline appears to be uncharacteristically strong. And we currently expect that third quarter results will be similar or potentially even stronger than the first quarter this year. So we're not relying on delivering a heavily disproportionate percentage of our second half license revenue in the fourth quarter.

Moving on to services. There was again a number of factors in play and I'd like to describe these to you. Consulting margins remained low than we'd like through the end of the second quarter. As I mentioned at the start of this year, we're in the process of implementing a 3-year plan to improve our operating metrics, and I did not expect to see much sign of improvement this year. Unfortunately, I was right through the first half, with Q2 services margins remaining below my expectations. However, I should point out that projections for the second half look decidedly better. Based on a series of changes made earlier this year, we're beginning to see increases pelt through our overall mix of business.

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