InformationWeek

June 8, 1998

Taking Stock:
J.D. Edwards Breaks Out

Since going public last September, J.D. Edwards has positioned itself to become a stronger player in the ERP market--and its prospects look bright

By William Schaff

.D. Edwards ( JDEC --Nasdaq) has long been a leading provider of enterprise resource planning software for companies with revenue from $50 million to $1 billion. Yet investors weren't keen on the stock because they perceived, and rightly so, that the Denver-based vendor was dependent on its WorldSoftware for IBM AS/400 operating systems, a slow-growth market. However, since the company went public in September 1997, it has positioned itself to become a more important player in the ERP market, and its prospects over the next two years look bright.

J.D. Edwards began going after the non-AS/400 market in late 1996, when it released its OneWorld client-server software, which runs on Unix and Windows NT, as well as the AS/400. By the end of the first quarter of 1998, 26 customers were using OneWorld, up from only six the prior quarter. At the end of the second quarter, 46 customers were running OneWorld.

Currently, J.D. Edwards has more than 265 licensed non-AS/400 customers in various stages of implementation. At the end of the second quarter, about 13% of revenue came from non-AS/400 customers, up from 10% in the first quarter and just 4% at the end of the first quarter of 1997. As J.D. Edwards intensifies its sales support, OneWorld will become the company's main engine of growth.

In the short term, of course, the company will depend on its core AS/400 business. Though not spectacular, revenue continues to grow in the high single-digits. Demand remains strong because AS/400 systems are perceived to be reliable and easy to implement (a recent Daewoo Motors implementation took only four months). Both are crucial points as companies race to fix the year 2000 date-field problem. And it doesn't hurt that IBM has continued to provide strong support for the platform.

J.D. Edwards' revenue for the second quarter ended April 30 was $209 million, up 43% from the year-ago period. License revenue for the quarter jumped 49% year-over-year, which follows a 66% year-over-year increase in the first quarter. Demand for OneWorld helped push license gross margins to about 90%.

The company signed a total of 150 new customers during the second quarter, and 85 during the first quarter. J.D. Edwards now has a customer base of more than 4,500. The sales staff has grown to 276 from 190 at the end of the second quarter last year. The company expects it to reach around 350 by year's end.

Nine of the new contracts the company signed in the most recent quarter exceeded $1 million. Second-quarter service revenue--consisting of consulting, training, and maintenance--rose 36.6% to $132.6 million. Operating margins came in at 9.4%. Both IS managers and investors have been pleased with the results.

Any clouds on the horizon? Possible delays in implementation programs by J.D. Edwards' customers because of year 2000 expenditures and limited resources could temper near-term growth. And most license revenue will still come from the slowing AS/400 market. However, a fast-growing ERP market should be able to offset these issues.

As J.D. Edwards gains more customers, it will start competing against larger ERP vendors, such as SAP, PeopleSoft, and Baan, instead of smaller midmarket companies like System Software Associates. Competition always puts pressur e on operating margins. Also, hiring quality IT personnel remains an issue for everyone, and assimilation of a fast-growing sales force brings its own problems.

I expect J.D. Edwards will earn 64 cents per share for fiscal 1998, which ends on Oct. 31. This is slightly higher than Wall Street's consensus of 63 cents per share. My 1999 projection is 79 cents, implying growth in excess of 23%. Despite my lofty projections, the shares are fairly valued at the current level of $35, though the stock could rise if demand for OneWorld really picks up.

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 .

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