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J.D. Edwards fights sales slump

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Copyright 2001 The Denver Post Corporation

The Denver Post

September 9, 2001 Sunday 2D EDITION

slump

Ed McVaney retook control of J.D. Edwards & Co. nearly 18 months ago,
after the software maker he co-founded hit some rough waters.

Although he's made a couple of significant changes, the Denver company's
struggles have continued.

The company has laid off 1,200 workers in the past year and a half while
posting net losses in all but one quarter.

On Aug. 22, it reported a third-quarter net loss of $ 185.9 million, an
eightfold increase from the same period in 2000.

A few days after the report, investment banker Robertson Stephens slashed
earnings estimates for J.D. Edwards for fiscal year 2001 by nearly 90
percent and for 2002 by 50 percent. And, after closing at $ 8.30 a share
Friday, the company's stock is more than 80 percent off its peak of $
49.50, reached in September 1998.

McVaney has blamed the slowing economy and sloppy salesmanship for the
company's struggles. Analysts have found at least some fault in the
company's business strategy.

'J.D. Edwards has done some misstepping,' said Brent Thill, an analyst
with Credit Suisse First Boston.

In August, the company addressed some of those concerns by announcing
that it plans to acquire Charlotte, N.C.-based software firm YouCentric
for $ 86 million in stock and cash.

Though analysts are bullish on the deal, they say it could be a year
before the company sees returns on the investment. And it could be longer
before J.D. Edwards returns to its glory days as one of the
best-performing companies in its industry.

Founded in 1977, J.D. Edwards is Denver's largest software company, with
4,800 employees, 6,000 customers and annual revenues of $ 1 billion.
The company makes enterprise resource planning, or ERP, software that
large businesses use to automate and manage back-office operations such
as payroll and distribution.

After experiencing impressive growth through much of the 1990s, J.D.
Edwards' sales slowed in 1999. The reason, the company said, was that
businesses delayed purchasing new enterprise software because of Year
2000 worries.

But the company's struggles continued beyond 2000. So McVaney, who gave
up the CEO post in November 1998, reclaimed the title in April 2000 after
the abrupt resignation of Doug Massingill. McVaney came back to take the
company to the next level, said Les Wyatt, senior vice president.

The economic downturn has slowed the company's growth, Wyatt said, and
analysts agree. Businesses have tightened their spending and the
enterprise software industry has suffered. Stock prices have been driven
down and companies have been forced to go through layoffs.

Software makers Oracle, Ariba and i2 Technologies have all announced
massive layoffs this year.

Just more than a month after he retook controls, McVaney laid off 800
employees. He cut another 400 positions in May.

McVaney also made senior management changes, adding Wyatt and chief
operating officer Hank Bonde to the staff in February.

But one of the biggest moves McVaney has made was to refocus the
company's strategy, Wyatt said.

The mid-range market has long been considered the company's sweet spot.
In late 1999, Wyatt said, J.D. Edwards began selling out of its market,
which it broadly classifies as any company with annual revenues of $ 100
million to $ 3 billion.

'We strayed outside our core competency,' Wyatt said.

But analysts point to another part of J.D. Edwards' business strategy
when explaining its struggles. They say the company is slow to adopt new
technology.

In a report released last week titled 'Too Little, Too Late for J.D.
Edwards,' analysts for market research firm Gartner Dataquest said the
company's slow move to emerging markets has placed it on a downward
slide.

'With the economy forcing an even tougher selling environment, the price
J.D. Edwards pays for procrastination is high,' said Tom Topolinski, an
analyst with Stamford, Conn.-based Gartner.

He also indirectly questioned the company's viability.

'Failure to keep pace with primary competition or new entrants and meet
the evolving customer requirements will be a great risk for ERP providers
to lose mind and market share and potentially viability,' Topolinski
said.

Most analysts point to J.D. Edwards' slow move to the customer
relationship management, or CRM, market.

'In this game, when you're late, it's tough to catch up,' said Standard
& Poor's analyst Jonathan Rudy, who downgraded J.D. Edwards stock to
'sell' in August.

CRM software automates front-office operations such as customer service,
marketing and sales, often with Internet capability.

'CRM is sort of like Microsoft and Windows - it has broad appeal to a lot
of industries,' said Chad Eschinger, a Garter analyst. 'Every business
has a use for a CRM application.'

Gartner predicted that ERP software sales will hover around $ 8 billion
to $ 9 billion through 2005. The CRM market is expected to surge from $ 4
billion in 2000 to $ 16 billion by 2005.

Until recently, J.D. Edwards resold CRM software from San Mateo,
Calif.-based Siebel Systems to its customers. J.D. Edwards has previously
admitted that it made a mistake by not developing its own CRM offering
instead, Wyatt said.

Reselling another company's product significantly reduces gross margins -
the money a company makes from a product after costs are subtracted.
Additionally, this strategy didn't sit well with customers, according to
First Union Securities.

'J.D. Edwards has quickly learned its recent strategy to go to market
utilizing reseller agreements with vendors such as Siebel Systems and
Ariba is not very popular with customers,' First Union analysts said in a
June report.

J.D. Edwards found that its customers preferred to deal with only one
vendor, First Union said.

PeopleSoft took a different path in the CRM arena and has benefited from
the decision, said Cameron Steele, a senior analyst with Dresdner
Kleinwort Wasserstein.

The company acquired Vantive, a Santa Clara, Calif.-based CRM software
developer, in January 2000 and began offering CRM solutions less than a
month after the acquisition. It has since fully integrated Vantive's
software into its products.

J.D. Edwards is in the process of developing its own CRM offering with
the acquisition of CRM software maker YouCentric.

Though Wyatt said the integration could be completed by as early as the
first quarter of 2002 because YouCentric's software is easily adaptable
to J.D. Edwards' software, analysts say it will take longer.

'Although we are positive on J.D. Edwards' entry into the CRM arena with
the acquisition of YouCentric, we believe the integration of the two
companies' solutions and the training of the sales force on the new
products will take a few quarters to complete,' Robertson Stephens
analyst Eric Upin said in his Aug. 27 report on J.D. Edwards.

In the report, Upin lowered his fiscal 2001 earnings forecast for J.D.
Edwards to 2 cents a share, from 18 cents. He also cut fiscal 2002
earnings to 16 cents a share, from 34 cents.

'We remain cautious on the stock given the company's continued transition
and a weak selling environment for software companies,' Upin said.

'In addition, J.D. Edwards faces heightened competition from Siebel and
other ERP vendors, such as Oracle and PeopleSoft - not only in the CRM
space, but in the mid-market,' he said.

Despite its struggles, J.D. Edwards still has a leadership position in
the mid-market, Thill of Credit Suisse First Boston said.

And though competitors are moving in on the company's target segment,
J.D. Edwards' software can better serve the customers in the market,
Wyatt said.

'We have a better solution for the segments we target,' he said.

'We're still very bullish on the business.'

positive about CEO Ed McVaney's plans for J.D. Edwards, but say it could
be a year before they bear fruit. The Denver Post/Jonathan Moreno


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