TEXT-S&P revises JDA Software outlook to stable from negative
Overview -- U.S. software applications provider JDA Software Group filed its Annual Report for the year ended Dec. 31, 2011, is current on its 2012 Quarterly reports, and is in compliance with applicable filing requirements. -- The reports contain restated selected financial data for the years 2007-2010. The restated results reflect a change in the timing of recorded revenue over the indicated periods. -- We are revising the outlook on JDA to stable from negative and are affirming our 'BB-' corporate credit rating and senior unsecured ratings on the company. -- The stable rating outlook incorporates our expectation that leverage will be managed at 4x or below over time.. Rating Action On Aug. 16, 2012, Standard & Poor's Ratings Services revised its outlook on Scottsdale, Ariz.-based JDA Software Group Inc. to stable from negative. We also affirmed our ratings on JDA, including our 'BB-' corporate credit rating and our 'BB-' senior unsecured rating. The '3' recovery rating on the senior unsecured debt remains unchanged. The internal investigation led by JDA's audit committee found no indication of fraud or intentional wrongdoing. Additionally, the internal investigation did not reveal any issues with the existence of the recorded revenue or any impact to actual cash received or reported cash balances as of December 2011, 2010, and 2009. With its filings, JDA believes it is in compliance with applicable requirements. Rationale The ratings on JDA reflect its second-tier presence in a highly competitive and consolidating industry and its niche product offerings. A solid base of recurring revenues and currently moderate leverage for the rating partially offset these fundamental business characteristics. JDA is a provider of software applications offering a comprehensive suite of products, specializing in enterprise resource planning (ERP), supply-and-demand chain optimization, and analytics. The acquisition of I2 Technologies Inc. expanded JDA's customer base and product capabilities into the discrete manufacturing market, provided additional scale, and should help JDA realize cost synergies through higher utilization and rationalization of the combined sales, product development, and service organizations. Revenues for 2011 were about $700 million with more than one-third of that amount from recurring annual service and subscription fees. Since the rating incorporates Standard & Poor's expectation for continued acquisitive growth, the company's established track record of integrating operations helps temper acquisition-related risk concerns. Oracle Corp. and SAP AG are the foremost players in the market for core ERP software and services. They hold the majority share of the market, while the remaining ERP marketplace is highly fragmented. Oracle and SAP derive much of their business from large companies (greater than $5 billion in revenues). JDA primarily focuses on smaller, midsize companies ($100 million to $5 billion in revenues), a less penetrated market with higher growth prospects. JDA's "fair" business risk reflects its high customer retention rates, along with the fact that roughly 40% of revenues derive from maintenance contracts, support good revenue visibility, and enhance JDA's business position. Despite JDA's good market position in its niche, the company still faces competitive pressures from the leading players, which also participate in this segment and possess greater financial resources and technical capabilities. JDA's "significant" financial risk profile reflects EBITDA margins in the mid-20% area, largely because of increased scale and cost-reduction efforts. JDA generated moderate free operating cash flow (FOCF; about $92 million in 2011), helped, in part, by low capital expenditures (less than 3% of revenues) and minimal working capital requirements. Total debt to EBITDA is in the2x area. The company's financial flexibility has improved following the favorable settlement and final resolution of a lawsuit filed by a customer. JDA received a notice from the SEC requesting information related to revenue recognition and other accounting and financial reporting matters for certain past fiscal years. Liquidity The company has "adequate" liquidity and can cover its needs for the foreseeable future, even if EBITDA declines moderately. In addition to good free cash flow generation, other liquidity sources consist of cash of $366 million as of June 30, 2012), and currently full availability under its $100 million revolving credit facility. The company is in compliance with all debt covenants. Outlook The stable rating outlook incorporates our expectation that leverage will be managed at 4x or below over time. We could, however, lower the rating if the company has issues integrating acquired operations, shifts to a more aggressive growth strategy, or implements shareholder-friendly initiatives leading to sustained leverage above 4.5x. A possible upgrade is not likely over the near term. We will monitor developments regarding the ongoing SEC inquiry and progress of remediating its material weakness in its internal control of financial reporting. Related Criteria And Research -- Industry Economic Outlook: Despite Economic Headwinds, Global Technology Shows Balanced Ratings Trend, July 9, 2012 -- Issuer Ranking: Global Technology Ratings, Strongest To Weakest, June 29, 2012 -- Performance For U.S. Semiconductor Equipment Makers Has Been Volatile, But Ratings Remain Stable, June 11, 2012 -- Top 10 Investor Questions: How Will The Global Technology Industry Fare Amid An Economy In Flux?, April 26, 2012 -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Key Credit Factors: Methodology And Assumptions On Risks In The Global High Technology Industry, Oct. 15, 2009 -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List Ratings Affirmed; Outlook Action To From JDA Software Group Inc. Corporate Credit Rating BB-/Stable/-- BB-/Negative/-- Ratings Affirmed; Recovery Rating Unchanged JDA Software Group Inc. Senior Unsecured BB- Recovery Rating 3 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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