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Manugistics' CEO gave a nice fifteen minute speech on Friday that encouraged investors about the prospects of his company despite its languishing stock price. After announcing that the company will be reporting a loss after coming off the best quarter that any supply chain company has had in history, he essentially stated that management was distracted and that growth would still be inline for 1999. I'm not sure, however, that Manugistics is truly giving an accurate portrayal of their future. Despite proclamations that this quarter was a tough one, my guess is that Manugistics "ain't seen nuthin' yet."

Short-term, perhaps the best word to describe Manugistics at this point is probably going to be "oversold." Fundamentally at the moment they're still a strong company in a strong sector but the real troubles are awaiting in the coming year. SAP and PeopleSoft may prove to be very serious threats to this corporation and despite hopeful rumors to the contrary I'd be very suprised to see either of them purchase Manugistics. SAP has become notorious for developing software inhouse and has devoted a significant staff of programmers to tackling the supply chain software market. Although SAP is only slowly ramping up their entry into the business by focusing on narrow vertical markets, if their most recent launch is any indication of future success then Manugistics and yes, i2, may have an early burial in store. SAP, possessing what are widely believed to be inferior supply chain products at the moment, looks to have snagged three of Manugistics marquee customers: Sara Lee, Colgate-Palmolive, and Reebok.

With Manugistics stock trading below thirty, however, I certainly like their odds and any deterioration in their business could probably be spotted before the market really catches on. Notice that concerns about SAP as competition did not seriously get factored into Manugistics' stock price until now, almost a month after they announced their first successful entry into the business. For my own portfolio I'm delaying a purchase to see what happens over the next several months and to get a better feel for the competive landscape of the business.

One place to watch out for a fall in this space is i2, the other major supply chain company. The stock has been marked by relative strength in the face of Manugistics fall and many investors do not yet seem to have factored in the potential threat that SAP poses. Although the majority of the buzz on the street about SAP's offerings is that they will hurt Manugistics because of their focus on the traditional consumer goods space, there is a large threat to i2's high tech customer base as well. An article that appeared in Semiconductor Business News near the beginning of the year, states that, "A new version of R/3, expected to be shipped later this year, is scheduled to include features that will enable chip makers to more efficiently provide BTO [build-to-order] services. It was developed by SAP after Intel, Motorola, and TI pressed the software vendor to enhance the functionality of R/3 to support their BTO strategies. TI is putting in a not-yet-released version of R/3 that is expected to include advanced functions that will make it easier for the supplier to run its flavor of BTO. Motorola is now considering whether to upgrade to this new edition." This looks to me like SAP's methodical but indirect encroachment into supply chain management for the high tech industries. With the majority of large technology companies running or implementing SAP's R/3 as their ERP processing backbone, SAP is in a good position to leverage their position into the supply chain market.

To conclude we are left, as always, only with questions. Will SAP and PeopleSoft prove to be a serious threat to Manugistics and i2? Honestly, no one is certain. Because of the uncertainty surrounding the space I'm not holding any shares in either supply chain software company. Later this year we should have a much better idea as to whom will emerge as a winner in the sector, in the meantime I feel much more comfortable holding onto my ERP stalwarts SAP and PeopleSoft who have a lot less to lose.

For what it's worth...

-Brent-
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