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No. of Recommendations: 56
Here is an analysis of i2 using Philip Fisher's 15 Points Framework. Philip Fisher is a favorite of Warren Buffett. (Buffett actually attributes a lot of his thinking to Philip Fisher.) Fisher was one of the first investors to realize the glories of true growth stocks. He suggested holding great companies for life, and never selling.

I highly recommend reading Philip Fisher's 3 books. They are very short (50-100 pages) but extremely insightful. Fisher goes over the "Scuttlebut" method of investing that he advocated (and largely invented).
He also goes over in detail, the 15 points to look at when evaluating a growth stock...

His books are:
1) Common Stocks and Uncommon Profits
2) Conservative Investors Sleep Well, and
3) Developing An Investment Philosophy

Here is the analysis...(It is somewhat dated, (a couple months old). And, to avoid being redundant -- since there are very good previous posts on such matters -- I didn't give a large description of i2's business and their products.)



Background: i2 is the leading supply chain management software company -- the company who largely designed and executed Dell's manufacturing and supply chain. They have a close working relationship with Dell [the CFO of Dell is 1 of only 2 outsiders on i2's board]. If one considers Dell's supply chain as a prototype for the future of collaborative manufacturing, then one must be intrigued with i2.

Key Points:
Great management team – see Point 15 (one that looks out for the shareholder)
Terrific sales force – see Point 4
Industry best technology – see nearly all points (Trade publications Traffic World, Information Week, and ComputerWorld support this assertion.)

Conclusion: i2 is the industry leader and a company worth investment consideration.

Philip Fisher's 15 Points Analyzed (Rough Sketch / Notes) (The points are summations and do not use Philip Fisher's wording verbatim.)

1) Does the company have the products to generate a sizable increase in sales? i2's products include supply chain management software and eBPO (e-business process optimization) applications for Internet transactions. i2 is the brains behind “dellification” of industry. Their products reduce lead times and inventory by replacing inventory with information. Their products also support “collaborative manufacturing”, or cooperation between suppliers and customers to create value in the supply chain.

2) Does management have the determination to continue to develop superior products? Yes, they own a lot of stock. Executive officers hold 55.2% of stock with Sanjiv Sidhu holding 44%. Their motivation to stay ahead translates into action; they funnel 24% of sales to R&D and one-third of i2's employees are in R&D roles. Also, Forbes ASAP magazine named i2 Technologies as the most dynamic company in 1998 (Microsoft ranked # 5). Another Forbes article on CEO Sanjiv Sidhu stated that, “His IQ is double that of most very smart people…He has a fanatical passion for the business.” As an example, i2 recently introduced the Rhythm Internet Fulfillment Server and eXchange, a virtual trading community for the high tech community. Private and public trading communities developed by i2 (such as the public one recently developed for Hewlett-Packard) will create annuity-like revenue streams in the near future. i2 is also broadening its product lines to offer a complete back end fulfillment solution. (1) Purchased transportation specialist, InterTrans, of Ontario, in mid-1998. (improved i2's position with consumer goods manufacturers.) (2) Decided to co-market with EXE technologies (Warehouse Management Software).

3) How effective are the company's R&D efforts: Customer list:

The Company has licensed RHYTHM products to over 600 customers since inception. The following is a partial list of companies that have licensed more than $1.0 million of RHYTHM products:

Abbott Laboratories
Applied Materials
AST Research
Bethlehem Steel
Bristol-Myers Squibb
British American Tobacco
British Steel
Broken Hill Proprietary
Compaq Computer
CSS Industries
Dell Computer
Dresser Rand
E&J Gallo Winery
Fletcher Challenge
Gateway 2000
GE Capital
GE Plastics
Herman Miller
Home Depot
Integrated Device
Iscor Limited
Johnson & Johnson
Lucent Technologies
National Steel
Newport News
Occidental Chemical
Philips Semiconductors
Ryder Logistics
Sara Lee Knit Products
Sherwin Williams
Siemens Semiconductors
Silicon Graphics
ST Microelectronics
Sun Microsystems
Texas Instruments
Thomson Consumer
US Steel
VF Services

This impressive list of customers indicates that i2's R&D efforts have been extremely impressive to date. Also, an article appearing in Information Week noted: “How has i2 done it? First, it's been a little more innovative than its peers.”

4) Does the company have an above average sales force? See customer list above. Also in 1998, a marketing trade publication, Sales & Marketing Management, named i2's sales forces #24 in the US for all industries. i2 recently signed an agreement with IBM sales force to have i2 products included in IBM turnkey offerings for manufacturing and retail sales. (e-business) Also, i2 is implemented by Andersen Consulting, Price Waterhouse and all other Big-5 consulting firms. Q2 conference call noted that recently there has been an even greater increase in interest in i2's products by Big-5 consulting firms. 59% of revenue came from existing customers in Q2 '99. i2 has a unique sales method that shows customers the benefit in their terms (i2 gets a percentage of the value created by its software implementation if it achieves a hurdle rate.)

5) Does the company have a worthwhile profit margin? i2 had a net profit margin in LFY of 5.5% while supporting 24% R&D. In addition, if one adjusts for i2's very large cash position (cash and S-T Investments is equal to about 65% of shareholder's equity), i2 has a very high Return on Invested Capital.

6) What is the company doing to maintain or improve its profit margins?
a) i2 actively considers acquisitions. With founder owning 44% of stock, one knows that i2 will not participate in inefficient and empire expanding acquisitions for the sake of doing them. Over the long-term, one can be quite confident in i2's acquisitions and that they are truly “synergistic” and strategically compelling. Warren Buffett notes that when you make an acquisition, you are actually selling part of your own business (issuing stock, debt or cash) to acquire another business. I believe that Sidhu will look at things in this manner and approach acquisition targets only when i2 receives as much intrinsic value as it gives by selling part of his company in an acquisition.
b) i2 is introducing many new products or modules to expand the utility of the Rhythm and eBPO suites.
c) i2 is increasing its already large installed base. As i2 moves into e-commerce applications, positive customer relationships should pay off with increased business.
d) It appears that i2 is more focused on increasing its installed base than on increasing its margins on a short-term basis. An increased installed base should bode well for margins in the long run.

7) Does the company have outstanding labor and personnel relationships? Yes, says so explicitly in 10-K. (Shouldn't take that for granted though.) Closer and less biased look shows that good relations are fostered through ESOP.

8) Does the company have outstanding executive relations? Yes, they are all significant owners, tying them to i2. The management has been expanded to include Mr. Gregory Brady, who came to i2 in 1994 after holding many positions at Oracle. Mr. Brady, the President, is paid twice as much as the founder, Sanjiv Sidhu. This hints at the founder's integrity and his business acumen. (He knows his specialties do not lie in business execution but rather in technological development. By recognizing his own limitations, he adds value to i2. Plus, his ego doesn't dictate that he has to be paid the most.)

9) Is there depth to management? Yes, although Mr. Sidhu is vastly important, he has surrounded himself with quality people. However, Mr. Sharma, the No. 2 man, has a brain tumor although he is still active in day to day operations (10-K). This point could be a criticism though. (Need more in depth look at this.)

10) How good are the cost analysis and cost control functions? Need “due diligence.” I would suspect they are rather good considering every dollar spent is essentially a dollar out of founder's pocket. i2 has no agency problem. Also, they specialize in helping companies utilize every asset efficiently, making one think that they would have a similar focus themselves.

The company does not appear to be flashy either. One Forbes article mentioned the CEO saying, “We'd rather be a bunch of techno nerds and geeks. People here don't look pretty. There are no Armani suits. No Gucci.”

11) Are there other aspects of the company that will provide clues as to how outstanding the company may be in relation to its competitors?
a) Partnerships with tech gorillas including HP and IBM. They also work closely with Big-5 consulting firms. Finally, as Microsoft becomes more interested in e-business, it has eyed i2 as a partner. Steve Ballmer is speaking at Planet99, i2's industry trade conference. In i2's Q2 conference call, i2's CEO responded to someone questioning this by saying that both i2 and Microsoft are interested in increasing their collaboration. Microsoft is consequently sending more engineers to work with i2 in Dallas.
b) First to make inroads into Japan among supply chain software companies.
c) No Y2K sales slowdown shows consistent demand for product and possibly even more demand once IT budgets don't have Y2K to worry about. Oracle blamed recent results partly on Y2K and said financial services and airlines will be adding databases once Y2K passes. i2 hasn't used that excuse.
d) A purchaser from Lucent mentioned in ComputerWorld that i2 is “so far ahead of SAP on functionality.”
e) i2 is part of the consulting value chain, meaning that their business should not slow down too much in a recession. They bring immediate productivity improvement and tangible savings to the customer (unlike ERP implementations), which should help in times of corporate downsizing. i2's product increases inventory velocity, reducing lead times and production waste. Timken Co. saw inventory fall 25% and lead and cycle times drop by 35%. Another company saw an increase in on-time delivery to 97% from 80%.
f) CFO of Manugistics (i2's primary competitor) resigned amid difficulties on 9/15/99. This hints that i2 is winning the battle with its major competitor. According to two articles in Traffic World, a logistics trade publication, i2 is beating Manugistics because it developed multiple location models and worked with ERP vendors to create advanced app add-ons. While Manugistics is tripping up, i2 is still succeeding. The conclusion must be that i2's product is more accepted in the marketplace and is having an easier time fighting off the big ERP vendors.
g) Recent announcement that their retail division saw sales skyrocket. (see news at I believe they tripled. This was traditionally MANU's strength. This really proves that MANU, who used to be i2's primary competitor is dead and ITWO is swallowing all of their business.

12) Does the company have a short-range or long-range outlook in regards to profits? Long range. Consistent spending of 24% of sales on R&D. They have significant technology partnerships with industry heavyweights. i2 is probably increasing installed base while sacrificing short-term margins to enhance future profitability.

13) Will growth require additional equity financing? That is doubtful, although acquisitions may be made by issuing equity. Positive operating cash flow should be used to fund expansion. Finally i2 is not in a capital-intensive business.
Ahhh....since I wrote this they announced that they were going to issue convertible debt to certain institutional investors. This is funny if one really looks carefully at i2's financial statements. They have strong operating cash flow, and a huge amount of cash on the balance sheet. Cash on the balance sheet actually equals $189 million (ST investments -- which are usually treasuries, plus actual cash.) What this says to me, if they are raising more cash -- and I heard a rumor to this effect -- is that they are building a war chest for a number of acquisitions, or a very large acquisition...Don't let 'em fool ya...they don't need more cash for working capital needs...Cash is 42% of the balance sheet for heaven's sake.

14) Does management get quiet when things are not going well? We don't know yet, but it is doubtful given their general candor and integrity (see below).

15) Is management of unquestionable integrity? Yes. According to the aforementioned Forbes article, CEO Sanjiv Sidhu is “Egoless.” Sanjiv for the past 3 years has paid himself $225,000 a year, including bonus. Mr. Sharma is also on the same pay schedule. However, Mr. Sharma has taken home a fairly sizable "other income" of $59,000-$193,000 in addition to his bonus over the past three years. However, these two men have not even given themselves one stock option. For the founder and No. 2 man of a fabulous tech company, this isn't that high of pay. It's really nothing for the value they provide the shareholders.

Compare this to Mr. Siebel of Siebel Systems. Siebel Systems is a good comparable company since Mr. Siebel, like Mr. Sidhu, founded the company and owns a large portion of the firm. Moreover, the firm is growing rapidly and is considered a leader in its market niche.

Mr. Siebel took home $800,000 last year in salary and bonus and an additional $2,000,000 in stock options. The year before that, he took home $320,000 and $1.4mm in stock options, and the year before that $320,000 and $4mm in stock options. The $7.4mm in stock options Mr. Siebel has granted himself comes directly out of shareholders' pockets, diluting their stake in SEBL.

The co-founder of Siebel Systems, Ms. House, has also been pretty liberal in this regard. Ms. House earned $675,000 last year and $500,000 in options. (97- $310K & $800K, 96 - $282K & $800K) This liberal granting of options and pretty decent pay comes out of the pockets of shareholders.

The CEO of i2 has refused to issue tons of options to himself and instead takes his pay in the form of the capital appreciation in his shares. By doing this, he is doing a service to his fellow shareholders. I think this provides a testament to the integrity of i2. It also provides shareholders a feeling of comfort while investing in this company, knowing that the founder isn't slowly going to dilute their stakes while he fattens his. Warren Buffett and Philip Fisher consistently talk about finding good people with integrity to get into business with or invest behind. I would say i2's management fits the bill.
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