ITWO -ein Turnaroundwert

Dow Jones Newswire:

The once-highflying company has been hobbled by a prolonged slump in demand for its supply-chain software as well as by accounting problems. It recently restated financial statements dating back to 1998, reducing reported revenue by $359.7 million over a several-year period. It is the subject of a formal Securities and Exchange Commission investigation, and its shares were delisted by Nasdaq officials in May.

Yet a collection of risk-taking money managers has been buying i2's stock and convertible bonds in recent months, betting that the Dallas company will survive these trials and its distressed stock and debt will rebound.

I2 is valued "like a software company that's not a going concern," says a software analyst at a hedge fund that has been buying i2 shares. "There is no way this company is going out of business," he says.

I2 has reduced its cash burn by slashing costs and has a steady stream of maintenance revenue, or revenue for product support and upgrades from existing customers, he says.

The shares - which trade on the lightly regulated Pink Sheets under the ticker symbol, "ITWO ," - were trading Tuesday at $1.22. The stock has rallied since falling as low as 52 cents in May, but remains below its 52-week high of $1.93 set last December. (I2 remains 99% below its peak of $110, which was set in the Internet-crazed days of March 2000.) Among the firms that have bought i2 shares since March are several prominent hedge funds, according to SEC filings.

Duquesne Capital Management LLC, which is run by George Soros' former lieutenant, Stanley Druckenmiller, purchased 3.1 million shares and 1.7 million of i2's convertible bonds in the June quarter. Karsch Capital LLC, run by another Soros alumnus, bought 1.7 million i2 shares in the same period. Galleon Management LP doubled its stake to 1.6 million shares, while JANA Partners LP bought 1 million shares, filings for the June quarter show.

These new investors have become some of i2's biggest institutional holders, replacing mutual funds and more staid money managers that cashed out of i2 earlier this year. Wellington Management Co., which manages funds for Vanguard, Hartford and others, sold its 22.1 million i2 shares in the June quarter, SEC filings show. Meanwhile, Fidelity Management sold its 4.3 million i2 shares, according to filings.

A Liquidity Play
Much of Wall Street remains skeptical of i2. Only one of the 10 brokerages that still follow the company (down from 34 firms at the end of 2000) recommends buying the stock, according to Thomson First Call. Standard & Poor's rates i2's bonds at CCC-, or highly speculative, and said in July the company faces "considerable challenges restoring sustainable profitability under current conditions."

Several hedge-fund analysts, who spoke on condition of anonymity, say i2 "turned a major corner" when it completed its re-audit and filed overdue financial reports in July. While its recovery will take several quarters, they argue its stock is at attractive levels.

With the stock trading around $1, "it's basically a call option on liquidity. Can this company stay alive?" says a second hedge fund analyst, whose firm has been buying i2 shares.

I2 sports a market capitalization of $550 million, or about one time this year's expected revenue. (I2 is forecast to have revenue of $515 million in 2003, down from a peak of peak of $1.13 billion set in 2000.) The company had $354.6 million in cash and investments and $356.8 million of long-term debt at the end of June.

The bargain hunters say the company could trade at two times sales if it can stabilize its business and start signing up new customers. After two years of losses and layoffs, i2 reported a profit in the first half of 2003, though its results were padded by restated revenue deferred from previous periods.

Supporters argue the company will survive its current woes because many of its existing customers have stayed with the company. i2 software runs factories, handles transactions with suppliers and manages store inventories. It is costly and complex to install.

"To date we certainly have not seen any kind of precipitous fall out from customers," says Janet Eden-Harris, i2's chief marketing officer. She says over 85% of customers are renewing maintenance contracts with i2 for ongoing support.

I2's software "is kind of like the (supply-chain) backbone. You don't take it out overnight and put somebody else in," says Gene Hunt, chairman of the i2 User Group, an Atlanta-based organization that represents 300 of the company's customers.

Pent-Up Demand
The company introduced a major upgrade to its software, i2 version 6, in March and some supporters are hopeful the release will fuel an upgrade cycle and drive sales to new customers in the seasonally strong December quarter and next year.

"There is definitely some pent-up demand for their products and this upgrade cycle," says the first hedge fund analyst. However, it will take several quarters for the company's sales force to regain its footing, this person cautions.

Last month, market-research firm Gartner Inc. raised its vendor rating on i2 to "promising" from "caution," saying the company "is past the most difficult problems of its restructuring."

Gartner analyst Karen Peterson says i2 customers, who questioned the company's viability earlier this year, are now supporting the company. "Before we didn't see a lot of loyalty.... we saw a lot of frustration," she said.

I2 angered some companies during the boom days by overpromising what its products could do and charging tens of millions of dollars. The company suffered a black eye in early 2001 when Nike Inc. (NKE) publicly blamed i2's software for an earnings shortfall.

In the past two years, i2 has focused on helping those companies that bought its software get it up and running, Peterson says. It has used a software-development center in India to lower prices and improve customer service.
By MARCELO PRINCE
DOW JONES NEWSWIRES
I2, which claims more than 1,000 active customers, has about 100 in the process of migrating to version 6 or planning for such an upgrade, says Eden-Harris. They include Whirlpool Corp. (WHR), DaimlerChrysler AG's (DCX) Freightliner and Airbus (F.ABI).

Nevertheless, the company needs to woo new customers to regain the support of Wall Street and boost its valuation, investors say. In the first six months of 2003, i2 reported new software license revenue fell 20% to $36.4 million, while total revenue fell 23% to $279.9 million.

The company reported a profit of $42.3 million in the first half of 2003, compared with a loss of nearly $1 billion in the year-ago period, which included a large acquisition-related charge. Expenses were $229.5 million in the first half of 2003, down from $425.7 million a year ago.

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