IFS Continues to Blossom

IFS Continues to Blossom
P.J. Jakovljevic - March 8th, 2000

Event Summary

On February 14, Industrial & Financial Systems (IFS AB) announced an increase in net revenue for 1999 to Swedish Kroner (SEK) 1,948 M compared to SEK 1,238 M in 1998, an increase of 57% compared with the previous year. License revenue rose by 49% to SEK 552 M as compared to SEK 371 M in 1998. IFS reported a loss after net financial items of SEK 147 M as compared to SEK 10 M in 1998.

IFS has been the fastest-growing vendor among the world's largest suppliers of enterprise applications over the past two years. Bengt Nilsson, president of IFS, commented: "IFS reports continued strong growth in revenue compared with our competitors. This can be attributed to major new sales of IFS' enterprise applications, among other things. The third generation of our component-based enterprise applications - IFS Applications - was shipped in September and has been well received by the market. Moreover, interest in IFS' e-business solutions increased significantly during the end of 1999. During the last quarter, IFS license revenue increased by no less than 70%, which is proof of the increasing demand for our advanced component-based enterprise applications and eBusiness modules."

"Market sales on the whole were considerably lower than expected during the latter part of the year due to customers' wait-and-see attitude toward the new millennium," continued Bengt Nilsson. "The lower growth rate in consulting revenue reported in the third quarter continued into the fourth, resulting in excess capacity among IFS consultants during the second half of the year. We expect our capacity to be fully utilized during the first half of 2000."

During the fall, IFS has further enhanced IFS Applications with an increased number of components for e-business. The 2000 generation of IFS Applications, because of its component-based architecture and rich array of Internet functions, is particularly suited to projects within e-business. Bengt Nilsson explained: "Today, a significant part of our sales to both new and existing customers encompasses e-business. A large number of IFS' 3000-strong customer base will need various types of e-business solutions, and IFS has developed systems to help them find the right solution."

IFS made major investments in the USA during the year through the acquisition of the US Manufacturing Execution Systems (MES) vendor, EMS, Inc. During the last quarter, 12 new contracts were signed, and net revenue in the USA for the fourth quarter rose by 283%. Bengt Nilsson commented: "Integration of EMS has gone well. IFS is now well positioned in the USA, which represents 40% of the world market. In the coming years, US operations will significantly increase their share of the Group's overall net revenue."

In November, IFS started its outsourcing unit, @IFS, which operates and maintains enterprise applications and e-business operations for IFS customers. The first customers were signed in November. In the middle of February, @IFS had nine new customers. "This operation has got off to a flying start. Customers hire us to do what we are best at, which allows them to concentrate on what they do best. We started in the Nordic region, and the USA is next in line," continued Bengt Nilsson.

The market for enterprise applications is expected to improve successively during 2000, reaching a growth rate of 20-35%. Bengt Nilsson adds: " In our assessment, IFS will continue to grow faster than the market. Moreover, operating margins in several of IFS' established markets are expected to increase as demand can be met with only a limited need for new recruitment." IFS had 3,226 employees at the end of the year, an increase of 67%.

Market Impact

We believe that IFS is in the driver's seat. It was one of the first ERP vendors to incorporate concepts of component technology, Internet and e-Commerce, and a high-level of integration with both its own and other vendors' components; all providing for flexibility, modularity, ongoing post-implementation system agility, and incremental deployment.

Concurrently with componentization of its suite, IFS has also developed the functionality depth and breath of its product. IFS Applications encompasses Front Office, Supply Chain Management, and E-Commerce functionality, in addition to conventional ERP modules. Moreover, the future incorporation of EMS's MES functionality may provide the Company with an almost "one-stop shop" functionality.

IFS also faces notable challenges. In order to maintain its strong growth, particularly in its global service and support execution, the Company will have to continue with service provider acquisitions. This may lead to both financial indigestion and poor management effectiveness.

Low profit margins in fiscal 1998 and a hefty loss in 1999 (See Figures 1 & 2) will not be looked upon favorably by discerning non-European investors. This could be an impediment to providing equity for the channel acquisitions needed to continue strong growth and increase its currently developing global market presence.

Furthermore, IFS's product portfolio, assembled through a number of recent acquisitions may see delays and costs resulting from resolving integration issues. Some modules, like Payroll, and more comprehensive Customer Relationship Management and Business Intelligence modules, are also not available at this stage and require an interface to 3rd-party software.

User Recommendations

We generally recommend including IFS in a long list of an enterprise application selection to mid-market and low end tier 1 companies (with $50M-$1B in revenue) within the following industries: Energy, Engineer-to-Order and Project delivery, Forest Segments, Automotive, Service Management, and Transportation.

IFS should be included on a short list in any selection within the following industries: Aviation, Engineer-to-Order and Project delivery, Service Management, and Transportation, on the condition that a Payroll module is not of primary significance to the customer.

However, potential clients should conduct preliminary research on industry expertise and reference sites of a regional IFS office or an affiliate service provider when IFS is included in the selection process due to its nascent distribution network outside of the European market.


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