IFS Far Cry From Running Out of Breath

IFS Far Cry From Running Out of Breath
P.J. Jakovljevic - June 29, 2000

Event Summary

In May, IFS, a Swedish ERP vendor, reported results for Q1 2000. It generated revenue of $57.0 million, a 21% increase compared to a year ago. License revenue grew 73% quarter over quarter to $18.6 million, while net income was $6.0 million (See Figure 1). IFS has continued its investments in the US market. Net sales in North America rose by 248% to $13.2 million, and the US market accounted for 23% of sales during 1Q00. Earnings during the period were affected by the fact that IFS' shareholding in Exactium was divested to US-based Pivotal Inc, which became a significant e-business partner at the same time. The sale generated a capital gain of $23.5 million.

Figure 1.

"Our license sales are progressing favorably," said Bengt Nilsson, president of IFS. "At the same time, in the first quarter, typically the slowest for enterprise applications, earnings are linked to the trend toward slower growth in consulting time due to the millennium shift. In March, we already saw an increase in consulting revenue due to the excellent license sales IFS has experienced since the fall."

"Our activities in the US are now starting to show results. The acquisition of EMS, Inc. in the US has given us a stronger position in the crucial US market, with many new transactions as a result," Bengt Nilsson continued. "During the first quarter, IFS sold a large number of e-business solutions, both to traditional industries and to newly established dot com companies. The @IFS outsourcing company that was started in November has performed well during the first part of the year and has further increased its customer base. The reason for the increased license sales is the increasingly growing demand for modern component-based business systems, not least because of their usefulness within the area of e-business. My assessment is that, in the year 2000, IFS will be able to report a higher rate of growth than the 20-35% average market growth predicted for the full year. During the first quarter, IFS yet again led the industry in growth, with a 21% increase in sales compared to the ten largest business applications vendors, whose sales increased by only 4%. IFS' investments in development are continuing. In the fall, IFS will launch its fourth generation of component technology. According to the Swedish technology magazine, Ny Teknik, IFS was one of the companies in Sweden that invested most in research and development, in relation to sales, during 1999."

It is anticipated that operating margins will improve due to the fact that several IFS companies established in 1999 are now moving into a consolidation phase. "Our goal for the full year remains the same - to have a sales increase better than the market. With the sale of Exactium Ltd., profit margins are expected to be significantly better than the previously projected 5%," concluded Bengt Nilsson.

Market Impact

IFS remains a shining star on the gloomy ERP skyline. While the majority of its direct competitors have been struggling to reinvent themselves in the new economy, IFS has continually been increasing its market share. It continues to react more nimbly than the rest of the ERP market to the market trends. We believe that its recipe for success is a good balance of the following required elements of the game - a flexible and technologically superior product, deep vertical functionality, reputable customer service, and prudent acquisitions and/or alliance moves. The EMS acquisition proves to be an epitome of success, particularly in terms of penetrating the US market.

Nevertheless, the challenge of further international expansion remains. Moreover, one should closely watch future IFS profitability and keep in mind that the profit in this quarter was mainly attributable to the above-mentioned sale of Exactium. Prior to that, the company had posted three consecutive losses (See Figure 1), and its shareholders may have started feeling jittery and stopped subscribing to the "growth at all costs" mantra.

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. As for the new added functionality through partnerships, users are advised to ask for firm assurances on the availability and timeframes of future upgrades, and more detailed scope of combined product functionality.

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