IFS Glows Amidst The Mid-Market Gloom




IFS Glows Amidst The Mid-Market Gloom
P.J. Jakovljevic - September 28, 2001

Event Summary

On August 24, IFS AB (XSSE:IFS), a Swedish mid-market enterprise applications vendor, reported upbeat results for the second quarter of fiscal 2001 amidst a prevailing gloom within the Tier 2 & 3 vendors. After four consecutive losing quarters, IFS was pleased to report Q2 2001 profits of ~$2 million after net financial items, compared with a loss of ~$10 million for the corresponding period in 2000 (See Figure 1). Total revenue increased by 62% to ~$84 million, compared with ~$52 million for Q2 2000. License revenue was up a whopping 82% to ~$40 million, compared with ~$22 million a year ago.

Figure 1.

This positions IFS as the fifth largest ERP provider during the second quarter in terms of license sales, while the company occupied the first position in terms of the fastest total and license revenue growth, stealing thereby the thunder from recently ebullient SAP and PeopleSoft. More important, the growth has been almost completely organic, as no significant acquisitions were made during the past 12 months.

Furthermore, IFS North America reported earnings of ~$2 million and is now IFS' largest market with 35% of total sales. The contract won from General Electric was the largest in the company's history and was of multifaceted paramount importance. GE Engine Services (GEES) has selected IFS software to run its 60 worldwide Maintenance, Repair, and Overhaul (MRO) facilities. GE will also market the application to airline and independent MRO providers. The multi-million dollar agreement will start with a deployment for 4,500 users. GE will then market the application to commercial airline maintenance facilities.

Also recently, an agreement has been signed concerning deeper technological and commercial collaboration with ABB. ABB has also acquired 3.7% of IFS, which represents 1.8% of the voting rights, through a direct share issue valued at roughly $10 million. The investment by ABB New Ventures strengthens an existing technical and commercial alliance between ABB and IFS. For more than a year, IFS has been developing ways to integrate its business software with ABB's Industrial IT platform. ABB signed an agreement with IFS in January to resell IFS Applications components. In the long term, cross licensing of system components between the companies might decrease research and development costs for both partners.

Bengt Nilsson, president and CEO of IFS, said, "The positive earnings trend is a result of strong license sales, especially during the second quarter. The market for business applications has grown 10%. Thanks to a strong product, we have succeeded in taking market share and increasing sales despite tight cost controls and fewer personnel. The orders from General Electric and General Dynamics and the partnership alliance agreements with General Electric and ABB are vital steps in our strategy to become a market leader in selected segments and thereby improve margins in the long term. We are pleased by the confidence shown in IFS and by the help from our partners in increasing our market share."

Towards the end of 2000, IFS initiated an action plan to strengthen the board, management, financing, profitability, and cash flow, which has been implemented. It is expected to have positive effects in the form of cost reduction in excess of ~$18 million during the current year compared with the cost level during the fourth quarter of 2000. However, the measures to reduce costs and improve cash flow have yet to produce their full effect and will be intensified and scrutinized during the remainder of the year. In its outlook for the rest of the year, IFS expects continued cost containment rationalization coupled with further growth to result in improved earnings for the rest of 2001. To that end, the product development will be more sharply focused on refining functionality, particularly within specific industry segments that are of strategic interest for IFS and its premium partners.

Market Impact

IFS' results should give hope to its embattled peers that it is possible to spar with the bigger players provided you have an appropriate approach. The company has realized and addressed the seriousness of its protracted poor financial performance, by focusing on profitability/positive cash flow, balanced growth through more reliance on growth and product enhancements through strategic partnerships, and product development costs tied to new sales. Sharp execution should continue be the name of the game. One should expect better financial performance in the future given the curbing of R&D expense and increased fiscal discipline, along with a healthy growth in the US and Latin America owing to IFS' expertise in certain vertical niches (see User Recommendations).

During 2000, IFS invested heavily in product development to complete the new version of its business applications, IFS Applications 2001. The product release should keep the company abreast with the latest market trends, as it boasts all the traditional ERP functionality and much more. In fall of 2000, when the product was launched, the 'hot items' were new e-procurement, customer relationship management (CRM), flow manufacturing, portal, and wireless capabilities. Furthermore, at the beginning of 2001, IFS announced an enhanced advanced planning & scheduling (APS) system featuring new Web-based "portlets" to provide improved demand forecasting visibility across the supply chain. In March, it launched its new eMarkets solution that should provide support for both private and public exchanges (marketplaces). Last but not least, in April, the company announced IFS Engage, a portal-based packaged solution for medium-size manufacturers. Engage helps manufacturers relatively quickly extend their existing ERP applications into e-Business, e-CRM, and extended SCM in a manageable, incremental fashion. The first modules currently available through IFS Engage are CRM, collaborative planning, vendor-managed inventory (VMI), collaborative project management, and subcontracting, with many others envisioned for the future.

While IFS has been well-known for providing ERP applications to medium-to-large organizations, that make complex, highly engineered products, with project-based manufacturing processes and asset intensive operations, it has long been trying to crack the U.S. Aerospace and Defense (A&D) industry. To that end, the GE contract might bear much more importance to IFS than a mere bruising of the bigger guys' egos (and even replacing an incumbent Tier 1 vendor in case). The intense scrutiny that the company of GE's stature has put IFS through in making its selection, should provide an increased confidence in IFS for the rest of high-profile prospects in all other IFS' target markets.

The magnitude of the deal can be seen in GE's decision to resell the software as a co-branded product to their commercial aircraft engine customers and prospects, where it has been considered the world's leading supplier. IFS thereby gets the chance to gain valuable exposure and to prove its ability to engage companies in a private trade exchange (PTX), possibly via IFS eMarkets solution. IFS' recognition should be bolstered with the GE deal as also seen in very recent wins at Derco Aerospace, UK Defence Logistics Organisation (DLO) and General Dynamics, in the great part owing to its strong MRO functionality. IFS has thereby encroached upon the stronghold of vendors like Western Data Systems (WDS), Epicor Software, Mincom, SAP, Oracle, Cincom Systems, MRO Software, and Ramco Systems. Moreover, deals from likes of GE could also allay many concerns regarding IFS Applications scalability, which has also plagued it in the past within the higher-end of the market.

Challenges

While the product with web-based component architecture, sharp focus and the attractive pricing should remain a winning combination, IFS should produce a few more profitable quarters to persuade risk-averse customers notwithstanding. Moreover, even with IFS' presence in 43 countries, the challenge of international expansion and low brand awareness could be heightened by the company's inconsistent industry expertise and focus in different markets so far.

While IFS' US client base has been predominantly in discrete complex manufacturing, little has been known about the company's expertise in utilities and process manufacturing segments elsewhere in the world. IFS, consequently, plans to expand its comprehensive ERP suite through internal development programs and strategic partnerships with leading suppliers such as PipeChain, a supply chain execution (SCE) vendor primarily in the process manufacturing industry.

IFS might also expand its presence in the world markets by establishing strong collaborative relationships with leading solution providers such as Cap Gemini Ernst & Young. This partnership will focus primarily on solutions for vertical industries such as energy and utilities. Another move is the recent alliance with ABB to deliver IFS Enterprise Asset Management (EAM) solutions. IFS will be using the cash infusion from ABB to the task of building IFS's EAM software on top of the ABB Industrial IT platform, which controls processes in power transmission, power distribution, automation, oil, gas, petrochemicals, and building technologies.

Greater shift of focus on its still relatively undeveloped indirect channel, which has been a major success factor for some companies in the mid-market, and which will be executed through a number of announced market/industry-based partnerships, could remedy IFS' predicament in the long run.

User Recommendations

The challenges aside, look for a vigorous IFS participation in many future software selection deals within its market segments of focus. The company has broadened its product lines and has responded to recent market trends, and, consequently, has been in the rear mirror of Tier 1 vendors. Time only will tell how well it will address its inferior viability compared to its bigger brethren. As the financial viability is of great importance, ensure that you feel comfortable with the IFS executives' assurances thereof, should the product offer a perfect fit to your business processes. To our belief, recent events vouch for stable future given that IFS' lackluster profitability in the past has been attributable to heavy investment in R&D and global market expansion, both of which have been recently curbed.

Medium and large discrete manufacturing enterprises with strong ETO, EAM and MRO-oriented requirements should put IFS Applications on the short list. Other industries (e.g., utilities, process manufacturing, etc.) might benefit from evaluating IFS subject to their geographic location, as the company's industry focus varies significantly in different geographic markets. More comprehensive recommendations for both current and potential IFS users can be found in Industrial & Financial Systems, IFS AB: Thriving on Product Flexibility and Incremental Deployability.

 
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