IFS' Tamed Growth + Continued Losses + Increased Competitors' Lobby Talk = Decreased Customer Confidence

IFS' Tamed Growth + Continued Losses + Increased Competitors' Lobby Talk = Decreased Customer Confidence
P.J. Jakovljevic - June 15, 2001

Event Summary

On May 17, IFS Industrial & Financial Systems AB, a Swedish mid-market business applications vendor, was presented, for the second consecutive year, with the Computerworld IT Company of the Year award in Brazil. IFS, which has only been operating in Brazil for slightly less than four years, took the prize in competition with more than 100 midsize IT companies. Computerworld, owned by the global publishing house, IDG, annually selects the IT company of the year in Brazil. Computerworld cited the following reasons for selecting IFS: "IFS has been named IT Company of the Year in Brazil due to its sales successes in 2000, combined with a number of criteria such as market share, the way it conducts business, its partnership program, product quality, and market acceptance."

The news comes as some consolation to the company's continued poor financial performance, which has been increasingly used as a negative publicity weapon by its mightier competitors. Earlier in May, IFS reported much less amusing results for the first quarter of fiscal 2001 (See Figure 1). The company reported a 46% growth in net sales for Q1 2001, totaling ~$74 million, compared with ~$57 million in Q1 2000. License revenue was up 50% to ~$25 million, while utilization of consultants improved significantly, resulting in an increase in consulting revenue of 38% to ~$49 million.

Figure 1.

Earnings after net financial items improved somewhat, with the company reporting a loss of ~$7.6 million, excluding non-recurring items in the form of unrealized losses deriving from a write-down in its shareholding in Pivotal Corporation (NASDAQ: PVTL). The loss for the comparable period in 2000 amounted to ~$12.3 million. The action plan initiated in December 2000 has been partly implemented, and is expected to have a positive effect on costs and cash flow only during the remainder of the year. To that end, the disappointing fact was the net loss of ~$12.6 million in Q1 2001, compared with a profit of ~$6 million in Q1 2000 although that figure was boosted by a gain of ~$17.3 million from the sale of Exactium Inc. to Pivotal Corporation (for more information, see What is IFS Up To in the CRM Arena?!).

Bengt Nilsson, president and CEO of IFS, commented, "The outcome in Q1, normally a weak quarter in the industry, is generally in line with our expectations, even if we noted a slight slowdown in license sales in the US and Central & Eastern Europe toward the end of the period. The drop-off has been compensated for in part, but not entirely, by better consulting revenue than expected. Our investment in technology has given us a leading position. IFS Applications 2001 has been enthusiastically received and is already running at several customer sites. We no longer need to invest as much in basic R&D but can concentrate instead on refining and enhancing functionality for specific industries in collaboration with our partners. Continued sales growth means that we will be able to reduce the cost of product development as a percentage of total revenue, our objective being 40% of license sales."

On a more positive note, the action plan designed to strengthen the management, the board and financing has essentially been implemented. The introduction of a new management organization has commenced, the results of which will be announced in Q2 2001. However, the measures to reduce costs and improve cash flow have admittedly yet to produce their full effect and will be intensified during the remainder of the year. Reductions in the workforce affecting 260 employees have been made, primarily in Southeast Asia, Germany, Benelux, Sweden, and Denmark.

Finances have been strengthened by ~$40 million via the issuance of a convertible debenture loan in an amount of ~$20 million and a directed share issue amounting to ~$20 million. The equity/assets ratio is 54% with the convertible debenture loan included in shareholders' equity. While US operations reported greatly improved earnings, one could not but feel a pang of anxiety due to somewhat slower sales toward the end of the period.

Market Impact

While it is apparent that IFS has realized and addressed the seriousness of its poor recent financial performance, the market has yet to see concrete results. IFS' focus on profitability/positive cash flow, balanced growth with more reliance on growth through strategic partnerships, combined with product development costs tied to new sales (to remain below 40% of license revenue) are steps in the right direction. Sharp execution should be the name of the game from now on, if that has not been the case from the way back.

Although one could speculate better financial performance in the future given the curbing of R&D expense and increased fiscal discipline, it is also subject to the continuation of a healthy growth, which has very recently recently become questionable in the important North American market.

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 for the reasons mentioned in IFS Aspires To Capture North American Market Against The Low Tide.

TEC has also recently seen IFS making the final list in many software selection engagements particularly within the engineer-to-order (ETO) manufacturing sector, raising the bar for its more prominent competitors. Although not necessarily taking the highest spot after responding to the initial request for proposal (RFP) document, the company often impresses prospective users during scripted software demonstrations.

While good product, sharp focus and attractive pricing are often a winning combination, it might not suffice in the current market with risk-averse customers notwithstanding. There are some indications that the attention to IFS' liquidity and viability issues, often boosted by bigger competitors' 'lobby talk' might have caused prospects to postpone their decisions/orders. Nobody is eager to start a long-term relationship with a vendor whose viability is uncertain. Additionally, in the US, the situation might be aggravated by the fact that IFS' track record of successful regional implementations is still only at a growing stage. Currently it is at the level of only a couple of hundred customers, although this market contributes to 25% of IFS' revenue.

With this in mind, even with IFS' presence in 43 countries, the challenge of international expansion and only a "dark horse" brand awareness could even be augmented given the announced downsizing in some under performing markets. Greater reliance on its currently undeveloped indirect channel, which has been a major success factor for many companies in the mid-market, and which will only have to be executed through a number of announced market/industry-based partnerships, could prove to be beneficial albeit only in the long run. As a bottom line, while IFS might still have a number of trumps in its hand, it should go out of its way to return to profitability in order not to enter the vicious circle of stalled growth and subsequent dismal financial results.

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, outgunned its opponents in a number of deals. Time only will tell how well it will address its inferior viability compared to its bigger brethren. It is needless to say that the financial viability is of paramount importance, and, therefore, make sure that you feel comfortable with the IFS executives' assurances thereof, should the product offer a perfect fit to your business processes.

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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