Faces Uphill Climb
S. McVey - November 1st, 1999
Founded in 1967, Swedish supply chain execution (SCE) software vendor Industri-Matematik
began as a custom software development and consulting services organization.
The company developed and delivered its first distribution logistics software
in 1974, its first UNIX-based version in 1984 and its first Oracle-based client/server
version in 1991. In 1993, the company introduced System ESS, which was designed
to meet the needs of multinational manufacturers, distributors and wholesalers.
Venture capital firm, E. M. Warburg Pincus purchased IMI in 1991 and took the
company public in the U.S. in September 1996.
all of IMI's revenues in the last three years have been attributable to license
fees and related services, including software maintenance and support, implementation,
consulting, and training. Less than two percent of revenues are derived from
third-party hardware sales for those customers who desire a "single source"
solution. In the fiscal year ending April 30, 1999, the company achieved $85
million in total revenues with 20% derived from licenses, 78% from services
and support, and the remainder from hardware component sales. License sales
as a percentage of revenues have declined dramatically over the last three years
with the peak at 44% for fiscal 1997 (see Fig. 2). Net earnings increased gradually
from 1995 to 1998, then fell sharply into negative territory in 1999 with a
loss of $35 million (see Fig. 3). Though IMI focused originally on distribution
and logistics for companies in the consumer packaged goods industry, two acquisitions
completed since April 1997 were intended to extend its reach into activities
that surround customer fulfillment. Through acquisition of Ceratina International
AB in April 1997, IMI added warehouse management system (WMS) functionality.
IMI made an early move into the CRM market space last December when it acquired
Stockholm-based vendor Abalon AB for $9.5 million. VIVALDI, its new aggregated
suite of global fulfillment and customer service software for e-commerce was
announced in May 1999. Incorporating both internally developed modules and acquired
products, VIVALDI combines best of breed components in three primary areas:
supply chain execution, customer relationship management, and order management.
Strategy and Trajectory
Industri-Matematik primarily targets the consumer packaged goods and high-volume
wholesale distribution markets. About one year ago, IMI broadened its focus
to include new verticals characterized by complex logistics and high transaction
volumes, including large consumer durables manufacturers, retailers, and third
party logistics providers. IMI also targets large, multinational companies so
that successful implementations at a single site can be propagated into other
divisions of the client's organizations. Further revenue growth is anticipated
through enhancement of core product functionality via internal development,
selected acquisitions, and third party vendor alliances.
recently as February 1998, IMI boasted a market capitalization of over $1 billion
and the top spot among SCE vendors in total license revenues. Rumors of poorer
than expected earnings and subsequent confirmation caused its stock to lose
more than half its value by early May 1998. A series of poor earnings announcements
followed (see Fig. 3), causing IMI's market cap to plummet to under $80 million.
In response to these events, disgruntled investors filed a class action lawsuit
against the company in February 1999 that alleges it misrepresented revenue
and earnings figures in 1997 and 1998 and conspired with auditors and underwriters
to inflate its stock price. IMI appointed a new CFO, Karl Asp, in June 1999.
Though IMI maintains the market lead, competitors Manhattan Associates and McHugh
Software are likely to usurp its position as early as 2Q00. IMI recently signed
an agreement with IBM to jointly market VIVALDI to customers in the retail,
wholesale, consumer durables, consumer-packaged goods, and electronics industries
through global direct sales teams. IMI is counting on the new arrangement to
help revive a revenue stream no longer supported adequately through its long-standing
Logical market expansion strategy: Similarly to other enterprise
software vendors, IMI has begun to expand its market presence by adding
complementary applications to its suite. We believe that IMI is growing
its footprint in the right direction by augmenting its demand-chain fulfillment
to back-end warehouse management and front-end customer care capabilities.
IMI was earlier to embrace CRM (Abalon, 12/98) than SCM market leader i2
Technologies (SMART, 6/99).
Advanced product functionality: Though significant sales
of its new product, VIVALDI, have yet to materialize, the suite provides
many differentiating features, including support for 13 languages, advanced
messaging (via partnership with Frontec AMT that began July 1997), and support
for web- Java-based clients.
Uniformly distributed customer base: A result of its long
operating history and early move to the U.S. (1993), IMI has developed a
well-distributed customer base in North America and Europe, deriving 47%
and 51% of revenues from these regions, respectively. The Pacific Rim accounts
for the remaining 3%. Well-established, high profile clients, including
Campbell Soup Co., Smuckers, Este Lauder, and Starbucks aid its visibility
in the U.S.
Eroding financial condition: Over the last five quarters,
IMI's financial condition has declined significantly, with failing revenues
from both licenses and services. In addition, substantial operating expenses
each quarter have caused the company to post steady losses (see Fig. 3).
Although liquidity is still above the market average, continued losses will
damage the company's ability to fund development activities and make acquisitions.
Litigation concerns: Although investor lawsuits rest largely
on circumstantial evidence, the class action lawsuit brought against IMI
contains compelling arguments that may force a settlement. Though IMI's
capital position remains strong in spite of recent losses, such an event
would complicate its ability to raise equity capital if losses continue.
Dependence on Oracle Corporation: In January 1997, IMI
signed an exclusive agreement with Oracle that enables the ERP vendor to
market and sell System ESS to customers in the CPG industries. While IMI
profited from the strong indirect channel in 1997 and 1998 (63% and 53%
of total revenues, respectively), revenues from the arrangement have fallen
drastically in 1999 to 20% of total. If IMI is to persist as an independent
entity, it must pursue an indirect channel strategy that is diversified
among multiple complementary vendors.
In spite of its recent legal problems and poor revenues,
IMI is a possible takeover or merger candidate. Such a combination with
current partner i2 Technologies is doubtful at this stage, but some synergies
would be evident in a merger with another SCE vendor such as Optum, Manhattan
Associates, or EXE Technologies (40% probability). Among ERP vendors, Oracle
is the most likely acquirer due to its experienced relationship with IMI
Due to strong circumstantial evidence, there is a great
likelihood that IMI will be forced into a settlement with litigants in its
class action lawsuit. Although this may spark further speculation about
the management team's reliability, this may be the only way that IMI can
put the matter behind them in the long run (60% probability).
Concentrate development focus on CRM, Sales and Marketing:
IMI needs to be able to offer customers seamless integration among its warehouse
management, order fulfillment, and customer care applications, so this should
be the primary area of development focus. Of secondary importance is a tight
integration between these parts of VIVALDI and the sales and marketing
Foster ongoing partnerships to expand geographic coverage
toward Asia: IMI should capitalize on its alliance with IBM and i2 Technologies
and seek licenses from native sources in Asian markets. Currently, IMI has
two U.S.-based customers in this region, Nike Japan and President's Foods
(Taiwan). Rival EXE Technologies benefits from a stronger alliance with
IMI has introduced a tool called Value Improvement Analysis
(VIA) that highlights problem areas within a customer's business to yield
an optimized implementation scope. Properly leveraged, this approach can
further differentiate IMI's solution from its competition, due to increased
user interest in methods for maximizing the potential for project success.
Industri-Matematik's difficulties bring to light an important consideration
for all users who are evaluating a future business partner: validation. Whether
or not litigants in the class action suit can prove allegations that IMI misrepresented
profit expectations and conspired with underwriters to fabricate favorable company
reports, the situation may have been avoided entirely had they sought to validate
information from the vendor. Obviously, vendors do not represent an unbiased
source of information about their products. Other information, including independent
analysis, existing customer references, and detailed scripted scenario demonstrations
should be brought into the package evaluation process and weighed carefully
against vendor claims.