Industri-Matematik Faces Uphill Climb

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Industri-Matematik Faces Uphill Climb
S. McVey - November 1st, 1999

Vendor Genesis

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.

Substantially 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.

Fig. 1

Vendor 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.

As 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 Oracle partnership.

Fig. 2

Vendor Strengths

  • 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.

Fig. 3

Vendor Challenges

  • 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.

Vendor Predictions

  • 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 (30% probability).

  • 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).

  • Provided IMI can resolve its litigation problems and sell its broader product offering, it should look forward to renewed license revenue growth in the latter half of 2000 or early 2001 (40% probability).

Vendor Recommendations

  • 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 applications.

  • 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 i2.

  • 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.

User Recommendations

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.

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