IFS Continues Its Reinvention Through Pruning Part One: Event Summary

Event Summary

Divestitures of non-core products and services, which have apparently worked well for vendors like Epicor Software Corporation or Ross Systems (see Way to Go, Ross Systems! and Latest Development on Epicor's Trying the Divestiture Tack), seem to be getting accepted by others too. Recently, Industrial and Financial Systems (IFS) (XSSE: IFS), a Swedish extended enterprise applications supplier with sales in 45 countries, over $330 million (USD) in revenues in 2003, and more than 350,000 users worldwide, announced the following:

• In early January that, following the agreement with Uniativa Ltda, which acquired the entire business and 100 percent of the stock in Industrial and Financial Systems do Brasil Ltda on December 31, 2004, partners will be solely responsible for the sale and distribution of IFS Applications in Brazil. In line with its strategy of operating to a greater extent via partners, IFS had previously transferred a substantial part of its business in Latin America to distributors. According to the vendor, within the near future, partners will hence operate all IFS' business in Latin America, while the vendor pledges to continue to fully support its 100 customers in the region. Moreover, it will provide its partners with localization support, methodology, tools, and specialists from its global industry teams. Otherwise, the transactions will have a negligible effect on IFS' cash flow and earnings.
  
  
• In mid December, IFS Sverige AB, IFS' Swedish subsidiary, announced that it has sold its payroll software to Personec, and the two companies have entered into a collaboration agreement. Personec, the largest supplier of human resource (HR) management and payroll administration software, consulting services, and outsourcing services in the Nordic region, is jointly owned by TietoEnator and Nordic Capital, and has more than 800 experts in Finland, Sweden, Norway, and Denmark, and 15,000 in the private and public sectors. The aim of the collaboration is to enable IFS and Personec to offer new and existing customers a better product. To that end, Personec will acquire the right of ownership of IFS' payroll software for the Swedish market and will assume responsibility for product development, consulting services, and support, while IFS Sverige will continue to sell the payroll component as part of IFS Applications.
  
  
• In November, IFS announced it would collaborate with Bentley Systems, Inc. (www.bentley.com), one of the world's leading providers of software for the lifecycle of the world's infrastructure, which offers a comprehensive portfolio for the building, plant, civil, and geospatial vertical markets like architecture, engineering, construction (AEC) and operations, and with 2003 revenues reaching $260 million (USD). Bentley, which has its headquarters in the US, will thereby acquire IFS' esoteric computer-aided design (CAD) applications for process, electrical, piping, and instrumentation design. As part of the acquisition, Bentley pledges to assume responsibility for IFS' maintenance and support services for more than 100 accounts, primarily in Sweden and Norway, which employ IFS' CAD applications. The agreement with Bentley is expected to have a positive impact on IFS' earnings totaling approximately 6 million SKr (approximately $800,000 USD) in 2004 and 2005.

This is Part One of a three-part note.

Part Two will present background information and cover challenges and response.

Part Three will discuss the market impact and make user recommendations.

Collaboration With Personec

The vendors believe the collaboration means that IFS customers, approximately 120, who are using IFS' payroll software will be given access to additional competence and a broader product offering for payroll and HR management. Most of these customers use the payroll component as part of a comprehensive enterprise application planning (ERP) solution from IFS, and IFS' annual revenue in the area has been approximately 40 million SKr (approximately $5.3 million USD). In connection with the acquisition, 45 of IFS staff will transfer to Personec.

As indicated earlier on, Personec has a leading position in HR management in the Nordic region, with approximately 27 percent of all employees in the region receiving their salaries via the company's payroll software. The acquisition of IFS' payroll component for the Swedish market is part of Personec's strategy of strong growth in the Nordic market, part of which includes collaborating with ERP vendors. The vendor believes the acquisition will increase its market share in the Nordic region to 29 percent. Further, according to the vendor, HR management and payroll management are extremely culture-specific, given that legislation, collective agreements, regulations, and traditions vary greatly between different countries and are in a constant state of change, which makes it too complex for any software company to conduct its own development. Therefore, this is a significant step in Personec's strategy of achieving growth by partnering with ERP vendors and offering expertise in payroll management.

The collaboration with Personec is expected to have a positive effect of 25 million SKr (approximately $3.3 million USD) on IFS earnings and of 42 million SKr ($5.6 million) on cash flow during 2004, while capitalized development expenditure totaling 18 million SKr (approximately $2.4 million) for IFS' payroll component has been written down in connection with the sale. The additional purchase price, based on sales, will reportedly be paid during 2005 and 2006.

Collaboration With Bentley Systems

Users of IFS' CAD applications operate mainly in the pulp & paper and power generation industries. The CAD applications are integrated with IFS Applications, which the users employ mainly for asset maintenance and spare parts logistics. IFS users will reportedly be offered the opportunity to change their existing CAD systems to solutions from Bentley while retaining the tight integration with IFS Applications. The agreement with IFS will provide Bentley with a large Swedish user base in these industries as a complement to its existing users in the region, among which is the Swedish National Rail Administration.

For IFS, on the other hand, the agreement means that it will collaborate with Bentley worldwide to market and sell IFS Applications to asset-intensive companies. With more than 22,000 accounts, Bentley has a strong market position in the design, engineering, construction, operation, service, and maintenance of capital-intensive operations, which include, among others, process plants and utilities, as well as water and waste treatment plants, railways, and airports. Because IFS also prioritizes these segments, the companies believe that they complement each other and can combine to offer users a more comprehensive solution.

On its side, Bentley recently launched the "You Deserve Better" upgrade program and Web site for potential disgruntled AutoCAD users facing forced retirement of their AutoCAD 2000i and AutoCAD LT 2000i software products by Bentley's archrival Autodesk (for more info on Autodesk, see Autodesk to Bring Microsoft Business Solutions Closer to PLM). As to benefit from its nemesis' predicament, Bentley has devised a survey on its Web site, and will use the survey responses to tailor its upgrade program, which will supposedly include special program pricing and services, to the needs of these AutoCAD users.

The upgrade program's product offerings are based on Bentley products including MicroStation-based product functionality, native support of DWG (a file extension for AutoCAD Drawing Database and Drafix Drawings), DGN (a file extension for MicroStation Graphics) and portable document file (PDF) file formats, and upgrade services. For example, PDF Composer lets users fairly easily package all of their AEC drawings, including MicroStation and AutoCAD files, into a single PDF document, whereby the interactive PDFs make it possible to quickly navigate through an AEC project using hyperlinks, bookmarks, and pages to access information.

After January 15, 2005, Autodesk reportedly states on its Web site that it will no longer sell upgrades or cross-grades from any AutoCAD 2000i-based products or Autodesk Inventor Series 6. Additionally, Autodesk will no longer provide technical support, apart from existing maintenance patches that are downloadable from www.autodesk.com.

On the IFS' side, on December 30, the vendor announced that structural changes, including cost containment actions, and divestments and changes in international subsidiaries and operations, are expected to charge IFS earnings with 98 million SKr (approximately $13 million), net, for the fourth quarter of 2004. Namely, provisions and write-downs are expected to amount to 130 million SKr (approximately $17.3 million), while the positive effects, primarily resulting from divesting payroll applications and CAD software for the Swedish market, will amount to 32 million SKr (approximately $4.3 million).

This concludes Part One of a three-part note.

Part Two will present background information and cover challenges and response.

Part Three will discuss the market impact and make user recommendations.