Intentia Braces For Its Ongoing Roller-Coaster Ride Part 1

Intentia Braces For Its Ongoing Roller-Coaster Ride
P.J. Jakovljevic - July 15, 2002

Event Summary

On June 12, Intentia International AB (XSSE: INT B), a Swedish provider of enterprise business applications for mid-size and large enterprises, vehemently denied certain erroneous information in media about its Q1 2002 cash flow situation. In issue no.23, the Swedish publication Affrsvrlden published an article that compared, in terms of liquidity, the financial situations of a selection of the IT companies listed on the Stockholm Stock Exchange. The article generated a great deal of attention and was cited by a variety of other media sources.

The first quarter is traditionally the one in which Intentia's cash flow is affected by once-a-year payments such as employee bonuses for the previous year. In the first quarter of 2002 bonus payments accounted for SEK 220 million. Because the calculations in the article were based on cash flow before investments a figure that includes one-time payouts related to bonus payments the resulting estimate of future cash flow was inaccurate. Intentia pointed this out to Affrsvrlden, which subsequently published the following correction:

"In the compilation of IT companies' cash flows (Affrsvrlden no. 23) the entire amount of bonus payouts for 2001 was included for Intentia. This payment should have been time phased, thus resulting in a positive cash flow for Intentia. The company therefore should not have been included on the list."

The retraction was only a crumb of comfort in light of Intentia's announcement of Q1 2002 results on April 24, though. The profitability restoration plan, which was launched back in 2000 with the intention to ensure the company would continue to generate higher license revenue within the constraints of its current product development and sales organization, has yet to result in consistently improved earnings and cash flow. As mentioned above, cash flow from operating activities of negative SEK 126 million (~$12.1 million) for the quarter was impacted by tax and employee bonus payments that totaled ~$21.1 million for 2001. Yet, cash and bank balances and current investments were at solid SEK 310 million (~$29.7 million), while liquidity continues to exceed borrowings. In addition to the cash position, the company disposes with an undisclosed (for competitive reasons) notable amount of available cash within its borrowing facilities. Still, license revenue was down by 11% to SEK 211 million (~$20.2 million), while consulting revenue was up by 8% to SEK 673 million (~$64.5 million) despite the lower number of billable days during the quarter. Total revenue of SEK 903 (~$86.5 million) represents a 3% increase compared to Q1 2001 (See Figure 1).

Figure 1.

As a result of somewhat improved capacity utilization, Intentia's consulting margin increased to 18%, which still could not counteract an operating loss of SEK 33 million (~$3.2 million). Net loss of SEK 39 million (~$3.7 million), attributable mainly to poorer license revenue and increased personnel costs, was nevertheless slightly lower compared to a SEK 42 million net loss from a year ago (See Figure 1). Its geographic regions reportedly posted mixed results.

While net revenue for the Northern Europe region fell by 14% and license revenue declined by 29%, net revenue in Central Europe was flat as the continued increase in consulting revenue offset the lower license revenue, and in Northwest Europe, where higher consulting revenue offset lower license revenue, net revenue was still down by 7%. Better performing regions were Southern Europe, which enjoyed higher license and consulting revenue during the quarter compared to the same period last year and had net revenue up by 26%.

Net revenue in the Americas rose by 4%, as license revenue was unchanged and consulting revenue rose by 20%, along with a continuing increase in the consulting margin. Net revenue in Asia Pacific climbed by 11% as the improvement reflected higher consulting revenue as a result of solid license trends in 2001, while license revenue decreased in the region. Still, these better performing regions still represent a small fraction of the company's total revenue (e.g., the Americas contributed to less than 6% of total revenues). Intentia does not break down profit figures by regions, nor does it provide detailed forecasts or a breakdown of its new business versus existing clients revenues.

This is Part One of a two-part Event Note on Intentia. Part Two will continue the Market Impact and Make User Recommendations.

Intentia's Focus

Intentia's focus remains on measures to further improve cost-effectiveness and to ensure that growth continues within the current organizational structure. Expansion will be selective in the sense that it must be commensurate with the requirements of the company's existing business volume. The total number of employees rose by 67 to 3,392 during the quarter, of which 27 were the result of new acquisitions.

The most prominent one is Intentia's acquisition of all rights to the source code and software of Catalog International AS in Denmark. Catalog-International AS has built a competence in Internet-based products for sales and indirect materials procurement. Through open interfaces to many ERP systems, Catalog has made it possible for its customers to get a quick start in opening a new sales channel and/or benefit from the cost savings more efficient indirect procurement routines can give. The integration of Catalog's expertise in the field of Internet-based e-procurement and sales products with Intentia's Movex might considerably strengthen its product offering.

During the past couple of years, Intentia has focused on developing a complete range of integrated e-business components. It has repositioned itself from being a traditional ERP vendor to an e-collaboration provider. In the autumn of 2001, Intentia launched Movex version 12, an integrated enterprise application that supports collaborative business processes. The incorporation of additional functional improvements in the first quarter of 2002 reinforces Intentia's belief of a leadership in terms of technology and functionality.

As the company's competitors increasingly turn to Java as the development environment of the future, that potential precursor position might solidify further. Consequently, Intentia's development effort shifted during the quarter from technology and architecture toward a greater focus on future functionality. The company believes that might further increase its present leadership in such top-priority areas as supply chain management (SCM), e-business and customer relationship management (CRM). Finally, although the market remains highly uncertain about the seriousness and length of the economic slowdown, based on its prospect pipeline, order backlog and the current customer base, Intentia anticipates positive operating earnings and considerably improved cash flow for the full fiscal year through a combination of sales growth and greater cost-effectiveness.

Market Impact

Like many products coming from Scandinavia, Intentia's Movex has shown quality and sturdiness, but one cannot help feeling that the product holds much more potential than the market is aware of. As for Intentia's market position, like many others in its upper Tier 2 ERP league, it has reinvented itself as a 'collaborative commerce' solutions provider. Intentia has indeed rounded out its platform-independent product portfolio, which also features strong industry-specific functionality and expertise.

Movex NextGen (standing for the next generation of Movex) release, the flagship ERP system launched in 1999, is now a Java-based software suite deployable agnostically across multiple platforms rather than solely on the IBM iServer (formerly AS/400). Looking at the product scope, the Movex 'collaborative enterprise solution' strives to cover end-to-end supply chain requirements, the ultimate objective being information flowing seamlessly between manufacturers' employees and trading partners (suppliers, and customers). It consists of six main application suites, each of which can be implemented on a stand-alone basis: Enterprise Management, Customer Relationship Management (CRM), Supply Chain Management (SCM), Business Performance Measurement (BPM), Value Chain Collaboration, and e-Business Suite.

Movex Enterprise Management is a comprehensive ERP suite, which supports traditional back-office functions, including manufacturing, finance, product data management (PDM), logistics, and human resources (HR). For a Tier 2 vendor, Movex is one of the most natively functional ERP products in the market that caters for almost all manufacturing environments from assemble-to-order (ATO) to hybrid batch process manufacturing. Contrary to its peer mid-market products, Movex features strong financial and distribution functionality as well.

Intentia has also complemented this wealth of horizontal functionality with specific solutions for several different industries, such as distribution, fashion, food & beverage, furniture, paper & pulp, service & rental, steel, aviation, and automotive. The company has incorporated specific functions to accommodate the unique requirements of each industry. For example, it added the accommodations' feature to handle large volumes of items with short life cycles for the fashion/apparel industry, and functions to manage by-products and co-products, or alternative recipes and production lines for the food & beverage market.

Also, it can handle parameter- or attribute-based planning for pulp & paper and steel industries, retailer commissions and quotation handling for the furniture industry, and support for just in time (JIT), Kanban, line-balanced/leveled scheduling, mixed modeling, and synchronization to accommodate requirements of the automotive industry. For some of the above industries, Movex also offers campaign-planning functionality, integrated laboratory information management system (LIMS), and material safety data sheets (MSDS), as well as the ability to perform planning simulations that take both financial and multilevel manufacturing resource planning factors into consideration. In engineer-to-order (ETO) industries, its integrated product configurator and PDM functionality again stand out among the like competitive products.

Consequently, Movex Fashion and Movex Food & Beverage products are the main contributors to the company's revenue and offer some functionality that is still unmatched even by more recognized competitors. Additionally, Intentia's successful shift in technology, the evolution toward e-collaboration and the considerably improved functionality of prioritized industry applications should have made Movex even more competitive. Indeed, Intentia now offers a set of applications that expand far beyond traditional ERP functionality to natively provide Supply Chain Planning & Execution (SCP & E), Customer Relationship Management (CRM), Partner Relationship Management (PRM), Business Performance Measurement (BPM) and integrated e-business components.

Movex CRM, SCM, BPM, and eBusiness

Movex CRM involves sales management, sales force automation (SFA), service and rental management and marketing management and automation, whereas Movex SCM covers primarily planning and execution, along with resource and material planning, scheduling, and fulfillment activities along the supply chain. The system offers strategic planning, including supply chain design, as well as tactical plans with their cost optimization and supply/demand balancing requirements. In general, today Intentia can offer the full suite of SCM & E including Multi-site Planner, Global Capability to Promise (CTP), and Real-time optimization.

Movex BPM, on its hand, is the extended analytics suite, while Movex Value Chain Collaboration is the XML-based web connector interoperability suite with its associated sales, logistics, procurement and catalog functionality, as well as automatic document capture, web-based electronic data interchange (EDI) and other features.

Finally, the Movex eBusiness suite covers the web storefront technology, and business-to-business (B2B) and business-to-customer (B2C) pertinent functionality pieces. The company also offers maintenance, repair & overhaul (MRO) e-procurement and web portal functionality bites, currently including employee self-service (ESS), and facilities for remote contract management and wireless applications protocol (WAP)-based remote service. Intentia has furthermore articulated an attractive strategy to support e-marketplaces with new developments in its portal technology for corporate and private trading exchanges (PTX). Good example is e-Collaborator module, which was devised to handle the transmission of all commonly used types of business information among companies over the Internet and thereby extend the customer's ability to interact outside the four walls of the enterprise.

Based on substantially improved breadth and functionality, the company's hopes that the new release will further strengthen its leadership in the markets on which it focuses are not unfounded. The new attractive applications, some already mentioned above, include Multi-Site Planner, e-Collaborator, and Movex Business Messages (XML-based business transactions). Additional new functionality includes Call Center Integration, Demand Planner, and Employee Self-service. Movex version 12 also offers new functionality in the areas of point-of-sales (POS) integration, scarce and alternate sources of supply identification, cross-docking, vendor managed inventory (VMI), self-billing, e-billing, Web-based product configuration and personalized corporate portals.

Intentia Differentiators

Although now is possibly the most difficult time ever to differentiate enterprise applications providers at this upper mid-market level, Intentia has some differentiation traits, partly because of its web- and Java-based component technology (which it espoused earlier than most vendors of its size) and partly because of its integrated and broad c-commerce software footprint. Intentia, with Movex Version 11, embarked on advancing its original RPG-based client/server architecture to support a network-centric environment accommodating integrated e-business components and interoperability with other applications along the supply chain.

The Movex NextGen architecture is Java based, enabling it to be deployed on any hardware platform supporting a Java Virtual Machine (JVM). Another crucial tenet in the NextGen architecture is its component design orientation, which, like in the case of IFS Applications experience, simplifies and speeds the development and testing of individual applications and their update cycles, and it also allows companies to deploy solutions incrementally in a building block fashion. Although an enterprise application source code rewrite is always a daunting task, Intentia's efforts were largely alleviated by the fact that its former RPG-based system was already quite componentized and standardized. And finally, the basis in Java and components means genuinely faster implementation.

This concludes Part One of a two-part Event Note on Intentia. Part Two continues to examine the Market Impact, including the Challenges faced by Intentia, and makes User Recommendations.