Event
Summary
On March 15, IFS Industrial & Financial Systems AB, a Swedish business
applications vendor announced that it won a number of major contracts
in the US during the first two months of 2001 despite the negative market
sentiment after recent announcements of its major competitors. Also, the
company touts that the utilization of its consulting organization, which
was possibly bloated during the past 12 months, has continued to improve
and the effects of the action plan targeting increased profitability are
beginning to be seen in the shape of lower costs. Sales in the US during
the first two months in 2001 are up 79%, amounting to USD 12 Million,
compared with USD 7 Million for the corresponding period in 2000. License
sales have increased by 63%, while consulting revenue has risen by 83%.
Bengt
Nilsson, president and CEO of IFS, commented, "The situation in the US
has recently been the subject of attention after negative signals from
Oracle and JD Edwards. Although January and February are
traditionally weak months, so far, IFS has not noticed any downturn. Although
earnings are slightly negative, they are better than we budgeted. It is
primarily our consulting utilization that has been strengthened a natural
consequence of our strong license sales during last year."
Earlier
in March, IFS, however, reported much less scintillating results for the
fourth quarter and the fiscal 2000 (See Figures 1 & 2). Total revenue
in 2000 increased by 21%, compared with 1999. Annual license revenue rose
by 74% to $102 million, which was still possibly the best license revenue
growth amongst leading ERP vendors. However, consulting revenue was down
2% during the year, while the most disappointing fact was the net loss
of $26.9 million in 2000, compared with a loss of $ 19.2 million in 1999.
The Q4 loss amounted to $6.9 million, compared with a loss of $5.2 million
for the corresponding quarter of 1999.
Figure
1.
Figure
2.
Bengt
Nilsson commented, "Concern about the financing of IFS' rapid expansion
affected sales negatively during the fourth quarter, as a result of which
earnings were lower than expected. However, we initiated a program of
measures during the fourth quarter to ensure short-term and long-term
financing for IFS and to improve IFS' cash flow and profit margins. This
is part of the foundation we are laying to ensure continued growth in
the future along with increased financial strength."
"During
the year we invested more than ever before in product development. The
result is a world-leading product that will guarantee IFS a competitive
platform for a long time to come," continued Bengt Nilsson. "In IFS Applications
2001, we have enhanced the architecture, completed the integration of
e-business functionality, and developed personal portals. Customer interest
in IFS Applications 2001, which contains over 500 improvements, has been
particularly strong."
"IFS'
investment in the US market has generated an increase in license sales
of 217% for the whole year. Today, US sales represent 24% of IFS' total
sales, up significantly from 13% in 1999. Companies acquired in the US
have now been integrated, and a new organization with 7 branch offices
has been introduced. During the coming year, a growing proportion of IFS'
sales will be carried out in collaboration with strong partners within
selected industry segments, which means that the consulting organization
will be of less significance for future earning trends", Bengt Nilsson
concluded.
During
the year IFS entered into a number of global partnerships with the partners
who are the market leaders within certain industry segments like BAE
SYSTEMS in Defense & Civil Aviation Markets, ABB Automation
in the asset-intensive industries, Cap Gemini Ernst
& Young within the utility sector, and Atos Origin
in certain European markets, to name but a few.
Market
Impact
The
time for IFS to get its bearings has finally come as illustrated in management's
rhetoric. The rampant growth both organically and through acquisitions
and exorbitant R&D costs (almost 60% of license revenue), with little
or no internal auditing and control has resulted in major operational
losses during the last two years. As a consequence, the company's focus
shift for the future on profitability/cash flow, balanced growth and reduction
of accounts receivable/DSO, reliance on growth through strategic partnerships,
and product development costs tied to new sales (less than 40% of license
revenue) is more than justifiable. TEC's previous reports on IFS raised
the need for this focus shift (see IFS
Marches On, Although With a String of Losses and IFS
Has A Magic Growth Formula; But What About Profitability?). One should
expect better financial performance in the future given the winding down
of R&D expense and increased internal control and discipline and assuming
the continuation of healthy growth.
IFS'
latest product release, IFS Applications 2001, which
was released in August 2000 in Europe and only recently in other markets
including the US, should keep the company abreast with the latest market
trends. In addition to its proverbial component-based architecture that
supports interoperability and collaboration, this release also features
over 500 major product enhancements and the addition of 10 new modules.
IFS Applications 2001 includes web-based components, Internet storefronts,
customer relationship management (CRM) applications, connectivity to other
business applications, and collaboration via a variety of e-commerce engines.
IFS
Applications 2001 offers over 50 functional business components for improving
business processes in medium-to-large size companies. Some major enhancements
were:
- Completely
integrated CRM Solution with Sales & Marketing, Call Management, Sales
Configurator and Web Store.
- Portals
implemented throughout the entire IFS Application product suite.
- Flow
manufacturing with support for Kanban.
- New quality
assurance statistical process control (SPC) methods and/or charts.
While
IFS focuses its marketing efforts in a number of segments within the four
main groups: manufacturing, utilities & telecommunications, logistics,
and services, look for an increased IFS' visibility in the US within selected
medium-size manufacturing markets. TEC has recently seen IFS making the
final list in almost any software selection gig within the sector, causing
thereby headaches to its more prominent, sometimes complacent competitors
(for more information, see Demonstration
Post-Mortem: Why Vendors Lose Deals).
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. Its teams' confidence without
arrogance and glitzy marketing collaterals as well as astute preparation
and following the scripts to the letter, with a minimal number of pre-sales
consultants often overturn users' sentiment about the product from skepticism
into enamor.
Despite ease
of use (a user has only to learn five different screen forms, e.g., query,
graph, etc. that are pervasive throughout the entire suite) and agility,
the product features very deep, vertically-focused functionality that
is also workflow enabled. IFS Applications encompasses Front Office, finite
scheduling, E-Commerce, product data management (PDM), and plant maintenance
management functionality, in addition to conventional ERP modules. Therefore,
IFS is very competitive in manufacturing industries that require strong
engineering, asset management and complex project manufacturing functionality.
Furthermore,
at the lower end of the market segment IFS represents a generally low-cost,
viable option. While the North American business unit continues to make
inroads into non-penetrated ERP land, IFS' track record of successful
regional implementations is still growing. Currently it is at the level
of a couple of hundred customers that include sites inherited through
IFS' acquisition of EMS in 1999. But the positive development for IFS
is the recent inclination of global corporations to more open, decentralized
IT strategy, which allows a plethora of vendors to provide solutions to
different corporate divisions. The company will also likely pursue the
opportunity of preying on the customer base of currently struggling or
all but vanished vendors (e.g., SSA or JBA).
However,
even with IFS' presence in 42 countries, the challenge of further international
expansion and "up-and-coming only" brand awareness remains. The perception
of poor scalability, confinement to Oracle database and less-than-global
presence within the higher-end of the market are the other hurdles yet
to be overcome.
There is
also room for improvement in its currently undeveloped indirect channel,
which has been a major success factor for other companies in the mid-market,
and which will only have to be executed through the above-mentioned partnerships.
Also, the lack of strong HR/Benefits module for the US market may limit
some opportunities. The product's suitability for process manufacturers
is almost completely unknown and poorly marketed in the US.
The major
challenge will lie in retaliatory moves of vendors that have traditionally
been strong players in the US manufacturing mid-market. They have been
increasingly realizing the danger coming from IFS and will very likely
orchestrate their efforts to find any caveats with this still relatively
unknown vendor. A potential soul candy for these vendors will be the IFS'
financial performance, which should be watched closely in the future.
The mitigating factor in this regard remains IFS' solid current stockholders
equity and the announced initiatives to bolster it also in the future.
User
Recommendations
The challenges aside, look for a vigorous IFS participation in many future
software selection deals within the above-mentioned segment. The company
has both broadened its product lines and responded to recent market trends,
consequently, slighting its opponents in a number of deals. Time only
will tell how well it will continue to target the right e-business issues
for the manufacturing and service mid-market within its industries of
focus (aerospace & defense, telecommunications, repetitive/automotive,
engineering and project delivery, internet entrepreneurs, service management,
energy and utilities, and forest segments).
More
comprehensive recommendations for both current and potential IFS users
can be found in IFS
Has A Magic Growth Formula; But What About Profitability?