Event
Summary
In May, IFS, a Swedish ERP vendor, reported results for Q1 2000. It generated
revenue of $57.0 million, a 21% increase compared to a year ago. License
revenue grew 73% quarter over quarter to $18.6 million, while net income
was $6.0 million (See Figure 1). IFS has continued its investments in
the US market. Net sales in North America rose by 248% to $13.2 million,
and the US market accounted for 23% of sales during 1Q00. Earnings during
the period were affected by the fact that IFS' shareholding in Exactium
was divested to US-based Pivotal Inc, which became a significant e-business
partner at the same time. The sale generated a capital gain of $23.5 million.
Figure
1.
"Our
license sales are progressing favorably," said Bengt Nilsson, president
of IFS. "At the same time, in the first quarter, typically the slowest
for enterprise applications, earnings are linked to the trend toward slower
growth in consulting time due to the millennium shift. In March, we already
saw an increase in consulting revenue due to the excellent license sales
IFS has experienced since the fall."
"Our
activities in the US are now starting to show results. The acquisition
of EMS, Inc. in the US has given us a stronger position in the crucial
US market, with many new transactions as a result," Bengt Nilsson continued.
"During the first quarter, IFS sold a large number of e-business solutions,
both to traditional industries and to newly established dot com companies.
The @IFS outsourcing company that was started in November has performed
well during the first part of the year and has further increased its customer
base. The reason for the increased license sales is the increasingly growing
demand for modern component-based business systems, not least because
of their usefulness within the area of e-business. My assessment is that,
in the year 2000, IFS will be able to report a higher rate of growth than
the 20-35% average market growth predicted for the full year. During the
first quarter, IFS yet again led the industry in growth, with a 21% increase
in sales compared to the ten largest business applications vendors, whose
sales increased by only 4%. IFS' investments in development are continuing.
In the fall, IFS will launch its fourth generation of component technology.
According to the Swedish technology magazine, Ny Teknik, IFS was one of
the companies in Sweden that invested most in research and development,
in relation to sales, during 1999."
It
is anticipated that operating margins will improve due to the fact that
several IFS companies established in 1999 are now moving into a consolidation
phase. "Our goal for the full year remains the same - to have a sales
increase better than the market. With the sale of Exactium Ltd., profit
margins are expected to be significantly better than the previously projected
5%," concluded Bengt Nilsson.
Market
Impact
IFS remains a shining star on the gloomy ERP skyline. While the majority
of its direct competitors have been struggling to reinvent themselves
in the new economy, IFS has continually been increasing its market share.
It continues to react more nimbly than the rest of the ERP market to the
market trends. We believe that its recipe for success is a good balance
of the following required elements of the game - a flexible and technologically
superior product, deep vertical functionality, reputable customer service,
and prudent acquisitions and/or alliance moves. The EMS acquisition proves
to be an epitome of success, particularly in terms of penetrating the
US market.
Nevertheless,
the challenge of further international expansion remains. Moreover, one
should closely watch future IFS profitability and keep in mind that the
profit in this quarter was mainly attributable to the above-mentioned
sale of Exactium. Prior to that, the company had posted three consecutive
losses (See Figure 1), and its shareholders may have started feeling jittery
and stopped subscribing to the "growth at all costs" mantra.
User
Recommendations
We generally recommend including IFS in a long list of an enterprise application
selection to mid-market and low end tier 1 companies (with $50M-$1B in
revenue) within the following industries: Energy, Engineer-to-Order and
Project delivery, Forest Segments, Automotive, Service Management, and
Transportation.
IFS should be included on a short list in any selection within the following
industries: Aviation, Engineer-to-Order and Project delivery, Service
Management, and Transportation, on the condition that a Payroll module
is not of primary significance to the customer.
However,
potential clients should conduct preliminary research on industry expertise
and reference sites of a regional IFS office or an affiliate service provider
when IFS is included in the selection process due to its nascent distribution
network outside of the European market. As for the new added functionality
through partnerships, users are advised to ask for firm assurances on
the availability and timeframes of future upgrades, and more detailed
scope of combined product functionality.