Event
Summary
On August 24, IFS AB (XSSE:IFS), a Swedish mid-market enterprise
applications vendor, reported upbeat results for the second quarter of
fiscal 2001 amidst a prevailing gloom within the Tier 2 & 3 vendors. After
four consecutive losing quarters, IFS was pleased to report Q2 2001 profits
of ~$2 million after net financial items, compared with a loss of ~$10
million for the corresponding period in 2000 (See Figure 1). Total revenue
increased by 62% to ~$84 million, compared with ~$52 million for Q2 2000.
License revenue was up a whopping 82% to ~$40 million, compared with ~$22
million a year ago.
Figure
1.
This
positions IFS as the fifth largest ERP provider during the second quarter
in terms of license sales, while the company occupied the first position
in terms of the fastest total and license revenue growth, stealing thereby
the thunder from recently ebullient SAP and PeopleSoft.
More important, the growth has been almost completely organic, as no significant
acquisitions were made during the past 12 months.
Furthermore,
IFS North America reported earnings of ~$2 million and is now IFS' largest
market with 35% of total sales. The contract won from General Electric
was the largest in the company's history and was of multifaceted paramount
importance. GE Engine Services (GEES) has selected
IFS software to run its 60 worldwide Maintenance, Repair, and Overhaul
(MRO) facilities. GE will also market the application to airline and independent
MRO providers. The multi-million dollar agreement will start with a deployment
for 4,500 users. GE will then market the application to commercial airline
maintenance facilities.
Also
recently, an agreement has been signed concerning deeper technological
and commercial collaboration with ABB. ABB has also acquired 3.7% of IFS,
which represents 1.8% of the voting rights, through a direct share issue
valued at roughly $10 million. The investment by ABB New Ventures
strengthens an existing technical and commercial alliance between ABB
and IFS. For more than a year, IFS has been developing ways to integrate
its business software with ABB's Industrial IT platform. ABB signed an
agreement with IFS in January to resell IFS Applications components. In
the long term, cross licensing of system components between the companies
might decrease research and development costs for both partners.
Bengt
Nilsson, president and CEO of IFS, said, "The positive earnings trend
is a result of strong license sales, especially during the second quarter.
The market for business applications has grown 10%. Thanks to a strong
product, we have succeeded in taking market share and increasing sales
despite tight cost controls and fewer personnel. The orders from General
Electric and General Dynamics and the partnership alliance
agreements with General Electric and ABB are vital steps in our strategy
to become a market leader in selected segments and thereby improve margins
in the long term. We are pleased by the confidence shown in IFS and by
the help from our partners in increasing our market share."
Towards
the end of 2000, IFS initiated an action plan to strengthen the board,
management, financing, profitability, and cash flow, which has been implemented.
It is expected to have positive effects in the form of cost reduction
in excess of ~$18 million during the current year compared with the cost
level during the fourth quarter of 2000. However, the measures to reduce
costs and improve cash flow have yet to produce their full effect and
will be intensified and scrutinized during the remainder of the year.
In its outlook for the rest of the year, IFS expects continued cost containment
rationalization coupled with further growth to result in improved earnings
for the rest of 2001. To that end, the product development will be more
sharply focused on refining functionality, particularly within specific
industry segments that are of strategic interest for IFS and its premium
partners.
Market
Impact
IFS'
results should give hope to its embattled peers that it is possible to
spar with the bigger players provided you have an appropriate approach.
The company has realized and addressed the seriousness of its protracted
poor financial performance, by focusing on profitability/positive cash
flow, balanced growth through more reliance on growth and product enhancements
through strategic partnerships, and product development costs tied to
new sales. Sharp execution should continue be the name of the game. One
should expect better financial performance in the future given the curbing
of R&D expense and increased fiscal discipline, along with a healthy growth
in the US and Latin America owing to IFS' expertise in certain vertical
niches (see User Recommendations).
During
2000, IFS invested heavily in product development to complete the new
version of its business applications, IFS Applications 2001. The
product release should keep the company abreast with the latest market
trends, as it boasts all the traditional ERP functionality and much more.
In fall of 2000, when the product was launched, the 'hot items' were new
e-procurement, customer relationship management (CRM), flow manufacturing,
portal, and wireless capabilities. Furthermore, at the beginning of 2001,
IFS announced an enhanced advanced planning & scheduling (APS) system
featuring new Web-based "portlets" to provide improved demand forecasting
visibility across the supply chain. In March, it launched its new eMarkets
solution that should provide support for both private and public exchanges
(marketplaces). Last but not least, in April, the company announced IFS
Engage, a portal-based packaged solution for medium-size manufacturers.
Engage helps manufacturers relatively quickly extend their existing ERP
applications into e-Business, e-CRM, and extended SCM in a manageable,
incremental fashion. The first modules currently available through IFS
Engage are CRM, collaborative planning, vendor-managed inventory (VMI),
collaborative project management, and subcontracting, with many others
envisioned for the future.
While
IFS has been well-known for providing ERP applications to medium-to-large
organizations, that make complex, highly engineered products, with project-based
manufacturing processes and asset intensive operations, it has long been
trying to crack the U.S. Aerospace and Defense (A&D) industry. To that
end, the GE contract might bear much more importance to IFS than a mere
bruising of the bigger guys' egos (and even replacing an incumbent Tier
1 vendor in case). The intense scrutiny that the company of GE's stature
has put IFS through in making its selection, should provide an increased
confidence in IFS for the rest of high-profile prospects in all other
IFS' target markets.
The
magnitude of the deal can be seen in GE's decision to resell the software
as a co-branded product to their commercial aircraft engine customers
and prospects, where it has been considered the world's leading supplier.
IFS thereby gets the chance to gain valuable exposure and to prove its
ability to engage companies in a private trade exchange (PTX), possibly
via IFS eMarkets solution. IFS' recognition should be bolstered with the
GE deal as also seen in very recent wins at Derco Aerospace, UK
Defence Logistics Organisation (DLO) and General Dynamics,
in the great part owing to its strong MRO functionality. IFS has thereby
encroached upon the stronghold of vendors like Western Data Systems
(WDS), Epicor Software, Mincom, SAP, Oracle,
Cincom Systems, MRO Software, and Ramco
Systems. Moreover, deals from likes of GE could also allay many
concerns regarding IFS Applications scalability, which has also plagued
it in the past within the higher-end of the market.
Challenges
While
the product with web-based component architecture, sharp focus and the
attractive pricing should remain a winning combination, IFS should produce
a few more profitable quarters to persuade risk-averse customers notwithstanding.
Moreover, even with IFS' presence in 43 countries, the challenge of international
expansion and low brand awareness could be heightened by the company's
inconsistent industry expertise and focus in different markets so far.
While
IFS' US client base has been predominantly in discrete complex manufacturing,
little has been known about the company's expertise in utilities and process
manufacturing segments elsewhere in the world. IFS, consequently, plans
to expand its comprehensive ERP suite through internal development programs
and strategic partnerships with leading suppliers such as PipeChain,
a supply chain execution (SCE) vendor primarily in the process manufacturing
industry.
IFS
might also expand its presence in the world markets by establishing strong
collaborative relationships with leading solution providers such as Cap
Gemini Ernst & Young. This partnership will focus primarily on solutions
for vertical industries such as energy and utilities. Another move is
the recent alliance with ABB to deliver IFS Enterprise Asset Management
(EAM) solutions. IFS will be using the cash infusion from ABB to the task
of building IFS's EAM software on top of the ABB Industrial IT platform,
which controls processes in power transmission, power distribution, automation,
oil, gas, petrochemicals, and building technologies.
Greater
shift of focus on its still relatively undeveloped indirect channel, which
has been a major success factor for some companies in the mid-market,
and which will be executed through a number of announced market/industry-based
partnerships, could remedy IFS' predicament in the long run.
User
Recommendations
The challenges aside, look for a vigorous IFS participation in many future
software selection deals within its market segments of focus. The company
has broadened its product lines and has responded to recent market trends,
and, consequently, has been in the rear mirror of Tier 1 vendors. Time
only will tell how well it will address its inferior viability compared
to its bigger brethren. As the financial viability is of great importance,
ensure that you feel comfortable with the IFS executives' assurances thereof,
should the product offer a perfect fit to your business processes. To
our belief, recent events vouch for stable future given that IFS' lackluster
profitability in the past has been attributable to heavy investment in
R&D and global market expansion, both of which have been recently curbed.
Medium
and large discrete manufacturing enterprises with strong ETO, EAM and
MRO-oriented requirements should put IFS Applications on the short list.
Other industries (e.g., utilities, process manufacturing, etc.) might
benefit from evaluating IFS subject to their geographic location, as the
company's industry focus varies significantly in different geographic
markets. More comprehensive recommendations for both current and potential
IFS users can be found in Industrial
& Financial Systems, IFS AB: Thriving on Product Flexibility and Incremental
Deployability.