Event
Summary
On May 17, IFS Industrial & Financial Systems
AB, a Swedish mid-market business applications vendor, was presented,
for the second consecutive year, with the Computerworld IT Company
of the Year award in Brazil. IFS, which has only been operating in Brazil
for slightly less than four years, took the prize in competition with
more than 100 midsize IT companies. Computerworld, owned by the
global publishing house, IDG, annually selects the IT company of the year
in Brazil. Computerworld cited the following reasons for selecting
IFS: "IFS has been named IT Company of the Year in Brazil due to its sales
successes in 2000, combined with a number of criteria such as market share,
the way it conducts business, its partnership program, product quality,
and market acceptance."
The
news comes as some consolation to the company's continued poor financial
performance, which has been increasingly used as a negative publicity
weapon by its mightier competitors. Earlier in May, IFS reported much
less amusing results for the first quarter of fiscal 2001 (See Figure
1). The company reported a 46% growth in net sales for Q1 2001, totaling
~$74 million, compared with ~$57 million in Q1 2000. License revenue was
up 50% to ~$25 million, while utilization of consultants improved significantly,
resulting in an increase in consulting revenue of 38% to ~$49 million.
Figure
1.
Earnings
after net financial items improved somewhat, with the company reporting
a loss of ~$7.6 million, excluding non-recurring items in the form of
unrealized losses deriving from a write-down in its shareholding in Pivotal
Corporation (NASDAQ: PVTL). The loss for the comparable period
in 2000 amounted to ~$12.3 million. The action plan initiated in December
2000 has been partly implemented, and is expected to have a positive effect
on costs and cash flow only during the remainder of the year. To that
end, the disappointing fact was the net loss of ~$12.6 million in Q1 2001,
compared with a profit of ~$6 million in Q1 2000 although that figure
was boosted by a gain of ~$17.3 million from the sale of Exactium
Inc. to Pivotal Corporation (for more information, see What
is IFS Up To in the CRM Arena?!).
Bengt
Nilsson, president and CEO of IFS, commented, "The outcome in Q1, normally
a weak quarter in the industry, is generally in line with our expectations,
even if we noted a slight slowdown in license sales in the US and Central
& Eastern Europe toward the end of the period. The drop-off has been compensated
for in part, but not entirely, by better consulting revenue than expected.
Our investment in technology has given us a leading position. IFS
Applications 2001 has been enthusiastically received and
is already running at several customer sites. We no longer need to invest
as much in basic R&D but can concentrate instead on refining and enhancing
functionality for specific industries in collaboration with our partners.
Continued sales growth means that we will be able to reduce the cost of
product development as a percentage of total revenue, our objective being
40% of license sales."
On
a more positive note, the action plan designed to strengthen the management,
the board and financing has essentially been implemented. The introduction
of a new management organization has commenced, the results of which will
be announced in Q2 2001. However, the measures to reduce costs and improve
cash flow have admittedly yet to produce their full effect and will be
intensified during the remainder of the year. Reductions in the workforce
affecting 260 employees have been made, primarily in Southeast Asia, Germany,
Benelux, Sweden, and Denmark.
Finances
have been strengthened by ~$40 million via the issuance of a convertible
debenture loan in an amount of ~$20 million and a directed share issue
amounting to ~$20 million. The equity/assets ratio is 54% with the convertible
debenture loan included in shareholders' equity. While US operations reported
greatly improved earnings, one could not but feel a pang of anxiety due
to somewhat slower sales toward the end of the period.
Market
Impact
While
it is apparent that IFS has realized and addressed the seriousness of
its poor recent financial performance, the market has yet to see concrete
results. IFS' focus on profitability/positive cash flow, balanced growth
with more reliance on growth through strategic partnerships, combined
with product development costs tied to new sales (to remain below 40%
of license revenue) are steps in the right direction. Sharp execution
should be the name of the game from now on, if that has not been the case
from the way back.
Although
one could speculate better financial performance in the future given the
curbing of R&D expense and increased fiscal discipline, it is also subject
to the continuation of a healthy growth, which has very recently recently
become questionable in the important North American market.
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
for the reasons mentioned in IFS
Aspires To Capture North American Market Against The Low Tide.
TEC
has also recently seen IFS making the final list in many software selection
engagements particularly within the engineer-to-order (ETO) manufacturing
sector, raising the bar for its more prominent competitors. 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.
While
good product, sharp focus and attractive pricing are often a winning combination,
it might not suffice in the current market with risk-averse customers
notwithstanding. There are some indications that the attention to IFS'
liquidity and viability issues, often boosted by bigger competitors' 'lobby
talk' might have caused prospects to postpone their decisions/orders.
Nobody is eager to start a long-term relationship with a vendor whose
viability is uncertain. Additionally, in the US, the situation might be
aggravated by the fact that IFS' track record of successful regional implementations
is still only at a growing stage. Currently it is at the level of only
a couple of hundred customers, although this market contributes to 25%
of IFS' revenue.
With
this in mind, even with IFS' presence in 43 countries, the challenge of
international expansion and only a "dark horse" brand awareness could
even be augmented given the announced downsizing in some under performing
markets. Greater reliance on its currently undeveloped indirect channel,
which has been a major success factor for many companies in the mid-market,
and which will only have to be executed through a number of announced
market/industry-based partnerships, could prove to be beneficial albeit
only in the long run. As a bottom line, while IFS might still have a number
of trumps in its hand, it should go out of its way to return to profitability
in order not to enter the vicious circle of stalled growth and subsequent
dismal financial results.
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, outgunned its opponents in a number of deals. Time
only will tell how well it will address its inferior viability compared
to its bigger brethren. It is needless to say that the financial viability
is of paramount importance, and, therefore, make sure that you feel comfortable
with the IFS executives' assurances thereof, should the product offer
a perfect fit to your business processes.
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.