Continuing a string of positive financial results, enterprise software provider IFS today reported a second-quarter profit of SKr 13 million on revenue growth of slightly more than 5% to SKr 561 million. License revenue grew 41% in the quarter.
The second-quarter earnings for the company, based in Linkoping, Sweden, were actually down sharply from the corresponding period in 2005, when the company earned SKr 23 million. The lower earnings, company management said, were due to the effect of disposals in last year's second quarter which increased profitability. Earnings before interest and taxes were SKr 23 million, compared with SKr 27 million in the like period last year.
Nevertheless, the performance in this year's second quarter represented the seventh consecutive quarter of profitability for IFS and followed full-year profitability in 2005, reversing a string of annual losses that began in 2001. To combat the losses, IFS undertook a recovery program that resulted in cost cutting, headcount reductions, a focus on specific vertical industries and a change in sales strategy to rely more upon partners and resellers.
In the company's Americas region, results for the second quarter were a high spot for IFS. License revenue grew 135% to SKr 35 million, from SKr 15 million, aided, in part, by a large Air Force contract won in cooperation with Oracle Corp. For all of IFS, license revenue rose 41% to SKr 111 million, from SKr 79 million in the second quarter of 2005.
IFS's consulting business struggled in comparison. Revenue dropped to SKr 293 million, from SKr 309 million in last year's second quarter, with even the Americas region showing a decline. Alastair Sorbie, president and CEO, said in an interview that IFS had "underestimated" certain projects primarily in the Northern Europe and Scandinavian areas.
"Valuable resources were tied up in low margin work," he said, noting that he expected the situation to ease in the second half.
But Sorbie, who became IFS chief executive in March, said he was encouraged by the company's overall performance in the second quarter. He said during a conference call this morning with financial analysts, and in an interview with Managing Automation, that the second-quarter results again demonstrated that IFS's strategy, particularly in vertical markets and in its sales approach, are working.
"We believe we are strengthening our position in verticals," he said. "We're doing better in asset-intensive industries. Increasing orders are coming from markets we are targeting. I'm encouraged that license performance is tracking."
IFS targets seven vertical markets, including automotive, high tech and medical devices, industrial manufacturing, process industries, service and facilities management, utilities and telecom, and aerospace and defense.
In the interview, Sorbie discussed the company's partner strategy, the rollout of the new IFS Applications 7 and his priorities for the second half.
IFS's shift to rely more on partners has apparently been tougher than the company anticipated. In its first quarter report, and again in today's second quarter report, IFS made a point of saying that sales, including those by local resellers, have been weaker than expected.
"Partner revenue tends to be quite patchy," Sorbie said. "It is difficult to predict partner income so we don't forecast it." IFS said in its second quarter report that efforts to add industry partners "are in progress."
IFS Application 7, which began shipping in April, has been well received by the IFS customer base, Sorbie said, and IFS expects that 180 customers will commit to upgrading to the system this year. "I've never seen such an enthusiastic uptake on a release before," he said.
With regard to the second half, Sorbie said his top priorities will keeping control of costs (which grew in the second quarter by SKr 47 million due to a variety of factors), achieving greater efficiencies in the business, improving the company's performance in the Asia/Pacific area, improving market awareness and "getting on top" of the consulting services issue.
Due to the shortfall in consulting, IFS adjusted its outlook for 2006. In the first quarter, IFS said its objective was to achieve a margin, on earnings before interest and taxes (EBIT), of 10% or more.
"The weaker than expected performance within consulting in the first half of the year will make it difficult to achieve more than 10% in EBIT margin for the full year," IFS said today. "However, strong license development combined with a stronger development for consulting is expected to make up for part of the shortfall, and the objective is to achieve an EBIT margin of close to 10% and continued improvement of cash flow."