ERP software vendor IFS AB saw its financial recovery slow somewhat in the third quarter, as the Linkoping, Sweden, company ran up against continued problems with its consulting business and delays in defense industry-related bookings.
IFS reported flat revenues and earnings for the quarter ended September 30. At SKr 485 million, revenues in the quarter were on a par with the performance reported in the comparable period last year. IFS's earnings of SKr 3 million also were identical to the figure reported in the like period a year ago.
Despite the flat results, IFS enjoyed strong demand for its licensed software products during the quarter. The company's license revenue climbed 22% to SKr 76 million. Revenue from consulting, however, dropped 7% to SKr 238 million. IFS's revenue from maintenance and support grew 7% during the quarter to SKr 146 million.
License revenue growth has been particularly strong in the company's Americas operations, where, over the past nine months, license revenues have grown 131%. Maintenance and support revenue in the Americas during that period grew 15%, while consulting revenue dropped 7.8%.
IFS CEO Alastair Sorbie, in an interview with Managing Automation, said the company's third-quarter revenues also were affected by the slow summer holiday season in the European region on which the company depends for much of its business.
"The quarter was positive in that we continued to grow license revenue and to improve our cash flow, establishing a pattern for the whole year," Sorbie said. "It was probably a reasonable quarter for us."
Sorbie said the third-quarter results do not represent a break from what, beginning in 2005, has been a significant turnaround for IFS. Beginning in 2000, IFS reported five straight years of losses that peaked at SKr 740 million in 2002. Thanks to cost cutting and a new sales model that relies more on channel partners, IFS reported a profitable first quarter of 2005 and has maintained profitability ever since.
Last quarter -- ending in June --IFS reported a SKr 13 million profit and 5% revenue growth on a 41% increase in license revenue.
However, IFS said that because off problems with its consulting business and complications with defense contracts, the company does not expect to achieve its goal of a 10% earnings-before-interest-and-tax rate for the year. IFS's third quarter EBIT was 2.7% of net revenue.
IFS's shortfall in consulting revenue, Sorbie said, was a result of a few large, complex deals in Scandinavian countries that have not gone as planned, which has reduced the company's consulting margins and kept personnel from other, potentially lucrative engagements.
IFS said so far those projects have resulted in SKr 25 million in losses, with the impact in the third quarter being "higher than expected." Sorbie said that while he expects the effect to continue into 2007, it should lessen next quarter.
The shortfall in IFS's defense contracts related to projects in Europe, where, Sorbie said, bureaucracy has delayed deals.
Sorbie attributed IFS's strong license revenue growth in the quarter to several factors. Many customers need to upgrade enterprise applications to execute globalization strategies, he said. Many customers are also attempting to drive service-related sales. And many others need new software to meet regulatory requirements, he added.
IFS has also benefited from the ongoing consolidation among providers of ERP products to mid-market customers. "As our traditional mid-range competitors have been absorbed, that's made them less attractive compared to ourselves," Sorbie said.
Besides being helped by market trends, IFS has managed to improve its sales efficiency by driving more collaboration between the company's sales regions, Sorbie said. In the past, he noted, sales management in each of the countries in which IFS operates has tended to operate independently. Now, the company has grouped sales organizations together -- for example in the U.S., Canada, and Latin America -- so they can share sales experts and support material such as customer references, Sorbie explained.