IFS, which specialises in ERP and related enterprise software for engineering-intensive industries, is reaping the benefits of the global economic recovery, based on its Q2 results yesterday. Diginomica caught a briefing with CEO Alastair Sorbie to see how the $400 million-a-year vendor views its market.
Headquartered in Sweden and listed on the Stockholm market, IFS operates globally, with customers concentrated in manufacturing, aerospace and defense, energy and utilities, construction, oil and gas.
Key financials announced yesterday:
- Total revenues in Q2 were up 7 percent to SKr 745 million ($112m) from SKr 686 million ($103m) a year ago.
- Combined with strong growth in Q1, this brought the half-year total to SKr 1439 million ($216m), up 11 percent from SKr 1299 million ($194m) a year ago.
- License revenues in Q2 came to SKr 134 million ($20m) up 5 percent from SKr 128 million ($19m) a year ago). For the half year, licenses were up 13 percent to SKr 241 million ($36m).
- Maintenance and support revenues in Q2 were up 11 percent to SKr 256 million ($38m)), with gross margins rising to 76 percent from 71 percent a year previously.
- Consulting revenues for Q2 amounted to SKr 354 million ($53m), up 6 percent from a year ago.
- Earnings before tax for the quarter were up 18 percent to SKr 64 million ($10m) from SKr 55 million ($8m) a year ago. The half year result of SKr 85 million ($12m) compares to a loss of SKr 39 million ($6m) for the same period last year.
- Forward guidance for the fiscal year is for strong license growth and a significant improvement in earnings over the prior year.
IFS was an early pioneer in architecting its software as a set of service-oriented components. This has helped it carve out a high-end niche for itself because it offers customers more flexibility than other vendors can muster, Sorbie told me:
Because we are componentized, we can move [capabilities] into our core functionality faster than our competitors can.
It is a changing, moving world. We focus on agility — us responding to market changes. That's why our market growth is at 13 percent and our competitors are much, much slower.
Other vendors are now adopting a more API-driven, componentized architecture of the type IFS introduced in 2005, said Sorbie, taking the opportunity to make a sideswipe at SAP:
SAP have announced their monolithic archictecture is not suitable and are adopting the same approach we implemented eight years ago.
The world that IFS serves is far removed from the technology fads of Silicon Valley, but it's nevertheless one that experiences rapid, technology-driven change. Sorbie cited large-scale wind farm management as an industry vertical IFS serves that didn't exist a decade ago. Achieving modest growth is hardly shabby at a time when competitors are finding similar markets leaking away.
Being able to reconfigure or add in new components allows IFS to keep pace with that rapid change, said Sorbie.
For these industries, speed of implementation is critical.
When we go into a vertical, we don't have a monolithic version for that vertical, we have a component selection. We can build components without affecting the underlying architecture for the product.
IFS is strong in enterprise asset management (EAM) and enterprise service management (ESM) as well as ERP. These are areas where smart devices and other aspects of the Internet of Things is becoming of interest. Sorbie cited a use case for IFS customer Tomra, which sells recycling machinery:
If that recycling machine is intelligent enough to say, 'I need a spare part,' it can then send a real-time message to the host ERP system, which will effect a response and send it out to a resource scheduling system. That system will allocate an engineer to attend that job, taking into account traffic conditions and the contracted service levels.
Because we're into maintenance and heavy asset manufacturing, the Internet of Things is quite relevant to that market.
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IFS made early investments in mobile applications, which have seen significant take-up.
We do see mobility as a gamechanger in our market.
Mobility is changing the way our business is working. The fact you've got intelligent handheld devices has transformed the service management business.
Big data is not part of that picture, he said, simply because IFS works in industries that mostly deal with equipment rather than people.
Big data tends to be more relevant to retail or medical. If you go into something like an oil refinery, it's B2B. The amount of data is more to do with manufacturing process data or service analysis. We don't have the demand for big data in IFS customers.
Sorbie doesn't see IFS getting much involved with cloud computing, either, even though the mediation server that linkes its mobile applications into back-office data is branded IFS Cloud. He told me:
The hosting of off-premise systems is something our partners do for us.
We never have gone out of our way to sell hosted systems. We sell products and solutions.
IFS has partnered with Logicalis, NEC and, more recently, Microsoft Azure for cloud hosting. It is also stepping up partnerships with systems integrators to take on implementations that it has previously done in-house.
Even though cloud-native application vendors such as Plex, NetSuite and Rootstock have a growing presence in the manufacturing sector, Sorbie argues that such multi-tenant SaaS systems won't appeal to the IFS customer base.
There's a great amount of new players and modern innovative suppliers in the low-end, simpler solution market. In our space with complex engineering systems we don't see that kind of player coming.
Multi-tenant SaaS is for low end applications. We don't see customers running multi-tenant systems at this high-end level.
- IFS is posting solid growth that's at least twice the rate of the mainstream ERP market. In part, though, this year's figures are flattered by a bad start to the previous year.
- Its customers are in industries that build complex, technology-heavy equipment. It's natural these businesses should want to customize and run their own operational computing, too.
- Thus IFS can benefit from economic growth in its target industries without attrition from SaaS competitors — though it may be exposed on its service management flank.
- Its service-oriented architecture and early investment in mobile were prescient moves that rivals are now starting to catch up with.
- How long can it count on that massively profitable stream of maintenance revenues?
- In the future it will have to rely increasingly on third-parties for implementation and hosting.
- Vertical expertise is the key to historic and future success for IFS. It must hold on to that while it builds out its partner ecosystem.
Disclosure: NetSuite, Plex and SAP are diginomica premier partners