I'm not normally a fan of analyst efforts around PE owned firms for one simple reason. They can talk all they want but usually restrict themselves to the most favorable percentages available but without actually talking numbers. This morning, IFS bucked that normality, announcing full year results with some flavor of the numbers.
At one level the results are impressive and CEO Darren Roos is entitled to wax lyrical. But IFS is a relatively small company in the pantheon of enterprise vendors and so when it talks eye-catching growth, you have to see that for what it is - a company focused on growth and wanting to up its game. What happened?
The graphic above is how IFS wants us to think about the numbers but the reality in hard currency is a bit different. See below from the company's press release:
- FY 2019 license revenue was SEK 1,518 (US$ 161 million), an increase of 32% versus 2018
- FY 2019 maintenance revenue was SEK 1,911 million (US$ 202 million), an increase of 16%
- FY 2019 consulting revenue was SEK 2,174 million (US$ 230 million), an increase of 14%
- FY 2019 adjusted EBITDA was SEK 1,454 million (US$ 154 million), an increase of 32%
- FY 2019 net revenue was SEK 6,317 million (US$ 668 million), an increase of 20%
- IFS’s strategic growth markets also saw double-digit increases in license revenues, with Aerospace & Defense growing 38% and Field Service Management up 51% versus 2018
- IFS cloud and SaaS revenue for FY 2019 increased 56% versus the same period of 2018 (excluding Astea and WorkWave).
Behemoths like SAP, Oracle, Infor, Workday, Salesforce and Microsoft will look askance at these numbers. Top line total revenue of $668 million is not to be sneezed at - Zoho as a comparison comes in at about $400 million but it is still considered 'small.' The more interesting question is whether IFS can continue on its growth trajectory. While the press release was silent on specifics, it said:
Looking to 2020 and beyond, the company remains confident that it will deliver on its targets, which encompass further growth in its channel and continued investment in research and development.
Assuming that IFS continues at roughly the same pace then in the current year we'd be looking at revenue of $800 million and for 2021, $960million. Even with a sense of global uncertainty and macroeconomics proving harder than ever to predict, the appetite is there if for no other reason than the relative underinvestment of the past 10 years by firms in the markets IFS serves. Being a tad speculative, I have to wonder whether the 2021 ambition is to hit the magic $1billion revenue mark.
I have also to believe that even with PE masters, IFS leadership can look at how Workday ran hard with growth north of 30% for many of its early years. But can you make similar comparisons? I think you can.
In an earlier interview with Phil Wainewright, Roos made the 'alternative to SAP' argument basically saying two things:
- We've get enough in our kitbag that's already integrated to get you to where you need to be without the integration hassle SAP customers are inevitably facing
- We're focused on delivering value from deep experience across five underserved industries.
Along with others, we have long argued that deep vertical market expertise is vital to convincing firms to make any meaningful software change. This is an area where SAP once excelled but allowed the knowledge to walk away without replacement. That's gives IFS a strong differentiating platform. However, the industries IFS supports are notoriously difficult to crack. As Wainewright notes:
There is no easy answer for established businesses that don’t have digital as their core mission. They’re having to graft digital onto what they do, and none of the solutions out there offer an easy way out.
At one extreme, there’s the option of building an all-new infrastructure out of best-of-breed components, but few have the digital expertise and resources to do this.
At the other extreme there's the option of staying with the vendor who provided the existing core systems, and trusting that their quest to modernize their own products will be a good enough fit. Trouble is, those modernization roadmaps tend to prioritize upgrades to the underlying technology, rather than putting a premium on delivering rapid solutions to today's business problems.
This divide is opening up an opportunity through the middle for vendors to come in with a simpler business suite proposition that may not have all the answers, but is functionally good enough and delivers fast results.
Let's not forget that Roos spent quality time in SAP leadership, knows where the bodies are buried and understands the playbook. He is therefore very well positioned to mold IFS field playbook to its advantage.
Equally interesting was the reference to Acumatica, a cloud only player in a similar space. Last year, EQT Partners, the firm that owns IFS bought out Acumatica. At the time it was said that:
“I closely evaluated IFS and Acumatica for The IDC MarketScape: Worldwide SaaS and Cloud-Enabled Operational ERP Applications 2019 Vendor Assessment,” said Mickey North Rizza, Program Vice President Enterprise Applications, IDC. “Each company was identified as a Major Player in the study, but for different reasons, and together they will truly complement one another. IFS can bolster Acumatica’s ability to globalize and expand in key industries, while Acumatica can support IFS with increased functionality in business intelligence, analytics, and extensive experience of providing a true born-in-the-cloud ERP software-as-a-service offering.”
And...Roos sits on the Acumatica board too. You see where this is going? In the annual report statement, Roos mentioned Acumatica as a channel innovator - yet another potential route to market.
'One swallow does not a summer make, nor one fine day' said Aristotle and that is equally true today. However, I can see that with EQT's savvy investment strategy and the portfolios of both ISF and Acumatica under the current leadership, there is the potential for one or both to fill that middle ground which has, for so long, been starved of real innovation in enterprise software.
Break out may be too strong a word given that Infor is well past $3 billion in revenue, but IFS has the luxury of agility relative to its size. We shall be following this with interest, and especially around the customer experience of managing IFS landscapes.