IBS Has Strong Software License and System i Sales in Q4

February 18, 2008 Timothy Prickett Morgan

Swedish ERP application software maker International Business Systems is one of the largest remaining independent software companies that has not been snapped up by a larger player. The company closed out the final quarter of 2007 with strong software license sales and System i hardware sales, but services sales were down a bit, which impacted top line sales and profits in the quarter. And, perhaps most significantly, restructuring moves taken in 2006 and 2007 have yet to yield their full intended effects on the bottom line.

Sweden is still using its own currency, the krona, which is abbreviated SEK, so the company’s financials are not expressed in euros or dollars. (The dollar is worth about 6.5 krona at current exchange rates.) In the fourth quarter of 2007 ended in December, IBS had sales of 711 million SEK (which is about $109.4 million), up 4.9 percent compared to the prior year’s fourth quarter. Software license sales accounted for 182 million SEK ($28 million), and Erik Heilborn, the company’s chief executive officer, said in a conference call with analysts that it was the strongest quarter for new license sales in the company’s very long history. IBS inked many large deals in the quarter, including a 42 million SEK deal with publishing giant Pearson and a 45 million SEK deal with Swedish food distributor Severa. IBS is a big distributor of System i machinery in the Nordic countries, and Heilborn said that hardware and related sales rose by 23.6 percent to 220 million SEK ($33.9 million), but added that margins were under pressure here because of the deep discounting on large deals. He added that there would be long-term pressure on prices and margins in the hardware side of the IBS business. Professional services came under pressure because of the way the Christmas holiday season fell in December and from lower utilization of services among customers, with sales dropping 7.5 percent to 309 million SEK ($47.6 million).

For the full year, IBS had sales of 2.26 billion SEK ($348.3 million), down eight-tenths of a percent from 2006’s sales, and it booked a net loss of 4 million SEK (around $620,000), which is a bit better than the 7 million SEK loss (around $1 million) from 2006. IBS has tapped into its cash hoard in the past year, using a little more than half of it and leaving the company with 186 million SEK in cash ($28.7 million)l but the company has nearly quintupled its credit lines to 141 million SEK ($21.7 million) and has only 150 million SEK ($23.1 million) in debt.

In an effort to cut costs, IBS opened a development center in Poland years ago, and in 2007 it opened development centers in India and Portugal as well. The company also reduced headcount at its various headquarters and central offices by 10 percent and closed facilities in the United Kingdom, Sweden, Finland, and Australia to get costs in line with sales. The company authorized 120 million SEK ($18.5 million) in restructuring costs in 2006, and still has 51 million SEK ($7.85 million) available for further restructuring costs. Heilborn said in the call that more than 100 full time employees that are currently not compensated under a billable hours scheme–meaning middle managers who work on salary, presumably–would be made redundant in 2008 to cut costs, and that IBS would be looking to wring efficiencies out of its Polish, Indian, and Portuguese development centers. In a telling admission, Heilborn said the costs associated with the offshoring of work to Portugal and India were higher than expected, which hurt the company’s bottom line. He added that overall costs for staff, including those in Europe and the Americas, were higher than expected, too.

Luckily for IBS–to one way of looking at it, at least–the company has not yet established a large presence in the United States, which comprises about 10 percent of sales at IBS each year. Heilborn says the economy is more or less holding, as far as he can see. “So far, we do not see an impact from the somewhat horrid situation that we see in the financial community,” explained Heilborn. “But we have seen in the last part of 2007 a bit lower sales in the U.S. market.”

Right now, IBS is more focused on getting its software rolled out onto Windows platforms, and says that the first company in the world deployed its Enterprise Financials in production atop Windows in December (of course, it was a Swedish company, which was not named). Heilborn said that IBS would now start pilots of the Windows versions of its distribution modules, and hoped to get those out the door and into production by the second half of 2008. IBS is hoping to have a full multi-platform suite of Java applications that runs on i5/OS, Windows, Linux, and Unix platforms in 2009. IBS has been working on this code since May 2005.

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