I N D U S T R I A L A N D F I N A N C I A L S Y S T E M S , I F S A B
ANNUAL REPOR
T
2008
TA B L E O F C O N T E N T S
TABLE OF CONTENTS
4 Highlights
5 5-year summary & financial targets 6 Message from the president 8 IFS and IFS Applications 10 The IFS stock
12 Table of contents of the annual report 13 Annual report
64 Corporate governance report 68 Board of directors
69 Senior management and auditors 70 Financial trend 2004–2008 72 Definitions and glossary 73 Addresses
FINANCIAL REPORTS
Quarterly report January-March April 21, 2009 Quarterly report January -June July 17, 2009 Quarterly report January -September October 21, 2009
Year-end report 2009 February 2010
ANNUAL GENERAL MEETING
The annual general meeting (AGM) will be held on
Wednesday April 1, 2009 in Solna, Sweden.
H I G H L I G H T S
HIGHLIGHTS
• In March, IFS announced long-term financial targets entailing that, in the next five years, product revenue will double through organic growth and acquisitions, the operating margin will increase to 15 percent, the dividend will rise to 50 percent of earnings after tax and surplus liquidity will be used to repurchase shares.
• The 10 largest license agreements during the year had an aggregate value of SKr 141 million.
The corresponding figure for 2007 was SKr 103 million. A total of 20 license agreements valued at more than US$ 0.5 million each were signed. In all, 215 (177) new customers were added, and 760 (778) customers either upgraded or expanded their existing solutions.
• During the year, a restructuring program was implemented to strengthen the company’s position.
Expenses of SKr 24 million for the program were charged against earnings. The program is expected to result in annual savings of approximately SKr 50 million.
• The overriding objective for 2008 was to achieve a higher operating profit and a significantly improved cash flow. Operating profit adjusted for the action program increased to SKr 178 million (141) and cash flow after investments rose to SKr 98 million (20). The positive trend is the outcome of IFS’ continued investment in project-oriented industries and markets with a substantial need for well-functioning processes in logistics, maintenance and service.
• Net revenue amounted to SKr 2,518 million (2,356), an increase of 7 percent, including and excluding exchange rate effects. License revenue increased to SKr 479 million (478), whereas maintenance and support revenue amounted to SKr 703 million (659). Consulting revenue rose to SKr 1,310 million (1,194).
• Adjusted EBITDA amounted to SKr 236 million, corresponding to a margin of 9 percent. Profit
before tax improved to SKr 161 million (129) and profit for the year was SKr 95 million (122). The
preceding year’s profit included tax income of SKr 58 million.
5 - Y E A R S U M M A R Y
5-YEAR SUMMARY
As of fiscal year 2005, the IFRS accounting principles have been applied; fiscal year 2004 has been restated accordingly. For further information, see ”Accounting principles”.
2004 2005 2006 2007 2008
Net revenue SKr, million 2 178 2 149 2 209 2 356 2 518
of which license revenue SKr, million 451 383 433 478 479
of which maintenance and support revenue SKr, million 470 528 600 659 703
of which consulting revenue SKr, million 1 174 1 175 1 140 1 194 1 310
Net revenue outside Sweden % 77% 79% 80% 78% 81%
EBIT SKr, million -128 97 120 141 154
EBIT margin % -6% 5% 5% 6% 6%
Profit/loss before tax SKr, million -204 67 75 129 161
Profit margin % -9% 3% 3% 5% 6%
License margin % 90% 84% 90% 90% 92%
Maintenance and support margin % 61% 58% 63% 64% 57%
Consulting margin % 22% 21% 17% 16% 19%
Product development expenditure/net revenue % 14% 10% 9% 9% 9%
Administration expenses/net revenue % 11% 10% 9% 10% 10%
Return on capital employed % neg. 11% 10% 11% 12%
Equity/assets ratio, after full conversion % 37% 38% 45% 50% 50%
Net debt SKr, million 363 294 166 3 3
Interest coverage rate times neg. 2.1 2.5 6.1 15.6
Cash flow after investment operations SKr, million -76 28 86 20 98
Acc rec (avg 12 month)/Net revenue (rolling 12 month) % 22 22 23 23 23
Average number of employees 2 661 2 453 2 644 2 646 2 663
Number of employees at year-end 2 583 2 600 2 630 2 627 2 723
FINANCIAL TARGETS
IFS announced the following financial targets in March 2008:
During the coming five-year period (2008-2012), IFS aims to double product revenue through organic growth and acquisitions.
During the five-year period, IFS also aims to:
• Achieve an EBIT margin of 15% and a return of 25% on average operating capital,
• Over time increase dividends to 50% of earnings after tax.
Additional surplus capital, which is not required for investments, expansion and other needs relating to the financial position of the
group, will be used to repurchase shares.
M E S S A G E F R O M T H E P R E S I D E N T
MESSAGE FROM THE PRESIDENT
A strategy working in difficult times
I am pleased with the full-year result with an EBIT of SKr 178 million, excluding restructuring charges, representing an increase of 26% compared with 2007. All through the year IFS has clearly stated that it has increased market focus on the more complex project-based industries. This focused approach will enable IFS to achieve a leading position in the key markets of EPCI (engineering, procurement, construction, installa- tion), utilities and infrastructure. Already in 2008, IFS achieved the leading position for maintenance and logistics systems in the defense sector. Despite the difficult times, product revenue grew, and 70–80% of the new licenses sold were from these target sectors.
With this shift in targeted markets, IFS has moved further away from consumer-facing sectors and general manufactur- ing. In other sectors there are still major trends that will drive long-term investment such as the development of alternative sources of energy, demand for food and other natural resources, and military projects. Furthermore, many govern- ments plan increased investments in infrastructure to stimulate the activity in their economies. This has already benefited IFS with the license pipeline at the end of 2008, adjusted for cur- rency effects, being 7% higher than at the same time last year.
Consulting margins have, as predicted, continued to improve through 2008, achieving 19% compared with 16% the previous year. This is the result of dealing with issues that were reported in previous years, namely a couple of challeng- ing projects, staff turnover and the use of high-cost external resources. The consulting backlog at the end of 2008 was equal to that seen at the end of 2007, and as long as the backlog remains stable, further efficiency gains are expected to yield continued margin improvement. Maintenance and support revenue increased in 2008 by 7% and is unlikely to be affected by the economic downturn.
In March 2008 IFS announced a plan to double product revenue and deliver an EBIT of 15% by 2012. This goal would be achieved by continued organic growth and by the acquisi- tion of product companies operating in our target markets and our main existing geographies. In 2008 IFS evaluated a number of acquisitions but decided that none was ideal—this is an ongoing process. The commitment to the strategy continues, but progress is likely to be affected by the economic situation.
Business analyst forecasts for the global IT market in 2009, based on extensive surveys of IT budgets, were adjusted downward during the end of 2008. The most recently reported surveys from analysts such as Gartner, AMR, and Forrester
indicate a total market growth of between -3% and +3%, which is stable in relation to many other industries. Further- more, ERP solutions are among the highest prioritized IT investments due to the need to streamline corporate processes, reduce costs, and improve business intelligence.
IFS does not offer any predictions regarding the world economy but must assume that the downturn will persist for all of 2009. Despite the favorable market positioning described above, IFS expects that investments are likely to be delayed and ongoing projects slowed down. For this reason IFS’
development for 2009 is expected to be stable and generally in line with 2008. Demand for products and services will be con- stantly tracked across all regions and should any deterioration in demand be seen, then cost reduction action will be quickly taken.
Alastair Sorbie
President and CEO
I F S A N D I F S A P P L I C AT I O N S
IFS – THE GLOBAL ENTERPRISE APPLICATIONS COMPANY
IFS, one of the world’s leading suppliers of business software, offers applications that enable companies to respond quickly to market changes and use resources in a more agile way to achieve better business performance and competitive advantages.
IFS was founded in 1983 and now has 2,700 employees worldwide. With IFS Applications™, now in its seventh generation, IFS has pioneered component-based ERP software. The component architecture provides solutions that are easier to implement, run and upgrade.
IFS has more than 2,000 customers in seven target industries, and the IFS Applications business software provides increased ERP functionality, including CRM, SCM, PLM, CPM, enterprise asset management, and MRO capabilities.
IFS - Snapshot
IFS is an organization with a truly global reach, with slightly more than 70 IFS offices and over 40 distributors around the world. IFS Applications business software is available in more than 50 countries and in more than 22 languages. IFS has over 2,000 customers and more than 600,000 end users of IFS Applications. The company has more than 20 years of expe- rience of implementing business software, with consultants who have in-depth industry competence and understand customers’ activities and needs.
Business Concept
With its own resources and in cooperation with partners, IFS develops, sells and implements the component-based ERP software IFS Applications.
Strategies in Brief
• IFS will strengthen its profit, cash flow and financial position by focusing on increasing sales, reducing costs and increasing its market share in selected industries.
• Our product development will focus on maintaining our position as technical leader in component-based business software for a global market.
• Our product, IFS Applications, will support the standards that are important for our customers. We will supply integrated Internet-based solutions that enable increased cooperation among customers, suppliers and partners.
• Our product, methods, support system and infrastructure will support customers with global operations.
• To meet the market’s increased demands for solutions with broad functionality combined with in-depth industry knowledge, we will focus on a limited number of industry segments.
• We will continue to develop global and local cooperation with partners to enable continued development of our competence and market presence with lower risk and capital requirements.
• We will maintain our own supplier capacity for consultant services related to the implementation and use of IFS Applications in important markets and to support our partners.
• Our customer projects will be predictable in terms of content, time and costs through a well-tested method,
continuous reuse of experiences and clear division of responsibility.
• Our ability to offer resources from IFS’ Sri Lankan unit for customer projects and cooperation with partners will increase our competitiveness.
• We will stimulate increased mobility among all our employees to increase competence and understanding of various international markets.
IFS Applications
IFS Applications is a comprehensive business system for mid- sized and large organizations, and is specialized in a number of business processes. Experience from customers, user groups, industry analysts and the company’s strong network of part- ners has been combined to create leading industry solutions to meet specific customer needs within IFS’ seven target
industries:
• Aerospace and Defense
• Automotive
• Construction, Contracting and Service Management
• Manufacturing
• Process Industries
• Retail and Wholesale
• Utilities and Telecom
This focus, which comprises consultant, marketing and prod- uct development competence, provides customers with com- petitive advantages in their own markets and has made IFS the leader in several industries. Within maintenance and logistics systems for aerospace and defense, for example, IFS is the global market leader.
In addition to the processes supported by all business sys- tems, such as finances, inventories, customer management and traditional manufacturing, IFS Applications is specialized in a number of specific manufacturing processes and in support for the entire life cycle of products, from construction to mainten- ance and aftermarket services. This provides substantial advan- tages for customers. The information created during construc- tion and manufacturing is of great importance when the prod- ucts are later maintained, possibly during several decades.
In recent years, IFS has seen increased demand for IT sup-
port for project-oriented activities in several of our targeted
I F S A N D I F S A P P L I C AT I O N S
industries. IFS has worked quickly to provide enhanced software components to better manage challenges such as cost, time, resources, liquidity and risk in project-driven activities.
The optimization of these key areas results in better control and is the key to enhanced efficiency and control. It also provides increased opportunities to capitalize on new business opportunities. The use of traditional organizational structures and systems makes it difficult to handle operational situations in real time and reduces flexibility, as it is necessary to balance resources in relation to expected deliveries. It is expensive and difficult to assess whether new business opportunities, but also ongoing operations, will be profitable. The need exists not only in traditionally project-intensive industries such as construction, but also in the manufacturing industry, where customers must have the ability to manage risk, complex contracts and relations with subcontractors as more produc- tion is outsourced or moved to low-cost countries.
Creativity and innovation
IFS has two distinct advantages over competitors: the single integrated product line in IFS Applications and the fact that it has been component-based for more than a decade. This means IFS is uniquely placed to supply business components that take advantage of today’s service-oriented architectures (SOA).
IFS continued to be creative in 2008. The first customers installed the revolutionary new user interface IFS Enterprise Explorer for testing and evaluation. IFS Enterprise Explorer is a completely new experience in which an ergonomic design, a
built-in search engine and multi-media functionality simplify the use of enterprise applications and increase productivity.
The new technology is the result of IFS’ long-term develop- ment work that aims to make business software easier and more efficient to use in order to increase customer benefit. In addition, several important improvements were launched during the year:
• A new version of IFS Sales and Marketing Customer Relationship Management (CRM). The new innovative interface enhances efficiency and usability for customers by simplifying the adaptation of solutions for the specific needs of each user.
• SOA-based CADP-DM (Product Data Management) integration as an online service.
• Support for Single Euro Payments Area (SEPA), entailing faster and easier payment transactions for companies in all industries in Europe.
• New functions for advanced planning for engineering plants focusing on the aerospace and defense industry.
In 2008, product development investments were also made in improvements to be launched in 2009:
• Eco-Footprint Management – a new solution allowing companies to monitor and report on the environmental impact of their operations.
• New functionality for aerospace and defense, project-
driven operations, logistics and stream of commodities.
S T O C K
STOCK
IFS Series B stock is listed since April 28, 1998 on the Stockholm stock exchange and is traded on the OMX Nordic Exchange, Stockholm Mid-Cap list (sector: information tech- nology). The Company’s Series A stock has been on the same list since June 18, 1998.
As of December 31, 2007, IFS’ capital stock amounted to SKr 539,058,460, represented by 26,952,923 shares, before dilution, with a nominal value of SKr 20 per share. These comprised 1,391,664 Series A shares and 25,561,259 Series B shares. At year end, 400,000 Series B shares were in own
custody. After full dilution, the number of shares amounts to 26,822,843.
Each Series A share carries the right to one vote, and each Series B share carries the right to one tenth of a vote. All shares carry equal rights to dividends.
During the year, a total of 0.0 million Series A shares and 11.4 million Series B shares were traded. The trading thereby amounted to 43% of the average total number of listed shares.
The principal owner is Gustaf Douglas with associated compa- nies, who controlled 18.8% of the capital and 17.4% of the voting rights on December 31, 2008.
Stockholders Stockholder
Number of series A shares
Number of series B shares
Share of capital
Share of voting rights
Gustaf Douglas and associated companies 202 800 4 788 300 18.8% 17.4%
Bengt Nilsson and associated companies 402 773 236 809 2.4% 10.9%
Anders Böös and associated companies 396 300 8 934 1.5% 10.2%
Catella funds - 2 805 361 10.6% 7.2%
NEC Corporation 110 000 679 135 3.0% 4.6%
Mason Hill Advisors - 1 375 000 5.2% 3.5%
DnB NOR funds - 1 104 290 4.2% 2.8%
Manticore fund - 961 600 3.6% 2.5%
Lannebo funds - 928 000 3.5% 2.4%
Unionen trade union - 927 146 3.5% 2.4%
Heinz Kopfinger 78 932 31 117 0.4% 2.1%
Fourth Swedish National Pension Fund - 818 740 3.1% 2.1%
Skandia funds - 785 400 3.0% 2.0%
Skandia Liv - 682 625 2.6% 1.7%
AMF Pension funds - 638 600 2.4% 1.6%
Other stockholders 200 859 8 390 202 43.2% 26.6%
Total outstanding shares 1 391 664 25 161 259 100.0% 100.0%
Shares in own custody - 400 000 - -
Total 1 391 664 25 561 259
Source: SIS Ägarservice, December 30, 2008
Share category
Number of shares
Number of voting rights
Share of capital
Share of voting rights
Series A shares 1 391 664 1 391 664 5.2% 35.6%
Series B shares 25 161 259 2 516 126 94.8% 64.4%
Total 26 552 923 3 907 790 100.0% 100.0%
Source: SIS Ägarservice, December 30, 2008
Distribution of stockholders
Share of capital
Share of voting rights
Swedish individuals 36.0% 51.8%
Swedish mutual funds 26.1% 18.0%
Swedish institutional owners 12.5% 8.6%
Swedish owners 74.6% 78.4%
International owners 25.4% 21.6%
Total 100.0% 100.0%
Source: SIS Ägarservice, December 30, 2008
S T O C K
Stockholder statistics Number of shares held
Number of stockholders
Proportion of stockholders
Number of shares
Share of capital
Share of voting rights
1–1 000 8 852 92.7% 1 235 056 4.6% 3.5%
1 001–2 000 301 3.2% 450 242 1.7% 1.2%
2 001–5 000 181 1.9% 586 814 2.2% 1.8%
5 001–10 000 78 0.8% 579 205 2.1% 2.2%
10 001–50 000 74 0.8% 1 640 330 6.1% 6.5%
50 001–100 000 23 0.2% 1 553 312 5.8% 4.0%
100 001– 38 0.4% 20 907 964 77.6% 80.8%
Summa 9 547 100.0% 26 952 923 100.0% 100.0%
Source: SIS Ägarservice, December 30, 2008
IFS Series B share price development and trade volume
January 1, 2008–December 31, 2008 2004–2008
TA B L E O F C O N T E N T S O F T H E A N N U A L R E P O R T
TABLE OF CONTENTS OF THE ANNUAL REPORT
13 Board of directors’ report 20 Consolidated income statement 21 Consolidated balance sheet – assets
22 Consolidated balance sheet – equity and liabilities 23 Consolidated capital account
24 Consolidated statement of cash flows 25 Income statement of the parent company 26 Balance sheet of the parent company– assets
27 Balance sheet of the parent company– equity and liabilities 28 Capital account of the parent company
29 Statement of cash flows of the parent company 30 Notes to the financial statements
Note 1 Accounting principles 30
Note 2 Segment reporting 39
Note 3 License revenue 41
Note 4 Maintenance and support revenue 41
Note 5 Other revenue 41
Note 6 Development expenditure 41
Note 7 Sales and marketing expenses 41
Note 8 Other operating income 42
Note 9 Other operating expenses 42
Note 10 Transactions between subsidiaries 42 Note 11 Operating expenses per type of cost 42
Note 12 Auditors’ fees 42
Note 13 Salaries, other remunerations, and social costs 42 Note 14 Remunerations paid to senior executives 43 Note 15 Transactions with related parties 44 Note 16 Average number of employees per country 45 Note 17 Results from participations in subsidiaries 45 Note 18 Results from participations in associated companies 45
Note 19 Financial income 45
Note 20 Financial costs 45
Note 21 Taxes 46
Note 22 Profit and dividend per share 46
Note 23 Intangible fixed assets 47
Note 24 Tangible fixed assets 48
Note 25 Operating lease agreements 50
Note 26 Participations in subsidiaries 51 Note 27 Participations in associated companies 52
Note 28 Receivables in subsidiaries 53
Note 29 Deferred tax claims and tax liabilities 53
Note 30 Other long-term receivables 54
Note 31 Accounts receivable 54
Note 32 Other receivables 54
Note 33 Liquid assets 54
Note 34 Stockholders’ Equity 54
Note 35 Convertible debentures/bonds 56
Note 36 Liabilities to credit institutions 57 Note 37 Risk structure pertaining to interest and financing 57
Note 38 Pension commitments 58
Note 39 Other provisions and other liabilities 58
Note 40 Other liabilities 59
Note 41 Accrued expenses and prepaid income 59
Note 42 Pledged assets 59
Note 43 Contingent liabilities 59
Note 44 Adjustments for items not included in cash flow 59 Note 45 Acquisition of subsidiaries/operations 60 Note 46 External sale of subsidiaries/operations 60 Note 47 Acquisition of tangible fixed assets 60 Note 48 Financial risk management and derivatives 60
Note 49 Conversion rates 62
Note 50 Information about the Parent company 62
63 Audit report
B O A R D O F D I R E C T O R S ’ R E P O R T
BOARD OF DIRECTORS’ REPORT
General
The Board of Directors and President of Industrial and Financial Systems, IFS AB (publ), corporate identity number 556122-0996, herewith submit the annual accounts and consol- idated accounts for the fiscal year 2008. Unless otherwise stated, all amounts are in SKr million. Information in paren- theses refers to the preceding fiscal year. The terms “IFS”,
“Group”, and “Company” all refer to the Parent Company, Industrial and Financial Systems, IFS AB, and its subsidiaries.
Summary
The overall objective for 2008 was to achieve an increased operating profit and a substantially improved cash flow. EBIT before expenses related to the restructuring program increased to SKr 178 million (141) and cash flow after investments in- creased to SKr 98 million (20). The positive development is the result of IFS’ continued focus on project-oriented industry and markets with a strong need for well-functioning processes within logistics, maintenance, and service. The action program announced in conjunction with the interim report for the second quarter charged earnings with SKr 24 million.
Net revenue amounted to SKr 2,518 million (2,356).
The positive development in earnings has further streng- thened IFS’ balance sheet and the company has a positive net cash balance.
Operations
IFS is a leading provider of component-based business software developed using open standards and based on service-oriented architecture (SOA). The solutions enable companies to respond quickly to market changes and use resources in a more agile way to achieve better business performance and competitive advantage.
Founded in 1983, IFS has 2,700 employees worldwide.
With IFS Applications™, now in its seventh generation, IFS has pioneered component-based ERP software. The compo- nent architecture provides solutions that are easier to imple- ment, run and upgrade. IFS Applications is installed in over 50 countries in 22 languages.
IFS has more than 2,000 customers and over 600,000 users across seven key vertical sectors: aerospace and defense;
automotive; manufacturing; process industries; construction, contracting and service management; retail and wholesale distribution; and utilities and telecom. IFS Applications pro- vide extended ERP functionality, including CRM, SCM, PLM, CPM, enterprise asset management, and MRO capabilities.
IFS is today represented in approximately 50 countries through wholly and jointly owned subsidiaries, joint ventures, and partners. Operations are divided into three regions, EMEA, Americas, and Rest of the World, which have the
operational responsibility for sales and delivery to customers.
Product development and support are included in corporate functions.
The Market
Globalization has led to increased pressure from competitors and more complex supply chains. To meet these challenges, many companies are investing in new, improved enterprise applications with the aim of streamlining operations and sim- plifying collaboration with suppliers, customers and partners.
Moreover, an increasing number of companies are operating internationally, using partly new business models. Legislation and regulations are becoming more extensive, mergers and acquisitions are more frequent, and many companies are moving from traditional manufacturing/ distribution to more project- and service-based business models. In recent years, these drivers have led to a growth of about 10 percent in busi- ness software, but economic conditions resulted in a reversal of the trend toward the end of the year.
Industry analysts’ forecasts for the global IT market for 2009, based on broad surveys of companies’ plans, were re- duced toward the end of 2008. The most recent surveys from such analysts as Gartner, AMR and Forrester indicate that the total market trend will range from a decline of 3 percent to an increase of 3 percent, a stable trend in comparison with many other industries. In addition, these surveys show that business software is among the highest priorities in IT investments. The current primary drivers are the need for efficiency enhance- ment in companies’ processes, cost reductions and improved support for decision-making. These results also correspond well with local surveys Scandinavia, which is an important market for IFS. Growth for the business software market is expected to return to levels of approximately 10 percent when global economic conditions normalize.
The situation with respect to competition remained un- changed during 2008 and is expected to remain unchanged in the coming years. After the consolidation of recent years, SAP and Oracle remain the main competitors in the industries in which IFS operates.
Structural changes
In 2008, a restructuring program was implemented to streng-
then the company’s position. As a result of structural changes
in Eastern Europe, operations in the Czech Republic will be
managed by external partners; changes in marketing were
initiated in Sweden. The impact of these changes charged
earnings for the year with expenses of SKr 24 million. Annual
savings resulting from the program are expected to reach some
SKr 50 million.
B O A R D O F D I R E C T O R S ’ R E P O R T
Net revenue
SKr, million
2008 actual
Translation effect
Structural changes
2008 adjusted
2007 actual
Organic change
Reported change
