CIMdata PLM Industry Summary Online Archive

19 July 2007

Financial News

IFS Interim Report January - June 2007

Second quarter 2007

•  Net revenue amounted to SKr 619 million (561).

•  License revenue increased to SKr 152 million (111), with maintenance and support revenue

•  reaching SKr 164 million (149).

•  Consulting revenue amounted to SKr 296 million (293).

•  EBIT amounted to SKr 49 million (23), with earnings before tax amounting to SKr 47 million (16).

•  Profit after tax was SKr 36 million (13), with profit per share after tax amounting to SKr 0.14

•  (0.07).

•  Cash flow after investments amounted to SKr -56 million (-31).

January-June 2007

•  Net revenue amounted to SKr 1,146 million (1,108).

•  License revenue increased to SKr 224 million (200), with maintenance and support revenue

•  reaching SKr 322 million (301).

•  Consulting revenue amounted to SKr 588 million (589).

•  EBIT amounted to SKr 57 million (44), with earnings before tax amounting to SKr 48 million (23).

•  Profit after tax was SKr 40 million (20), with profit per share after tax amounting to SKr 0.16

•  (0.09).

•  Cash flow after investments amounted to SKr -43 million (37).

Outlook

The expectations of the board for 2007 remain unchanged; an EBIT that is significantly better than the 2006 EBIT of SKr 120 million and continued improvement in cash flow.

Group Performance

The market for business applications continues to be stable. Analysts such as Gartner and AMR expect growth of about 5-10% in the total market during the first six months. Growth during the remainder of the year is expected to be at the same level.

License revenue increased by 12% (15% organic) during the first six months and by 36% (39% organic) during the second quarter. The increased focus on license revenue growth combined with IFS' stronger market position in the defense, contracting, service management, and project-oriented industries resulted in a positive development in order backlog and strong license sales in the second quarter. In the defense sector, licenses were called-off in the ECSS project for the US Air Force, and the Norwegian Air Force signed an agreement valued at approximately SKr 50 million to upgrade its IFS Applications solution. Within the contracting, service management and project-oriented industries, agreements with a total value exceeding SKr 100 million were signed with Heerema Fabrication Group, Eltel Networks, Tomra, and a European field service company, which primarily had a positive effect on the growth of license sales in EMEA.

IFS' position in the defense industry will be further strengthened with the acquisition, after the end of the report period, of the software provider, Information Science Consultants (iSC), by IFS Defence, a joint venture business with BAE Systems. This acquisition demonstrates IFS' stated strategy of further strengthening its presence in areas in which the company has a strong market position. Within defense, IFS already has a strong market position in air, land forces, naval shipyards and other military installations. The iSC acquisition improves the capability for naval ships, with iSC's biggest customer being the British Royal Navy.

In the Americas, license revenue substantially exceeded the weak development experienced in the first quarter. The stronger Swedish krona, however, has a negative effect on comparisons with the previous year.

As a result of the increasing license sales, net revenue during the first six months increased by SKr 38 million, despite negative foreign currency translation effects of SKr 33 million. Adjusted for these, organic growth was 6%.

Maintenance and support revenue continued to show good growth, increasing by 7% (10% organic) in the first six months. As a percentage of net revenue, maintenance and support revenue continued to grow, to 28% (27%) in the first half of the year. Good economies of scale in maintenance and support also mean that the growth in revenue contributes to higher margins. During the first six months, the maintenance and support margin was 67% (61).

Consulting revenue remained at the same level as the first half of 2006, which corresponds to 3% organic growth, whereas the consulting margin was lower. About one percentage point of the weaker consulting margin can be attributed to foreign currency translation effects, but apart from that, uneven utilization in various geographies in the Group had a negative effect on margins. The trend toward higher salary increases in certain markets also affected margins negatively as the increases cannot always be passed on to customers in ongoing implementation projects. As the consulting order backlog is very good in several major markets, an improvement is expected during the remainder of the year. However, an increase in the need for external consulting resources, with lower margins for IFS, will mean that the improvement in margins will be modest in the short term.

To improve the agility and profitability of the consulting organization over a business cycle, increasing efforts are being made to establish long-term collaboration with partners. A contract was signed with WM-data to establish a center of excellence for IFS Applications in the Nordic region. IFS and WM-data are currently in the process of recruiting and training staff for this. Moreover, an agreement has been entered into with Tata Consultancy Services with the twin aims of increasing new sales within certain prioritized markets and of supporting existing customers and projects. Initially, the partnership will target the US market in the oil and gas, chemicals, and energy and telecom industries.

Operating expenses increased by SKr 25 million during the first six months, corresponding to 2% at current exchange rates. The organic increase, adjusted for exchange rate effects, amounted to SKr 59 million, or 6%, of which direct expenses, affected by the higher volume, accounted for SKr 15 million, or 9%. Personnel-related expenses increased by 4% organically.

Several markets are experiencing an increase in demand for IT competence, which affects the availability of qualified personnel and salary levels.

The increase in direct costs pertains mainly to EMEA, in which substantially higher net revenue resulted in improved earnings. In the Americas, the lower net revenue in the first six months was balanced by lower cost levels, as a result of which organic earnings were unchanged compared with 2006. Earnings in Rest of the World were also in line with those of the previous year. Operations in Asia have been streamlined and organizational changes made, which will have a positive affect on the cost structure toward the end of 2007.

Financing and Cash Flow

Cash flow after investments during the first six months was negatively affected by developments related to receivables during the end of the period. Apart from the effect of the higher revenue, with several major contracts being signed late in the quarter, payments deferred over the turn of the quarter had a considerable negative affect, which amounted to more than SKr 30 million.

During the first six months, cash flow after investments amounted to SKr -43 million (37). In the second quarter, the figure was SKr -56 million (-31). The change in working capital during the first six months was SKr -59 million (54), of which receivables accounted for SKr 16 million (96), whereas the effect of these during the second quarter was SKr -88 million. Cash flow after investments is expected to be substantially strengthened during the remainder of the year.

Liquid assets amounted to SKr 307 million (282), and net liquidity was SKr 17 million (21). The Group also had access to unutilized lines of credit amounting to SKr 46 million (60). During the period, liabilities to credit institutions were reduced from SKr 305 million to SKr 290 million.

Parent Company

Net revenue amounted to SKr 8 million (7), with earnings after net financial items of SKr 51 million (-26). Somewhat lower operating expenses, but, above all, improved net financial items, contributed to an improvement in Parent Company earnings.

Dividends from subsidiaries had a positive effect of SKr 71 million (0) on net financial items during the first six months. Profit for the period was SKr 55 million (-26). Liquid assets, including unutilized lines of credit, amounted to SKr 121 million (90). Parent Company equity increased to SKr 1,282 million, from SKr 1,098 million at the beginning of the year, primarily resulting from the conversion of debentures and bonds, net SKr 128 million, which resulted in an increase of SKr 55 million in capital stock and of SKr 73 million in the share premium reserve.

Convertible debentures /bonds at a nominal value of SKr 139 million (40) were converted during the period. The booked liability of convertible debentures/bonds amounted to SKr 50 million (170), whereas the nominal liability was SKr 53 million (199) at the end of the period. The KV3B convertible debenture matured during the first quarter and the outstanding liability of SKr 1 million was repaid.

The number of employees in the Parent Company at the end of the period was 5 (3).

Outlook

The expectations of the board for 2007 remain unchanged. For 2007, it expects an EBIT that is significantly better than the 2006 EBIT of SKr 120 million and continued improvement in cash flow.

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