IBS Interim Report January - September 2008 Solna, Sweden, October 23, 2008 - IBS AB (listed on the OMX Nordic Exchange Stockholm, Nordic list, Small Cap, Information Technology: IBS) today presented the Group's interim report for January 1 - September 30, 2008. The information was submitted for publication on October 23, 2008, 8:00 a.m. January - September • Total revenue amounted to SEK 1,422 m (1,549). • Net profit amounted to SEK -181 m ( 24). • Earnings per share amounted to SEK -1.86 (-0.28). • Operating profit amounted to SEK -173 m (-25). • Earnings after financial items totaled SEK -175 m (-29). • Cash flow from operating activities amounted to SEK 45 m (27). July - September • Total revenue amounted to SEK 422 m (477). • Net profit amounted to SEK -111 m (0). • Earnings per share amounted to SEK -0.90 (-0.00). • Operating profit amounted to SEK -92 m (7). • Earnings after financial items totaled SEK -89 m (2). • Cash flow from operating activities amounted to SEK 17 m (-49). • Goodwill impairment of SEK 53 m (0) and adjustment of deferred tax assets of SEK ¬ 26 m (0). • On September 23, IBS announced a new strategy, focusing on key verticals and reducing staff with up to 500 employees. Important events after end of period • New CEO and President Mike Shinya joined IBS on October 15. • Divestment of non-profitable operations in Portugal in October. Summary of January - September 2008 2007 Change % Total revenue, SEK m 1,422 1,549 -8% - New sales - Renewal revenue Software licenses, SEK m 93 190 284 112 196 308 -8% License margin 88% 92% -4 p.p. Professional services revenue, SEK m 845 878 -4% Professional services margin 15% 19% -4 p.p. Hardware and other revenue, SEK m 293 363 -19% Hardware and other margin 19% 20% -1 p.p. Operating profit, SEK m -173 -25 Earnings after financial items, SEK m -175 -29 Net profit, SEK m -181 -24 Operating margin, rolling 12 months * -2.6% 2.8% -5.4 p.p. * Excluding other operating income/costs as defined on page 8, “Consolidated income statement” IBS interim report January - September 2008 Summary of third quarter The global financial crisis has had some negative effects on revenue, particularly in selling to new customers as these tended to defer investments until uncertainties are cleared. As a consequence, license revenue showed a decrease in the quarter compared with the same period 2007, particularly in new sales. Productivity was also adversely affected by the planning for the new strategic initiative launched on September 23. Professional Services revenue decreased compared to the same period 2007, in part due to a division of the French operations being divested in 2007 and in part due to weaker customer demand, particularly in Southern Europe. In October a Portuguese division containing approximately 90 employees was divested. Hardware sales continued to show decline, reflecting lower worldwide demand for IBM System i servers. Total revenue for the quarter decreased by SEK 55 m. Net profit was affected by several non-cash affecting items such as impairment of goodwill mainly due to divestments, lower capitalization of product development cost, increased provisions for bad debt and higher amortizations on capitalized product development cost. These four items affected profit negatively with a total of SEK 74 m. Operating profit showed a decline of SEK 98 m compared to the same period last year. The drop in net profit was also impacted by a reduction of deferred tax assets of SEK 26 m. Ongoing cost saving activities decided in the first quarter have had effects on the operation which can be seen in a reduced number of employees and lower G&A costs including lower costs for offices, travel and administration. The workforce has been reduced by 194 employees or 11% compared to 2007. During the summer, IBS launched and completed a rights issue to shareholders, guaranteed by Deccan Value Advisors. The issue was fully subscribed and raised SEK 397 m, of which SEK 177 m was received in June and SEK 220 m received in July. In September IBS announced a re-structuring program aimed at reducing staff, office costs and driving efficiencies in product development and customer project delivery and support. IBS appointed a new CEO and President, Mike Shinya, who took up his position on October 15. On June 30 Deccan Value Advisors placed a mandatory bid on the company, the acceptance period for which ran to August 18, 2008. In a statement August 4, the Board recommended shareholders to not accept this bid. During the quarter Deccan attained 77% of the votes in IBS. On September 5, an Extraordinary General Meeting was held and the composition of the Board of Directors was changed. Christian Paulsson was elected to the Board while Bo Pettersson and Fredrik Svensson left the Board. Market The third quarter showed a decline in license revenue, particularly from new customers. The effects of the global financial situation affected sales negatively. Outside of the US, Southern Europe was affected most strongly. The effects of a slowing economy will likely continue to show some effects, especially in the US market; however it should be noted that IBS in the Nordics showed a performance more or less in line with last year, whereas the Asia Pacific region continued to show improvements. The demand for professional services declined as customer deferred major upgrades and other projects. However, the Asia Pacific region showed an increase in Professional Services revenue. Hardware sales have clearly been affected both by the slowing economy, particularly noticeable in fewer large contracts from the financial sector than normal, and the global slow-down in IBM System i sales. January - September 2008 Operating profit for the first nine months amounted to SEK -173 m (-25). The decline in earnings was attributable to a drop in revenue, SEK 1,422 m (1,549) combined with lower capitalization of product development costs, SEK 66 m (108), higher bad debt provisions of SEK 28 m ( 10) and an impairment of goodwill of SEK 53 m (0) in the third quarter. July - September 2008 IBS' operating profit was down to SEK -92 m (7). Revenues were down to SEK 422 m (477), a reduction of SEK 55 m or 11%. This was mainly due to lower hardware and license revenue, as well as divestment of a division in our French operations, which took place in September 2007. Apart from lower revenue, operating profit was impacted negatively primarily by non-cash items incurred in the quarter, such as a continuation of the lower capitalization of product development cost, SEK 25 m (32), increased bad debt provisions, SEK 15 m ( 6) and a goodwill impairment of SEK 53 m (0). The third quarter noted a decrease in revenue for software licenses, SEK 89 m (102), with several customers deferring signing of contracts citing the uncertainty in the market. New sales accounted for SEK 27 m (35) and renewal revenues for SEK 63 m (66). The profit margin from software licenses was 89% (93). Revenues from professional services amounted to SEK 259 m (279). There was reduction of revenue due to the divestment of a division in our French operations in 2007 but also because customers deferred upgrades and other large projects in view of the current market conditions. The professional services margin amounted to 16% (23). Hardware and other revenue continued to decline and amounted to SEK 73 m (97), which added to the overall reduction in revenue. The profit margin for hardware sales was 20% (24). The Group's gross profit margin declined to 32% (38). Gross product development costs incurred during the quarter decreased to SEK 80 m (-82). However, capitalized product development declined to SEK 25 m (32). The resulting product development cost in the income statement thus increased to SEK -55 m (-50). Sales and marketing costs were SEK 69 m ( 61). Provisions for bad debt made were SEK 15 m ( 6) and occurred due to increased overdue amounts in accounts receivables together with a stricter internal policy. It should be noted this had no cash impact in the quarter. General and administrative costs were down 15% to SEK 50 m ( 58) which was a direct result of the activity program initiated in the first quarter 2008. Other operating income/costs amounted to SEK -54 m ( 8). This contained an impairment of goodwill amounting to SEK 53 m (0) mainly due to the divestment of a division in Portugal and to the French operation. The remaining restructuring provision related to the action plan approved in 2006 amounted to SEK 27 m on September 30, 2008. During the third quarter, SEK 7 m was utilized. Earnings after financial items amounted to SEK -89 m (2). Restatement of Income Statement A new organization was put in place in 2008 based on an international business line structure. A consequence of the new organization was that some adjustments to the allocation of costs were made to the different cost functions in the income statement. For example, a number of former Product Development employees have been transferred to the Professional Services staff, in alignment with the stated ambition of reducing non-billable staff within IBS. To facilitate comparison with the preceding year, an income statement for 2007 by quarter, with historically reported and restated figures, is presented later in this report. Development by region for the quarter From January 1, 2008, IBS reports in accordance with the new IBS organization, which is divided into four Areas: Nordics, Europe, Americas and Asia Pacific. Nordics: While revenue declined slightly, profit improved compared to last year due to lower costs. The decline in hardware revenue slowed, and several contracts were signed including Automotive spare parts distributor K.W. Bruun Logistik. Some concern over drop in professional services revenue particularly in Denmark was somewhat off-set by improvements in Norway. Europe: Europe showed the weakest performance in the group, particularly in Southern Europe where weaker market and weaker demand for local products affected license, professional services and hardware revenues. A loss-making division selling local products was divested in Portugal. Americas: In the US, the general market economy is still affecting customers' ability to purchase new systems, though less so than in previous quarters. However, license revenue increased compared to same period last year. Professional services revenue has also been affected negatively by previously delayed contracts, but the new global professional services organization has allowed Americas' resources to be utilized in UK, Germany, Netherlands, and Italy. Asia Pacific: In Asia Pacific as elsewhere we saw a decline in hardware revenue, however professional services revenue continued to improve. This combined with lower cost of staff, in part thanks to the off-shoring partnership with an Indian supplier, meant that operating profit continued to improve compared to the same period last year. Product development The overall strategy is to continue developing IBS' position as the leading international supplier of software and professional services within distribution management solutions for selected market segments. The first live installation of a Windows version of the financial system continues to run well. The first phase of testing for the complete suite of IBS Enterprise 6.0 is now complete and a few pilot installations will be made to ensure the full system operates satisfactorily in industrial conditions. In parallel, a launch plan is being developed for deploying IBS Enterprise 6.0 in its entirety on a Windows/Intel platform, with the aim of making it available in all markets. A first version of IBS Enterprise that can be sold as Software as a Service (SaaS) has gone into beta testing and is expected to be marketed in the US market during the fourth quarter of 2008. Liquidity and financial position As of September 30, the Group's equity amounted to SEK 1 161 m (931), impacted by receiving a net of SEK 387 m in the rights issue. The equity/assets ratio was 64% (47%). Liquidity amounted to 146% (101%). During the third quarter, cash flow from operating activities amounted to SEK 17 m ( 49). Cash flow from investing activities amounted to SEK -34 m (-44). Cash and cash equivalents, including short-term investments, amounted to SEK 311 m (298) on September 30. In addition, there were credit facilities of SEK 344 m (18). The Group had interest-bearing loans totaling SEK 111 m (474) on September 30. Excluding debts to leasing companies, the corresponding figure was SEK 79 m (443). Investments The Group's investments in tangible fixed assets during the third quarter amounted to SEK 9 m (14). Tax Tax for the third quarter, as reported in the income statement, amounted to SEK -21 m ( 2) and consisted of SEK 3 m (0) in current tax expenses and SEK 24 m ( 2) in deferred tax expenses. Tax paid during the period amounted to SEK 1 m ( 4). An adjustment of deferred tax assets impacted net profit in the third quarter by SEK -26 m (0) following the divestment in Portugal. Currency IBS' currency risk is limited in that virtually all operating subsidiaries invoice in the same currency in which expenses are incurred. Personnel The number of employees on September 30 was 1,615 (1,809), a decrease of 194 employees or -11% compared with the year-earlier period. Part of this reduction is derived from the restructuring program aimed at reducing non-billable staff by more than 100 employees and some divestment of non-profitable operations. The number of consultants was 1,044 (1,019). The increase was primarily derived from consultants hired in low-cost resource centers and developers transferred to billable staff. Parent Company January - September The Parent Company, IBS AB, has 26 (29) employees and the overall management responsibility for the Group. The Parent Company's total revenue for the period amounted to SEK 63 m (91) and earnings after financial items amounted to SEK 24 m (33). Investments in tangible and intangible assets amounted to SEK 56 m (100). Cash and cash equivalents at the end of the period amounted to SEK 205 m (140). Rights issue A new share issue with preferential rights for the Company's existing shareholders was completed and subscribed for in its entirety. Deccan Value Advisors had issued a full subscription guarantee. On the basis of authorization granted by the Extraordinary General Meeting (EGM) on May 20, the Board of Directors of IBS issued 1,162,329 new class B shares to Deccan Value Advisors as consideration for the subscription guarantee for the rights issue. This was set-off against Deccan's claim for consideration of SEK 11,147,106 under the relevant subscription guarantee agreement, using a subscription price of SEK 9.59 as determined in accordance with the subscription guarantee agreement and the EGM's authorization. Total transaction costs for the rights issue amounted to SEK 21 m (0), of which SEK 10 m where other costs.. Action program for increased profitability The new business line focused organization is now fully implemented and efficiencies can be seen particularly in lower G&A costs, and also the fact that the Professional Services organization is utilized more efficiently. However, in view of the continued economic decline and subsequent drop in total revenue, IBS decided to launch a new strategic initiative in order to focus the business on core products and verticals. The initiative, which was planned during the summer and launched September 23, will result in staff reductions of up to 500 employees worldwide, including voluntary resignations, business divestitures, country exits and redundancies. In addition reduction of office space used throughout the group will be pursued and other cost measures implemented. The program to relocate some of the product development, programming and customer support resources to low-cost countries such as Portugal, Poland and India will accelerate. In addition to cost measures, IBS will offer a Java/Windows and a SaaS (Software as a Service) version of its core product IBS Enterprise. Together with campaigns targeting the customer base these programs will create opportunities to balance the revenue risk. The total costs for this plan are estimated to be up to approximately SEK 400 m and will result in approximate savings of up to SEK 330 m per year. This initiative has not affected the results in the quarter. Related party transactions Except for the above mentioned issue of shares to Deccan Value Advisors, no related party transactions were performed. Information on risks and uncertainty factors IBS is affected by a number of external and internal factors, and has an ongoing process to identify all existing risks and how these should be handled. Among the risks the company is exposed to are market related risks (including competition, technological development, and political risks), business related risks (including product ownership, immaterial rights, customer dependencies and contract risks) and financial risks (including currency exchange rate risks). For more information about IBS' risks and uncertainty factors, please read the 2007 annual report pp 40-41 and note 21 on page 63. In addition to the risks published in the annual report 2007 should be added risks with the current strategic initiative. The IBS share The IBS share price decreased by 46% during the quarter and the closing share price was SEK 5.70 on September 30, 2008. Accounting principles The interim report is prepared in accordance with IAS 34 Interim Financial Reporting. Applicable rules in the Annual Accounts Act and the Securities Markets Act have also been applied. The same accounting principles and calculation methods were applied as in the most recent annual report 2007. This means that the consolidated accounts were prepared in accordance with the International Financing Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) and the interpretations issued by the Financial Reporting Interpretations Committee (IFRIC) as approved by the European Commission. New and revised standards and new interpretations applying as of January 2008 did not affect the IBS Group's financial reporting. For further information on the Group's accounting principles, see the 2007 annual report. For the Parent Company, the interim report has been prepared in accordance with Annual Accounts Act and the Securities Markets Act and in accordance with Recommendation RFR 2.1 - Accounting for Legal Entities. The same accounting principles and calculation methods were applied as in the most recent annual report 2007. Nominating Committee and Annual General Meeting In accordance with an Annual General Meeting in May 2008, IBS is contacting major shareholders in order to elect a Nominating Committee. The members of this committee will be communicated shortly. IBS Annual General Meeting is scheduled for May 7, 2009 in Stockholm. The exact time and place for the Annual general Meeting will be announced in IBS' year-end report. New reporting dates 2009 • The year-end report for 2008 will be published on February 11, 2009. • The annual report will be published in April 2009. IBS AB Corp. reg. no. 556198-7289 P.O Box 1350 Hemvärnsgatan 8 SE-171 26 Solna, Sweden Tel. +46 (0) 8 627 23 00 www.ibs.net The Board of Directors declares that the interim report gives a fair overview of the business development, financial position and result of operation of the Parent Company and the consolidated Group, and describes significant risks and uncertainties that the parent company andSolna, October 23, 2008 Pallab Chatterjee, Chairman of the Board Vinit Bodas, Member of the Board George Ho, Member of the Board Gunnel Duveblad, Member of the Board Christian Paulson, Member of the Board Bertrand Sciard, Member of the Board Ann-Mari Öhman, Member of the Board Mike Shinya, President and CEO Questions regarding this report will be answered by: President and CEO Mike Shinya Tel: ++46 (0)8 627 23 00 mike.shinya@ibs.net CFO Lennart Bernard Tel: +46 (0)70 627 23 54 lennart.bernard@ibs.net Investor Relations Director Oskar Ahlberg Tel: +46 (0)70 244 24 75, oskar.ahlberg@ibs.net its subsidiaries are facing. IBS in brief With over 30 years of experience, IBS is a leading provider of distribution management solutions. IBS focuses on industries such as automotive, electrical components, paper & packaging and pharmaceutical distribution. More than 5,000 customers across some 40 countries use IBS software to gain fast and measurable returns on IT investments. IBS B share is listed on OMX Nordic Exchange Stockholm. For more information, please visit www.ibs.net
IBS Interim Report January - September 2008
| Source: IBS AB
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