Lawson Ekes Out Profit in Q3, Partners to Peddle in Quebec

Published: April 13, 2009

by Alex Woodie

Currency fluctuations and a downturn in IT spending, particularly among manufacturing customers, combined to drive third quarter revenues down 18 percent to $174 million for Lawson Software, but cost cutting enabled the company to post a profit anyway. The St. Paul, Minnesota, ERP software vendor also announced a deal with a French Canadian reseller, Commsoft Technologies, to sell Lawson's M3 suite, which is primarily implemented on i-based Power Systems machines.

Conventional wisdom says that during periods of macro economic uncertainty, such as we find ourselves in now, companies will put the brakes on big new ERP purchases and shift their focus to maintaining existing IT systems. Those two predictions were born out in Lawson's financial results for its fiscal third quarter, which ended February 28.

Software license revenues--still the best indicator of new deals for a traditional software company like Lawson--declined 22 percent to about $25 million for Lawson. However, sales declined just 14 percent when currency fluctuations on the global market are taken into account and revenues are counted in the currencies that the deals were done in inside their home countries. Fewer ERP implementations during the quarter also took its toll on consulting revenues, which in recent quarters has accounted for nearly half of the company's revenues. Consulting revenue for the quarter plummeted by 34 percent, or $33 million, to $63 million (although the drop was "just" 26 percent when adjusted for currency fluctuations).

The one bright spot for Lawson in terms of revenue streams was maintenance fees, which continued its strong recent showing and increased 1 percent from 2008 levels to almost $86 million. When the strengthening U.S. dollar and weakening foreign currencies are factored into the equation, maintenance fees increased a healthy 8 percent. The vendor says "consistent renewals" at "higher average prices" helped to partially offset the drop in consulting revenues.

Lawson managed to eke out a $7.4 million after-tax profit for the quarter, or $0.04 per diluted share, despite slowing sales and $11.6 million in charges for the quarter ($3.5 in restructuring charges and $8.1 in an impairment charge related to Lawson's unfortunate dip into auction rate securities). This compares favorably to net income of $0.7 million, or basically nothing per diluted share, during the same period in 2008. The positive net income figure pleased traders on Wall Street so much that they pushed Lawson's stock price up nearly 20 percent to $5 per share, a level not seen since early January. The stock was trading near $9 per share last June; now its market capitalization is roughly the same as its annual revenues, a relative bargain by the standards of the once high-flying technology sector.

The fact that Lawson managed to post a profit in this economy can be traced to job cuts that Lawson made in late November, at the end of the second fiscal quarter, when it laid off 5 percent of its workforce, or 200 people. Total cost of revenues in fiscal Q3 was $82.5 million, nearly 20 percent lower than it was a year ago, reflecting lowered spending by Lawson in research, development, sales, marketing, and general and administrative categories. An 8 percent decline in fully diluted shares outstanding also helped to prop up the earnings-per-share figure. A 32 percent decrease in income tax provisions (from $9.8 million to $6.7 million) also helped profitability.

"We are operating well in a challenging business environment," said Harry Debes, Lawson's president and chief executive officer, in a statement accompanying the financial results. "During this fiscal year, revenues have been negatively impacted by reduced capital spending and weakening foreign currencies, things which are beyond our control. We can control how we react to economic conditions and our focus has been to preserve profitability."

Lawson expects things to continue along as they have for its fiscal fourth quarter. The company's guidance says revenues will be in the range of $175 million to $182 million. That would be a 22 percent to 25 percent decline compared to the $233 million in revenue the company posted during the fourth quarter last year. Profitability is expected to be in the range of $0.04 to $0.07 per share.

In addition to its financials, Lawson has also announced a new partnership with Commsoft Technologies, which will sell the M3 suite to small and medium businesses in the manufacturing, distribution, and food and beverage industries, primarily in the Canadian province of Quebec. Commsoft will offer localized service in French, which is critical when working with Quebec-based customers and prospects, Lawson says.

Commsoft CEO Alix Muller says M3 is a good fit for its customers. "We see the Lawson M3 system as a compelling ERP offering for the types of companies we serve in this region," Muller said in a statement announcing the deal.

M3 sales have come in below Lawson forecasts in recent quarters, which is due in part to the global manufacturing slowdown. Since the majority of Lawson customers implement M3 on IBM Power Systems servers (formerly System i and iSeries boxes), that has also had an impact on IBM hardware sales. Sales of Lawson's S3 suite, which is aimed at services industries such as healthcare and legal, have faired better than M3.

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