Lawson's Q4 Profits Slammed by Investment Writeoffs, Sales Up Though

Published: July 14, 2008

by Timothy Prickett Morgan

Trying to hedge your bets in this world is a tricky business, and in the global economy, it is also unfortunately a necessary business, too. But those hedges, as we are all learning once again as we watch the news each day, don't always pan out. Sometimes they fall flat. And so it has been with some auction-rate securities that application software maker Lawson Software invested in to try to make the most of its money.

In the fourth quarter of fiscal 2008 ended May 31, Minneapolis, Minnesota-based Lawson was able to boost its sales by 9.5 percent to just over $233 million, a feat that was possible in large measure because of the company's acquisition of Swedish ERP competitor Intentia International. The deal has been good for Lawson and Intentia both, allowing for synergies and cross-selling opportunities, which have driven organic growth. During Q4, Lawson had $41.7 million in software license sales, up only 2.7 percent, compared to maintenance fees of $88.9 million, up 14.3 percent. The big money maker at Lawson is consulting services related to the installation of its various ERP, SCM, CRM, and other software modules, and in the quarter these services accounted for $102.4 million in revenues, up 8.4 percent from Q4 of fiscal 2007. Lawson was able to cut back on the cost of delivering software by 11 percent and on consulting by 2 percent, which offset a 16 percent increase in the cost of providing maintenance (costs outgrew revenue growth here, which was obviously not the intended effect). Still, with the revenue boost and overall costs more or less flat, gross profits grew by 20.1 percent to $123.5 million. Operating income nearly doubled to $17.5 million. But writeoffs relating to the disposal of the auction-rate securities pushed net income down to $3.7 million, a 55 percent decline compared to the year-ago quarter.

Wall Street is sure not going to like that.

For the fiscal 2008 year, Lawson posted sales of $851.9 million, up 13.5 percent, with software license fee sales up 24.8 percent to $132.2 million, maintenance fees up 15.5 percent to $336.8 million, and consulting revenues up 8.5 percent to just under $383 million. Net income for the fiscal year was $13.7 million, which was a lot better than the $20.9 million loss Lawson had in fiscal 2007, but it is probably not as well as the company's top brass had hoped to do. The auction-rate securities were only part of the problem, but they were a significant factor, apparently. As of the end of Q4, Lawson had $488.6 million in cash and equivalents. That was after the company flushed those auction-rate securities, which had a par value of $63.7 million but which Lawson sold after closing Q4 for $45.2 million. Some of that $18.5 million hit--$6.1 million, to be precise--was recorded in Q4, with the rest coming in fiscal 2009, presumably in Q1 when the assets were sold.

(Auction-rate securities, or ARSes, are debt instruments sold in a Dutch auction that are typically resold every week. They are considered as good as cash--or as the joke goes, as good as cash until they are abruptly not when no one wants so buy them any more. Many states and municipalities were left flatfooted this spring when the market for these instruments started drying up. You'd think the acronym ARSes would have been a better tip off to trouble, eh?)

Looking ahead into fiscal 2009 was not a lot of fun for the company when it announced the Q4 results last Thursday after the market closed. Lawson said that it expected sales of between $195 million and $200 million in the first quarter ended August 31 with earnings per share in the range of 6 cents to 7 cents; the Wall Street consensus, according to brokerages polled by Reuters/Thomson Financial had Q1 coming in at $205 million in sales with 8 cents per share dropping to the bottom line. And this disappointment does not appear to be limited to Q1. For the full fiscal 2009 year, Lawson says that it expects sales of between $920 million and $925 million, with earnings between 43 cents and 47 cents a share. Wall Street was looking for $922 million in sales, which is the middle of the range that Lawson is projecting and therefore good, but Wall Street was also expecting to see 51 cents a share drop to the bottom line.

In the conference call with Wall Street analysts on Thursday, Harry Debes, the president and chief executive officer at Lawson (and a former hotshot exec from JD Edwards, which was acquired by PeopleSoft which was eaten by Oracle), did what the top executive always does: puts the best face forward on the situation. And given the shakiness of the U.S. economy and some other pockets in Europe, Lawson did OK. Losing money in investments seems, well, normal right about now. He said that the $51 in new software contracts signed in Q4 (some of that revenue got deferred, as it always does) was the highest level ever set by Lawson, even beating the pervious high a year ago, which was $42 million in Q4 of fiscal 2007. Deferred software license revenues rose by 50 percent in the quarter, in fact, to $54.6 million. This is actually like money in the bank, contrasting mightily with the ARSes cited above.

"The bottom line is that our customers--both new and existing--are buying and paying for more Lawson Software then ever before," Debes said. "And here's the good news. The greater our backlog, the more predictable our future license revenue becomes."

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