Lawson Boosts Sales, But Costs Cut Profits in Fiscal Q4

Published: July 19, 2010

by Timothy Prickett Morgan

Midrange enterprise application provider Lawson Software, which has come under the harsh gaze of activist investor Carl Icahn in recent months, probably didn't make Icahn any happier when the company closed out its fiscal 2010.

In the fourth quarter ended May 31, Lawson's revenues were up by 6 percent, to $197 million, with software license fees rising 13 percent to $38 million. Software maintenance services revenues were up 10 percent in the quarter, to $93.3 million, while consulting revenues fell by 3 percent, to $65.7 million in the quarter. Software maintenance, sales, marketing, and research and development costs were up faster than revenues grew, and the company booked $7.2 million in restructuring charges and $2.9 million in amortization fees; Lawson also changed its accounting for convertible debt securities and paid taxes that were 10 times higher than the prior year's final quarter. All of this pushed down net income in the final quarter of the fiscal 2010 year by a harsh 70 percent, to $2.6 million.

For the full year, Lawson's sales fell by 3 percent, to $736.4 million and net income was down 8 percent, to $13 million.

Harry Debes, president and chief executive officer at Lawson, said in a conference call with Wall Street analysts that the company had the highest rate of sales pipeline conversion it has seen since the middle of 2008, and then the acquisition of Healthvision (which Lawson acquired in January) built atop this. The S3 ERP suite that is focused on healthcare, public sector, and human capital management, saw 19 percent license growth sales in the fourth quarter, and the S3 product accounted for 37 percent of the company's total sales for fiscal 2010. Debes said that margins for the S3 products were now better than those of application software rival SAP. The M3 product line (which came to Lawson through the acquisition of Intentia International several years back) found itself in tougher sledding conditions, but license revenues rose by 6 percent. M3 accounted for 32 percent of Lawson's sales in the fiscal year and was "moderately profitable."

On the cloud front, Debes said that more than 20 early stage customers were kicking the tires on S3 and M3 suites deployed on Amazon's EC2 compute cloud, and the majority are for human capital management (as expected).

Debes didn't say much about the situation with Icahn, except to reiterate that the activist investor had a 9.7 percent stake in the software company, asked to meet with management, and did. "The interaction was cordial and constructive," Debes said. "Nothing has changed in our business plan or our day-to-day operations. It is business as usual for us, and we remain focused on making our customers stronger, bringing innovative products to market, and winning new business. Other than this, we really can’t comment further."

Lawson ended the quarter and fiscal 2010 year with $387 million in cash and equivalents (only $143 million net of debts) and deferred revenues of $328 million, up from $292 million a year ago.

Looking ahead to fiscal 2011, Lawson says it expects sales to be in the range of $168 million to $172 million in the first quarter ended in August, which is basically flat to a tiny bit up compared to the first quarter of fiscal 2010. Earnings are expected to be a penny to 2 cents a share, worse than the 4 cents per share in Q1 fiscal 2010, and not surprisingly, Wall Street gave Lawson a haircut since it reported its financials on July 8 (when I was happily on vacation and completely oblivious of the IT business). For the full fiscal 2011 year ending next May, Lawson expects to bring in $755 million to $766 million in revenues and have earnings per share ranging from 17 cents to 21 cents. That's 3.3 percent growth at the midpoint of the revenue estimates, which ain't all that great, but it is two to three times the profits.

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