Net Loss Clouds Lawson's Q1 Report

Published: October 6, 2008

by Dan Burger

Enterprise resource planning software is as comfortable on IBM midrange computers as a cowboy is in the saddle. It's been that way since the debut of the AS/400 and even earlier with the System/38 and System/36 boxes. But last week, when Lawson Software released its first quarter 2009 financial report, the lack of System i-based business was one of the reasons the bean pot was not as full as expected.

In releasing its Q1 2009 report October 2, Lawson was pleased to report revenues were up slightly thanks in large part to maintenance renewals, customer migrations to Lawson Total Care premium support, and new customer contracts. But a decrease in license fees, particularly in its M3 product lineup that serves primarily System i shops in industries such as food and beverage, distribution, and apparel, was a unexpected. The M3 products rely on applications specializing in customer relationship management, supply chain management, performance and workplace management. Approximately 90 percent of M3 customers run the software on the System i, according to Dean Hager, senior vice president of product management at Lawson.

"In our first fiscal quarter, we saw mixed results," said Harry Debes, Lawson's president and chief executive officer since 2005. "Relative to our guidance, sales of our S3 solutions in healthcare and public sector performed well, but sales of M3 in the Americas and Europe were weaker than forecasted. This resulted in flat year-over-year software contracting. Services revenues and utilization were weaker than forecasted particularly in certain European regions. However, our maintenance business continues to deliver excellent results."

In addition to the M3 applications, Lawson develops and markets a product line called S3, which targets services industries including enterprise financial management, human resource management, and business intelligence. (S3 is Lawson's own code, while M3 hails from the Intentia side of Lawson, which came to the company after an acquisition of the Swedish ERP software maker.) The target industries for S3 include healthcare, government, retail, and education. It fully supports System i, but only about 20 percent of the S3 customers run the software on a System i, Hager says.

Hager says the M3 and S3 product lines both sell about the same amount on a quarter-to-quarter basis, so, in general, when M3 sells more than S3 it can be attributable to the System i shops. And, of course, the opposite is true, too.

For the quarter, Lawson booked total revenue of $190.9 million, up 2 from the same period one year ago. This was unable to remove the sting of a first quarter net loss of $2.5 million. The per share net loss for Q1 2009 was a penny, which underperformed analysts' expectations of earning a nickel per share. Just a year ago, the company was reporting $5.6 million net income. Putting up another number like that would have made a lot of people happy, but what a difference a year makes. Lawson attributed the erosion of net income to "an increase in the provision for income taxes and lower interest income resulting from lower investment balances along with lower yields on those investments."

During the recently completed quarter, software license revenue fell by 17 percent and consulting revenue dipped 3 percent. Meanwhile maintenance fees rose by 13 percent.

The company closed fewer deals 216 in Q1 2009 compared to 294 in the first quarter of fiscal 2008, but the average price per transaction was $123,000 compared to $89,000 a year ago. And 31 new customers were added to the installed base, compared with 27 in the first quarter a year ago. Little change was reported on the average selling price of a new customer deal, as it dropped a tick from $308,000 a year ago to $306,000 in this quarter that ended August 31.

Lawson does not release information pertaining to new deals as they relate to platforms, but Hager contends that "it really wasn't as negative on the M3 sales as it might come across. It was just slightly less than forecasted."

Hager says the way the figures are tallied produced a "double whammy" in Q1. "Even though we had just a little more contracting this Q1 compared to last Q1, it was not quite as high as forecasted, particularly on the M3 side. And that combined with contracts that were recognized over the year as opposed to being recognized up front in Q1."

Regarding the increased revenues on maintenance fees, Hager says it's a sign that customers are getting the support and innovation they expect, otherwise they will drop maintenance rather than continuing to pay for it. The increase in revenue, he says, has to do with customers upgrading to new versions of the software and upgrading maintenance along with it, not a situation where fees are increased by a company holding customers hostage.

Company officials predicted second fiscal quarter total revenues of $205 million to $215 million, with GAAP fully diluted earnings per share between $0.03 and $0.06. The estimates are below market analysts forecasts.

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