Lawson Software License Sales Miss Expectations in Q1 Fiscal 2007

Published: October 9, 2006

by Timothy Prickett Morgan

Lawson Software reported the first full quarter of financial results since its acquisition of Swedish ERP software provider Intentia International. The merger of the two companies has allowed Lawson to report big revenue increases, of course. But as is the case with a lot of mergers, Lawson is struggling with some issues.

Lawson completed its acquisition of Intentia in April, and in July the company acquired Competency Assessment Solutions, a provider of Web-based performance management software for the healthcare industry. The company also said at the time that Robert Barbieri, the company's chief financial officer, would step down. Last week, Lawson said that it had hired Robert Schriesheim to be executive vice president and chief financial officer, reporting to company president and chief executive officer, Harry Debes. Schriesheim was, for the past four years, a venture partner in ARCH Development Partners, which invests in technology companies, and was chief financial officer for Global Telesystems, a $1 billion British telecom company that was traded on the New York Stock Exchange until KPNQwest, one of many telecom conglomerates that were built during this time, bought it in October 2001. In the wake of the dot-com bubble bursting, KPNQwest went bankrupt less than a year later. Shreisheim is already a member of Lawson's board of directors, by the way, so the company did not have to look far for a new CFO.

Now that Lawson has an experienced bean counter at the job of counting those beans, it needs to get more beans for him to count. "We achieved our total non-GAAP revenue and non-GAAP EPS guidance ranges in this first full quarter of combined Lawson and Intentia operations," explained Debes in a statement accompanying the financial results. "But there was one area in which we did not execute well. License fee contracting and revenue were below expectations. However, maintenance and consulting revenues were strong and expenses were well managed thereby allowing us to achieve bottom-line results in line with our expectations. The integration of our international operations and the orientation of our sales and services employees had more impact than we anticipated, but I am confident that this is now behind us. Our sales pipeline is strong, we are executing on our operating plans, and feedback from customers during the last quarter has been very positive. We're looking forward to improved results throughout the coming quarters."

Specifically, Lawson posted sales of $161.8 million in the quarter ended August 31, an increase of over 84 percent compared to the year ago quarter when Intentia was not part of the picture. Consulting fees have nearly tripled to $75.5 million in the quarter, and maintenance fees rose by 60 percent to hit $69.6 million. However, even with the combination of Lawson and Intentia, sales of software licenses still dropped by 10 percent to $16.8 million. Gross profit at the company rose by 37 percent to $72.4 million, but this was not helped by the fact that the cost of software license sales more than doubled to $5 million in the quarter. And while consulting revenues nearly tripled, the cost of delivering those consulting services nearly tripled as well. Gross profits on maintenance fees are usually high at ERP software companies, and such was the case at Lawson during the quarter, with a gross profit of 80 percent. Software license fees had a gross profit of 70 percent by comparison, and consulting services had a gross profit of only 7 percent. Adding in research and development, SG&A, restructuring charges, and other costs pushed Lawson to a $16.6 million operating loss, and after adding in interest income and paying taxes, the company reported a net loss of $15.8 million, compared to a profit of $4.2 million a year ago. Clearly, Lawson is counting on a substantial uptick in software license fees in the coming quarter from the combined Lawson-Intentia product lines and sales teams to put it back in the black.

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