Lawson Buys Enwisen, Posts Decent Fiscal Q2

January 10, 2011 Timothy Prickett Morgan

Midrange enterprise application software maker Lawson Software, which has a strong presence in the healthcare, public sector, and consumer goods sectors, closed out its second quarter of fiscal 2011 ended in November by eating a provider of cloudy human resources management tools called Enwisen.

The deal to buy Enwisen for $70 million was announced on December 20 and closed on December 31, which is when Lawson’s fiscal Q2 ended. Enwisen’s online tools, known as the AnswerSource suite, has an HR central repository and portal for accessing that employee information as well as workflow that controls the hiring and firing of employees. (This is called “onboarding” and “offboarding” in the HR lingo that doesn’t like to use the words “layoff” or “fire” because they are loaded. To my ear, both sound a little too much like “water-boarding,” but what do I know about human resources. I thought they were “employees” and better still “co-workers.”) Enwisen, which is located in Novato, California, was founded in 1994 by a bunch of human resources professionals and the company delivered its first product, called the Employee Resource Center service, in 1999.

Enwisen has 260 customers, and Stefan Schulz, Lawson’s chief financial officer, said in a conference call with Wall Street analysts that the Enwisen business would yield about $3 million in incremental revenues for Lawson’s current fiscal Q3 and about $5 million in fiscal Q4. He added that in Lawson’s fiscal 2012 year, the company expected the AnswerSource suite to yield somewhere between $28 million and $30 million in revenues and add 2 cents per share to Lawson’s earnings. Moreover, cash flow in the next few quarters would cover the cost of the acquisition. Lawson has been a “strategic partner” of Enwisen since 2008, when the two companies bundled together portions of Lawson’s S3 Human Capital Management suite with the AnswerSource online tools. Lawson has over 1,000 customers using its HCM tools, and is beginning to offer its applications as cloudy services as an alternative to on-site installations to companies.

In the fiscal second quarter, Lawson posted sales of $187.5 million, an increase of 2 percent over the prior year period. Lawson has been dialing back its less-profitable services business and focusing on software license sales and the recurring revenue stream it generates, which is why revenue growth was not larger. This intentional pulling back on services–Lawson is trying to get services to be somewhere between 30 and 35 percent of total sales in any given quarter–has helped boost profits and acquisitions have helped stabilize revenues even as the company walks away from services deals it might have otherwise pursued in the past.

In Q2, software license fees rose by 7 percent, to $26.4 million, and maintenance revenues rose by 14 percent, to $97.5 million. So total software revenues in the quarter were $123.9 million, up 9 percent. Consulting revenues dropped by 10 percent, to $63.6 million, and accounted for 34 percent of sales for Q2.

Thanks to the shift away from services and toward software sales and maintenance, Lawson brought just under $12 million to the bottom line, which works out to a factor of 3.4 times as much money it pushed into the black ink in the year ago quarter. That worked out to 7 cents per share, compared to 2 cents per share in Q2 fiscal 2010.

Harry Debes, Lawson’s president and chief executive officer, provided a little color on the company’s S3 and M3 product lines. The S3 products are native Lawson products in addition to applications it got through its $160 million acquisition last year of Healthvision Solutions. The M3 products came through its June 2005 acquisition of Intentia International, which cost $480 million. Intentia’s original Movex products were focused heavily on manufacturing and distribution companies, and got their start on the AS/400 way back when. Lawson was a key AS/400 player, too, but the S3 and M3 suites are written in Java and can be hosted on a variety of platforms.

Debes said that the S3 products performed well in the second quarter of the year, with license sales rising 25 percent. In fact, 11 of the top 13 deals that Lawson did in the quarter were for S3 products. The healthcare sector was strong, and the company closed a deal in Canada that was worth over $1 million in licensing fees for the Healthvision product, which is called CloverLeaf. The public sector, which includes state and local governments, is under huge budget pressures right now, but Debes said that Lawson was increasing its sales here. “I know it sounds contradictory, but people are spending money so they can save money,” Debes said. Revenue for the S3 line grew organically if you strip out the acquisitions, and operating margins for this product increased 24 percent compared to a year ago.

The compare for the M3 line was difficult because of a multi-million dollar deal that Lawson did in the year ago quarter for its equipment service management and rental (ESM&R) products in the M3 lineup. Without a similarly large deal in this fiscal year’s Q2, overall M3 licensing was down 30 percent and contracting was down 40 percent. However, with the shift away from services, M3 operating margins were up to 7 percent, better than the 3 percent in the first quarter and the operating losses from fiscal 2010.

Across the core S3 and M3 product lines, organic maintenance grow was up 7 percent, and maintenance operating margins were 83 percent. Services margins were at a much lower 14 percent, which is a good reason not to focus on them.

Lawson exited the quarter with $288.3 million in cash and equivalents after paying the $70 million for Enwisen; the company has $228.1 million in long-term debt.

Looking ahead, Schulz said that Lawson expected sales in the third quarter of its fiscal 2011, which ends in February, to be between $188 million and $193 million, with earnings per share being more or less what the company booked in Q2, at between 6 and 8 cents per share. For the full fiscal 2011 year, which ends in May, Lawson expects revenues to hit $764 million to $774 million, with earnings per share of between 28 and 30 cents.