Thrown by a more-difficult-than-expected integration of recently acquired Intentia International AB, Lawson Software Inc. reported a "disappointing" drop in license revenue and a $15.8 million loss in its first fiscal quarter, ended Aug. 31.
In the first quarter -- Lawson's first three-month period to include full financial results from Intentia -- the company reported revenues of $161.8 million, up 84% compared to the corresponding time frame last year. The revenue spike was largely due to the addition of Intentia, said Lawson President and CEO Harry Debes. Lawson's first quarter net loss compared to a $4.2 million profit reported in the like period last year.
"The integration of our international operations and the orientation of our sales and service employees had more impact than we anticipated," Debes said in explaining the post-merger complications that contributed to the company's disappointing first-quarter results. "But I am confident that this is now behind us."
Hardest hit by Lawson's post-merger lag was software license revenue performance. Despite the addition of Intentia, Lawson's software license fees in the quarter were $16.8 million, down 10% compared to the same period last year.
"This was below what we expected, and that's disappointing," said Debes in a conference call with financial analysts. In July, Debes had told analysts that the company expected to tally between $32 million and $35 million of license revenue in the first quarter.
"It could easily have turned out that way," Debes said. "However, we had several deals of significant size in both M3 [the Intentia product line] and S3 [the Lawson product line] slip into next quarter. None of these deals were lost. In all cases Lawson was selected as the vendor of choice. But, for various and individual reasons, we simply could not get them signed by August 31."
The two largest deferred deals, both for Lawson's S3 product line, were worth over $3 million combined, Debes said. The company is currently working on finalizing those deals, the CEO noted.
The drop in license revenue was partially offset by strong gains in maintenance and consulting revenues. Lawson reported $69.6 million in maintenance revenue for the quarter, up 60% from the same period last year. And consulting revenue rose 194% to $75.5 million.
The big rise in consulting revenue came largely from the Intentia side of the business, which tends to generate more consulting business, Debes said. Lawson's increased reliance on consulting and services revenues -- which typically carry lower profit margins than software license revenues -- reduced the company's overall profitability. Lawson's first-quarter gross profit margin of 45% was a decline of 15% compared to the like period a year ago.
Lawson continued to be profitable in the U.S. But the company suffered losses in several countries in Europe and Asia during the first quarter, said Stefan Schulz, the company's acting CFO. "Addressing countries with operating losses will be a major driver to getting our consolidated operating margins to our target," Schulz said.
For the quarter, 58% of Lawson's revenue came from the Americas, 38% was derived from Europe and just 4% originated from Asia.
Also affecting Lawson's profitability during the quarter were pre-tax expenses totaling $15.1 million for amortization of acquired assets, restructuring charges, and other acquisition-related charges.
Lawson officials said they expect that pressure on profitability will continue in the second quarter, due in part to ongoing acquisition asset write-downs. Lawson projected second-quarter GAAP earnings of between break even and a loss of 2 cents per share. Predictions for GAAP revenue for the quarter are between $172 million and $180 million, with recognized software license revenue of between $22 million and $25 million.
Despite the disappointing first-quarter results, Debes insisted that Lawson is on track to return to what had been solid growth rates prior to the Intentia merger. And, Debes said, Lawson already is beginning to cash in on cross-selling opportunities presented by the Intentia merger.
One S3 service sector customer, Guilford County, NC, recently purchased the Intentia Enterprise Asset Management software package, for example. And an Intentia manufacturing customer, Kansai Paint, has purchased the Lawson S3 Business Intelligence product, Debes said.
"We expect cross-selling will be a regular part of our future business," Debes said.
Debes also said that despite the down quarter and acquisition-related disruptions, Lawson's customers remain committed to the company and its products.
"Our company has the scale, products, and geographic footprint to offer our customers a very credible alternative to the other vendors," Debes declared. "Lawson's tested M3 and S3 solutions offer more affordable and less-risky options than installing version one of [Oracle's] Fusion or costly migrations for SAP customers over to MySAP and NetWeaver."
"Although license revenue contracting was lower than expected, this was only a temporary setback," Debes added. "We remain highly focused and confident in achieving our revenue and earnings goals."
Separately, Lawson announced the selection of board member Robert Schriesheim to the position of CFO. Schriesheim replaces Robert Barbieri, who resigned earlier this year.