Approaching what it hopes is the home stretch in its prolonged effort to acquire manufacturing-minded ERP software vendor Intentia International AB, Lawson Software Inc. yesterday disclosed fiscal third-quarter results that suggest the merged companies will have reasonable momentum moving forward.
For the period ending February 28, Lawson reported revenues of $87.7 million, a 6% increase from the like quarter last year. Revenue growth, as well as prudent expense reductions, contributed to a three-fold surge in operating income to $10.4 million compared with the corresponding period last year, the St. Paul, MN-based company said.
Lawson, which primarily focuses on mid-market healthcare and financial services concerns, told financial analysts during a conference call that it expects to consummate a ten-month marathon effort to buy Stockholm-based Intentia by month's end. Closure of the acquisition was pushed back late last year from January 31 to April 30, 2006 to accommodate regulatory requirements on both sides of the pond. Intentia shareholders have until April 24 to tender their shares; Lawson shareholders are expected to meet on April 17 to vote on the deal.
Lawson's recently completed third quarter, meanwhile, had a familiar ring: strong license revenue and deals won at the expense of Oracle, company CEO Harry Debes said during the conference call. The quarter would have looked even stronger had Lawson not opted to defer revenue from the largest deal signed during the period: a multi-year license agreement with Triad Hospitals Inc.
Debes said Lawson bested Oracle for a key component of the healthcare company's $1.3 billion IT upgrade initiative. He didn't disclose the deal's value, but said license revenue would be recognized in fiscal 2007 -- and beyond -- as the company delivered against agreed-to milestones.
"We could have enticed the customer to enter into different terms ... we chose not to go there," Debes said, noting the Security & Exchange Commission's strict interpretation of revenue recognition rules.
Because of the deferral, fiscal third quarter license revenues of $15.1 million were off appreciably from the $18.1 million reported in the prior quarter. However, they were up 8% from the $13.9 million posted in the like period last year, Debes pointed out.
Overall, 131 deals were signed in the period, up from the 100 inked in the like quarter last year. Of the fiscal-Q3 deals, 13 came from new customers, with an average value of $394,000, compared with 10 deals with an average value of $478,000 in the like period last year -- a figure skewed by the Triad deferral, Debes said. Overall, seven deals with a value greater than $500,000 were signed in the quarter, up from six in the prior year, the company reported.
Services revenues in the period reached $72.6 million, up nicely from $68.8 million posted in the corresponding period last year. The increase, the company said, is attributable to steady growth in maintenance and in consulting and implementation services, fueled by increased license sales throughout fiscal 2006.
The company's focus on expense containment within its services business contributed to a 3% decline in costs as a percentage of revenue. Expense reductions were achieved by Lawson's partnership with an undisclosed third-party vendor in India. Lawson also recently opened a services facility in Manila in the Philippines, which will eventually house 200 employees, Debes added.
Overall, Lawson's operating expenses decreased 4% from the corresponding period of fiscal 2005 -- the result of a $2.1 million reduction in G&A expense and SEC-related legal costs incurred last year, as well as stringent cost-cutting and headcount reductions. The expense reduction was partially offset by increases in costs related to the pending acquisition of Intentia, the company noted.
On a GAAP basis, net income was $10 million, or nine cents a share, which beat Street estimates. GAAP net income was favorably impacted by $1.5 million in interest income, the reversal of a $1.4 million tax valuation allowance, and the release of $500,000 worth of tax reserves. The company reported GAAP net income of $2.8 million, or three cents a share, in the like period last year.
The strong quarter propelled GAAP net income for the nine-month-period to $20.7 million, or 19 cents a share, on revenues of $264.6 million. Lawson reported a net loss of $700,000, on revenues of $248.4 million, in the fiscal third quarter last year.
Lawson's balance sheet also remains strong. The company had $187 million in cash and equivalents on its books as of February 28. Debes said the company generated $38.6 million in cash from operations during the first nine months of fiscal 2006 -- double what was achieved in the like period last year.
Debes said he is generally pleased with the progress management has made in turning Lawson into a more "profitable and predicable business" following tough times earlier in the decade. "Turning promises into reality is the theme for the foreseeable future," he noted.
That extends to guidance provided for the fourth fiscal quarter. Lawson CFO Robert Barbieri said the company expects to report revenues of between $90 million and $93 million, with GAAP earnings per share of between seven and nine cents during the period, excluding results from Intentia. Barbieri said he will provide additional guidance on the expense impact of the Intentia deal on the fourth-quarter analyst call.
Continued revenue growth will be fueled by the recent release of Lawson 9, which Debes said would officially debut at the company's user conference in Orlando next week. The release, Debes said, unites all of Lawson's applications and tools under a common Java-based architecture running on IBM's WebSphere middleware and DB2 database.
Debes said Lawson expects release 9 to be "the most successful product" in the history of the company. Already, "more than 500 customers have signed for training at the user conference next week," he said.
Interestingly, Intentia recently embraced a similar Web services infrastructure in the latest release of its enterprise software suite.
Process planning for the integration of the two companies remains on schedule, Debes said, and is "ready for execution." He claimed the ten-month wait to conclude the acquisition has given management of both companies time to complete extensive merger preparations.
Without disclosing many details, Debes said that the deal would have minimal impact on customers and prospects because sales assignments and territories would not change once the acquisition is completed. Intentia's sales force would continue to target the manufacturing and distribution markets, while Lawson's 71-member sales organization would remain focused on financial services and healthcare. New Lawson sales personnel, whom Debes said would number at least nine by fiscal year-end, would be cross-trained to sell both product lines.
Although the combined companies will continue to remain true to their historical roots, some cross-pollination is expected once the deal is completed. For instance, Intentia's asset management software should appeal to healthcare and financial services companies, Debes pointed out. Intentia's enterprise suite, on the other hand, lacks home-grown human resource and business intelligence software, functionality Lawson could provide to manufacturing customers.
Debes allowed himself one forward-looking post-acquisition financial projection: The combined company expects to reap between $6 million and $10 million in cross-selling revenue in the quarter following the deal's consummation, he said.
The cross-selling could be a boon to Intentia, which in early 2005 committed additional resources to expanding its presence in the North American manufacturing market. So far, Intentia has struggled to break through amid aggressive targeting of the mid-market manufacturing space by a host of players -- including Oracle, SAP, and even Microsoft.