Lawson Software, Inc. (LWSN) reported revenue of $186.2 million in the third quarter of fiscal 2010, up 7% year over year.
Lawson provides enterprise resource planning (ERP) software solutions and professional services to mid-market enterprises in the health care, retail, public and services industries. The company derives its revenue from software license fees, customer support and maintenance fees and consulting fees.
In January, Lawson acquired Healthvision Solutions, Inc. for $160 million. Based in Dallas, Healthvision is a privately-held company providing integration and application technology and related services to hospitals and large healthcare organizations.
The growth in revenues was offset by higher amortization expense due to the Healthvision acquisition and increased operating expenses primarily related to employee costs which resulted in a decline in GAAP net income on a year-over-year basis.
Healthvision contributed $4.6 million to the top-line in the third quarter. Excluding purchase accounting adjustments, the contribution was $7 million and total revenues were $189 million.
License revenue came in at $32 million, up 28% compared to last year. Excluding the acquisition, license revenues of $31 million grew 25%.
Software contracting has increased year over year in the past two quarters as the selling environment started to improve. However, Lawson is yet to attain 2008 levels of business activity even though more customers are moving forward on software investments.
Maintenance revenue stood at $89 million, up 4% year over year driven by some one-time items and favorable impact of currency movements.
Consulting revenue of $65.2 million was up 3%. Lawson is currently rightsizing its consulting organization.
Gross margin came in at 55.3% compared to 52.5% in the year-ago quarter. Excluding one-time items, gross margin came in at 59%, an increase of 440 basis points over the same period last year.
Operating margin came in at 16%, an improvement of 110 basis points approximately year over year. Operating expenses increased 17% to $82 million primarily due to the Health Vision acquisition and currency fluctuations. Sales and marketing expenses also increased due to higher sales incentives, in line with the quarter’s higher licensing activity.
Net income declined 71% year over year to $1.8 million. Excluding purchase accounting adjustments, amortization expense, and non-cash stock-based compensation, earnings per share came in at 7 cents, in line with the Zacks Consensus Estimate. Health Vision operations contributed 1 cent to EPS.
During the quarter, Lawson generated $44 million of cash from operations and used $6 in capital expenditures. Total deferred revenues at the end of the third quarter were $208 million, up from $193 million at the end of the second quarter, primarily due to the international maintenance renewal cycle.
Deferred maintenance revenue came in at $152 million, up from $132 million at the end of the second quarter. The license portion of deferred revenue was $41 million, down sequentially from $46 million in the second quarter.
Guidance
Going forward, management expects projects revenue between $194 million and $198 million in the fourth quarter. After adding back $2 million of deferred Health Vision revenue impacted by purchase accounting, revenues are projected between $196 million and $200 million.
EPS is expected around 4 cents – 6 cents. Excluding approximately $10 million of pre-tax adjustments for amortization expense, non-cash stock-based compensation expense, non-cash interest expense and a one-time gain related to the modification of a defined benefit pension plan, EPS is forecasted around 10 cents – 12 cents.
The guidance assumes currency exchange rates based on average rates at the end of March. Lawson expects to generate approximately $120 million of cash from operations in the fourth quarter and $110 million in fiscal 2010, up significantly from $71 million generated from operations in fiscal year 2009.
The company targets vertical markets for growth and continues to focus on improvements in services margins.
Healthvision Acquisition
On the call, management stated that the integration of Healthvision is on track and customer feedback since the announcement has been favorable.
With this acquisition, healthcare customers of the company foresee increased value from Lawson as it extends its ERP leadership to broader healthcare software needs.
Healthvision’s lead product – Cloverleaf is used by 33% of North American hospitals and 40% of large integrated delivery networks.
Management is working on a number of cross-sell opportunities for Lawson ERP for several Cloverleaf customers.
The results did not have much impact on the share price. Shares of Lawson were down 0.86% in after-hours trading to close at $6.90. In regular trading hours, the stock was up 0.72% to close at $6.96.
Business conditions in the US and Europe are starting to improve but the recovery is likely to be choppy. Management expects to see a broad improvement in business spending in calendar 2010. Organic growth is expected to come from vertical markets while the company also sees opportunity for growth through strategic acquisitions.
Our long-term recommendation for Lawson is Neutral.
Read the full analyst report on “LWSN”
Zacks Investment Research
