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Below is my analysis of Lawson Software (NASDAQ:LWSN) ahead of Q4 earnings.

Date/time of earnings release:

  • After the market closes on 7/9/2009.

Consensus estimates for the reporting quarter:

  • Revenue - $177.12 million
  • EPS - $0.10

Consensus guidance estimates:

  • Q1 Revenue - $165.75 million
  • Q1 EPS - $0.05
  • FY10 Revenue - $714.39 million
  • FY10 EPS - $0.39

Data Points to Watch

When Lawson reports on Thursday, the key numbers to look for will be revenue and EPS guidance for Q1 and FY10. The first quarter is typically Lawson’s weakest so it will be no surprise to see a sequential decline in revenue and EPS expectations but should management guide Q1 earnings lower than expectations, investors may rethink the current premium it trades at relative to peers on an enterprise value/free cash flow basis.

Also, Lawson announced in May that it will be eliminating about 150 positions which will save about $18-$20 million on an annual basis. While the majority of the savings are not expected to hit for a few quarters, investors should look for any comments regarding what impact the restructuring will have on future operating margins.

Recent Events

On May 18th, Lawson Software announced it would be eliminating 4% of the global workforce, which equates to roughly 150 employees. The restructuring effort is expected to save $18-$20 million annually. However, the savings will be partially offset by Lawson’s plans to hire for new support positions in FY10.

This move came on the heels of a 8-10% headcount reduction that was announced in November. The majority of the layoffs will occur in Europe, which will delay some of the impact to the operating margin due to the lengthy termination process required by European labor laws. Lawson will take a $10 million charge in Q1 as a result of the restructuring.

The difficult economic environment has caused major players in the enterprise resource planning (ERP) space to look to generate revenue from previously untapped markets. SAP (NYSE:SAP) and Oracle (NYSE:ORCL) have both stated their intentions to further penetrate their mid-market revenues, which would come at the expense of Lawson and other smaller players.

Analyst Commentary

In recent reports, analysts have been split on Lawson Software. Cantor Fitzgerald has a Buy rating on the stock with an $8 price target. Keybanc currently has a Hold rating. Both analysts expressed concerns about the ability of the company to complete the restructuring effort within the suggested timeframe and budget. Also, on a quarterly basis, the analysts acknowledged the lumpy nature of Lawson’s revenue stream due to the uncertain timing of license booking deals. This could create an earnings surprise or disappointment which does not reflect the true state of Lawson’s business.

Both analysts agreed that the recent headcount reduction initiative is not indicative of weak sales but an attempt to maintain or increase operating margins in this tough environment.

Technical Analysis

The past three days have been unkind to Lawson as the stock has fallen below its 50 day moving average (5.40) on high volume. However, it has proven resilient below the 50 day and is still within the $4.90-$6.00 trading range it has maintained the past 10 weeks. Lawson will find support at the 150 day (4.79) and in the $4.00-$4.60 price range but a break below $4.90 would be a bearish signal.

On another bearish note, the 20 day moving average (5.32) has broken through the 50 day for the first time since the mid-March rally, as an indication of recent weakness in the stock.

Scenario Building

In the two days leading up to last quarter’s earnings report, Lawson rallied nearly 10%. The mostly positive report pleased investors as Lawson beat the consensus on EPS and license revenue. The only negative appeared to be the slightly lower than consensus guidance for Q4. However, the stock had already priced in the report and the stock traded flatly the next few days.

In the days leading up to the Q4 report, we have witnessed almost the exact opposite scenario play out. The stock has dropped 10% over the past week. This time around, investors are already expecting weak guidance for Q1 so should Lawson issue lower than expected guidance again, I expect the stock to take a hit. If guidance and earnings are in-line or better than expected the stock, should experience a slight pop as the company proves it can navigate this extremely difficult environment for ERP software.

Source: Lawson Software: What to Expect from Q4 Earnings