Lawson Software, Inc. F3Q10 (Quarter End 2/28/10) Earnings Call Transcript

| About: Lawson Software, (LWSN)

Lawson Software, Inc. (NASDAQ:LWSN)

F3Q10 Earnings Call

April 7, 2010 5:00 pm ET

Executives

Barbara Doyle – Investors and Analysts

Harry Debes – President, Chief Financial Officer & Director

Stefan B. Schulz – Chief Financial Officer

Analysts

Tom Ernst – Deutsche Bank Securities

Mark R. Murphy – Piper Jaffray

Steve Koenig – Longbow Research

Peter Goldmacher – Cowen & Co.

Brad Sills – Barclays Capital

Mark Schappel – The Benchmark Company

Brian Murphy – Sidoti & Company

Operator

At this time all lines have been placed on a listen only mode throughout the duration of today’s conference. Today’s conference is being recorded. If you do have any objections you may disconnect at this time. I would now like to turn the call over to Ms. Barbara Doyle

Barbara Doyle

Welcome to Lawson Software’s fiscal 2010 third quarter conference call and we’re covering the quarter ended February 28, 2010. With me on today’s call are Harry Lawson, President and CEO and Stefan Schulz, Senior Vice President of Finance and Chief Financial Officer. After completing our prepared remarks we will take your questions as usual.


I would make one note that our acquisition of Health Vision Solutions was completed during our February quarter. Our Q3 results therefore include a partial quarter of contribution from Health Vision’s operations which was effective with the close of the transaction on January 11, 2010. During this call, we will highlight certain financial metrics for our Q3 business performance excluding the acquisition where it is practical and useful to do so. We do not anticipate being able to continue this practice after Q3 given the integration of Health Vision in to our S3 operations.

Now, let me please review our Safe Harbor statements. We remind you that this call will include forward-looking statements. They are subject to risks and uncertainties. These forward-looking statements contain statements of intent, belief or current expectations of Lawson Software and its management. Such forward-looking statements are not guarantees of future results and they involve risks and uncertainties that may cause actual results to differ materially from the potential results discussed.

Our SEC filings contain further information about the risk factors that could cause actual results to differ from managements’ expectations. We do not obligate ourselves to update our forward-looking statements for circumstances or events that occur in the future. I would also like to remind you that in addition to reporting financial results in accordance with generally accepted accounting principles, Lawson Software reports non-GAAP financial results. Discussions of our use of non-GAAP results as well as reconciliation of our non-GAAP results to GAAP is included in our press release and Harry and Stefan’s comments will predominately be focused on our non-GAAP results.

Lastly, we have a supplemental summary of some historical key business metrics and it is posted on our website at www.Lawson.com/investor for your reference. Now, let me turn the call over to Harry Debes.


Harry Debes

As you can see from our press release we had a very good quarter. From a high level perspective I’d like to point out three things about this quarter. First, we are growing. Our license revenues grew 28% and total revenues increased 9% compared to last year. Second, we are on track with our operational objectives including successfully executing our vertical strategy. Revenues in our strategic industry segments were up 16% in the quarter and we tied our record for the highest non-GAAP operating margin in our history as a public company. Third, our acquisition of Health Vision that was completed in January is being well received by customers and is already having a beneficial impact on our financial results.

Today, I’ll provide insight on our performance, our new product announcements and the integration of our Health Vision acquisition. After that our CFO, Stefan Schulz will summarize the financial highlights for the third quarter and provide guidance for the fourth quarter. So, let’s begin. Total revenues for the third quarter were $189 million and non-GAAP earnings per share were $0.11.

Health Vision added $7 million to revenues and $0.01 of EPS for the quarter. Excluding Health Vision, revenues were more than $181 million and non-GAAP earnings per share were $0.10. Both of these measures were better than our forecast. Non-GAAP operating margin were 16%. Health Vision had a small positive impact on our operating margin but the margin was effectively the same both with and without this acquisition.

As we expected, Health Vision’s contribution to our business has already been beneficial. However, our core business was also very strong. On an organic basis before adding the acquisition software contracting grew 26% and license revenues grew 25%. Software contracting has increased year-over-year in the last two quarters as the selling environment has started to improve. We aren’t back to 2008 levels of business activity yet but more customers are moving forward on software investments. All-in-all, our Q3 results were very positive.

Now, let me provide some color on our software contracting performance by vertical. Our M3 channels and emerging markets business had a strong quarter contributing roughly 10% of the company’s contracting. Q3 was one of the strongest quarters with our partners. We’ve invested in our channel program over the past year and we are pleased to see these results. We don’t expect channel partners to deliver 10% of contracting every quarter but we do expect our investments to provide a healthy sustainable revenue contribution.

Our fashion vertical also had a good quarter after being significantly impacted by the global recession for most of last year. Notably, we signed a deal worth more than $1 million with a prestigious luxury goods manufacturer in Europe. Our human capital management business had record sales. In our healthcare vertical, two existing customers Cleveland Clinic and Nationwide Children’s Hospital added our entire suite of human capital management products which includes Lawson’s HR and Lawson’s Talent Management Solutions.

In our public sector vertical, Hillsborough County public schools purchased Lawson Talent Management. Hillsborough is the nation’s eighth largest school district and they will use our software as part of a seven year strategic plan to ensure the effectiveness of classroom teachers throughout their district. Texas Scottish Rite Hospital, City of Carlsbad, Life Science Innovations LLC and [Oak Lawn] Hospital are all new customers who chose Lawson for their HR solutions this quarter.

In the last nine months we have signed a long list of customers to our human capital management suite. Industry analysts have also confirmed our leadership position. IDC for example named Lawson Talent Management as a leader in innovative talent management in their December 2009 MarketScape Report. This is the second consecutive year we’ve earned this distinction. Lawson is also the only company named a leader in both integrated talent management by IDC and a leader in human resources management by the Foster Wave Report.

I’m dedicating a lot of air time to Lawson’s human capital management applications and here’s why. HCM is one of the fastest growing markets in enterprise software and this is a core important business for us. While many HR, payroll and talent management point solutions are available, we believe that an integrated HR talent and work force management suite will solve complex integration headaches for our customers. We also believe that the market will eventually be won by a full suite provider. Lawson offers a broad, deep and fully integrated suite which eliminates the complexity and cost of password point solutions and we are seeing great traction in this space.

We made a significant investment in this solution four years ago and now it is beginning to pay off. Today, our HR products drive more than $80 million of software revenues across our various verticals and have become the highest selling product line for Lawson. Our continued innovation in human capital management solutions have been the fuel for this growth and we expect our HCM solutions to be a major contributor to Lawson’s business for many years to come.

Another important innovation to highlight is the Lawson Amazon Cloud Services announcement we made on March 31st. Effective in May we are making our M3 and S3 suites available in the cloud through a partnership with Amazon to leverage their cloud infrastructure? With this announcement, we are the first company to deliver customizable ERP solutions in the cloud for our targeted industries. This is not SAS by the way, it supersedes SAS. It’s a better option for our customer than restrictive multi tenant solutions that require customers to use the same vanilla product and upgrade all at the same time with no flexibility for their individual business needs.

Deploying our solutions on Amazon addresses customers unique ERP needs rather than ignoring them. we are giving our customers more choices in deployment and license pricing than any other software vendor we know of so this announcement represents a significant initiative for Lawson. It allows us to meet the needs of potential customers who might not have otherwise considered Lawson and thereby opens up new market opportunities. While Lawson cloud offerings will be available with flexible options including subscription pricing.

I would note that this does not change the licensing terms for the majority of our customers or prospects. This is not a wholesale transition in our financial model. However, we do anticipate that our cloud bundles will be attractive to new customers who want rich customizable ERP functionality but don’t want to manage and on premise solution. We’re very excited about this new line up of solutions and we will be talking more about them at our annual user event at the end of this month.

Before I hand the call over to Stefan, let me give you an update on our Health Vision acquisition. For some time now we’ve been telling you that our strategy is to combine robust innovation through our own R&D while also pursuing strategic acquisition opportunities. Health Vision is a prime example of that strategy in action. We closed the deal in January and our goal was to integrate it in to our healthcare vertical with speed and minimal destruction to our customers.

I’m pleased to say this integration is on track and the initial financial results are very positive. Customer feedback since the announcement has been very favorable. Our healthcare customers foresee increased value from Lawson as we extend our ERP leadership to broader healthcare software needs. At the recent HIMSS Healthcare trade show in Atlanta, the Cloverleaf product from Health Vision was the number one demo requested at the Lawson booth. We are also already working on a number of cross sell opportunities for Lawson ERP for several Cloverleaf customers. Overall, I’m pleased with how we are enhancing the value that we deliver to our healthcare customers through this acquisition.

Now, I’ll turn the call over to our CFO Stefan Schulz for more insight in to our Q3 financial performance and guidance for the fourth quarter.

Stefan B. Schulz

In my comments today I will focus on key factors influencing our Q3 results as well as our Q4 guidance. As a reminder, my comments will be on a non-GAAP basis. Our Q3 results were strong and demonstrate that we were executing our business model. Our strategic industry segments are leading the growth in our total revenues and the disciplined focus is leading to improved non-GAAP operating margin.

Overall, total revenue of $189 million was up 9% year-over-year. Health Vision contributed $7.3 million or about half of the increase. At $181 million, excluding the impact of the acquisition we exceeded the high end of our guidance range of $174 million to $178 million in the quarter. Non-GAAP EPS of $0.11 per share also exceeded the high end of our $0.07 to $0.09 per share guidance range. Health Vision operations contributed $0.01 to EPS. We exceeded our guidance range as a result of better than expected performance from license revenues and maintenance revenues which I will detail now.

As Harry mentioned, the total value of software contracting in the quarter was $28 million which was up 31% compared to Q3 last year. Health Vision added approximately $1 million of contracting in the quarter but organically contracting still grew at a healthy rate of 26% from last year as the selling environment continued to improve. License revenues of $32 million increased 28% compared to last year. Excluding the acquisition, license revenues of $31 million grew 25%.

The combination of higher contracting activity plus higher rates of revenue recognition on deals closed which we refer to as our conversion rate is having a positive impact on our license fee revenues compared to last year. Our conversion rate in the third quarter was higher than we expected. Maintenance revenues of $91 million increased 6% or 1% if you exclude the impact of the Health Vision acquisition. This growth was driven by some onetime items as well as the slightly uptick from currency.

This was positive news and offset some of the negative news we experienced last quarter. Renewal rates on our international customer contracts from this past January were approximately 90% which is flat from last year. Similarly, looking ahead at our upcoming Americas’ renewal cycle in May we’re planning for constituent renewal rates year-over-year.

Consulting revenues of $66 million were up 4% and were flat excluding the impact of Health Vision. Our efforts to right size the consulting organization are paying off as services gross margin increased significantly from the prior year improving from 1% to 11% excluding Health Vision. The 11% margin in Q3 was driven mainly by improvement in our Americas business. We also saw some improvement in our European business but we still have more work to do there. We will continue implementing best in class operations which includes limiting fixed price contracts and insuring greater project profitability.

Services margins declined sequentially but this a function of our business seasonality and a pattern that we expect. The increase in total revenues and the improvement in services margin improved our overall gross margin to 59% in Q3. That is an increase of 440 basis points over the same period last year. Health Vision did not have a material impact on our gross margin.

Now I’ll shift to the operating expense side of the equation. We had an increase in our total non-GAAP operating expenses that I will break down for you. Overall, non-GAAP operating expenses of $82 million increased 17% or $12 million. Half of this increase was due to the Health Vision acquisition and currency. Health Vision’s operations added $2.5 million to our operating expenses and currency increased operating expenses by $3 million.

The remaining increase of $6.5 million in constant currency was primarily in sales and marketing as well as R&D. We had a $3 million increase in sales expenses for higher sales incentives which was in line with this quarter’s higher licensing activity. We also increased our development organization for some key vertical specific products that further distinguish us from our competition. This increased R&D expense by approximately $3 million. Our G&A costs excluding Health Vision were relatively flat reflecting the efficiencies we have gained in the G&A organization through structure and process improvements over the last four years.

As Harry pointed out, we achieved a 16% operating margin which was roughly the same with or without Health Vision. This was a 110 basis improvement over last year which once again is solid evidence that we’re executing against our business plan and operational strategy. Two years ago we outlined a financial goal of reaching mid teens operating margins and we met that goal for the fifth consecutive quarter in Q3.

This progress reflects the cumulative impact of strategic and operational actions we have implemented over the last four years and we’re very proud of the progress we have made. We will continue to make targeted investments in our sales and development organizations in order to drive business growth. As we invest for revenue growth we expect to maintain our mid teens operating margins in the near term and this will give way to high teens margins once we realize productivity from these investments.

Below the operating income line the trends in Q3 were similar to those experienced in Q1 and Q2 which was low yields on invested cash and a slightly higher tax rate. Once again, these items cost us about $0.005 per share compared to last year. Now, let me provide some comments on deferred revenues as well as cash flow before I turn to Q4 guidance. Total deferred revenues at the end of Q3 were $208 million, up from $193 million at the end of Q2. This is a typical pattern with the increase primarily driven by our international maintenance renewal cycle.


The Q3 deferred maintenance balance increased to $152 million from $132 million in Q2 and in our fourth quarter deferred maintenance will increase to the highest point of the fiscal year when we invoice for the Americas’ maintenance contracts. The license portion of our deferred revenues was $41 million which was down sequentially from $46 million in Q2.

I mentioned in my comments on license revenue performance that our contracting to revenue conversion rate had a positive impact on Q3 license revenues. One of our operational goals has been to increase this conversion rate and in Q3 the conversion rate was extraordinarily high at 80%. Our typical conversion rate has been in the 70% range which is up from the 50% range in the initial quarters following the Intentia acquisition in 2006.

Conversion rates often fluctuate quarter-to-quarter due to the mix of deals signed but overall we expect our conversion rate to trend higher as we continue to improve our business processes. I also want to highlight that our quarterly cash flow from operations was $44 million which is nearly three times higher than the $16 million generated in Q3 of last year. The increase was a result of the improvements in our profitability and working capital accounts, namely prepaid expenses, deferred revenue and accounts receivable.

Our nine months year-to-date cash used in operations of $8 million is also significantly improved from $42 million used last year. Operating cash generation in Q4 is always the highest given our maintenance renewal cycle. This year is no exception to the pattern. We expect to generate approximately $120 million in cash from operations in the fourth quarter bringing us to north of $110 million in cash from operations for the fiscal year. That will be up significantly from the $71 million generated from operations in fiscal year 2009.

Now, turning to guidance, our GAAP revenues from Q4 are expected to be between $194 million and $198 million. Adding back $2 million of deferred Health Vision revenue impacted by purchase accounting, we anticipate total non-GAAP revenues in Q4 will be in the range of $196 million and $200 million. We expect that GAAP EPS will be in the range of $0.04 and $0.06. Non-GAAP EPS is expected to be in the range of $0.10 to $0.12. Non-GAAP EPS includes $2 million of purchase accounting impact on revenue and excludes $10 million of adjusting items that are detailed in our press release.

Our guidance today assumes currency exchange rates based on average rates at the end of March. When comparing relative exchange rates to this time last year we’re expecting a $0.01 hit to EPS in Q4 which is similar to the impact we experienced in Q3. Overall, we are anticipating another good quarter in Q4. We have some very tough software contracting and license revenue compares in Q4 and in Q1 of fiscal ’11 for that matter due to the strong success of the VIP customer stimulus sales program that we offered a year ago.

We will not have a similar benefit this year so it is unlikely that we can exceed the level of software contracting activity that resulted from last year’s promotion but our core Lawson should continue to perform well and we anticipate that Health Vision will continue to benefit our business. So to summarize we are pleased with the strength and quality of our first three quarters in fiscal 2010. With the Q4 results that we are forecasting we are also expecting solid growth in license revenue, operating income and non-GAAP EPS on a full year basis.

While we were very pleased with our business results this year we will continue to focus on the opportunities ahead of us, namely further improvements in our services margins and leveraging the economic recovery through our growth in targeted segments. The vertical focus is working and as we execute our plan I believe we are well positioned to capture those opportunities. With that, I will turn the call back to Harry.

Harry Debes

So let me close by summarizing what we covered during today’s call. First, Q3 was a positive quarter on virtually every front. Second, we are growing with growth led by software licensing in our strategic verticals. Third, we are achieving higher operating profit margins through increased revenues and also because of the operational initiatives in which we have invested over the last four years. Fourth, the integration of Health Vision is on track and the early financial results are meeting our expectations. Finally, we are addressing new market opportunities by enabling our solutions in the cloud to make it easier for customer to try, purchase and deploy Lawson’s robust business software.

We continue to deliver strong innovation for customers in the mid market and for customers of all sizes in our strategic verticals in order to achieve our mission which is to make our customers stronger. Operator, that concludes our comments. Now, we’re ready to take some questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Tom Ernst – Deutsche Bank Securities.

Tom Ernst – Deutsche Bank Securities

Harry, the Amazon cloud services announcement, a couple of questions about it. First, have you had the chance to have any customers try out the offering or perhaps do you have customers that are leading this with you? Then second, you’ve had the option for customers to take your products hosted for some time and I think you pointed out that the customers just prefer to take it themselves. Do you see this perhaps gaining more traction? Is this a material efficiency gain for the customer?

Harry Debes

Two questions, for the first question yes Tom, we do have some customers who are working with us and who are already using the Amazon cloud environment. We’re going to be having them on stage with us at our Q event. The second question about how material do we think this will be, I guess I don’t know the answer to that question, time will tell. But, I think it’s undeniable that cloud was a major new direction for our industry at large and we thought it was important for us to play a role in that.

We have now an offering. We think it’s very robust, we think it’s innovative, we think it’s leading in many respects because it gives our customers ultimate choice. You want to buy the solution and put it on your site, we’ve got that. You want to host it through a third party vendor, we’ve got that. You want to host it in the cloud and pay subscription like pricing, we’ve got that. You want to convert your subscription like pricing eventually in to a perpetual license, we’ve got that. Nobody else offers those choices.

We believe that kind of offering and broad range of offerings is great for our customers. Perhaps in three of our years time as cloud becomes more common, it may have a material impact. In the first one or two years we think it might represent less than 10%, perhaps 5% of our overall contracting. But, time will tell.

Operator

Your next question comes from Mark R. Murphy – Piper Jaffray.

Mark R. Murphy – Piper Jaffray

I’m wondering if you can estimate for us what portion of your maintenance contracts currently are tied to the consumer price index just in terms of the annual price changes that you try to pass through and also now that the CTI has returned in to positive territory year-over-year for a few months in a row, does that in any way change your expectation for the maintenance revenue growth for next year basically as you enter in to the May cycle?

Stefan B. Schulz

I’ll take that one. First of all, just from a timing perspective, our international maintenance renewals went out in November and the ones in the Americas have already gone out. So any opportunities that we may have had of a recent trend we’re not going to get any benefit for that in our fiscal 2011 because the invoices are already set and out there. As it relates to your first question, the degree or the amount of contracts that we had were tied to the CPI index, we don’t have that number right here at our fingertips but I think it’s fair to say that a large portion of our maintenance contracts do have that kind of an escalator built in to the contract itself or some form of that that relates to the level of price increases that they can have.

Harry Debes

I can give a little more color on that. In the case of our S3 customers or our Americas’ customers, they generally do not have a limit so we can charge in most cases, whatever we want. But what we of course have to be sensitive to is current market conditions. On the international customers, historically the M3 customers I would tell you the number that CPI type language in them is about 50% and in the absence of that language we can charge anything we want. But once again, charging anything we want doesn’t mean that you charge 20% increases or even 10% increases at a time when inflation is zero or perhaps even negative. So we have to be very sensitive to what the economy is doing and what customers can afford.

Mark R. Murphy – Piper Jaffray

Harry, at what time do you think the marketplace will be ready to accept kind of a more normal, more historically typical level of maintenance price increases?

Harry Debes


That’s like asking me when will the economy get back to 2007 and 2008 levels. I hope soon but I can’t forecast that, I can’t tell you. We make those decisions three months prior to issuing the invoices and we’ve already made our call for the June 1st renewal and we’ll make our call for the January 1st renewal probably in October of this year.

Mark R. Murphy – Piper Jaffray

Then my second question is on the Q4 revenue guidance I think arguably looks just slightly conservative in terms of the sequential increase and I’m just wondering if you are using a more conservative close rate assumption than usual possibly in that forecast.

Stefan B. Schulz

No, not anything different than we had done in the past Mark. One thing that I will point out is the typical sequential swing that you saw like last year did involve the VIP campaign that we talked about in our prepared remarks that we’re not going to see that same benefit this year and so we feel like the step up that we have is about right with what we’re expecting.

Harry Debes

Furthermore there is a general weakness in the market still for professional services. I think if you listen to the calls of our competitors or the systems integrators you’ll get the same comment and feedback. We’re still not back to demand at 2007 and 2008 levels as far as professional services are concerned and don’t forget we’ve also consciously decided to scale back our services business from four years ago when it represented about 47% of our total revenue. Today, it ranges, depending on the quarter from 30% to 35%, that’s a range that we’re actually very comfortable with and we expect to maintain over a longer period of time but that’s significantly down from previous years.

We’ve explained this to you ever quarter and we keep saying we’ve enabled a partner channel that doesn’t exist, it takes some time for that partner channel to become established. That’s happening, we’re in transition but now we think we’ve leveled off.

Operator

Your next question comes from Steve Koenig – Longbow Research.

Steve Koenig – Longbow Research

I’ll stick to just a question or two about the outlook for contracting activity. I was under the impression that you were going to be promoting through some kind of VIP program a little bit in Q3 and Q4 your M3 foundation. Shouldn’t we expect to see some boost from sort of promotion? And, I have a follow up question that’s related to that.

Harry Debes

Let’s not forget that contracting in Q3 was up 31%. The M3 initiative actually has been going on for the last two quarters. We weren’t waiting until Q4 to launch that and you saw contracting was up last quarter and up again this quarter in a significant way. I think let’s give us some credit for that, the economy still is in the [inaudible] so yes, we’re seeing that. Can we however expect a comparison to last year when I think that initiative represented almost $10 million of contracting that initiative alone? No, because we’re not launching it to the same degree this year.

Steve Koenig – Longbow Research

A long those same lines then, I understand there are some tough comparisons in Q4 and Q1, so two questions related to that. Number one, are you on track for hiring the 190 sales people you wanted by the end of the fiscal year? And, do you have any insight on might you continue that hiring further in the remainder of the calendar year? Then kind of related to that is the idea after Q1 – I know visibility is limited but would you be surprised to see contracting grow double digits after those tough compares?

Harry Debes

The first question about the 196 AEs at the end of this year, so when we gave you that guidance at that was Lawson only, the former Lawson only and I will tell you we’re a little bit behind. Right now, including the AEs we inherited from Health Vision we’re at 189 AEs as of today. So when I subtract those out, when it comes to those 196 number we’re a little bit behind on that ramp up but that ramp will continue. We’re being selective and we’ve got deals to close as you can imagine but that ramp will continue and I think if I think about the Lawson only business, by the end of the first quarter I expect us to be at that 196 number or maybe at 200. But, it’s not 225 or 250 or anything like that, it’s going to be in the 200 range.

In terms of double digit contracting growth, I think that’s what your question was, I think you should start thinking about that in the Q2 and beyond time frame because these AEs do take a little while to ramp up and you know Q1 is always a fairly quiet period for us as far as contracting is concerned because of the vacation periods that we have, in Europe predominately and also to some degree in the US. But, Q2 should start to see a healthy pick up and then we expect contracting throughout next year to be up.

Operator

Your next question comes from Peter Goldmacher – Cowen & Co.

Peter Goldmacher – Cowen & Co.

I want to ask you two questions, the first is can you help us understand a little bit more how the cross selling is going with Health Vision and core Lawson ERP? I know you said you’re working some deals, is it the Health Vision guys that are bringing in Lawson ERP, is it the Lawson ERP guys that are bringing in Health Vision? In your install base where you are cross selling, walk me through the mechanics of how you bridge the gap on the customer side, how you get the different end market customers together? Secondly, a little more commentary on what you’re seeing in Europe?

Harry Debes

On the first question I think the answer is it’s a little bit of both. We are seeing cross selling both ways so some existing Lawson ERP customers that were considering integration software or alternatives now that we have this new offering are now very engaged with us in looking at Cloverleaf in particular. So the ERP AE has called in the specialist solution consultant or presales resource from Health Vision and now they’re engaged.

Conversely, there are existing Health Vision customers who have been long time customers and who don’t have Lawson ERP installed. I’ll give you a really good example, in the Province of Quebec in Canada where we have a significant customer base using the Medisuite solution, I think there are about 190 hospitals. Today, none of them are Lawson ERP customers but all 190 are Health Vision customers. In some cases to a small degree but nevertheless they are customers. We think there’s a tremendous opportunity for us to engage with those customers to sell our ERP solution.

We already have a relationship through these folks. We didn’t have a direct office or personnel in the Province of Quebec either in Montreal or Quebec City and now we have that so now we can engage with those customers directly. So we believe that’s a great opportunity for us to sell ERP.

Peter Goldmacher – Cowen & Co.

What are those 190 customers using? What would you be replacing?

Harry Debes

A mixed bag of local disparate solutions, none of the classic vendors. For those SAP and ORACLE sales reps on the call, we expect to compete with you so welcome.

Peter Goldmacher – Cowen & Co.

And the environment in Europe?

Harry Debes

The environment in Europe, it depends very much on the country but I’ve spent about two and a half weeks in Europe in the month of March and I would say depending on the industry that you’re talking about you’ve either got very poor economic conditions, construction in particular or all building materials in particular, financials are still really hurting. Strangely enough, in some other markets, which you wouldn’t expect, some fashion markets, the [inaudible] markets are actually doing quite well. So it’s vertical and country specific but generally I would say Europe seems to be coming out of this recession more slowly than we are and first of all than Asia did which started to climb out about five or six months ago. America seems to be moving in the right direction, I think Europe hasn’t made the turn yet.

Operator

Your next question comes from Brad Sills – Barclays Capital.

Brad Sills – Barclays Capital

Just one on maintenance again here, I think you’re saying excluding Health Vision maintenance was up roughly 1% year-over-year. That sequentially is a little better than what we had modeled based on commentary on expected renewal rates. It sounds like you had a onetime benefit in there, ex the onetime benefit could you just describe where maintenance came in relative to expectations and how renewal rates came in as well relative to expectations heading in to the quarter?

Stefan B. Schulz

I think a couple of things, one currency helped us a little bit there as well and we talked about that on the expense side but currency helped us a little bit on the maintenance side. The renewal rates were roughly in line with what we experienced last year and in the comments we talked about last quarter we were more or less guarding against any sort of slight decline which we ended up not seeing so we were very pleased with the renewals and the customer acceptance of the pricing and the invoices that went out. That was really what led to some of what we saw this quarter.

Brad Sills – Barclays Capital

Brad I would also just expand on that, some of those onetime items were customers who had chosen to discontinue maintenance not because they were unhappy with our software but because of tough economic conditions and that didn’t really shock or surprise us but many of those customers have now decided to come back to us and that’s kind of what happened. I expect that that will continue to happen periodically over this year. Some of those customers who discontinued for financial reasons only will come back and we have an active campaign, as many other software companies do by the way, to engage with customers who initially discontinued to get them back and so we had some real benefit from that in Q3.

Brad Sills – Barclays Capital

Then just a question on your plans with M3 in the US, I know you’ve kind of backed off from cross selling in the US just given the macro. Now that you’re seeing things improve it doesn’t look like your plans are to hire AEs quickly here any time soon but are you planning to kind of refocus again on getting M3 sold in to verticals in the US or where are we I guess there?

Harry Debes

Brad, we haven’t backed off on M3 AEs in the US. I think we did that about a year and a half ago when the economy turned south but since that time we’ve been rebuilding and it’s going very well for us and we plan to continue to hire in our target verticals, absolutely. In the case of ESM&R alone, I think we have close to 20 AEs in the US.

BB

That is an M3 offering, that’s based on the M3 technology.

Brad Sills – Barclays Capital

I think you said ESM&R was strong this quarter. Was that in the US I assume?

Harry Debes

Actually I didn’t. We’re kind of like taking two segments for granted a little bit. Healthcare tends to always be strong, ESM&R tends to be always strong, those are continuing. I highlighted specifically fashion, public sector, some healthcare stuff and also our channels in my comments but yes, ESM&R which is an M3 solution was strong. We’re making good traction in fashion and food and other as well.

Operator

Your next question comes from Mark Schappel – The Benchmark Company.

Mark Schappel – The Benchmark Company

Harry, I was wondering if you could just give us the foreign exchange impact on total revenue?

BB

We have it. It’s in the press release Mark but that’s alright I’ll identify it for you. Total revenues increased 7% year-over-year, as reported increased 3% year-over-year at constant currency.

Mark Schappel – The Benchmark Company

Then just one follow up question, given the upside in the quarter Harry, your Q4 guidance for revenue appears overly cautious I was just wondering did some mid size deals close a bit early this quarter more than expected?

Harry Debes

When you take a look at first of all in Q3, let’s talk about Q3, and I think Stefan explained it very well in his comments, one of the benefits that happened was we did have a higher conversion rate in the 80% range which is unusually high. We have consciously made an effort to improve our conversion rates from like 45% or so four and a half years ago to now more traditionally in the 70% to 72% range. That’s kind of where we’re cruising but, it’s been a stepping exercise.

We’ve been gradually moving that conversion rate in the right direction and that comes from education of our AEs, working closely with our revenue recognition people, knowing how to package a deal so it gets recognized and also getting VSOE on certain parts of our business. So that has taken us a number of years to get there. What happened in Q3 was we made a jump up and that tends to be as a result of certain mix of transactions. We don’t think that 80% is normal although ultimately we’d like to get 80% or even 90% but from where we are right now we think 70% range is a more normal number.

So that explains to some degree Q3. As far as Q4 and our sort of general philosophy on guidance is concerned, our whole approach to guidance is we’re going to give you a number that we’re pretty darn sure that we’re going to hit. Every quarter at this stage of the quarter, we know there are some deals in the pipeline that are significant that could improve our overall numbers but they tend to be the elephant like deals which if you forecast them and bundle them in, you have no way of recovering.

So, we tend not to include significant transactions where we have not already been picked as vendor or choice or we don’t believe we have a definitive time table to get them closed before the end of the quarter. That tends to be our approach. Sometimes when the bounce goes our way or timing goes our way, they come in to the quarter and then we have a positive uptick. It’s just that it is very difficult with any degree of certainty to make a call on those at this stage and that’s why we chose to give you numbers that we know we’re going to deliver top line and bottom line. I hope that makes sense.

Operator

Your next question comes from Tom Ernst – Deutsche Bank Securities.

Tom Ernst – Deutsche Bank Securities

One more follow up question Harry. I know you’re not going to be giving guidance for breaking Health Vision out looking forward. You gave us some expectations when you bought Health Vision, I think it was $60 to $70 million in revenue and $0.06 to $0.07 in EPS accretion excluding integration costs. Is that still your view today?

Harry Debes

Absolutely.

Tom Ernst – Deutsche Bank Securities

Within Health Vision the Cloverleaf is obvious I think how that fits in the sales bag. One of the maybe lower probability but high upside is the HIE market. I know there’s a handful of larger city or state opportunities out there, how’s Health Vision doing competing for those opportunities? Any progress?

Harry Debes

At this stage I’m not sure I can give you a good answer on this but you know what, we’re going to write this down and at the end of our fourth quarter call we’ll give you a little more color on the HIE solution.

Operator

Your next question comes from Brian Murphy – Sidoti & Company.

Brian Murphy – Sidoti & Company

Harry could you just give us some color on new customer deals? It looks like the number of deals is up significantly but the ASP down quite a bit.

Harry Debes

As we say all the time, ASP really varies depending on the mix of deals that we have. A couple of quarters ago we would have a couple of very large deals and that swings the ASP widely. I think it’s important for everyone to think about our ASP over a 12 month period. I think if you’re trying to do modeling, that’s the number I would – take our annualized number or the last trailing 12 months, I think that would be most helpful for you. In this particular quarter we had 37 new deals of which about just less than a third were Health Vision.

They tend to have smaller size deals so that’s going to have a little bit of downward pressure on ASP but 26 new Lawson deals, the former Lawson average value per deal, ASP was 219 in this quarter. But once again, when I look at and I am looking here at the trend over the last six quarters it ranges from 200 to 650 depending on the quarter and the mix of deals and that’s a very broad range. But, I can tell you that the average over that six quarters looks to be about 410 for new business deals and that’s kind of what I would think about.

Brian Murphy – Sidoti & Company

I think you mentioned that in recent quarters ESM&R deals have been knocking up that ASP. Was it that you didn’t have as many of those deals this quarter?

Harry Debes

That’s correct. Not the significant ones, we had some deals in the quarter and we still think there are significant ones in the pipeline but they just didn’t materialize in Q3.

Brian Murphy – Sidoti & Company

Then just a quick one on the consulting gross margin, how should we think about that coming back up in to the low to mid teens?

Harry Debes


Here’s the answer to that question and I’m giving you the companywide number. We do have some significant seasonality in our margin for services. Q1 is our weakest quarter for services margins, Q3 is usually our second weakest quarter. Strangely enough Q2 is our strongest services quarter and that happens to be because everybody is at work. There aren’t prolonged holiday times during the September, October, November period.

All the other periods there are significant vacation times. So even though you’d think Q4 would be a very strong services quarter, it just hasn’t turned out that way and as we look over the last couple of years, that’s the answer. So Q1 weak, Q2 very strong, Q3 a little bit weak and Q4 a little bit in the middle. If you’re looking for a specific range, we talk about this a lot, we’re still not happy with where we are. It gets better. We are making progress. We’ve put lots of measures in place, lots of training, lots of coaching, lots of control. It’s getting better and its trending better if you look at it over the long term.

Unfortunately, when you look at it one quarter at a time the dots are kind of scattered. I’m not happy with that and no one in our company is happy with the fact that they’re scattered and they’re not a little bit more consistent but over the longer term they are getting better and a bit more predictable. We will be in the – with the possible exception of Q1, we will be in the mid teens to low – let’s say the 12% to 16% range probably for the foreseeable future.

Operator

I am showing no other questions at this time.

Harry Debes

Thank you everyone for joining us on the call. We look forward to speaking to you again in three months time.

Operator

That does conclude today’s conference. Thank you for your participation. You may now disconnect from the audio portion.

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