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Lawson Software, Inc. (NASDAQ:LWSN)

F4Q10 (Qtr End 05/31/10) Earnings Call Transcript

July 8, 2010 5:00 pm ET

Executives

Barbara Doyle – VP, IR

Harry Debes – President and CEO

Stefan Schulz – SVP, Finance and CFO

Analysts

Tom Ernst – Deutsche Bank Securities

Ajay Kasargod – Morgan Keegan

Steve Koenig – Longbow Research

Peter Goldmacher – Cowen & Co.

Richard Williams – Cross Research

Neil Herman – Herman Advisors Inc.

Brad Sills – Barclays Capital

Brian Schwartz – Piper Jaffray

Brian Murphy – Sidoti & Company

Mark Schappel – The Benchmark Company

Operator

At this time, all participants are in a listen-only mode until today’s question-and-answer session. (Operator instructions) Today’s call is being recorded. If you have any objections with that you may disconnect at this time. I would now like to turn the call over to Barbara Doyle. Ma'am, you may begin.

Barbara Doyle

Thank you very much, Jeremy, and good afternoon to everyone on the call. Welcome to Lawson Software’s fiscal 2010 fourth quarter conference call. We’re covering the quarter ended May 31, 2010. With me on today’s call are Harry Debes, Lawson’s President and CEO; and Stefan Schulz, Senior Vice President of Finance and CFO. As usual, after completing our prepared remarks we will take your questions as Jeremy described.

So, please let me review our Safe Harbor statement. We remind you that the call will include forward-looking statements, which 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 involve risks and uncertainties that may cause actual results to differ materially from the potential results discussed.

Our SEC filings contain further information about risk factors that could cause actual results to differ from managements’ expectations. We do not obligate ourselves to update the forward-looking statements for circumstances or events that occur in the future. Before we start our call, I would also like to remind you that in addition to reporting financial results in accordance with Generally Accepted Accounting Principles, Lawson also reports non-GAAP financial results, and our remarks today will focus on our non-GAAP results, unless otherwise noted. All of the discussion of our use of non-GAAP results as well as a detailed reconciliation of non-GAAP to GAAP results is included in our press release.

And lastly, I will remind you that we have a supplemental summary of historical key business metrics on our website at www.Lawson.com/investor for your reference. Now, let me turn the call over to Harry Debes.

Harry Debes

Thank you, Barbara and good afternoon everyone. I will begin today’s call with some comments on Q4, the Healthvision integration, and performance in our business segments. Our CFO, Stefan Schulz, will provide the financial highlights from the quarter, financial guidance for Q1, and a view of our goals for fiscal 2011. Then I will wrap up with some additional discussion on our full year’s results and our key focus areas for FY11. After that we will take your questions.

Now let us begin. As you can see from our press release we had an excellent quarter. In fact, we achieved record company performance in several areas. We had strong year-over-year growth in many key financial metrics. For example, license revenues grew 13%. Total revenues increased 7%. Services margins increased 40%. We generated record levels of cash flow. Non-GAAP operating margin increased 19% to a 16.5% margin, and non-GAAP earnings per share grew 20% to $0.12 for the quarter.

The 16.5% operating margin and the $0.12 earnings per share are the best quarterly operating results we have ever achieved as a public company. On the sales side, we had the highest rate of pipeline conversion since mid-2008, and this strong performance was organic. So our same-store sales figures, excluding Healthvision, were very healthy. For example, in Q4, organic license revenue grew 8%, organic operating income increased 9%. Our operating margin was 16% and that was excluding Healthvision.

Our earnings per share, excluding Healthvision, was $0.11, up from $0.10 in Q4 ‘09. Now Healthvision is certainly adding incremental revenue and profit to our results. But the point is that we grew and improved our core business before any benefit from the acquisition. And I’m not sure many of our ERP competitors will be able to make the same claims.

With that introduction, let me give you an update on Healthvision. The acquisition which occurred in mid-January 2010 has been very successful. Integration of Healthvision into Lawson’s Healthcare business unit is now complete, including sales and services, customer support and back office operations. We have begun fiscal 2011 with a single integrated healthcare business, and during all of that integration work we even issued a major new release of our Cloverleaf application.

We signed 97 Healthvision software deals since the acquisition, and I will remind you that these deals are significantly smaller in size and therefore reduce our average selling price. We have also now started to realize some of the potential for cross sell opportunities. In Q4, we closed two new Cloverleaf deals with existing Lawson customers, and we have several million dollars of additional cross sell opportunities in the pipeline.

The emerging markets for our health information exchange solution also continues to look intriguing due to the need to share patient data among hospitals, clinics and doctors' offices. And while the core business rationale for this acquisition was the Cloverleaf integration solution, the up side of the acquisition is the health information exchange opportunity.

Now let us discuss our overall sales and segment performance. Total contracting in Q4 was $38 million. This was a 37% sequential increase from contracting in Q3, but down 13% compared to Q4 in fiscal 2009. I will remind you that last year in fiscal ’09 due to the uncertain economic conditions we created a sales stimulus program called VIP. The VIP program achieved its objectives and generated a one-time contracting boost of approximately $21 million in revenue, about 15 million of which fell into Q4 of ’09 and 6 million in Q1 of fiscal 10. Since we did not offer a similar campaign this year, we did not expect to exceed last year’s Q4 contracting levels. The $38 million of contracting in the quarter just ended was right in line with our forecasts.

The S3 business segment, which includes the healthcare, public sector and human capital management verticals showed strong performance in Q4, as well as throughout fiscal 2010. Year-over-year, our S3 Q4 license revenues grew 19%. Public sector led S3 performance in Q4 with two of our largest deals in the quarter. We also had good performance in our healthcare vertical, which has been consistently strong reflecting our dominant market position in this space.

Our human capital management products continued to be a strong differentiator for Lawson and were included in the majority of S3 deals signed in the quarter. We had significant HCM wins at North East Independent School District in Texas, the University of North Carolina, the city of Savannah, and St. Charles Healthcare. We also had several HCM go lives in the quarter, including Geisinger Health System in Pennsylvania, and Jackson Health System in Florida. In addition, our HCM pipeline has grown significantly since the beginning of January as we have increased our sales force, added customer references and announced our new human capital management cloud offerings.

The S3 business accounted for 37% of our total revenues in fiscal ‘10. S3 showed not only the highest growth in total revenues during the year, but also delivered the best operating performance, and with a 28% fully burdened all in operating margin, our S3 business now has better margins than SAP. In FY ’11, we are looking to build on that success.

Now let us turn to our M3 business. The economic and business recovery in Europe continues to lag other regions, and this is putting pressure on our M3 business. However, we did see signs of improvement. Year-over-year our M3 Q4 license revenues grew 6%. Equipment service management and rental led the M3 business unit sales. We are advancing our strategy beyond Caterpillar dealers, and are winning new accounts in construction and industrial manufacturing.

During the quarter, we signed significant ESM&R deals with industrial companies Aggreko Limited, Zodiac Aerospace and Fraken SAS [ph]. This was also the second consecutive quarter of good sales activity in our fashion vertical, where we signed a significant deal with Gresvig Holding, one of Norway’s biggest private label sportswear retailers. We also closed a significant fashion deal in Singapore signing Club 21 as a new customer. In addition, Hermes the luxury fashion label purchased more seats, which now brings them to over 1,000 users.

M3 made up 32% of our total revenues in FY ’10. The M3 contribution margin improved over FY ’09, but we still have a long way to go. Provided the economy in Europe begins to recover, we consider this business to have the most upside of all of our business segments.

And now let us review our General Industries segment. The General Industries business is primarily focused on meeting the needs of existing customers. Of the 350 deals they signed in the fiscal year, 340 of them were with existing customers. Nevertheless, in Q4 we had a very strong quarter and signed three deals greater than $1 million in this segment. Year-over-year our General Industries Q4 license revenues grew 37%. And while the full-year contribution margin increased in all three segments, the General Industries business showed the largest year-over-year improvement. This was precisely the plan for this business - focus on existing customers and on margin improvements.

And now let me give you a brief update on Lawson’s cloud initiative. In April, we announced that we are making our M3 and S3 suites available in the cloud, leveraging Amazon’s EC2 infrastructure. That announcement positioned Lawson as the leader in delivering cloud innovation to customers who want fully customizable ERP. Customer interest in this offering has been high. We now have visibility to more than 20 early-stage prospects. The majority of these opportunities are human capital management deals as we expected. But we also see a significant opportunity for M3 cloud deployments that we expect will build over the next year. We continue to be excited about this innovation and will keep you updated as the business progresses.

One final thing before I hand the call over to Stefan, I know there has been some speculation about Icahn Capital’s investment in Lawson, so I would like to make some brief comments on the matter. Icahn filed a 13-D, disclosing he had accumulated approximately 9.7% of our shares, and that he wished to meet with management. We have met with Mr. Icahn and other representatives of his firms, and the interaction was cordial and constructive. Nothing has changed in our business plan or our day-to-day operations. It is business as usual for us, and we remain focused on making our customers stronger, bringing innovative products to market and winning new business. Other than this, we really can’t comment further.

Now I will hand the call over to Stefan to review our financial results and also our guidance.

Stefan Schulz

Thank you, Harry, and good afternoon. Today, I will comment on certain Q4 and fiscal year 2010 results. I will then provide our Q1 guidance and our financial objectives for fiscal 2011. As a reminder, my comments will reference our non-GAAP results.

As Harry mentioned, we reported company record results in Q4. Our operating margin, EPS, and cash flow in Q4 established new company benchmarks, which reflect the hard work of our global team and moves us closer to our goal of achieving world-class business performance. Q4 also marked the seventh consecutive quarter of meeting or exceeding our EPS guidance, and the fifth consecutive quarter of meeting our revenue guidance.

This is a point worth emphasizing. The last seven quarters arguably included the most tumultuous economic environment in the last 60 years. Yet we met or exceeded our EPS guidance in each quarter over that span. Proactive management and accountability for results are core Lawson values, and I know these are also important values for our investors. While we are pleased with our recent track record, we are continuing to enhance our insights into the business through process improvements and better leverage of our infrastructure.

Software licensing patterns within the enterprise software space continue to be back end loaded. So we certainly are not immune from an EPS or revenue miss, but we believe our track record speaks for itself. Now let me cover some other key financial metrics. Harry has covered our licensing contracting results, so I will start with license revenues. Q4 license revenues were $38 million, increasing 13% compared to last year.

Excluding Healthvision, license revenues grew 8%. We had a high rate of revenue recognition on deals contracted in the quarter, which we refer to as our conversion rate. That positively impacted license fee revenue compared to last year. Our conversion rate was 84% compared to 64% in Q4 of fiscal 2009. This results primarily due to the higher percentage of contracting with existing customers.

The conversion rate on contracts with existing customers is generally higher than the conversion rate on new deals with new customers. Also the higher conversion rates in Q4 and throughout the fiscal year have led to a lower deferred license revenue balance of $39 million compared to $56 million at the end of fiscal 2009. Conversion rates have improved over time as revenue recognition rules are better understood in the field. With the recent announcement of our cloud subscription services offering, we believe the trend of higher conversion rates will not continue in fiscal year 2011. We anticipate the average conversion rate will be closer to the mid-70s versus the low 80s experienced in the third and fourth quarters of fiscal 2010.

Non-GAAP maintenance revenues of $95.6 million increased 12% year-over-year. Healthvision’s maintenance revenues contributed to that increase, but even excluding Healthvision, our organic maintenance revenues increased by 3%. The risks we envision in our January EMEA renewal cycle are clearly behind us. We have seen many customer win backs since January, and we are seeing good renewal activity in the June 1 Americas cycle. Customers are renewing promptly and we are seeing fewer bankruptcies and negotiations from what we saw earlier in the year.

Collections for the June renewal cycle were stronger than what we forecasted with a large amount of collections coming in May. This was one of the key drivers of our strong cash flow quarter in the fourth quarter. We also continued to experience solid margins in maintenance at 82% in Q4, down only slightly compared to 83% in the fourth quarter of fiscal 2009. This decline resulted from lower maintenance margins associated with Healthvision.

Consulting revenues of $67 million were down 1% year-over-year as we ended fiscal year 2010 with about 90 fewer billable consultants than we had on board at the end of fiscal 2009. Our work at rightsizing the consulting organization continues to pay off. The mix of Q4 services revenues were a bit lower than last year, representing 33% of total revenues compared to 36% in Q4 last year. Overall, utilization rates have begun to stabilize, and the fourth-quarter consulting margin of 14% improved 400 basis points from 10% in Q4 last year.

This rightsizing in services had the impact of producing lower services revenues by increasing the margin, and puts us on track to achieve our near-term goal of 17% and 19% in services margin.

Now I will shift to the operating expense side of the equation. Operating expenses of $89.5 million were 14% higher than Q4 of last year. Half of the year-over-year increase was due to the addition of Healthvision. Currency pushed the expenses up another 1%, and the balance of the increase was largely made up from increases in employee costs, reflecting the addition of headcount in key areas, as well as higher earned incentive compensation.

Overall, we’re comfortable with our expense levels, and on a full year basis, total cost and expenses of $626 million are down 6% compared to fiscal 2009, even including Healthvision. The bottom line is that growth in license and maintenance revenues as well as higher gross margin more than offset the increase in expenses, resulting in 160 basis point increase in operating margin. Non-GAAP operating margin of 16.5% and earnings per share growth of 20% is solid evidence that we are executing against our business plan, and our operational strategy.

Now onto some key balance sheet metrics and cash flow. Our balance sheet is very strong with $387 million of cash and investments for a net cash balance of $143 million. Total deferred revenues at the end of Q4 were $328 million, up from $208 million at the end of Q3. The increase is typical for a Q4 and is primarily driven by our maintenance renewal cycle. Total deferred revenues also increased on a year-over-year basis, increasing from $292 million at the end of fiscal 2009. The year-over-year increase was also driven by our higher maintenance renewal cycle in fiscal 2010.

Also of note is that we decreased DSOs by 20 days year-over-year from 74 days in the fourth quarter of fiscal 2009 to 54 days in Q4 of fiscal 2010. This was a direct result of our efforts during the year on reducing past due receivables. We reduced our past due receivables by nearly 50% in fiscal 2010, and I would like to thank our finance and field teams for this significant improvement. Another highlight of fiscal 2010 was our strong cash flow.

In Q4, our cash flow numbers were outstanding, but I evaluate our cash flow performance on an annual basis due to the seasonality of our maintenance collections. We generated $134 million of free cash flow in fiscal 2010, which was $92 million higher than the 12 months of fiscal 2009. This significant year-over-year improvement includes three roughly equal measures of about $30 million in EBITDA improvement, accelerated maintenance payments and working capital improvement, the latter of which was driven by collection of aged [ph] receivables.

We expected about $100 million of free cash flow for the fiscal year, and the high volume of maintenance renewal payments in May lifted this higher than our forecast. While we expect healthy growth in EBITDA, we do not anticipate the same dramatic level of working capital improvements in fiscal 2011. As a result, we are expecting free cash flow to be relatively flat year-over-year. The timing of the maintenance payments and significant improvement in working capital in fiscal 2010 create a rather tough bogey for us in fiscal 2011. But I’m happy to have this cash in the bank sooner rather than later.

Now turning quickly to key fiscal year 2010 results, our license revenues were $124 million, up 13%, and maintenance revenues of $357 million, increased 2%. Services revenues of $261 million decreased by 12% and again this was due to our resizing of our consulting business. Operating income of $116 million grew 27% and our full year non-GAAP operating margin was 16%. Full year fiscal 2010 EPS was $0.42, up from $0.35 in fiscal ’09. So while we are pleased with the progress we made in fiscal 2010, we plan to continue expanding our operating margin to the high teens and in the 20% plus.

To that end there are three primary areas of focus for us in fiscal 2011. One, continue our recent two quarter trend of total revenue growth. This will be driven by increases in software contracting in our targeted verticals. Two, continued increases in services margin with the rightsizing over the past several quarters will position us for a near-term 17% to 19% margin, and then three, improved M3 profitability.

In fiscal 2010, our M3 business was marginally profitable, and we are taking meaningful steps towards sustained profitability improvements in fiscal 2011. We will continue to manage our business proactively and aggressively to achieve all of these goals. As an example, we announced a restructuring in May that affects 150 to 200 positions primarily focused on M3 operations in Europe. The economy there continues to lag the recovery we have begun to see in the US, so we acted accordingly. This is one of the several steps we are taking to improve the M3 profitability. We also announced that we expected to add approximately the same number of resources in other areas where investment is needed.

Now turning to guidance, GAAP revenues for Q1 of fiscal 2011 are expected to be $168 million to $172 million, and we anticipate total non-GAAP revenues to be in the range of $170 million to $174 million. GAAP EPS in Q1 is expected to be in the range of $0.01 to $0.02 per share. Non-GAAP EPS is expected to be in the range of $0.08 to $0.09 per share.

Our guidance includes an estimated non-GAAP tax rate of 35%, which we will apply consistently in each quarter in fiscal 2011. Our guidance also assumes currency exchange rates based on average rates at the end of June. Exchange rates have changed significantly since April, when we last spoke to you making a sizable impact on our revenue forecast. Utilizing June rates has the impact of reducing Q1 revenue by approximately $5 million compared to currency rates in April, when most of the analyst models were last updated. Due to similar currency impacts on expenses, there is no currency impact on EPS.

The significant change in foreign currency exchange rate has also impacted our outlook for the full 2011 fiscal year. We estimate that the recent changes to foreign currency rates will reduce our total revenues by $25 million. It is because of this change that we are electing to provide you with our targeted ranges for fiscal year 2011. We expect GAAP revenues for fiscal 2011 to be in the range of $751 million to $766 million, and non-GAAP revenues to be between $755 million and $770 million.

GAAP EPS for the full fiscal year is expected to be in the range of $0.18 to be in the range of $0.18 to $0.23 per share, while non-GAAP EPS is expected to be in the range of $0.47 to $0.51 per share. The GAAP to non-GAAP reconciling items for Q1 and fiscal 2011 are noted in our press release. Again, our guidance ranges are based on current foreign currency exchange rates. These ranges also assume a similar economic environment to the one we are experiencing today. Changes to either one of these assumptions will likely have an impact on our outlook.

With that, I will turn the call back over to Harry.

Harry Debes

Thank you, Stefan. You know, last month I celebrated the anniversary of my fifth year at Lawson. It is a milestone that invites a certain amount of reflection. So I will share with you the list I made of things that I think have gone well, and the things that still need work.

At the top of the list of things that have gone well is the steady continuous improvement in our financial performance over the last five years. The key here has been steady, consistent and most importantly sustainable improvement. We could have easily taken short-term actions to show one or two quarters or even one year of heroic performance, but we have never approached our business with shortsighted goals. We have always focused on building sustainable value for our stakeholders, and this is evident in many of our financial metrics.

Here are just a few data points. We improved our annual operating margins from 5% in fiscal 2006 to 7% in fiscal 07, then 9% in fiscal ‘09, 12% in fiscal ’09 [ph], and now 16% in 2010. Similarly we grew earnings per share from $0.12 in 2006 to $0.42 in 2010 with consistent increases every year. Our license and maintenance revenues increased at a 17% compounded annual growth rate during this time. And our free cash flow was $29 million in fiscal 2005 and in fiscal ’10 it was a record $134 million. It was a multi-year effort to improve dozens of operational matters, which culminated in these financial results, and for these initiatives and the results, I would like to acknowledge the hard work of our employees and the continued support of our customers. But there are at least two things we really need to improve.

The first is total revenues. While our license and maintenance revenues have shown good growth, our total revenues have not. This is because we purposely reduced the size of our services business to achieve a healthier revenue mix. In 2008, our services revenues were 47% of our total revenues. Today services revenues are down to 33% of total revenues, but that meant a reduction, a purposeful production of more than $100 million. Now taking revenue down on purpose is a tough decision. It was the right thing to do for our business, but I’m aware of the drag this has had on our total revenue measurements. And now we need to focus on revenue growth, but with the correct mix.

The other area that needs improvement is our overall performance of our M3 business. Over the years, we have made many investments to transform this business, and while it is now profitable we are not yet yielding the results we believe are achievable. So for fiscal 2011, we will build on the good progress we have made in fiscal 2010. But we will also put considerable focus on these areas, which need improvement. That should lead to revenue growth and continued improvement in our operating margins.

Now that concludes my comments, but before we open it up for questions I would actually like to ask the first question. And the first question goes to Stefan. Stefan, first of all, congratulations on Q4 and 2010. It looks like you did a great job and hit a lot of great metrics, but help me better understand your revenue guidance for FY ’11. It seems a little bit light, how can I reconcile this with what most analysts were projecting, which was closer to $795 million of revenue.

Stefan Schulz

Well, thank you, Harry. That is a good question. You know, since we last spoke to you we have seen the foreign currency rates move significantly from April to today. As a matter of fact about 40% of our revenues are subject to foreign currency exchange rates, and we have done as we have finished our modeling for fiscal year 2011, we continuously modified what our results would be based on how the rates have moved and we quantified about a $25 million impact just from currency impact alone that have moved from April rates to today’s rates.

Harry Debes

Are you saying that if you had done this forecast using April rates that that projection would have been higher?

Stefan Schulz

Our range would have been $25 million higher. That is correct.

Harry Debes

All right. Hopefully, that does clarify that. (inaudible) but I still like to see you increase your revenues, Stefan.

Stefan Schulz

We will do that.

Harry Debes

Okay. Operator, now, we would like to open the call-up for questions for our analyst friends.

Question-and-Answer Session

Operator

(Operator instructions) Our first question today comes from Tom Ernst. Your line is open.

Tom Ernst – Deutsche Bank Securities

Good afternoon guys. Thanks for taking my question.

Harry Debes

Sure.

Stefan Schulz

Hi, Tom.

Tom Ernst – Deutsche Bank Securities

Although I think technically it is the second question, isn’t it? So you made clear I think your outlook for next year, the question is Wall Street is worried about increased economic pressure, particularly in Europe beyond FX. So I think Stefan in your comments you highlighted that you are forecasting lower conversion rates. Is that just a conservative macro assumption or are you actually seeing a trajectory that would point to that?

Stefan Schulz

Tom, actually it really has little to do with the economic impacts, and more to do with the products we believe we will be selling in fiscal ’11. First of all, it starts with our human capital management product. You know, that is a relatively new product, and we know that we will be selling that in some cases with services and managed services that may take those deals ratably.

Secondly, we do expect to see some sales of our cloud subscription offering that we also think will take our conversion rate down slightly. So, when we look forward into fiscal 2011, we think that the 80% plus that we have been enjoying in the last couple of quarters will come down a notch to the mid 70s.

Tom Ernst – Deutsche Bank Securities

Okay. Then the question about next year everybody is going to have, and I know you partially answered it already, are you being more conservative in your approach and the assumption on the strength of the macro economy, both Europe and also US?

Stefan Schulz

You know, we don’t think so. What we put together, and the reason we put the guidance together was mainly because of the currency movements. We felt like we needed to get in front of that, and let you guys know just how much we have been impacted by the currency movements and that is why we put that out there. But as we just discussed, there is a lot of things that can happen aside from our execution. It can also be the amount of conversion rates that we are able to enjoy that also has an impact on our revenue numbers. So we feel like we factored all those risks and opportunities, and so that kind of goes into the – also relatively wide range of revenues that we gave you for fiscal ’11.

Tom Ernst – Deutsche Bank Securities

Okay, fair enough. And then just one follow up, the maintenance revenue saw an uptick that we expected you highlighted, do you think that we have established a new baseline we should expect maintenance growth looking forward from here?

Stefan Schulz

Yes. You know, one of the things that we have been very pleased with in the last six months has been how our maintenance business has rebounded from when we first mentioned some concerns on maintenance about six months ago. Ever since then our European renewal cycle was very strong and then our Americas renewal cycle that we’re just completing now, was the strongest it has ever been. So we were very pleased with how that business has rebounded in the last six months.

Tom Ernst – Deutsche Bank Securities

Okay. Thanks again for taking my questions.

Stefan Schulz

Okay, Tom. Thank you.

Operator

Our next question comes from Ajay, and your line is open.

Ajay Kasargod – Morgan Keegan

Thank you. Yes, this is Ajay Kasargod, Morgan Keegan. How are you guys doing?

Harry Debes

Great. Thanks Ajay.

Ajay Kasargod – Morgan Keegan

Okay, great. Remember one, Harry just your comment, there is no doubt that you guys have done an extremely strong job of blocking and tackling and enhancing the margins. What I am trying to understand, and it was helpful with the explanation of the FX the you guys provided was that even if you exclude that impact of FX, you are still looking at really low nominal organic growth rates for losses, so can you just go into a little more detail on where the strength is and where the weakness is. I think you kind of talked about it with S3 and M3, and then I have one more quick follow-up.

Harry Debes

Okay, and that is very good question, Ajay. So you have to remember that what we have done since we have focused on certain verticals, we have decided that certain strategic verticals is where our growth is going to be. That means that there are other parts of our business which is historical, where we sold to anybody who needed software. That is no longer strategic for us, and therefore we are going to have relatively flat growth in those areas. So if you take half of our business and put it in the bucket or call it strategic, and that has high single digit growth, and then the other half of our business that was historical, but we’re not making great deal of investments in. We are really making sure that the customer base is looked after, but we don’t expect a lot of growth there.

And in fact in some parts of the business, some of the revenue lines are actually negative growth. When you add those two together and then do the average, it actually shows somewhat modest growth. Therefore, I think what you should do is focus on the strategic verticals, where we are actually having very healthy growth. We did it last year and we expect to have very healthy growth again next year. And those are the verticals we keep talking about, you know, healthcare, public sector, ESM&R, human capital management and fashion. Those are the areas that are actually growing; in some cases, growing double digits.

Ajay Kasargod – Morgan Keegan

Okay. Now, Harry, that is very helpful, and it makes sense. As we look forward, I think one of the things you have highlighted is utilizing more third-parties and the impact by taking away some of the bench with your consulting business. So as we look at the guidance in a little bit more detail, you know, how can we better focus our models in terms of what the consulting team can contribute, because clearly that is leading to obviously part of the revenue – some of the revenue shifts that we have in the model?

Harry Debes

Yes, our consulting revenue is actually not expected to grow. It is going to be flat to slightly down.

Ajay Kasargod – Morgan Keegan

Okay.

Harry Debes

And that is part of our plan. We are focusing on margin, and as I said we know – now that we have got our services revenue into the low 30% of our total revenue mix, that is where we expect it to stay. So as we grow our license revenue and maintenance revenue, that will grow slightly over the longer term, but for the next year we don’t really expect our services revenue to grow.

Ajay Kasargod – Morgan Keegan

Okay. And then just lastly and I will just get back in queue if I have others, can you guys just kind of either give us an update or just reaffirm your expectation regarding Healthvision, because I think you kind of said 60 million to 70 million in pro forma revenue, and just can you give us an update on the revenue and income or margin expectation and also in terms of how you guys have been able to cross sell and work with customers, maybe an example of how this is working positively? Thank you.

Harry Debes

So, Healthvision, the original guidance we gave, we can absolutely confirm that original guidance is still holding, and we expect to deliver exactly that in fiscal ’11 both on the revenue side and on the earnings side. So we are very pleased about that. In terms of the cross sell opportunities I highlighted a couple of deals that were sold – of Cloverleaf deals that were sold into Lawson customers. Now, we also have identified several million dollars of opportunities in both the HIE solution set into Lawson customers and conversely ERP deals into Cloverleaf and HIE customer opportunities.

So we are very pleased with the acquisition. The integration has been very, very smooth. It has been right on schedule. We always told you that it would be a relatively easy integration, and that we would be delivering results virtually immediately. That is exactly what has happened. And we are now acting as one company. So we really don’t plan to talk about Healthvision a lot going forward, but I’m glad you asked the question, so that I can categorically state our original frame of reference on this deal is still very much what we see happening for the next year.

Ajay Kasargod – Morgan Keegan

Thanks, Harry.

Operator

Our next question in queue comes from Steve. Your line is open.

Steve Koenig – Longbow Research

Hi, there. I assume it is me. Steve Koenig, Longbow. How are you guys doing?

Harry Debes

Hi, Steve. Well, great. Thank you.

Stefan Schulz

Hi, Steve.

Steve Koenig – Longbow Research

Good. Let us see – may be one question now and one follow-up if I may. Let us see, can I ask you guys a little bit in terms of overall growth rates organically. The color was helpful. Could you comment or give any color on how we should think specifically about bookings growing organically next year and licenses organically as well?

Harry Debes

Yes. So, bookings are as I explained to Ajay, you almost have to parse the business, and we could give you completely different sets of numbers depending on which vertical you are talking about. But if you are talking about the entire company, bookings are expected to grow around the 10% level year-over-year, total company. In terms of license revenue, it is you know single digits. Once again, two reasons – number one, the conversion rate that is definitely referred to isn’t going to be as great. So we expect that over the next year our deferred revenue will actually increase again over time, as we don’t recognize all of the revenue that we signed.

Steve Koenig – Longbow Research

Great. That is very helpful. And then just one housekeeping question if I may, can you help us a bit on Healthvision this quarter, I think we can deduce the license contribution with the organic growth numbers you gave, can you help us think about maintenance or services from Healthvision this quarter?

Barbara Doyle

Now, I’m not sure that we can break out that specifically, Steve. It is really a consolidated part of our business overall. We can’t…

Harry Debes

Yes, and I think that is going to happen from now on as well. You know, we’re running it as one company and so it is going to be very difficult for us to give you detailed breakouts of revenue contribution. It is safe to say that it is doing exactly as we expected and it contributed about a penny to our EPS. But having said that, I think I highlighted in my comments that Lawson standalone, without Healthvision, did exceptionally well in Q4, and actually for the year as well. So I think the business was strong and Healthvision is contributing exactly as we planned it would.

Steve Koenig – Longbow Research

Okay, great. All right. Thank a lot. I appreciate it.

Harry Debes

Sure.

Operator

Our next question in queue comes from Peter Goldmacher. Your line is open.

Peter Goldmacher – Cowen & Co.

Hi, guys. Hi, Harry, sorry to keep bothering you on Healthvision, but can you talk a little bit about qualitatively about the cross selling opportunities you had hoped would appear when you announced this deal. I think it is what, six months ago or so now?

Harry Debes

Yes, mid-January. So, we did expect that those would materialize, but as you know, Peter, these pipelines take a little while to get rolling and then for us to close them. We already have signed two deals. The sum of those deals I think was around $400,000 or $500,000 of license value. We have several new and additional deals, several million dollars worth of deals, cross sell deals now in the pipeline, and we expect over the coming months that many of those will close.

Peter Goldmacher – Cowen & Co.

And were these – who led the deal, was it Healthvision bringing Lawson in or Lawson bringing Healthvision in?

Harry Debes

In both of these cases, a Lawson rep brought a Cloverleaf, Healthvision rep into the deal that otherwise that rep at Cloverleaf Healthvision rep would not have had access to.

Peter Goldmacher – Cowen & Co.

All right. And when you talk about your business, you talk about kind of care and feeding [ph] and growth businesses?

Harry Debes

Yes.

Peter Goldmacher – Cowen & Co.

Are there other growth opportunities the you see out there that you are thinking about going after, and I’m sorry to ask a bit of a rude question, are there businesses that you would consider divesting and using that cash to deploy for growth businesses, or you are just thinking about we had relatively steady cash flow businesses that we don’t have to put a lot of time into and we will use that cash to slowly try and grow the growth businesses we have.

Harry Debes

Peter, it is the latter scenario. The earlier part of your question, which was do you see potentially other growth businesses, a portfolio of solutions, and the answer to that question is yes. However, for us the issue is, spreading our investments possibly too thinly over many different industry segments and not doing an effective job to the point that we can be truly competitive against an SAP, or an Oracle or perhaps some other specialty players. So it is a fine line for us to walk. At this point, the segments that we have identified, we know that there is lots of opportunity. It is simply up to us to execute along those lines. I think over time however, it is very conceivable that we could add a few more business segments.

As the economy improves and as we build out our solutions, but when you make those investment choices, sometimes you have to give up something, and that might be growth in one of the areas you are in or perhaps additional dollars allocated from sales and marketing or from development, which puts some short-term pressure on bottom-line results, and you know, right now the Street and our investors look for us to continue to improve on all areas. So, that is a difficult choice to make. We will make the right long-term decision for the company, but for now, we are pretty happy with the business units that we have identified as growth segments.

Peter Goldmacher – Cowen & Co.

All right. Let me just ask you one last question. You guys announced a quarter or so ago that you're going to move into the cloud and run some port to Amazon web services. What's uptake been like on that and how are people using it?

Harry Debes

Well, as I think I mentioned in my remarks, there are approximately 20 opportunities, real opportunities, in our pipeline right now. And as you can imagine some of them are later stage and some of them are earlier stage. But we expect that in the next quarter or two we will sign several deals, and some of those deals are actually quite sizable, which surprised me. I thought that we would probably get the smaller customers to be showing interest in this. But that is actually – and while we certainly have some of that, there are some larger opportunities there as well.

Peter Goldmacher – Cowen & Co.

But, for people using Amazon, are they going to run, are they going to run – are they going to have Amazon run the database or are they just using it for compute power and sharing load? How are they working Amazon into the Lawson solution?

Harry Debes

Well, that is the bundle. And that is kind of the offer that we have put together. It is a bundled offer, which includes our products, our managed services, and the Amazon hosting cloud offering, as well as some value-added solutions – proprietary value-added solutions that we added to the mix to enable the software to work in this environment. And so we have created a bundle. It is in the menu where you choose x and y, and r. We create the bundles, which we think make this offering particularly attractive.

Peter Goldmacher – Cowen & Co.

Got it. Okay, thanks guys.

Harry Debes

Okay.

Operator

Our next question in queue comes from Richard Williams, and your line is open.

Barbara Doyle

Hi, Rich.

Harry Debes

Richard, are you there?

Richard Williams – Cross Research

Hi, can you hear me?

Harry Debes

Yes.

Richard Williams – Cross Research

Sorry about that. Could you give us a little bit of color on Asia? Just whatever you can give?

Harry Debes

All right. Well, actually Asia has not suffered the same recession or at least has come out of the recession quicker from our perspective than say first the US and then secondly Europe. So our business in Asia is actually quite robust even though in the whole it is only 5% of our total worldwide business. Nevertheless, our business in Asia last year was very strong. In fact, I think we signed the largest deal – of the year was signed in the beginning of the second quarter in Asia.

And that deal is going well. It is a multi-year implementation, but that deal is going well. I’m going to be visiting that customer in August. And we have also signed significant other deals. We have also increased our sales headcount in Asia. You know, two years ago we had about 10 or 11 AEs. I believe today we have about 27 or 28, and we’re planning to continue to increase our headcount there. So, Asia seems to be from an economic perspective buoyant, and from our sales perspective, and importantly from our margin perspective doing actually quite well.

Stefan Schulz

Rich, to further Harry’s point, we saw revenues grow by about 10%. To Harry’s point, the economy hasn’t been affected there as much as it was in the rest of the world.

Richard Williams – Cross Research

And how about M3 sales in Latin America? Any color there?

Harry Debes

Not much is going on there. We have some business partners down there. In fiscal 10, we did sign a couple of new accounts. But we don’t have a large direct presence there, Rich. And once again it is a question of focus, you know, where are you going to put your time and energy and money and resources. We can’t be everywhere, and we have decided that there are better places for us to make our investments.

Richard Williams – Cross Research

Makes sense. Thank you very much.

Harry Debes

Okay.

Operator

Our next question comes from Neil Herman. Your line is open.

Neil Herman – Herman Advisors Inc.

Hi, good evening. A couple of questions, you previously talked about sales headcount growth. Could you kind of talk about what your thoughts are there, where you are, are you still planning to grow your sales headcount? Secondly, if you could talk a little bit about the competitive environment, what changes you're seeing, who you're still running up against primarily? Thirdly, it kind of sounds like that other than currency issues, Europe pretty much remains business as usual, although you are assuming a bit lower conversion rate. Is that the way that we should be thinking about it and then fourthly, if you could kind of give us a little bit more detail about what you see in terms of your overall pipeline of business?

Harry Debes

All right. So let us begin with the headcount. So at the end of the year, the traditional Lawson started with 171 AEs, and then we added 11 AEs from Healthvision, so that is 182. I’m a little disappointed in that headcount. Frankly, I was hoping that we would be closer to 200 AEs, but we had some employee action, some terminations for2 nonperformance that we usually do near the end of the year. And we have a hiring campaign under way in Q1. So we do expect that we will be adding AE headcount in the next two quarters to get closer to the 200 position. But again, keep in mind, as you well know that those don’t become productive straight away.

Then you asked about…

Neil Herman – Herman Advisors Inc.

Competitive environment.

Harry Debes

Competitive environment, you know, it is the same group of people that we see traditionally, M3 sees pretty much SAP everywhere, very rarely do they see Oracle, whereas the S3 business sees Oracle pretty much everywhere. And those are the primary competitors. Now, there will be niche players dependent on the vertical segment. For example, in the case of public sector, we see public sector specialists such as Tyler Technologies, as an example.

In terms of Europe, that was your question about Europe, is that right?

Neil Herman – Herman Advisors Inc.

Yes, and Oracle's ad [ph] business was down year-over-year in Europe and you guys were actually up a bit. So, I was…

Harry Debes

Yes. But frankly Europe still remains a challenge. You know that are still headwinds from the economy, and you know, as we can see what is happening in the news about the whole Europe, it is still not as robust as it was a couple of years ago before the financial crisis. So we’re still nervous about Europe and that certainly is factored into our guidance.

And finally in terms of overall pipeline, our overall pipeline has been steady and has been growing slightly. We do know for a fact, however, that the quality of our pipeline is improving and that is because of our greater focus in certain vertical markets. So for example, you can’t put a pulp and paper deal into the pipeline. A pulp and paper customer, I mean, whereas years ago, you can put anything in there that you wanted as long as they were interested in buying software. Right now, we have very rigorous discipline that says if it is not in one of our target market segments, or if it is not an existing customer, you’re not putting that deal into the pipeline.

So, while I can’t say to you that the pipeline has grown 25%, I can tell you that the deals that are in there are really legitimate deals that are attuned to the business markets in which we are targeting. And that gives me higher confidence about the conversion rates that we will see, in terms of pipeline conversion rates, I mean.

Neil Herman – Herman Advisors Inc.

Got you. Great. Thank you very much.

Harry Debes

Sure.

Operator

Our next question comes from Brad Sills, your line is open.

Brad Sills – Barclays Capital

Hi, guys. Thanks for taking my question. Just one on the restructuring, are there any areas outside of consulting for M3 that you're seeing the need for reduction, perhaps disappointing sub-verticals for M3 in Europe?

Stefan Schulz

Yes, this is Stefan. And with the restructuring that we had announced of a 150 to 200 people, I think the largest component of that was in the consulting organization, but to your point, yes, there were other areas that were impacted. I think Harry mentioned some in the field, there were some in other support areas that support the M3 business primarily.

Brad Sills – Barclays Capital

Okay, okay, and then just one on the general industry strength you saw this quarter. It seems like that was probably better than where you'd expected. Was that a one-time thing or is it a response to certain products that you have in a certain vertical, just some color on that would be helpful please? Thanks.

Harry Debes

I hope it is not a one-time thing. I don’t believe it was. I think it took a little while for that business to find its footing. We had some new leadership in there. There were some historical situations that had to be cleared up. I think the team has its act together. It now has a very active customer account executive relationship in place. We went back to some of our long-term customers, and I think I mentioned in my comments that three of our largest deals in the quarter, 3 million dollar plus deals were actually signed with existing customers in the General Industries segment.

So, there is potential there, and we think that there continues to be potential there. In February, for example, we announced the latest version of our M3 product, 10.1, which replaced the former 7.1, which was released in 2007, and so we think that there is tremendous potential to upgrade our customers, I would say that more than half are not on the 7.1 release, and now they have got great reasons to seriously consider 10.1. So in many cases when you upgrade, you also acquire additional models and components. So we think there is considerable potential in General Industries.

Typically, Q1 for General Industries, especially on the M3 side, is muted because you know, again, we keep saying this every year, but during Q1 it is vacation period, our employees and customers are typically not spending a lot of time at the office during the June, July, August period. But by the second quarter, we should see the General Industries start to pick up again.

Brad Sills – Barclays Capital

Got it. Thanks for the help.

Harry Debes

Sure.

Operator

Our next question comes from Mark Murphy. Your line is open.

Brian Schwartz – Piper Jaffray

Yes. Hi, this is Brian Schwartz. Thank you for taking my question; I'm sitting in for Mark Murphy. Most of my questions have been asked and answered. Just had one question on the Amazon cloud services. Harry, you mentioned that I guess you have 20 opportunities there in the pipeline. Just wondering, the opportunities that you're seeing, are these new customers that are looking to procure Lawson or are they existing customers that are looking to deploy certain apps through your cloud services and SaaS or maybe a mix between the both?

Harry Debes

85% are new.

Brian Schwartz – Piper Jaffray

85%, great. That's all I have. Thank you.

Harry Debes

Okay.

Operator

Our next question in queue comes from Brian Murphy. Your line is open.

Brian Murphy – Sidoti & Company

Hi. Thanks for taking my questions. I just have a couple of real quick housekeeping questions. Stefan, just in terms of CapEx in fiscal 2011, can we look for that again in sort of the $19 million to $20 million range?

Stefan Schulz

You know, Brian, I think it will be slightly under that. You know, a lot of the investments in the infrastructure are winding down from the last couple of years. So it would be a couple or $3 million lighter than that.

Brian Murphy – Sidoti & Company

Okay, great. And Harry do you happen to have the number of AEs at the end of fiscal 2009?

Harry Debes

Yes, I do. And I believe it was close to the same. Let me just get it for you here. It was 172, which is pretty close to what the Lawson’s, traditional Lawson head count was. However, I will tell you that for most of 2009. the AE head count was actually north of 172. It was in the 180s range for the vast majority of 2009. In fact, it started off, I think it started off significantly higher, and then declined over the year.

Brian Murphy – Sidoti & Company

Okay, got it. And then I think you mentioned that your sales headcount is up, so you're up 15 to 20 heads in Asia. How do we think about the balance there on a year-over-year basis? Meaning, are you down a similar amount in Europe right now?

Harry Debes

Yes, that is correct.

Brian Murphy – Sidoti & Company

Okay, thanks very much.

Harry Debes

Okay.

Barbara Doyle

All right. Operator, we are at the top of the hour, so I think we have time for just one more question.

Operator

And our final question in queue comes from Mark. Your line is open.

Mark Schappel – The Benchmark Company

Hi, good evening. Just most of my questions have been answered, but just one question for you Harry. With respect to the recent headcount reductions in the M3 business, was there a particular reason why you chose to make those cuts now versus say six months or a year ago? Was there something you saw in your business that just gave you some concern or something you saw in your pipeline?

Harry Debes

Well, I mean, you make them when you have better visibility. Six months ago we, I guess, didn’t see – our forecast wasn’t as clear, and we saw that in Europe there continued to be economic headwinds, as I said before, that certain parts of our business were not responding as we expected. Also, however, I would say that we have also had real strength in our partner community, which is kind of part of the plan by the way. As we have said we are going to downsize our consulting headcount.

We couldn’t really do that when our partner community didn’t exist. So as our partner community has been created and strengthened, you know, many of these people that are leaving are actually joining business partners, and so that gives the customers an opportunity to continue to work with them. But in certain cases, frankly, the persons that are leaving weren’t meeting our utilization objectives.

Mark Schappel – The Benchmark Company

Thank you.

Harry Debes

It is not that they weren’t working. But they just weren’t meeting our utilization objectives. And you know, you give it a try, you do some coaching, you do some training. If it still doesn’t work, at some point you got to make the call. So it shouldn’t be a surprise to you, I said that our S3 business is doing the 28% margin, but yet our overall company is not at that level. So, you can see that the M3 business still has a long way to go before we catch up there. And you know, the consulting side of the M3 business was hurting us the most. So we had to balance our cost with our revenues.

Barbara Doyle

Okay. I think we’re done with questions here. Harry, do you want to make any…

Harry Debes

All right. Thank you for joining us today. As I think hopefully the message came across, we feel very good about the continuous and sustainable improvements that we have achieved over the last five years. I think FY ’10 was a great result. I thank again our employees and our customers for their hard work and commitment. I thank the members of my team for doing a great job. Q4, in fact we delivered better results than most people expected, and in terms of our guidance, you know, I will just reiterate our philosophy. We’re going to give you guidance on numbers that we can make.

Stefan talked about our ability to deliver on our promises and the commitments. That is important to us. It is an important company value, and that is something we want to live up to and continue to do. So when we give you a number, you can put it in the bank. Thanks to everyone. See you next quarter.

Operator

This does conclude today’s conference call. Please disconnect your lines at this time.

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Source: Lawson Software, Inc. F4Q10 (Qtr End 05/31/10) Earnings Call Transcript
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