Barbara Doyle – VP, IR
Harry Debes – President and CEO
Stefan Schulz – SVP, Finance and CFO
Ajay Kasargod – Morgan Keegan
Brian Schwartz – Piper Jaffray
Steve Koenig – Longbow Research
Richard Williams – Cross Research
Brad Sills – Barclays Capital
Mark Schappel – The Benchmark Company
Neil Herman – Soleil Securities
Lawson Software (LWSN) F1Q11 Earnings Call September 30, 2010 5:00 PM ET
[Operator instructions.] I would now like to turn the call over to Barbara Doyle, vice president of investor relations. Thank you, you may begin.
Thank you operator, and good afternoon to everyone on the call. Welcome to our fiscal 2011 first quarter conference call. This covers our results for the quarter ended August 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. After completing our prepared remarks we will take your questions as the operator described.
Before we begin the call, I would like to inform you that we have made some minor changes to our reporting segments for fiscal 2011. At the beginning of fiscal 2010, we aligned our business around our vertical markets. We did this in order to gain more insight into the businesses.
We reported our results using three segments in fiscal 2010, S3 industries, M3 industries, and General industries. This year, in fiscal 2011, we've refined our structure, and now have two reportable segments, S3 industries and M3 industries. There is no longer a separate general industries segment.
The services industries unit is related to services industries and is now a part of the S3 segment. The manufacturing and distribution unit is now a part of the M3 segment. Both services industries and manufacturing and distribution were previously reported under general industries in fiscal 2010.
So our S3 segment this year is comprised of our customers in healthcare, public sector, and other services industries. Our M3 industry segment this year is made up of customers in manufacturing and distribution, equipment service management and rental, and consumer products. Consumer products was formerly our food and fashion verticals, which have been combined into this new consumer products unit.
This is an organizational change that we expect will result in more efficiency. There has been no change at all to our management strategy for each vertical. So you will see this change in our segment reporting in our 10-Q that will be filed before October 7. The segment information we post on our investor website at www.lawson.com/investor has also been changed to reflect these new segments and it reflects the new segmentation back through 2010. So some of our comments today will highlight these new segments.
Now let me review our Safe Harbor statement before we get to our prepared comments. We remind you that the call will include forward-looking statements, which are subject to risks and uncertainties. They contain statements of intent, belief, or current expectations of Lawson and its management. Such forward-looking statements are no guarantees of future results and involve risks and uncertainties.
Our SEC filings contain further information about risk factors that could cause actual results to differ from management's expectations. We do not obligate ourselves to update forward-looking statements for circumstances or events that occur in the future. I would also like to remind you, finally, that in addition to reporting financial results in accordance with Generally Accepted Accounting Principles, we report non-GAAP financial results, and our remarks today will focus on our non-GAAP results, unless it's otherwise noted. Discussion of our use of non-GAAP results, as well as a detailed reconciliation of non-GAAP to GAAP, is included in our press release.
I will also 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.
Thank you Barbara, and good afternoon everyone. As usual, I will begin today's call by commenting on our Q1 business performance, and then our CFO, Stefan Schulz, will cover financial results and the guidance for our second quarter. Then I'll wrap up the call with some closing comments and we'll take your questions. So let's begin.
Overall, Q1 was a strong quarter and a good start to our fiscal year. On a non-GAAP basis, total revenues were $177 million, and earnings per share were $0.11. Both of these metrics increased year-over-year. There are three things in particular that I would like to highlight from Q1.
First, we had 21% year-over-year growth in software license contracting. Second, non-GAAP maintenance revenues increased by 12%, boosted by Healthvision, and strong S3 renewals. And third, it was another strong quarter of operating margin performance with non-GAAP margins of 17%.
Now let's take a closer look at contracting and sales performance. As a reminder, the term "contracting" means the dollar value of all software licenses signed during the quarter. We had solid sales performance with $21 million of contracting. This is a 21% year-over-year increase, and I'd like to provide some color by segment.
First let's talk about our S3 segment. S3 software license contracting was up 38% year-over-year. Six of our top ten largest deals in the quarter were S3 deals. Healthcare continues its strong performance with contracting in healthcare up 16%, and that was excluding Healthvision. When you include Healthvision, healthcare contracting was nearly double last year's results. Healthcare is one of our strategic growth areas, where we are hiring aggressively. In fact, we hired seven sales executives in healthcare during the quarter, including four dedicated to our Healthvision solution.
In the public sector, we had a key win with the City of Nashua, in New Hampshire. The city purchased our full ERP suite for public sector, which includes Human Capital Management, Financials, and Supply Chain Management.
We also continue to see increased traction with our Human Capital Management solutions. As planned, HCM is becoming an increasingly larger part of our product sales. HCM solutions sales drove more than 25% of our total contracting in the quarter, and here are a few deals that illustrate this point.
Our largest S3 deal was an HCM standalone deal with Fairview Health Services, based in Minnesota. This deal exceeded $1 million of software licenses. Fairview is a new Lawson customer who purchased our HR and Payroll suites, replacing an Oracle solution. We won this contract in an otherwise all-Oracle shop.
Two other new customers, CareSource Management Group and Lowe's Corporation, purchased our full Talent Management solution in the quarter, and our largest deal with an existing customer was an HCM sale to Reading Hospital and Medical Center in Pennsylvania.
As we've been saying for some time, Lawson is a significant contender in the human capital management market. We have more than 1,000 customers using our HCM solutions, and revenue from these solutions now exceeds more than $100 million annually. Yesterday, we issued two press releases which highlighted the success of some of our newest offerings, and these were at customers J.R. Simplot Company and Hillsborough County Public Schools in Florida.
And projects like these get people's attention. I'm proud to report that in a new independent Forrester research paper dated September 24, 2010, Lawson is listed as both a leader for human resource management systems, and an innovative "player to watch" for talent management. Our vision for this market, and now our execution on the delivery and implementation of that vision, are gaining us this valued industry recognition. That increased visibility and credibility will lead to more sales.
Let me also give you an update on Healthvision. Q1 software sales of our Healthvision solutions were in line with our expectations. In addition, our pipeline for these products has increased significantly as we continued to build and integrate our sales teams.
We signed more than 40 Healthvision deals in Q1, including key wins at Yale New Haven Health System, University of Washington Medical Center, and Fremont Area Medical Center. Yale is a current Lawson ERP customer, and they purchased Cloverleaf. Fremont Medical Center and the University of Washington are new Lawson customers. Fremont purchased HIE and Washington purchased Cloverleaf.
Cloverleaf continues to be the leading solution in healthcare integration and our Health Information Exchange solution is gaining real traction in a market that seeks to link doctor and patient data. So overall we continue to feel very good about this acquisition.
So to wrap up the section on S3, the bottom line is that in S3 we're not only achieving our sales and have strong maintenance renewals, but that business continues to be very profitable. Operating margin in our S3 business in Q1 was nearly 25%.
Now let's move on to our M3 business. In M3 we saw some notable pockets of improvement in the quarter, and here are some of the highlights. M3 contracting increased 4% year-over-year, led by the consumer product verticals and our Asia-Pacific region. Four of our top-10 largest deals in the company this quarter were M3 deals, including two equipment service management and rental deals.
Lawson's single largest deal in the quarter was an M3 ESM&R deal with [unintelligible] Equipment, a new Lawson customer. One very bright spot was our Asia-Pacific region, where contracting tripled year-over-year, driven by ESM&R and Fashion. Overall, Asia-Pacific accounted for 6% of our total revenues in the quarter.
And finally, we're also seeing improvements in M3 operating profitability, which was positive territory in Q1 at 3% margin, compared to a negative 2% margin in Q1 of last year. We still have plenty of opportunity to improve our M3 margins, but Q1 is a good start compared to last year, especially when we take into account the high vacation period in Europe, which negatively impacts our first quarter every year.
So in summing up our M3 results, I would say that while we're not where we want to be, we are clearly making progress. And now I'll hand the call over to Stefan for his comments.
Thank you Harry, and good afternoon. I will review the financial highlights from our Q1 results and provide guidance for our second quarter. As a reminder, my comments will reference our non-GAAP results.
As Harry discussed, we reported strong results in Q1. Our continued focus on our target markets and operational discipline allowed us to report an operating margin and EPS that are the highest in any Q1 in our company's history. Operating margin of nearly 17% continued our consistent trend of expanding margins.
The impact of foreign currency fluctuations had a minor impact on our year-over-year results, which we detail in our press release. However, foreign currency rates did change a bit since we gave our guidance three months ago. The euro appreciated 4% and the [SEK?] 5% during this time, which lifted results above our guidance. Without this uplift from currency, our revenues would have been at the top end of our guidance range, and EPS would have been at $0.10 per share.
Now I'll move on to other key financial metrics on the income statement. As Harry mentioned earlier, our license contracting grew by 21%. However, the growth in licensed contracting did not result in growth for license revenues this quarter. Our Q1 license revenues were $24.5 million, which is a decrease of 6% compared to last year.
This decrease was expected, and we signaled this decline when we gave our Q1 guidance in July. As many of you recall, we implemented a targeted sales campaign called the VIP program in Q4 of fiscal 2009, which was designed to encourage customers to purchase software during the depths of the recession. This program was very successful, and drove significant contracting activity in Q4 of fiscal 2009.
Due to certain terms and conditions in the VIP program, approximately $4.5 million of the contract value was recognized as license revenue in Q1 of fiscal year 2010. If we adjust for the impact of this $4.5 million in Q1 of last year, we would be showing 14% year-over-year increase in license revenues, which is more in line with the Q1 contracting performance.
So the year-over-year decline in license revenue was more about the timing of revenue recognition and less about the sales activity. The growth in deal volumes disclosed in our press release, along with the contracting growth in Q1, is solid evidence regarding our ability to attract new customers and our ability to offer new and innovative solutions to our existing customers.
Non-GAAP maintenance revenues of $96.1 million increased 12% year-over-year. In our maintenance business we see some very encouraging trends. First, Healthvision is making a positive contribution to our maintenance revenues. The strong customer base and recurring revenues were attributes we liked in the Healthvision acquisition.
Even excluding Healthvision, however, our maintenance revenues increased by 4% year-over-year, which brings me to the second key point about maintenance. We are seeing the benefit of very strong results from our Americas maintenance renewal cycle that we completed in Q1. The Americas renewal cycle is comprised primarily of S3 customers with an annual contract renewal rate date of June 1.
We achieved a record renewal rate of 96% for this cycle, significantly higher than the 92% renewal rate last year. We believe that this is a world-class renewal rate and it points to the value that customers see in Lawson's customer support, the strong execution of our maintenance team here at Lawson, and an improving economy compared to last summer. The high renewal rate and timely payments from many customers puts us in a very good cash position to begin the fiscal year.
Lastly, we also had about $600,000 of maintenance revenue that was recorded in Q1 related to win-backs from both S3 and M3 customers. This is a benefit to the quarter as we recognize the catch-up revenue that customers pay to get back on maintenance. As $600,000 of catch-up revenue won't be repeated of course, but the recurring benefit from these win-backs allows us to maintain a strong maintenance revenue stream going forward, and it reflects the value that customers see in Lawson's products and support. Maintenance margin of 83% was flat compared to the prior year, so needless to say we are very pleased with the results in our maintenance business for this quarter.
Consulting revenues of $56 million were down 3% year-over-year. Over the past year and a half, we've worked to right size the services organization to the appropriate level we feel meets the demand for the market. Compared to a year ago, we have approximately 100 fewer billable consultants, and that is the primary driver for the year-over-year decline in services revenues. The decline in revenue occurred mainly in the M3 business, where the majority of the restructuring took place.
Our Q1 services margin was 9%, which was down compared to the 11% reported in the first quarter of fiscal 2010. Consulting services margin is traditionally low in the first fiscal quarter, and our first fiscal quarter in 2011 was no different.
The summer vacation schedules of our customers and our employees, especially in Europe, caused our revenues to decline and our margins to decline as well. Also, the recent restructuring announced in the fourth quarter negatively impacted our first quarter margin, because many impacted services employees were still in place for a large portion of the first quarter.
We expect the services margins to improve sequentially, to be 15% or better in the second quarter. Because of the strong growth in our maintenance revenues year-over-year, our services as a percent of total revenue was 32% compared to 34% last year. This shift in revenue mix drove a higher gross margin of 61%, which was up 170 basis points from last year.
Now, moving down the P&L, our operating expenses were $79 million, and that is up 6% year-over-year. Approximately half of the increase was due to the acquisition of Healthvision, and the remaining increase resulted from $2 million of one-time costs incurred in G&A during the quarter. We have, and will continue to, keep a watchful eye on our operating expenses as we go forward.
Now, on to some key balance sheet metrics in cash flow. Our balance sheet remains very strong, with $344 million of cash and investments, and a net cash balance of more than $100 million. In typical fashion, we reported a net use of cash from operations during the quarter. Cash used in operations was $38 million, compared to $21 million of cash used in operations in Q1 of last year.
The higher net use of cash this year was primarily driven by the lower maintenance collections in the quarter, compared to the quarter one collections last year. As we discussed on our fourth quarter call in July, we collected approximately $30 million more in cash from our Americas renewal cycle in Q4 than we have historically done. So the lower maintenance cash collections in Q1 are not a concern, as we had already banked those collections before June 1. We still expect fiscal 2011 free cash flow to approximate the $134 million in free cash flow generated in fiscal 2010.
Total deferred revenues at the end of Q1 were $273 million, down from $328 million at the end of Q4. The sequential quarter decrease is typical for a Q1, and is also caused by our maintenance renewal cycle where deferred maintenance revenues peak in the fourth quarter. Compared to the prior year, total deferred revenues increased by $16 million, driven by the strong maintenance renewals we experienced in the Americas renewal cycle that ended in Q1.
And finally, turning to guidance, GAAP revenues for Q2 of fiscal 2011 are expected to be between $184 million to $189 million. And we anticipate total non-GAAP revenues to be in the range of $185 million to $190 million. GAAP EPS in Q2 is expected to be in the range of $0.04 to $0.05, and non-GAAP EPS is expected to be in the range of $0.11 to $0.12.
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 during September. A detailed reconciliation and explanations between GAAP and non-GAAP results are located in our press release and is available on our website at www.lawson.com/investor.
That concludes my comments, so I'll turn the call back to Harry.
Thank you Stefan. So as you can see, Q1 was clearly an excellent quarter for Lawson, but no one measures a business on only one quarter's results. One looks for predictable and sustainable improvement over time and that's exactly what we have been delivering. Consistent execution and performance, regardless of the challenging economy, has been a critical focus for us at Lawson.
Q1 was our eighth consecutive quarter of delivering earnings per share results at or above our guidance. It also marks the 12th consecutive quarter where we have delivered a year-over-year increase in our non-GAAP operating margin.
And over the last five years, non-GAAP operating income has increased by a compound annual growth rate of 27%. And at 17% we just delivered the highest operating margin in any quarter in the history of our company. And, we did it in our seasonally weakest quarter. That's an accomplishment.
And for that I want to thank the many employees and business partners and customers for their continued commitment and support. And to our shareholders I would say this, while the company is now stable, financially strong, and predictable, I am very confident that there is still plenty of opportunity to grow our revenue and our earnings in the quarters and years ahead.
Operator, that concludes our comments. We're ready to take some questions.
[Operator instructions.] Ajay Kasargod, please state your company name and you may ask your question.
Ajay Kasargod – Morgan Keegan
The first question was looking at the license bookings number, and this really actually is extrapolating and looking at the mix. If I look at it correctly, about 30% of new license bookings came from new customers versus existing. If my math's correct, Harry, just comment, is that the right level where you want to be? Do you think that the mix could be greater with new customers as you look forward into this year?
The truth is that we have ranged between 25% and 40% over the last couple of years now, and so that range, I would say, 30% to 35% is probably the right number. And that's something that we probably would be comfortable with.
And then just looking - to make sure I have an apples to apples comparison - when you had that $21 million of contracting in the quarter what was the growth rate of that contracting number excluding Healthvision, just so we can understand the organic core loss, or prior to Healthvision, loss in the bookings rate.
We don't break that out, Ajay, but I can tell you it's - we still would have grown organically with or without Healthvision.
Okay, and then just a last real quick question and I'll turn it over. I know you talked a lot about the success you're having in the healthcare vertical. Can you talk to us about the public sector's environment in terms of what spend has been like and what you expect it to be as part of your guidance?
Sure. The public sector has been a strong vertical for us. It was last year, and it continues to be this year. As I mentioned in my remarks, we are seeing real traction, particularly with our HCM solution. That's true not just in public sector but also in healthcare. I noted, for example, the Hillsborough County School District, which purchased our HCM solution, and also the City of Nashville, which also acquired our HR solution. So we still think that the spending there is robust. The opportunities are plentiful, and we believe that the public sector business is an integral part of our strategy moving forward.
Mark Murphy, Piper Jaffray, your line is open.
Brian Schwartz – Piper Jaffray
Hi, this is actually Brian Schwartz for Mark Murphy. Harry, I was wondering if you could just give us a little more color on what's going on with the business conditions over in [AMIA]. It looks like the revenue was down year-over-year. I don't know if that was all FX related or not. Just wondering if we could get some more color.
First of all, on the revenue side, the only thing that's down is services revenue, and as we've been saying for some time, that's not an accident. We have been consciously adjusting our mix to reflect, first of all, a desire on our part to be more a software company than a services company. If you'll recall, several years ago, approximately 47% of our total revenue was services. That had pressure on our margin. We didn't feel it was the right mix. We also didn't have a robust business partner strategy, so over the last couple of years we've been downsizing our services organization. In fact, the last such downsizing happened in our May and June restructuring and since that time we took out an additional 100 persons out of our services organization. When it comes to license and maintenance, in the M3 business in Europe - and we actually had a pretty strong quarter - however, I will tell you that Europe still is a difficult and challenging environment when it comes to macroeconomic conditions. So it's tough. We're fighting for every dollar. But I want to make sure you have the right perspective on what was down. It wasn't software. In fact, software was up. Contracting was up, maintenance is steady. It was services. And that was down year-over-year, but we expected it to be down.
And a question for Stefan. Just trying to understand the guidance. Some of the business metrics are pretty good here in the quarter with the license contracting growing 20% and such. But if I do take the guidance for next quarter - the Q2, the $1.85 to $1.90 - it looks like it's certainly a slower sequential growth than you've done in the past few years from the Q1 to Q2. And possibly one way of inferring that is looking at what you did last year and adding in contributions from Healthvision this year that the guidance would be below what you did from a revenue standpoint in Q2, which could maybe mean that that may be the business is just kind of stable here and not quite accelerating from the core side. So I'm just trying to reconcile that and just wondering if maybe there is just a level of conservatism that you're using in forecasting next quarter.
That's actually a good question. When we look at the numbers of what we provided guidance on and compare that to last year, I can see how you'd come up with that logic. But the one thing that's taking place and it's very similar to what Harry was explaining as he talked about the market in Europe, and that is our services revenue is expected to decline year-over-year, and that's offsetting the growth that we're going to see from a license and maintenance perspective. So when you look at that software revenue line item, that will grow as a part of our guidance, and the services component will decline. And I think that's probably what's taking you off track when you look at last year plus the Healthvision acquisition to get to our guidance.
In fact I would say that as we look at most analyst models, they generally are more optimistic or aggressive on the services line than we are.
So the rest of you who are maybe thinking the same thing because that was an excellent question, the difference is not in software, it's not in maintenance. It has nothing to do with Healthvision. It's in services.
Well, that's helpful, and certainly we'll always trade services revenue for license and maintenance revenue. So that's good to hear. Speaking of revenue recognition, I just wanted to kind of follow up on some of the large Caterpillar deals that you signed up with the dealership last year. Just wondering the expectation is that those deals will - customers will start going live and we'll start seeing some of the revenue flowing through the model.
Well of course some of them are live already. We've been live with Zeppelin for a couple of years now in Europe. We've been live with Hewitt in the U.K. for at least a year, year and a half. Some of the other deals in North America, the next one I think is going to be going live in January and then a few more going live in late spring, early summer of next year.
Great, and then just a quick metrics question for Stefan. Just wondering what the ending headcount was for your sales reps and what you think the ending fiscal year count will be.
The ending headcount for AEs was 183 at the end of this quarter, and we're targeting 200 to be the headcount number at the end of the year for AEs.
Steve Koenig, from Longbow Research, your line is open.
Steve Koenig – Longbow Research
Wanted to ask just a couple things here. Looking at the sales hiring, you said you hired seven in healthcare, four of which were Healthvision, but it looks like you had a net gain of one for the quarter, so was the seven that you hired in healthcare, was that gross or net?
Okay, so you had some minor attrition in the quarter, brings me down to the 183.
That's correct, and that's normal.
But I would also say that we are net up in healthcare, from an AE perspective, and we're going to be down in other areas where we don't see the same level of growth that we would, say, healthcare or human capital management, etc.
Sure, but the whole message for segmenting our business into the strategic verticals, the strategic verticals where we believe there is plenty of runway and plenty of growth in the future, that's where we're making our bets. That's where we're making our investments in product, in marketing, and also in salespeople of course.
So we should see an acceleration on the net sales headcounts as we move forward here next couple of quarters is what I'm guessing?
That was the last question, which was what do you expect to end the year with, and we think it's about 200 AEs or so at the end of the year.
If I could turn to the conversion on license contracts. Was the conversion rate kind of in line with - I know Q4 was pretty high - was it kind of back to normal levels?
No, it was high again. It was right at 90%, and so this is the third quarter in a row where we've seen good, healthy conversion rates from our contracting. And to your point, that's kind of different than what we had several years ago, or several quarters ago, and a number of reasons for that, but probably one of the biggest ones is the focus in our strategic vertical of producing and providing products that are good, out of the box, for the industries we serve. They require less customizations, less services, and consequently higher conversion rates. So that's really been a benefit, and something we've seen over the last three quarters.
We're also doing a lot less fixed-price contracts these days. That's another factor. But we never expected to be at a 55% or 60% conversion rate forever. We knew that it would take some training, some education, some orientation, and some adjustment to how we've positioned and sold our solutions. But it was always our plan to get a much higher conversion rate, so we're just there now. Now I can't tell you that it's going to be 90% every quarter. I think that number's going to be volatile, but it could well be in the 75% to 90% range for many years to come now.
Would that be affected by, say, a large ESM deal, for example?
Yes, absolutely. But once again, just to Stefan's comments, as we get better at these ESM deals and we continue to build out the product, we believe that future transactions will be less services intensive because we'll meet the needs of our customers out of the box more than we have in the past.
A good example? Our most recent seven-figure ESM&R deal was converted in the quarter it was signed.
There you go.
Remind me which quarter that was Stefan?
That was this quarter. Okay. And lastly, and then I'll turn it over to the next caller. On Healthvision, you provided some good color on organic maintenance with and without Healthvision. Do you have that kind of color on the other line? And if not can you give us some sense of are we still expecting $60 million to $70 million in revenues for the year, $0.06 to $0.07 accretion?
So to answer your question, the reason we break out maintenance was because it did have a pretty significant impact to the growth. On the other line items it wasn't as much of a factor. So we're not breaking it out, but to a point I made earlier, our license contracting would have grown regardless of whether Healthvision was in that figure or not. And so to your other question of whether we're on track to the $60 million to $70 million, yes we are.
Healthvision is doing exactly what we said it would do on the day we announced the deal, which was in January of 2010.
And are you guys still looking at about $0.06 to $0.07 accretion?
Yes. That is correct.
Richard Williams, from Cross Research, your line is open.
Richard Williams – Cross Research
Just wondered if you could lead me through, by geography, in terms of business conditions, any changes that we've seen in the last couple of quarters?
I would tell you that having spent a good part of August in the Asia-Pacific region, that region has rebounded quickly and strongly. We all read in the papers what China's doing, GDP is close to 10%. In Australia the economy is strong. Unemployment is less than 5% and business is robust. That's true for the Southeast Asian region as well. And I think that accounts for why we had a very strong quarter in Asia-Pacific. People are generally feeling positive. In the U.S., as you probably know, it's pockets. It's by industry. Certain industries are doing well, others are not. In Europe, as we head further east, it's a little bit more depressed still. Times are tougher, and we haven't seen a recovery yet.
It's interesting though. When I do my [unintelligible] adjusted geographic numbers it looked to me like Europe was quite a bit stronger, strongest of all three.
Well, I'm giving you what we see from a demand perspective.
Brad Sills, from Barclays Capital, your line is open.
Brad Sills – Barclays Capital
You mentioned strength in human capital management, strategic HCM, could you just comment, a little more color on where that's coming from? Is it just this kind of trend we're seeing in investment in talent management solutions? Are you getting strength on selling HCM in to the install base, maybe into M3 for example?
It's coming from all of our business segments, so we're selling it into our growth segment and into some of our lower growth segments. We're selling it in new deals and we're selling it to existing customers. So I will tell you that we're very pleased with that. Now in addition to selling it into those segments I've just talked about, we've also created recently a new, dedicated, new business team that sells only HCM to non-Lawson accounts. It's a straight competition against, say a Taleo or a Workday or SuccessFactors, etc. And we've had some good success there. And in fact the Simplot deal that we have a press release out about, they signed about nine months ago. They went live recently. That was not an existing Lawson customer for any reason. It was a straight deal where they were shopping and comparing HCM offerings from a number of different vendors. And we have a number of those that we sign every single quarter. So it isn't just Lawson customers that purchase this. It's across the board.
And then just one on the consulting margin. Down year-over-year for the first time in a few quarters here. I know you mentioned some seasonal softness in Europe just due to summer vacations, but was there anything else going on there? Was it just worse than you expected in terms of the demand? Though the revenue was strong. So maybe just some commentary on what you saw there on the margin side?
Let me start and then I'll ask Stefan to elaborate. First of all, we made an announcement of a restructuring of reducing headcount of about 100 persons. Most of those were in Europe, and that restructuring was announced at the end of May, early June. You don't just announce a restructuring in Europe and then people leave. You actually incur the costs of those personnel for several months. But I will tell you once they know they're leaving their productivity is pretty low. And so we had the costs but we didn't have the benefit of their full attention. That's going to be largely behind us now, and so the people we have will be focused on doing their jobs. Stefan anything you want to add?
No, I think you hit the nail on the head with that one.
Mark Schappel, the Benchmark Company, your line is open.
Mark Schappel – The Benchmark Company
Harry, I was wondering if you could provide some additional color on how the cloud subscription products did in the quarter?
We didn't comment on it only because at this point we didn't have significant transactions to discuss, but I will tell you I think that will change very shortly. As you know, we made those announcements in spring, in the April time frame in particular. We put together an organization, and we have developed a very significant pipeline and we are on the verge of signing a number of cloud transactions, both existing customers and also brand new customers who find our offering very appealing. So if you can just hold on to that thought for another 90 days, I think I'll be able to tell you some really great stories this time next quarter.
Okay, I'll be patient. And then as a follow on to an earlier question on the public sector, Lawson has always been very strong in the K-12 education market, and I was wondering if you're beginning to see any effects of budgetary pressures in some of the local school districts out there.
Not yet. We read the papers and we understand what's going on in the public sector and we know that there was stimulus money directed in that way, but I will tell you one of the fascinating stories that I've been watching is this New Jersey school district that just got this money from the Facebook guy. So about six, nine months ago Hillsborough County Public School Systems in Florida received a $100 million grant from the Bill and Melinda Gates Foundation to upgrade their school systems because they were nervous about the performance of their schools. They were not tracking very well relative to other schools, and they realized that one of the things they had to do was a better job of monitoring the performance of their teachers. So the very first dollar they spent of the grant money was the acquisition of the Lawson Talent Management solution. And they went live in less than five months and are a reference account for us. And by the way there's a lot of - on NBC news in the last week they've been doing a lot of stories about the focus on education and the need to improve performance in our schools and if more money flows into those school systems to improve performance and hold people accountable I think that we have a great story to tell here and I wouldn't be surprised if some other school systems have been watching Hillsborough and are going to track their performance and see if this really makes a difference. And if it does, I think we have a great opportunity in the future.
And then just finally here, I see that R&D spending ticked down in the quarter. That was a little bit of a surprise. Was this due to anything in particular?
No. It's not due to anything in particular at all. We did have some year-end incentives that were paid out a little late last year that went into that, but other than that, no. There's not really a big reduction in headcount.
Our last question comes from Neil Herman from Soleil Securities. Your line is open.
Neil Herman – Soleil Securities
Quick couple of questions. Have you found that your primary two competitors in the marketplace have changed in any way, particularly given - clearly both of them have made sizable acquisitions for each one of them, and I was wondering if you're seeing anything new, interesting, or different from them in the marketplace. Or have they been somewhat defocused given these acquisitions? I'd love your thoughts on that. And then as a followup if you could give your sense in terms of your expectations in terms of what you expect to see going forward from a consolidation perspective in the applications space as well.
On your first question, are Oracle or SAP distracted by the acquisitions? Probably at the corporate level they are, but the guys that we compete with are not the guys in Waldorf or Redwood Shores in the corporate office. We compete against the salesmen and the sales managers who are in the regional offices and they're still thinking about making their quotas as are our people. And so at this stage we haven't seen any real changes in behavior. Do we monitor their conferences? Like, do we monitor their Oracle conference to see what their announcements are? Absolutely. And we take a look at that and if we find any of it threatening or what are we going to do to counter some of these [unintelligible], yeah, sure. And you would expect us to do that, and we do that regularly. We want to know what our competitors are doing, what they're about, and how do we counter any moves that maybe we see as strategic or important. At this stage we don't see anything related to Sun on the short term horizon that will impact us, and we don't see anything related to Sybase that will impact us. So at this stage we're really not concerned about those acquisitions. The CEO, CFO, and a couple of senior execs are distracted, that could be, but I think the salesmen on the ground are not.
The second question, which I think you asked about consolidation in the software industry. Yeah, I think that will probably continue for a while. I think the hot consolidation space these days is the human capital management space. Just look at the number of acquisitions or consolidations that have taken place in the last year. There must be a dozen or more. And that's not uncommon in a segment that's pretty hot, where a lot of companies have started up in the last four or five years, and some of them are small, and some of the larger ones now are trying to fill out their solution portfolio. So I think that's what they're doing there, making acquisitions to enrich their product sets. Of course, when you make acquisitions like that, you have integration issues, which you try to cover up with fancy GUIs, but that's a problem for another time.
Oracle has made a lot of noise about Fusion. I'm wondering if you're actually seeing it competitively in the marketplace and does it change the equation in any way with regard to the way in which you compete against them?
I'm probably the happiest person on the planet that Oracle has finally announced Fusion. I've been waiting for this for five years. Because they've been talking about it for five years. So I'm really glad to see that they finally announced it. In terms of are we seeing it today, no. We are not. In fact I think that they said they wouldn't start really shipping it in any sort of volume until the first quarter. But you know, I've been around the software business for a long time. I know what version one of software looks like. It's going to be high level, it's going to be generic. It won't be particularly vertical. And then maybe by version three, four, or five, they'll get their act together and make some success.
Secondly, I think it's going to be a generic solution rather than a vertical solution, and our story's all about verticals. And the third point is that if Oracle suggests to its customer base that they need to upgrade to the Fusion apps, that's a great fight for us, because we would love to engage. Because those customers are not automatically going to take that upgrade. They will have to evaluate alternative options and I think I like our chances in our target verticals.
Okay, before we wrap up Stefan just passed me a note saying that he wanted to augment an answer he gave to an earlier question.
I do. Thank you Harry. When Mark asked the question earlier about the downtick in R&D I had forgotten about the recent restructure did have a handful of R&D personnel related to that. And so that is probably what he was seeing when he saw the reduction in the expenses. So that slipped my mind when he asked the question.
It wasn't that many people.
No, it wasn't that many people. I don't remember offhand how many it was, Harry, but it was -
I think it was less than 20 out of 800.
Yeah, I believe that's right. So anyway I wanted to get that out there and that probably is what led to the, what he saw on the expenses.
All right. If there are no other questions, let us thank you for joining us on the call. As I said, I think we had a very good quarter by all measures. I want to thank our employees again for their hard work and dedication. I think the senior team and leadership team and the sales team and everybody can feel proud of a consistent execution and we'll speak to you again in 90 days time.
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