Lawson Software Braves IPO And Reports Strongly Against The Odds

Event Summary

On December 20, Lawson Software, Inc. (Nasdaq: LWSN), a provider of Web-based business applications for specific service industries, reported total revenues for its second quarter of fiscal 2002 ended November 30, 2001, of $95.1 million, which a 15.5% increase from total revenues of $82.3 million in its fiscal 2001 second quarter. For Q2 2002, license fee revenue totaled $30.1 million, up 16.6% from $25.8 million in Q2 2001. Services revenues for Q2 2002 totaled $65.0 million, up 15% from $56.5 million in the comparable fiscal 2001 period. As-reported net income for the quarter was $138,000, compared with $1.7 million a year ago. The company's cash and investments were $28.1 million at November 30, 2001.

The company's as-reported operating results for fiscal 2002 include expenses that are non-recurring or non-cash in nature and not part of its normal operations. These expenses were $1.7 million net of taxes in the second quarter and $3.9 million net of taxes for the six months ended November 30, 2001. The expenses were for non-cash stock-based compensation, business process improvement initiatives related to preparation for the initial public offering (IPO), and amortization of software and intangibles related to the company's Q1 2002 acquisition of Account4, Inc. (see Lawson Software Means Business With PSA and IPO). After adjusting to eliminate the highlighted expenses, the company's net income from operations for Q2 2001 was $1.9 million. In the comparable Q2 2001, after adjusting to eliminate the highlighted expenses, net income from operations was $2.1 million.

Jay Coughlan, Lawson Software's president and CEO, assessed revenue growth in the second quarter and net income from operations adjusted to eliminate the highlighted expenses reflected a strong performance in a difficult environment. Coughlan attributed the increase in second quarter revenue to the company's continued focus on the unique requirements of customers in specific vertical markets in the services sector. During the quarter, the company reportedly signed four software licensing agreements each valued at more than $1 million. Of total licensing activity in the fiscal 2002 second quarter, 65% came from new customers, compared with 64% in Q2 2001.

The acquisition comes only two weeks after Lawson Software, which has remained private for more than a quarter of a century, hit the public market on December 7, against the tide of tech companies that have pulled their IPOs because of calamitous market conditions. At the close of a very slow year for IPOs, especially in the technology sector, at a strike price of $14, Lawson raised more than $190 million in capital, and its market capitalization is currently over $1.5 billion mark, which is a multiple of its FY 2001 revenues of $384 million, and almost on par with those of even much larger competitors like, for example, J.D. Edwards.

Market Impact

While Lawson has for over 25 years been a silent nemesis to the bigger competitors, it will now continue to do so in a more vocal manner. Having reached nearly $400 million revenue mark and profit in 2001, and having maintained significant mind and market share in the service industries sector, the time has come for the company to become a recognized competitive force. Going public successfully amid the overall market malaise may speak in regard to its sound business model, and not necessarily to the better economic climate and an onslaught of IPOs in the near future.

Lawson continues to be a leader in the mid-to-high end market for financial management, human resources (HR), professional services automation (PSA), e-procurement, distribution, and customer relationship management (CRM) applications by continually betting on the following three creeds of success:

  1. Early delivery of visionary, Web-addressable (with server-based application logic and data structure that can be referenced and executed via a URL) and componentized products (using Active Object Repository) that exhibit an open architecture and a support for a wide range of platforms (using Business Component Integrator (BCI)), even well in advance of much larger and more noisy competitors. Lawson has long been promoting its Self-Evident Applications (SEA) initiative (since 1996), with the idea to simplify the learning curve required by users, featuring Lawson Portal (role-based Web user interfaces) and navigational tools.

    Lawson's advantage also lies in its integrated, omnipresent Drill Around functionality and its tight integration with Microsoft Office applications. The drill around feature allows users to extend their knowledge search in a point-and-click manner at every level of the application including reports for every data element within the database. This powerful tool enhances the user's ability to quickly extract specific information for reporting or analysis.

  2. Very tight industry focus and an undisputed leadership position within the healthcare, retail, financial services, professional services, public sector (government and education) segments of the market. With an analogy to geometry, as the volume of a 3D object equals to its base multiplied by its height, Lawson, contrary to many other players, seems to be compensating its narrow foothold with a strong vertical dimension. Lawson will continue to concentrate its internal sales efforts on its traditional vertical markets and to additionally rely on partners to address and develop a particular industry needs. Look for Lawson's opportunistic expansion into another service industry market (e.g., utilities and telecommunications) and for its abstaining from manufacturing in the foreseeable future.

  3. Early involvement in ASP deployment (owing to its advanced product technology and its focus on the functional areas that lend themselves well to the ASP business model) and consequent mind share and the success in the ASP market, with approximately 50 viable ASP partners and close to 500 ASP sites. Through its ASP program, the company insists on its ASP partners to customize and pre-pack Lawson product in order to provide a particular value to a certain vertical industry and to also bring a new business from the market segment.

While Lawson has long provided professional services as it strives to ensure high customer satisfaction, the recent announcements of vertically focused system implementation partnerships (e.g., with Cap Gemini Ernst & Young for the healthcare) should additionally bode well for the company's continued market success. These partnerships might be the sign that Lawson has begun to address its SI partnerships as strategic rather than opportunistic. Also, the partnerships with renowned EAI, infrastructure and applications management vendors (e.g., IBM, BEA) will provide Lawson with readily available toolkits for making deeper functional adjustments and customizations as well as the better scalability, security and load balancing, where the company has traditionally trailed the bigger competitors.

Beside automating and integrating critical enterprise business processes, Lawson's solutions also facilitate collaboration among customers, partners, suppliers and employees. As an example, within its e-Procurement module, workflow and business processes can include outside suppliers and business entities for different steps in order approval. The application is Web deployable, making the functionality remotely accessible. It is also seamlessly integrates with the lawson.insight ERP system, sharing the same data model. Further, it includes tighter integration to most major ERP systems than other niche e-procurement vendors typically provide. Integration with Wireless Application Protocol (WAP) and handheld devices is superior to many other ERP systems.

While we believe that Lawson's product strategy is hitting the bull's eye, one should not discount fierce competition from much larger vendors, like SAP, Oracle, PeopleSoft, and ever more from J.D. Edwards, Infinium, and Microsoft Great Plains. These vendors, while possibly inferior regarding service industries focus, will try to influence customers purchase decisions by offering their more comprehensive horizontal product portfolios, and by touting a superior global presence and multi-national product capability, which are still the hurdles for Lawson to overcome. Further, although using its Digital Depot connector, Lawson can connect to most major marketplaces, exchanges, and/or catalog providers, Lawson does not provide its own database or exchange of catalog data, and it relies on third parties for catalog conversion, which its bigger competitors typically can provide.

User Recommendations

Evaluate Lawson if you are a mid-market and low-end Tier 1 company (with $10M-$2B in revenue) within the following service industries: Financial Services; Healthcare; Professional Services; Public Sector; and Retail. Organizations considering business applications (both Web-based and network dependent) should however consider competitive offerings too. Nonetheless, using a full Internet based solution could save time and money on the integration.

Enterprises seeking a Web-based solution and out-of-box functionality with little or no re-engineering effort may benefit from evaluating Lawson's ASP offering. Since any company planning to engage in e-business will want to have at least a basic financials package and will need other components of an ERP suite afterwards. The easy deployability and integration promised by Lawson is a compelling reason to consider it as part of any e-commerce initiative.

You may want to check Lawson's willingness to develop on the fly a solution for your industry that is currently outside of its narrow focus but that it might target in the future; there might be a synergistic partnership in the offing, with you benefiting with a favorably priced deal, while Lawson will get the foothold into a new industry.

More comprehensive recommendations for both current and potential Lawson users can be found in Lawson Software Expands Vertically As Well and Lawson Software: Self-Evidently Thriving on Innovations.

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