Q3 2005 Lawson Software, Inc. Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Good morning. Thank you for standing by. All participants will be able to listen only, until the question and answer portion of the conference. This conference is being recorded. If anyone has any objections, you may disconnect at this time.

I would like to introduce the host for today's call, Barbara Doyle, you may begin.

BARBARA DOYLE, IR, LAWSON SOFTWARE, INC.: Thank you and good morning everybody. Welcome to Lawson's third quarter fiscal 2005 conference call. As always, I'm joined on today's call by Jay Coughlan, Lawson's President and CEO, and Bob Barbieri, Lawson's CFO. We'll provide our comments regarding our Q3 results and future guidance and then we'll open up the call to your questions at the end.

Let me remind you you can reference our financial tables included in our press release, which is posted at www.Lawson.com. We also have some additional supplemental investor spreadsheets posted on our website to further aid your review at www.Lawson.com/Investor.

Before I turn the call over to Jay let me review our Safe Harbor statement. This call will make forward-looking statements. That includes statements of intent, belief, or current expectations of Lawson Software and its management. Such forward-looking statements are no guarantee of future results, and they involve risks and uncertainties that may cause actual results to differ materially from the potential results discussed.

The Company is not obligated to update forward guidance based on events which occur in the future. Throughout the call we will attempt to present some factors relating to our business that may affect our outlook. Risks and uncertainties that may cause differences include, but aren't limited to, a decline in general economic conditions, global military conflicts, terrorist attacks in the United States and any future response to those developments, changes in competition and product acceptance. You should also review our latest Form 10-Q filed with the SEC for a further discussion of these risks and uncertainties.

With that, let me turn the call over to Jay.

JAY COUGHLAN, PRESIDENT, CEO, LAWSON SOFTWARE, INC.: Thanks, Barbara, and good morning to everyone on the call. Thanks for joining us early this morning. We'll keep our prepared comments focused and concise as always, and then open up the calls for your questions. I'll begin with a summary of our Q3 results and then discuss the state of the market and the current selling market. Bob will then provide a financial summary, review our key sales metrics for Q3 and provide our guidance for Q4. I'll close with comments on initiatives we're focusing on in Q4, as well as fiscal 2006, and then we'll open up the call for your questions. With that let's get started.

In Q3 we hit the high end of our EPS guidance range, coming in at $0.03 per share on a GAAP basis. Total revenue was $82.7 million, with $13.9 million in license fees and $68.8 million in services. Bob will cover the financials in more detail, but here's a brief summary of our financial results.

Regarding EPS and the overall execution last quarter, we continue to manage our costs and expense well. I'm very pleased with our team's focus on streamlining operations and excellence in execution. Examples include new streamlined pre-sales and demo processes, more accurate and easy contract processing and fulfillment. We also improved A/R collections and gained efficiencies in our development and IT and operations. We're executing very well in both our internal and client facing processes across the Company, and becoming a more efficient company each quarter.

Let me take a moment to talk about Q3 revenues before beginning discussion on the entire market environment. First let's look at our service business in the quarter, and what it reflects about Lawson's client base. Total service revenues were $68.8 million, up about 4 percent year-over-year. Strong maintenance revenues of $43.3 million drove the increase, reflecting high maintenance contract renewals, and the benefit of the client contracts we acquired last April. We are encouraged by our continued high renewal rates with current clients, and it corresponds to our internal survey results that show steadily improving client loyalty rates.

Lawson professional service revenues of $25.5 million reflected a lower level of consulting and implementation activity resulting from lower software licenses in the past two quarters. The service group restructuring, however, began to have a positive impact on service margins in the quarter, and we expect that we will continue to see improvement going forward. Brad Callahan, EVP of Services, is executing the strategic change of moving from a primary focus on installing software, to a consulting and service group that will continue to help clients focus on business outcomes resulting from using Lawson's software. In other words, helping them get more out of their software while building long-term client relations.

Some changes Brad has already implemented include growing organization-wide best practices, and sharing information across the entire team, while continuing to keep our vertical edge. But the shift also results in improving the billable/nonbillable ratio, as we've been able to reduce redundancies that exist in a strict vertical model. He's also been focused on attracting and retaining top talent, and setting up internal coaches and mentors to nurture that talent. And he's implemented a new rate structure that differentiates rates based on skill levels and expertise, providing more flexibility for clients.

These changes are important aspects of our manifesto, and are absolutely the right moves for our clients for the long term. While it may take our clients and partners a few more months to adjust to the changes, we're seeing benefits in increased client satisfaction, as well as improving margins.

Now let's talk about license revenues. First on the positive side, there's a reemergence of $1 million plus deals from large companies, who are including us in their RFPs. Some decisions that were on hold during the Oracle-PeopleSoft transaction are beginning to reengage. Our software license business with existing clients continues to be healthy, consistent with our high renewal rates …