Lawson earnings steady in tough times

There may be no economic turnaround in sight when Lawson Software reports year-end earnings this week, but there probably won't be any erosion of earnings, either -- a situation analysts attribute to good management and aggressive cost-cutting.

These are tough times for companies such as St. Paul-based Lawson that market big-ticket corporate software systems for what is sometimes called Enterprise Resource Planning, or ERP. Lawson has bigger competitors, such as Oracle and the German firm SAP, but all have been hurt by the recession because their customers' information technology budgets are down 10 to 15 percent, analysts said.

But profits at Lawson look stable despite an undeniable decline in revenue. Although the company signaled to analysts in April that they were $20 million too high on fourth quarter revenue -- causing Wall Street's consensus to drop from $197 million to about $177 million -- there's been no change in the consensus on earnings: 10 cents a share.

The reason is good management and a business model that accommodates cost-cutting, analysts said. The consensus recommendation on the stock last week was "buy."

"Lawson is a well-run company," said analyst Peter Goldmacher of Cowen and Co. in San Francisco. "You can't save your way to prosperity -- you want both revenue growth and profit margin expansion. But if there's no revenue growth, you take the margin expansion."

In addition, the chief cost in the software business is people, and trimming people is easier than closing plants or assembly lines, he said.

"Fixed costs are more easily manipulated in a software company because you can keep trimming headcount to a point where the profit margin stays relatively stable," Goldmacher said. In May, Lawson said it would eliminate 150 jobs, or 4 percent of its global workforce. The majority of cuts would come in Europe, it said. Lawson said it expected to take a $6 million pre-tax charge for severance and related benefits.

Like the stocks of other tech companies, its shares have outperformed the S&P 500 in the past several months, suggesting it might be a harbinger of good economic news. It hit a 2009 high closing price of $5.87 a share in May, although that was well below its 2008 high closing price of $9.94 a share in January 2008. In between, the stock hit a 2008 low closing price of $2.82 in November. It closed Thursday at $5.43.

But analysts say the stock performance is more likely the result of tech companies bottoming out from a sharp decline earlier this year.

In the case of software companies, the market has rewarded their shares because their balance sheets are attractive, said David Rudow, an analyst at Thrivent Financial in Minneapolis. The balance sheets look good because they include a steady stream of software maintenance revenues from existing customers, he said.

"A lot of software companies have strong maintenance revenues that have 70 to 80 percent gross margins," said Rudow, a buy-side analyst who doesn't publish stock recommendations.

While corporate software firms such as Lawson aren't getting as much new business or software licensing during the recession, the company will be protected as long as Lawson can hang on to its existing customers and thus protect the recurring software maintenance revenue, Rudow said.

Lawson has, if anything, been the voice of caution about its fourth quarter. In its third-quarter filing with the Securities and Exchange Commission, the company said its software licensing -- the up-front transaction that later generates continuing revenues from software maintenance and services -- was under pressure from the "weakening of the global economy and the fallout from the financial market crisis" and "will continue to be so for the remainder of our fiscal 2009."

Said Rudow: "For corporate customers, anything big and expensive that takes time to deploy is easy to skip for six to 12 months."

He doesn't expect a turnaround in the market Lawson serves until the second half of 2010.

"Everybody is hoping for flat corporate information technology budgets next year," Rudow said. "But it's hard to say because these market conditions are unprecedented."

Steve Alexander • 612-673-4553