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American Software (NASDAQ:AMSWA)

Q3 2012 Earnings Call

November 29, 2012 3:30 PM ET

Executives

Vince Klinges - CFO

Mike Edenfield - CEO

Analysts

Kevin Liu - B. Riley & Company

Operator

Good day everyone and welcome to American Software second quarter fiscal year 2013 preliminary results. At this time, all participants are in a listen-only mode. Later you will have an opportunity to ask questions during the Q&A session. Please note, today's call is being recorded, and I will be standing by should you need any assistance. It is now my pleasure to turn the conference over to Vince Klinges. Please go ahead.

Vince Klinges

Good afternoon and welcome to American Software Second Quarter Fiscal 2013 Earnings Conference Call. To begin, I'd like to remind you that this conference call may contain forward looking statements including statements regarding among other things our business strategy and growth strategy. And such forward -looking speak only as of this date. These forward-looking statements are based largely on our expectations and are subject to a number of risks and uncertainties, some of which cannot be predicted or quantified and are beyond our control. Future developments and actual results could differ materially from those set forth and contemplated by our underlined forward-looking statements. There are a number of factors which could cause actual results to differ materially from those anticipated by statements made on this call. Such factors include but are not limited to changes and uncertainty in general economic conditions, the growth rate of the market for our products and services, the timely availability and market acceptance of these products and services, the effective competitive products and pricing and other competitive pressures and the regular and unpredictable pattern of revenues. In light of these risks and uncertainties, there can be no assurance that the forward-looking information will prove to be accurate.

At this time I would like to turn over the call over to Mike Edenfield, COO of American Software and CEO of Logility.

Mike Edenfield

Thanks Vince. Good afternoon everyone and thank you for participating in this call. I have some comments on the fiscal 2013 second quarter results. Vince will review the details on the financial results for the quarter and year-to-date and then we’ll take your questions.

American Software was profitable for the 47th consecutive quarter. We grew our revenues 3% over second quarter last year led by professional service revenue increase of 17% and maintenance revenues increasing 5%. License fee revenues did decline 22% compared to second quarter last year and we did increase them 8% sequentially.

Net earnings decreased by 7% compared to Q2 last year. But again we did increase them sequentially. We had 15 new customers sign contracts with us in the second quarter, customers from seven countries signed license agreements with the company in the quarter. Those countries included Australia, Canada, Denmark, Morocco, Sweden, Thailand and the United States. Some notable new and existing customers include A.O. Smith, Berry Plastics Corporation, Brightstar, Cary Francis, Elo Touch Solutions, Great Plains Manufacturing, Pall Corporation, Probiotec Limited, Quickie Manufacturing, Sagent Pharmaceuticals, Dow Chemical, SECO Tools, and The RoomPlace. We continue to be encouraged by the number of new customers launches in our products as new customers are a source of future maintenance and implementation services revenues as well as being excellent prospects for additional product sales.

We look forward to third quarter and the remainder of fiscal 2013. We have the deals on the pipeline to grow our licensee fees and revenues. We must have a better closing rate than we did last quarter.

I will turn the call over to Vince for more detailed review of the financial results.

Vince Klinges

Comparing the second quarter of fiscal ’13 in the same period last year, as Mike indicated the total revenues increased 3% to 26.3 million and that’s compared to 25.6 million the same quarter last year.

License fees decreased 22% to 5.5 million compared to 7 for the same period last year. Services and other revenues increased 17% to 12.3 million for the current quarter and that’s compared to 10.5 the same period last year. Services revenues increased by 45% of Logility to 34% in ERP business units and 3% in our IT consulting business. Maintenance revenues increased 5% to 8.4 million and it compares to 8 million primarily due to increased revenues license fee revenues in prior quarters. Taking a look at costs, our overall gross margin was 56% for the current quarter and that compares to 57% in the same period last year. License fee margins was 74% for the current period and that compares to 79% in the same period last year. Our services margins increased to 34% compared to 28% in the same period last year due to increased services revenue improved billing utilization and project grade margins.

Our maintenance margin was 76% for the current end same period last year. Looking at operating expenses, our gross R&D expenses were 12% of total revenues for the current and that compares to that’s up from 10% in the prior year quarter. As a percentage of revenues, sales and marketing expenses were 19% for both the current and prior year quarter. G&A expenses were 12% again for the current and prior year quarter. So our operating income was 4.2 million this quarter and that compares to 4.7 the same period a year ago. Adjusted EBITDA which excludes stock based compensation which is 5.7 million this quarter compared to 6.1 the same period last year, GAAP net income was 2.8 or earnings per diluted share of $0.10 and that compares to 3 million or $0.11 earnings per diluted share in the same period last year.

Adjusted net income was 3.1 million or adjusted earnings per diluted share of $0.11 and that compares to 3.3 million adjusted earnings per share of $0.12. The adjusted numbers exclude the amortization of intangible expense related acquisitions and stock based compensation expense. International revenues this quarter were approximately 12% of total revenues for the current quarter and that compares to 13% for the same period last year.

Taking a look at the year-to-date numbers for the six months ended period, total revenues increased 6% to 52.2 million and that compares to 49.3 million. License fees year-to-date were 10.6 compared to 13.7. Services revenues increased 25% to 24.8 million year-to-date and that compares to 19.8 last year. Maintenance revenues also increased 6% to 16.8 million compared to 15.8 same period last year.

Looking at our costs, our overall gross margin was 55% year-to-date compared to 56%. Our licensee fee margins decreased to 73% from 76% and that’s the low license fees. Services margins were 32% compared to 27% year-to-date and that’s due to increased services revenue and improved utilization and project billing rates. Our maintenance margin was 77% for both the current year-to-date and the same period last year.

Looking at expenses, our gross R&D expenses were 12% of revenues year-to-date that compares to 10% the same period last year. As a percentage of total revenue, sales and marketing expenses were 19% for the current year-to-date compared to 18% the same period last year. That’s due to increased headcount. G&A expenses were 12% of revenue compared to 13% the same period last year. So our operating income year-to-date was 8 million and that compares to operating income of 8.3 last year.

On an adjusted EBITDA year-to-date was 10.8 million compared to 11.1 million in the same period last year. GAAP net income was 5.2 year-to-date or $0.19 earnings per diluted share compared to net income of 5.3 or $0.20 earnings per diluted share. Adjusted net income year-to-date was 5.8 or $0.21 compared to 5.8 or $0.22 for the same period last year. These adjusted numbers exclude amortization of intangibles and stock based compensate expense.

International revenues year-to-date are 12% of total revenues compared to 15% the same period last year. Looking at our balance sheet, the company’s financial position remains strong with cash and investments of approximately 64.8 million at the end of October 31st, 2012 and no debt. Cash increased 10.5 million when compared to the same time frame last year. During the same quarter the company repurchased over 29,000 shares of its common stock for approximately $237,000 under its authorized stock repurchase program and paid approximately 2.4 million in dividends. The authorized stock repurchase program has a remaining balance of approximately 1.2 million shares available under the program.

Some other aspects of our balance sheet, build receivables are 12.6 million, unbilled is 5.9 for a total 18.4 ARE. Deferred revenues are approximately 18 million and our shareholder equity is 84.9 million. Our current ratio increased to 2.9 as of October 31st, 2012 and that compares to the same period last year of 2.5. Our days sales outstanding improved also as of the end of October 31st, 2012 to 65 days and that compares to 73 days the same time last year.

At this time, I’d like to turn the call over to questions.

Question-and-Answer Session

Operator

(Operator Instructions). We’ll go first to Kevin Liu with B. Riley & Company. Please go ahead.

Kevin Liu - B. Riley & Company

You talked about deals just not closing within the quarter and certainly there is some macro uncertainty out there. Maybe if you could talk about if there were any particular points of weakness or was this fairly broad-based? Speak to it either on a project basis, on a geographic basis.

Mike Edenfield

I would say it was uniformly spread.

Kevin Liu - B. Riley & Company

And as you look at the pipeline as it sits today, it doesn't seem like you are necessarily concerned that deals are falling out of there. But what are your customers talking about, either with respect to kind of year end budgets and whether they intend to spend against them. And to what degree do you have confidence that if we are able to avert this fiscal cliff that business should pick up from then on?

Mike Edenfield

I think where we’re engaged with existing customers, they are generally moving forward with the projects add-ons to initial project we did. The new businesses are harder to close right now and I think they don’t want to start a big new project with the uncertainty that’s out there.

Kevin Liu - B. Riley & Company

And how are you guys approaching your business as it relates to continuing to hire sales force and with your ambitions to drive strong license growth in the coming years?

Mike Edenfield

Yes well we've added some folks to help manage the bar channel. We've grown the bar channel for our demand solutions brand a good bit and I think when we bought them several years ago they had like a 11 bar organizations and now we've got over 50. And so we've invested a layer of sales management to help manage them and get them more productive. And so we have some upside there. We have slowed down hiring direct sales people however just to sort of see how we do this quarter.

Kevin Liu - B. Riley & Company

Got it. And your services revenues have continued to hold up. Certainly I would imagine that is a function of having done pretty solid license growth for much of the past year. But with two quarters here of a bit softer license revenues, how long do you expect to be able to sustain this level of service revenue? And is there any worry of a drop off in the near term?

Mike Edenfield

From the Logility software perspective, we have enough implementations going on, I think we have got maybe six months backlog there. We have a lot of new projects. A lot of customers are upgrading now as well and that’s keeping some of our services, resources active. So I think we’re okay. Now we will see some seasonal downturn because of the Christmas and Thanksgiving holidays we typically have that this quarter.

Kevin Liu - B. Riley & Company

And just in terms of the general competitive landscape, certainly some more consolidation continuing with the acquisition of JDA. I mean how do you feel the landscape has changed, if at all, with this most recent deal? Do you feel like you are better positioned? Or are you at all worried that that combination might make it tougher in the marketplace?

Mike Edenfield

Now we didn’t really compete with (inaudible) it’s different product sets. And I think it will in the short term it will probably help us because I know the last time JDA went through, what they would have acquired, they acquired I2, there was a lot of confusion and things like that for a while. So I think they will have a little bit of that if not a lot of it because there is so much bigger acquisition and what I read about the acquisition, they didn’t have a lot of the deals, they are now ahead of time as you might expect. And so I think in the long run it won’t make much difference. We might get a benefit in the short term.

Operator

(Operator Instructions). And gentlemen, it appears we have no further questions at this time. I'll turn it back to you for any closing remarks.

Mike Edenfield

Thank you to all of you for participating in the call and look forward to updating you next quarter.

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