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Executives

Vince Klinges – CFO

Mike Edenfield - CEO

Analysts

Brian Murphy – Sidoti & Co

Kevin Liu – B Riley & Co

American Software (AMSWA) F3Q 2013 Earnings Conference Call February 27, 2013 5:00 PM ET

Operator

Good day, everyone, and welcome to today’s program. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. (Operator Instructions)

Please note this call may be recorded and I will be standing by should you need any assistance. It is now my pleasure to turn the conference over to Mr. Vince Klinges, Chief Financial Officer of American Software. Please go ahead, sir.

Vince Klinges

Good afternoon, and welcome to American Software’s third quarter, fiscal 2013 conference call. To begin, I would 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.

Any such forward-looking statements 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 in, contemplated by or underlying the forward-looking statements. There are a number of factors that 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 product and services, the timely availability and market acceptance of these products and services, the effective competitive product and pricing and other competitive pressures and the irregular 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 the call over to Mike Edenfield, CEO of Logility and COO of American Software.

Mike Edenfield

Thanks, Vince. Good afternoon, everyone, and thank you for participating on the call. I have some comments on the fiscal 2013 third 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 48th consecutive quarter. Our revenues were $23.1 million, which was a decrease of 9% compared to the third quarter last year.

Revenues declined due to an unexpected drop in services revenues as well as lower license fees, which we attribute to the economic uncertainty in the marketplace, which seems to be (setting) our sales cycles. Our net earnings were $2.1 million, a decrease of 17% from last year.

We had 21 new customers sign license agreements in the third quarter compared to 15 new customers in the second quarter. Customers from 14 countries licensed agreements with the company in the quarter. Those companies were Australia, Canada, Columbia, Finland, France, Germany, India, Italy, Japan, The Netherlands, Norway, Sweden, the United Arab Emirates and the United States.

Some notable new and existing customers include Boise Paper, Brooks Sports, Denso Europe BV, IPD Industrial Products, Integria Healthcare, Kelly Moore Paint Company, Mark Anthony Brands, Masonite, Massimo Zanetti Beverage USA, Nichiha Corporation, Seagate Technology, Revise Clothing and Sunovion Pharmaceuticals.

We continue to be encouraged by the number of new customers licensing our products as new customers are a source of maintenance and implementation services revenue as well as being good prospects for additional product cycles.

So as we look to the fourth quarter and remainder of fiscal 2013, we have the deals in the pipeline to grow our license fees but we must have a better close rate and environment than in recent quarters.

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

Vince Klinges

Thanks, Mike. Comparing the third quarter of fiscal ’13 to the same period last year, as Mike indicated, our overall revenues decreased 9% to $23.1 million compared to $25.4 million during the same quarter last year.

This is primarily due to license fees, which did decrease 28% to $4.1 million compared to $6.8 million for the same period last year. Services and other revenues decreased 7% to $9.6 million for the current quarter and that compares to $10.3 million for the same period last year.

Services revenues decreased 17% at our ERP unit and 13% at our IT consulting unit due to timing of project work and this was partly offset by 11% increase at Logility.

We expect these services revenues to increase sequentially in Q4 based on the pickup of project activity.

Maintenance revenues increased 3% to $8.6 million compared to $8.3 million primarily due to increased license fees in prior quarter. Taking a look at our costs, our overall gross margin was 52% for the current quarter and that compares to 53% for the same quarter last year.

Our license fee margin was 64% for the current period compared to 68% for the same period last year and that’s – (primarily) the down time (might be due) to lower license fees.

Our services margins were 23% for the current and prior year quarter. Our maintenance margin was 78% for the current quarter and that’s up from 77% in the same period last year.

Looking at operating expenses, our gross R&D expenses were 13% of total revenues for the current quarter compared to 11% in the prior year quarter and that’s due to an increase in investment in several R&D projects at Logility.

As a percentage of revenues, sales and marketing expenses were 21% of revenues for the current quarter compared to 18% for the same period last year and that’s primarily due to increased headcount.

Our G&A expenses were 11% of total revenues for the current quarter and that compares to 14% in the same period last year. Operating income was $2.3 million for this quarter compared with $3.3 million for the same quarter a year ago.

Adjusted EBITDA, which excludes stock-based compensation was $3.7 million for this quarter compared with $4.7 million in the same period last year. So our GAAP net income was $2.1 million or earnings per diluted share of $0.08 for this quarter compared to net income of $2.6 million or $0.10 earnings per diluted share for the same period last year.

Adjusted net income was $2.5 million or adjusted earnings per diluted share of $0.09 for the third quarter and that compares to net income of $2.9 million to adjusted diluted earnings per share of $0.11 for the same period last year.

And these adjusted numbers exclude amortization of intangible expenses related to acquisitions and stock-based compensation expense.

International revenues this quarter were 11% of total revenues and for the current and same prior year quarters. Looking at year-to-date numbers, nine months ended January 31, 2013 compared to the same period last year. Overall revenues increased 1% to $75.3 million compared to $74.7 million.

License fees year-to-date are $15.5 million compared to $20.5 million for the same period last year. Services revenues increased 14% to $34.4 million year-to-date compared to $30.1 million last year.

Our maintenance revenues also increased 5% to $25.4 million compared to $24.1 million last year.

Looking at costs for the nine month period, overall gross margin was 54% compared to 55% in the same period last year. Our license fee margin decreased to 70% from 73% last year, again due to low license fees.

Our services margins were up to 30% compared to 26% for the year-to-date basis and that’s because of the increase in services revenues and improved utilization and project billing rates.

Maintenance margins were 77% for both the current year-to-date and same period last year.

Looking at operating expenses on a year-to-date basis, our gross R&D expenses were 12% of revenues for the nine month period compared to 11% in the same period last year and that’s due to increased R&D investments.

As a percentage of total revenues, our sales and marketing expenses were 19% for the current period compared with 18% for the same period last year and that’s due to increased headcount.

G&A expenses were 12% of revenues compared to 13% for the same period last year. So our operating income year-to-date was $10.2 million compared to operating income of $11.6 million last year.

Adjusted EBITDA year-to-date was $14.5 million compared to $15.8 million for the same period last year. Our GAAP net income was $7.3 million year-to-date or $0.27 earnings per diluted share compared to net income of $7.9 million or $0.29 earnings per diluted share.

Adjusted net income year-to-date was $8.3 million or earnings per diluted share of $0.30 compared to net income of $8.7 million, earnings per diluted share of $0.32 for the same period last year.

International revenues year-to-date were approximately 14% of total revenues compared to 16% in the same period last year.

Looking at the balance sheet, the company’s financial position remains strong with cash and investments of approximately $57.6 million at the end of January 31, 2013 with no debt.

During the third quarter, the company paid approximately $10.6 million in dividends and repurchased approximately 65,000 shares of its common stock for approximately $505,000 under its authorized stock repurchase program. The stock repurchase program has a remaining balance of 1.1 million shares left in it.

Other aspects of the balance sheet, our billed in accounts receivable at the end of January 31, 2013 was $14.3 million, unbilled was $4.6 million for a total of $18.9 million. Deferred revenues are $19.8 million and shareholder equity is $79.4 million.

Our current ratio increased to 2.9 as of January 31, 2013 compared to the same quarter last year of 2.6. Our day sales outstanding as of January 31, 2013 was approximately 75 days versus 68 days and that was due primarily to a delay of one of our large receivables which was subsequently what we collected at the end of the quarter.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Brian Murphy – Sidoti & Co

Brian Murphy – Sidoti & Co

Mike, could you tell us the inventory optimization, the large inventory optimization deals that you closed last year, are they fully implemented now? Has that been completed? Are they up and running and are those customers referencable?

Mike Edenfield

Yes, probably the largest part that we did is definitely up and running. As a matter of fact, they had us fly our team out and had a celebratory dinner for us. They are a very good reference.

Brian Murphy – Sidoti & Co

And did you do any IO deals in this quarter?

Mike Edenfield

We didn’t do any large ones this quarter.

Brian Murphy – Sidoti & Co

Can you give us a sense for maybe what the AST was like versus last year?

Mike Edenfield

The AST this quarter was the lowest we’ve had in two or three years.

Brian Murphy – Sidoti & Co

And so it sounds like you may be comfortable with the pipeline. Can you give us some detail about what the pipeline looks like in terms of components? Do you have large deals in the pipeline and any thoughts on what you might do to improve close rates here?

Mike Edenfield

We have a couple of nice sized opportunities that one we’ve selected is just – it’s a very large company that’s going through a number of signoffs. We hoped to get that one last quarter but we – they’re just moving much, much slower than they could be.

And so we’ve got bigger opportunities. We have – quite frankly, I think we have more opportunities in the short-term pipeline for the quarter we’re in right now. So things just seem to be taking longer. I don’t know if it’s the uncertainty with the sequester what have it but it’s just not like it was last year in terms of deals moving along in a timely manner and getting done.

They’re moving slower and not as many of them are getting done. That said, I was very pleased with our quarterly forecast at the start of the quarter and how many deals and the size of the deals.

Brian Murphy – Sidoti & Co

Your win rates also declined or is this just strictly the sales cycle’s getting longer?

Mike Edenfield

It’s more lengthening of the sales cycle.

Brian Murphy – Sidoti & Co

I know the Logility service revenue was up year-over-year but it looks like a pretty substantial decline sequentially. Is that Logility service revenue a good run rate going forward?

Mike Edenfield

Yes, well, actually, we had a – the third quarter is a seasonal issue for us and usually we’re down maybe 10%, 15% from what the run rate and all of the things equal in the run rate in the prior quarter.

But this year hit us a little harder. The way the holidays were where you might have a full week you lose billing because of Christmas and New Year’s, the way the holidays lay in, they landed in the middle of two different weeks and we lost a big chunk there. So we’re going to rebound. I think the run rate will be higher than what we had.

Operator

(Operator Instructions) Your next question comes from the line of Kevin Liu – B Riley & Co.

Kevin Liu – B Riley & Co

In terms of some of the comments on the services side, you talked about things not coming in as expected. Was that purely the seasonal factor as you mentioned earlier or did you actually see customers either defer or cancel (some service engagements) altogether?

Mike Edenfield

No, it was the seasonality.

Kevin Liu – B Riley & Co

Then in the press release it mentioned you guys continue to want to expand the sales force here. I guess given the current deal cycles that you are seeing, at what pace should we expect incremental sales capacity to be brought on?

Mike Edenfield

Well, we added for the Voyager line, which is our direct channel primarily, we added about 40% last year. And we’re still carrying those folks. We’re still investing in them and I think they can be productive, particularly if the market improves.

We’ve also made some additional investments in the demand solutions sales channel by hiring managers to focus on certain regions of the world and help our (inaudible) and that is something that we studied some other companies in the past who had very good indirect channels and consulted actually with some people who had worked there and how they did it.

And I think that’s an investment we’re making but it’s going to take a while for that to move along but it’ll help us there as well.

Kevin Liu – B Riley & Co

And I know historically (Smart Ops) has been an (SAP) partner, anyway, so maybe the acquisition there doesn’t really change things but curious on your thoughts how that impacts the competitive landscape and then whether that presents you guys with opportunities to pick up any additional sales folks with good experience in the space.

Mike Edenfield

Yes, we’ve already interviewed one before we knew about the acquisition. He said they weren’t doing very well there. I think what it does is it gives us a free ride outside of the (SAP) world.

(Smart Ops) was trying to sell outside of (SAP) as well but they’ll be – they will not be in that market I don’t think. They’ll focus on (total excel) into (SAP) customers.

Kevin Liu – B Riley & Co

And then just a couple housekeeping questions since I heard the growth for Logility services. I was wondering if you had the supply chain growth for the maintenance on (inaudible).

Vince Klinges

Yes, the maintenance went up 4% in the supply chain year-over-year and the license fees went down 23% year-over-year.

Operator

Your next question comes from Brian Murphy – Sidoti & Co.

Brian Murphy – Sidoti & Co

Mike, what percentage of the Voyager reps have been onboard more than a year?

Mike Edenfield

Yes, I would say about 70%, maybe 80%.

Operator

(Operator Instructions) It appears there’s no further questions from the phones at this time.

Mike Edenfield

Thank you for participating on the call and your support of American Software and we look forward to our next earnings call.

Operator

This does conclude today’s conference. You may now disconnect and have a wonderful day.

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