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American Software, Inc. (NASDAQ:AMSWA)

Q4 2013 Earnings Conference Call

June 20, 2013, 17:00 PM ET

Executives

J. Michael Edenfield - President and CEO

Vince Klinges - CFO

Analysts

Kevin Liu - B Riley & Co.

Brian Murphy - Sidoti & Co.

Operator

Good day, everyone, and welcome to American Software's Fourth Quarter and Fiscal Year 2013 Preliminary Results. At this time, all participants are in a listen-only mode. Later, you will have the 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 program over to Vince Klinges, CFO of American Software. Please go ahead.

Vince Klinges

Good afternoon. 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 the 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 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'd like to turn the call over to Mike Edenfield, CEO of American Software.

J. Michael Edenfield

Thanks, Vince, and good afternoon, everyone. Thank you for participating in this call. I have some comments on the fourth quarter and annual results. Vince will review the details of our financial results for the quarter and the fiscal year, and then we'll take your questions.

American Software was profitable for the 49th consecutive quarter and the fourth quarter was the best quarter of the year from a license fee revenue and net income perspective. Fourth quarter revenues were 25.2 million which is a decline of 10% year-over-year. Both license and service fees declined 22% and 11%, respectively. Maintenance revenues, which were recurring, grew 3% in the fourth quarter. Net income for the fourth quarter was $3.1 million.

For the year, license fees declined 24% but we increased services revenue 7% and maintenance revenue was 5%. The company increased our investment in research and development by 12% over last year and we had net income of 10.4 million for the year. We had 16 new customers sign license agreements in the fourth quarter and customers from 14 countries signed license agreements with American Software in the quarter. Those countries include Australia, Belgium, Brazil, Canada, Columbia, Denmark, Italy, Japan, Mexico, Nicaragua, South Africa, Sweden, the United Kingdom and the United States.

Some of the notable new and existing customers include 3M Australia, Ballet Jewels, Cytec Surface Specialties, Glen Raven, Haddon House Food Products, Maidenform, Jay Franco and Sons, Oceana Brands, Polaris Industries, Rocky Brands, Ruko, Unifirst Corporation, VF Services, and Zimmer. For fiscal 2013 we added 68 new customers.

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

So as we look at the first quarter and fiscal 2014, our pipeline is similar to the past few quarters. There is interest from our customer base as well as new potential customers and we have some large deals in the pipeline. We have enough pipeline to be successful but we need to improve our (inaudible).

I would now like to turn the call over to Vince for a detailed review of the financial results for the fourth quarter and fiscal '13 annual results. Vince?

Vince Klinges

Thanks, Mike. Comparing the fourth quarter of fiscal '13 to the same period last year, as Mike indicated, our overall revenues decreased 10% to 25.2 million compared to $27.9 million the same quarter last year.

Certain license fees decreased 22% to 5.7 million compared to 7.3 million for the same period last year. Services and other revenues decreased 11% to 11 million for the current quarter compared to 12.3 million the same period last year. Services revenue decreased 32% at our ERP unit, 10% at our IT staffing unit and due to timing of project work, and by 2% in Logility.

As we indicated on our last earnings call, services revenue which increased sequentially and it did 15% in the fourth quarter compared to third quarter of '13, and that was based on a pickup of activity in all three business units.

Our maintenance revenues increased 3% to 8.6 million compared to 8.4 million primarily due to increased license fees in the prior-year quarters. Taking a look at gross margins, it was 56% for the current quarter and that's up from 55% in the same period last year.

License fee margins increased to 78% compared to 75% in the same period last year. Our services margins were 29% for both the current and prior-year quarter. Our maintenance margin was 78% for the current quarter and that compares to 75% in the same period last year, and that's primarily due to an increase in maintenance revenues.

Looking at operating expenses, our gross R&D expenses were 12% of total revenues for the current quarter and that compares to 11% in the prior-year period. As a percentage of revenues, sales and marketing expenses were 21% of revenues for the current quarter compared to 18% the same period last year, and that's primarily due to increased headcount.

G&A expenses were 12% of total revenues for the current quarter and the same period last year. So operating income was 3.5 million for this quarter and that compares to 4.6 million for the same quarter a year ago.

Adjusted EBITDA, which excludes stock-based compensation, was 4.9 million this quarter compared to 6 million in the same period last year. GAAP net income was 3.1 million or earnings per diluted share of $0.11 and that compares to net income of 3.5 million or $0.13 earnings per diluted share the same period last year.

Adjusted net income was 3.4 million or adjusted earnings per diluted share of $0.12 for the fourth quarter and that compares to net income of 3.8 million or adjusted earnings per diluted share of $0.14 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 approximately 14% of total revenues. That compares to the 15% in the same period last year.

Looking at the full year of fiscal '13, total revenues for the year decreased 2% to 100.5 million and that compares to 102.6 million the prior year. License fees for the year came in at 21.1 million and that compares to 27.8 million in the same period last year. Services revenues increased 7% to 45.3 million, and that compares to 42.4 million. Maintenance revenues also increased 5% to 34 million and that compares to 32.4 million last year.

Looking at costs, our overall gross margin was 55% for this year and in the same period last year. License fee margins decreased to 72% compared to 74% last year due to lower license fees. Our services margins were 30% compared to 27% for the same period last year and that was due to increased services revenues and improved utilization and project billing rates. Our maintenance margin was 77% for both the current year and prior year.

Operating expenses, gross R&D expenses were 12% of total revenues for the year. That compares to 11% for the same period last year. As a percentage of total revenues, sales and marketing expenses were 20% for the current year compared to 18% for the same period last year, and that's primarily due to increased headcount and marketing related expenditures.

G&A expenses were 12% of total revenues compared to 13% the same period last year. So operating income was 13.8 million compared to operating income of 16.2 million last year. Adjusted EBITDA for the year was 19.4 million compared to 21.8 million the same period last year. Our GAAP net income was 10.4 million or $0.38 per share and that compares to 11.3 million or $0.42 per share last year.

Adjusted net income was 11.3 million or earnings per diluted share of $0.42 compared to net income of 12.5 million or earnings per share of $0.46 for the same period last year. International revenues year-to-date were approximately 14% of total revenues and that compares to 16% the same period last year.

Looking at the balance sheet, our cash and long-term assessments were 66.4 million at the end of April 30, 2013 and no debt. During the fiscal '13, the company paid approximately 15.5 million in dividends and repurchased approximately 96,000 shares of its common stock for average cost of $7.89 per share under its stock authorization program.

Under that program, we have a remaining balance of 1.1 million shares available to buy back shares. Other aspects of the balance sheet are account receivables bills were 13.1 million and unbilled was 3.7 million for a total of 16.9 million account receivables. Deferred revenues were 21.3 million and our shareholder equity was 83.2 million.

Our current ratio increased to 2.8 as of April 30, 2013 compared to 2.6 for the same period last year and our days sales outstanding as of the end of April 30, 2013 was approximately 62 days versus 64 days the same period last year.

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

Question-and-Answer Session

Operator

Certainly. (Operator Instructions). We'll go first to Kevin Liu with B Riley. Please go ahead.

Kevin Liu - B Riley & Co.

Hi. Good afternoon, guys. First question I had was just in the fourth quarter, did you guys close any seven-figure deals? And also what does the pipeline of inventory optimization deals look like as you head into fiscal '14?

J. Michael Edenfield

We did not close any seven-figure deals this past quarter, Kevin. And we do have sighting opportunities with the IO product in the pipeline.

Kevin Liu - B Riley & Co.

Got it. And just wanted to clarify some of the comments you made regarding the pipeline. You said it was similar to levels as in prior quarters. As we go into '14 here, I mean how much – first is that pipeline sufficient to get back to some of the license levels we've seen in the prior year when you guys were showing really strong growth? And then second, can you talk a little bit about the closing trends in Q4, most specifically did they improve from – at least from Q3 levels here?

J. Michael Edenfield

We had pretty good closing rate in Q4. We had a lot of midsized deals and we closed a good bit of them, but we didn't have that one or two figure deals to really blow the number out. So going into this year, we have more big deals than we had, at least it appears we do, so that can make a big deal for us. But those tend to take longer and are less certain, so that's why I was little cautious in saying it looks a lot like last year.

Kevin Liu - B Riley & Co.

Got it. And I know you recently introduced the SAS version for the lower end of the market, but also wondering if you've built in any sort of expectations in the numbers for '14?

J. Michael Edenfield

We don't have any extra revenue planned for SAS, because that will have to be shred anyway even if we do sign some deals.

Kevin Liu - B Riley & Co.

And just one last one for me. In terms of the account on the sales side, I'm wondering what your plans are as we make our way through this coming year which has either looked at or maintained or is there potential that you might take out some if license revenues don't get back up to the levels we've seen in prior periods?

J. Michael Edenfield

Our plan is to maintain but we have attrition, we would think hard about – we would evaluate the situation and see whether we wanted to replace that person.

Kevin Liu - B Riley & Co.

Great. Thank you.

Operator

Thank you. (Operator Instructions). We'll go next to Brian Murphy with Sidoti & Company. Please go ahead.

Brian Murphy - Sidoti & Co.

Hi. Thanks for taking my question. Mike, I'm sorry, did you give us the sales headcount at the end of the quarter?

J. Michael Edenfield

For Voyager, it's around 16, 17 right now. And then of course we have dozens of VARs all over the world.

Brian Murphy - Sidoti & Co.

Right.

J. Michael Edenfield

And new generation has about three or four.

Brian Murphy - Sidoti & Co.

Okay. Now I think you ended last year with 18 sales reps. Were those just Logility sales reps or did they include the NGC guys?

J. Michael Edenfield

That didn't include the guys from specifically to Logility last time.

Brian Murphy - Sidoti & Co.

Okay. And what was the sales force attrition like in fiscal '13?

J. Michael Edenfield

Very low. We had one leave and then we promoted one to manager and the manager retired.

Brian Murphy - Sidoti & Co.

Okay. And so I mean it sounds like most of these guys have been on board now for at least a year?

J. Michael Edenfield

Yes, they're ready to go. That shouldn't be an issue.

Brian Murphy - Sidoti & Co.

Okay. And Mike, can you – if we just step back, can you just give us some color on sort of what you think happened here in fiscal 2013 in terms of the pipeline and sales force productivity, because you came out of fiscal 2012 and license revenue was up 45%? And I think this time last year, you were pretty bullish about the pipeline. I think you mentioned that the Voyager pipeline was double where it was going into fiscal 2012, and that bullish just gave you the confidence to ramp up the sales force as aggressively as that progressed is I've ever seen you guys do it. So, can you tell us sort of – are a lot of the same deals still in the pipeline or have you gone back and scrubbed that pipeline? Maybe what happened with the pipeline management or sort of what changed in fiscal 2013 here? Was it win rates, close rates, can you just give us a sort of broad recap of what happened in terms of license revenue this year?

J. Michael Edenfield

You're correct. We did talk about this time last year how much our pipeline increased. But for whatever reason the demand didn't follow it and I think it's just been people who just been more cautious when 12 people were pulling the triggers or doing big projects and it just dissolved in the first, second, third and fourth quarters. We still got some good customers but it just wasn't as good of a demand environment we expected. And also I think the economy was a little slower and really DMI probably had the bigger drop and they are more – since we've owned them, we noticed they are more sensitive to dips in the economy. So they hurt us a good bit if you look at the drop, we have more than 50% of the license fee drop was probably due to DMI.

Brian Murphy - Sidoti & Co.

Okay. And how many VARs do you have now?

J. Michael Edenfield

I don't know. We probably have close to 50 right now, 56.

Brian Murphy - Sidoti & Co.

Okay. I mean that's up over last year.

J. Michael Edenfield

Yes, it's up and some of these deals – I don't know if you noticed, but I mentioned Brazil, that's new. We haven't sold in Brazil before. Colombia, that's the second deal. We got Colombia in two quarters in a row. Japan, we've gotten five or six deals from Japan through to the channel. Mexico, Nicaragua, that's a new country for us. So that's working. Now those Latin American deals and they'd not be real big but if you sell every country every quarter one or two deals, then it's going to start adding up. And so I like what we've done in the channel. And another thing we talked about last time as we put a layer sales manager on top of the channel too where we took people who once used to be the Vice President of Sales for Manugistics which is now part of JDA, very good supply chain sales manager and she's running the U.S. managing the VAR. So we've put in I think the structure, we need a good pipeline and a good demand environment, and I think we can start going like 12 again.

Brian Murphy - Sidoti & Co.

Okay. And I know you mentioned that you didn't have any seven-figure deals in the quarter. Did you have any IO deals?

J. Michael Edenfield

I don't think we had an IO deal, but we have – the two biggest opportunities we have on IO for this quarter.

Brian Murphy - Sidoti & Co.

Okay. And again, can you give us a sense for what stalled in the adoption there, because fiscal 2012 you seem to be closing multiple IO deals every quarter? And it would seem to me that the hard part would be getting those initial customers on that product. And it seems like you landed some very large sophisticated customers in fiscal 2012, and I mean I don't know how many – 10 or 12 deals, and then it just seemed to completely dry up here in fiscal 2013. Was it something in the implementation? Is there something that's changed with the value proposition? Is there more competition? What do you think is going on?

J. Michael Edenfield

I don't know. It wasn't anything to do with our implementation. As a matter of fact, our largest one we implemented was a fantastic reference. I mean they flew our entire team out that did the implementation for us as sort of a celebration dinner on their nickel. I just don't think a lot was going on for some reason and I have – but it showed sign of picking up.

Brian Murphy - Sidoti & Co.

Okay. And I know sort of for a software vendor of your size, you probably need a decent economy and demand environment to be closing seven-figure deals. And I think the demand environment on the software space has been fairly apocalyptic over the past couple of quarters. Is that the way to think about it? Should we see some of these deals start to come through, who do you think when we start to get a better demand environment maybe in the back half of this calendar year?

J. Michael Edenfield

I would hope so. If we have a good demand environment, I mean our products are very competitive. We're selling them and beating all the players that are out there. And it's not a competition that is hurting us, it's more moving deals through the pipeline.

Brian Murphy - Sidoti & Co.

Has there been any change one way or the other post the acquisition of SmartOps?

J. Michael Edenfield

We never see them. We don't see SAP in standalone IO deals.

Brian Murphy - Sidoti & Co.

Okay. All right, thanks a lot.

Operator

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

J. Michael Edenfield

Thank you very much for participating on the call and all your support of American Software and we look forward to the next call. Thank you.

Operator

This does conclude today's program. We appreciate you participation. You may disconnect at any time and have a great day.

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