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American Software Inc. (NASDAQ:AMSWA)

F1Q10 Earnings Call

September 2, 2009; 5.00 pm ET

Executives

Vince Klinges - Chief Financial Officer

Mike Edenfield - Chief Executive Officer

Analysts

Drake Johnstone - Davenport

Jackson Spears - The Robins Group

Brian Murphy - Sidoti & Co.

Ryan McGaver - Capstone Investments

Sam Rebotsky - SER Asset Management

Operator

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

It is now pleasure to turn the conference over to Mr. Vince Klinges, Financial Officer of American Software, please go ahead, sir.

Vince Klinges

Good afternoon and welcome to American Software’s first quarter of fiscal 2010 earnings results. 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. 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 notice anticipated by statements made on this call. Such factors include, but are not limited to changes 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 effect of competitive products and pricing and the irregular 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.

Mike Edenfield

Thanks, Vince. Good afternoon everyone and thanks for participating in this call. I’ve some comments on the first quarter results and then Vince will come back and review the details on the financial results for the quarter and then we’ll take your questions. We had a good quarter it was our 34 consecutive quarter of profitability, company delivered strong profit growth, and the company completed a tender offer for the shares of Logility we did not already own.

For the first quarter, revenue was approximately $17.8 million, a 7% decrease compared to the first quarter of last year. The decrease in revenues is primarily attributable to services revenue declines in both our IT consulting business segment and the ERP segment. Bright spot from a revenue perspective was a license fee growth of 51% which was driven by Logility with a 75% increase in their license fees.

This is the third consecutive quarter we have achieved growth in license fee revenue over the prior year’s period. We believe this is a direct result of our ability to provide a high return on investment to our customers with an industry leading time to benefit and lower total cost of ownership than our primary competitors.

Adjusted net income was $2 million, a 155% increase over last year’s quarter, with increased license fees, lower cost and higher other income driving the improvement. We signed 20 new customers for license agreements in the first quarter. Customers from six different countries signed license agreements with the company in the quarter. Those countries include Australia, South Africa, the Netherlands, Turkey, The United Kingdom and The United States.

Some of the notable new and existing customers include Arrow Fastener, Boston Apparel Group, Bush Hog, Cache, Carlisle Tire & Wheel, Central Garden and Pet, DCI Cheese, Hanesbrands, Juicy Couture, Johnstone Supply, KGP Telecommunications, Stony Apparel, Synergy Health, and WinWholesale. We continue to be encouraged by a number of new customers license in our products.

New customers are a source of future maintenance and implementation services revenue as well as being great prospects for additional product sales. As we look forward to next quarter as well as the remainder of the year, we are pleased with our overall performance. Our business model is in good shape, company has a strong balance sheet with cash and investment of over $60 million.

Our IT consulting business unit revenues are trending back up this quarter, as we’ve hired approximately 25 people this quarter to staff additional projects. On the software side while some projects have slipped due to macroeconomic conditions, we’ve again have a decent sales pipeline for the second quarter. As usual, close rates will be the key and the quarter appears to be backend loaded as is typical.

I’d now like to turn call back over to Vince for a detailed review of the financial results for the quarter.

Vince Klinges

Thanks Mike. First, I’d like to take look at the first quarter of 2010 compared to the same period of last year. The total revenues for the quarter, as Mike indicated decreased 7% to $17.8 million compared to $19.2 million. However license fees increased 51% to $4.1 million compared to $2.7 million for the same period last year.

Services and other revenues decreased 26% to $6.9 million due primarily the lower consulting services at our IT consulting business than lower implementation work resulting from lower license fees in the prior quarters in our ERP segment when compared to the same period last year.

Maintenance revenues decreased 4% to $6.8 million compared to $7.1 million primarily due to lower license fees in our ERP business unit compared to prior quarters. Overall, our gross margin increased to 60% for the current quarter compared to 53% for the same quarter last year.

Our license fee margin increased to 70% compared to 53% and that’s due primarily to, as a result of the completion of amortization expense of several projects in Q3 of ‘09, resulting in lower amortization cost in the current quarter and also due to license fee sales mix between direct and indirect. We had higher direct sales this quarter.

The service margins decreased to 33% compared to 36% in the same period last year, and that’s due to lower margins at our ERP unit from lower utilization rates. Our maintenance margin was 75% for the current and prior year period.

Taking a look at operating expenses, our gross R&D expenses were 12% of total revenues for both the current and prior year quarter. As a percentage of revenue sales and marketing experiences were 21% of revenues or $3.7 million for the current quarter and it compares to 20% or $3.8 million for the same quarter last year.

G&A expenses were 21% of total revenues for the current quarter, compared to 16% for the same quarter last year. The increase was primarily due to legal, banking, advisory and other fees related to the Logility tender offer and also higher bonus compensation expense accrual.

Our operating income increased 14% to $1.5 million this quarter compared to $1.3 million the same quarter a year ago. Our EBITDA was $2 million this quarter and that compares to $2.2 million for the same period last year. This is lower primarily due to the tender offer costs this quarter, which were approximately $800,000.

GAAP net income was $1.2 million or earnings per diluted share of $0.05 for the quarter and that compares to a net income of $610,000 or $0.02 earnings per share last year. On adjusted net income basis, that increased to 155% to $2 million or adjusted earnings per diluted share of $0.08 for the first quarter, and that compares to an adjusted net income of $795,000 or $0.03 for the same period last year.

Adjusted numbers exclude amortization of intangibles, related acquisitions or stock based compensation expense and expenses related to Logility tender offer. International revenues for this quarter were approximately 9% of total revenues and that compares to 10% in the prior year quarter.

Taking a look at the balance sheet, the company’s financial position remains strong with cash and investments of approximately $61 million at the end of July 31, 2009 with no debt. During the quarter, the company paid over $9 million to purchase the outstanding shares of Logility and paid approximately $2.3 million in dividends.

Other aspects of the balance sheet, our billed accounts receivable was $10.2 million, unbilled $3 million for a total of $13.2 million of AR. Deferred revenues are $15.6 million and our shareholder equity is $73.8 million. Our current ratio is 2.3 versus 3.7 last year and this is lower due to approximately $16 million in investments, classified as long term.

Let say, we have increased our investment and maturities to mostly one to three years to improve the yields and also due to lower cash on hand. Our day sales outstanding as of the end of the quarter were approximately 68 days compared to 66 days this time last year.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Drake Johnstone - Davenport.

Drake Johnstone - Davenport

A question I had for you. Mike, when you talked about the pipelines in the current quarter. You didn’t really give us any indication, how the pipeline from the current quarter compared to the outset of Q1 and also the outset of Q3. The impression I had received prior to this report was, that your pipeline in Q3, Q4 and for Q1 was at is a similar level.

So it sounds like maybe this closes as many deals this quarter, which I guess typical in this quarter. So could you give input in terms of the level of the pipeline going to Q2 compared to some of the other few quarters?

Mike Edenfield

Yes. We’re actually pleased with the amount we closed in the first quarter. We had a pretty good pipeline going into; our first quarter is normally a seasonally low quarter for us. There are some exceptions, if you look back last five or six years, it’s usually seasonally low. So we’re very happy with the first quarter. I’d say our pipeline is about the same this quarter as it was last quarter and the previous quarters.

I think we have an opportunity to do as well, a reasonable shot to do better in license fees. It will as I mentioned earlier, it will comedown to our close rates again, but we do have some interesting opportunities this quarter.

Drake Johnstone - Davenport

Mike, you said do as well as license fees, but as you indicated Q1 was down sequentially due to seasonality. You had $4.8 million in license fees in Q4 and $4.7 million in Q3. So which quarter is it you’re referring to?

Mike Edenfield

We had an opportunity to do better than the first quarter and I don’t know if it would be as good as fourth quarter or third quarter, but we had definitely an opportunity to do better and have an opportunity to do as good as those quarters, maybe better.

Drake Johnstone - Davenport

Then as far as expenses, it sound like you had some one time expenses in the quarter associated with the Logility acquisition. So for G&A, should that be closer to 16% of revenue going forward?

Vince Klinges

Actually, if you look at the bottom of the press release, you actually see the expenses broken out related to Logility tender offer a little over $500,000. Then that’s a stock compensation charge in there. So those are unusual items, yes.

Drake Johnstone - Davenport

So that Logility stock compensation charge, that’s a one time charge associated with the transaction?

Vince Klinges

Yes.

Operator

Your next question comes from Jackson Spears - The Robins Group.

Jackson Spears - The Robins Group

On the revenues, other than that I mean you think so the rent is two months paid up front plus a $1,000 month or $1,100 or whatever…?

Operator

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

Brian Murphy - Sidoti & Co.

Mike, I think you mentioned that you hired some people on the IT services side, just looking at that services line item, obviously, down quite a bit. If my memory serves me, you have quite a bit of customer concentration in that business. Can you give us a sense for sort of what your visibility is sort of into that service line item at this point?

Mike Edenfield

I mentioned we’ve hired approximately 25 people, and we only hired those people when we have work for them. So we have good visibility; and then that the current plans are that we think we continue to grow it throughout the rest of the fiscal year. So we’ve actually are more bullish on that segment than we were 90 days ago.

Brian Murphy - Sidoti & Co.

Did you guys hire any salespeople during the quarter?

Mike Edenfield

I believe we did have one start this quarter. We actually reached agreement on the prior quarter, but I think we started this quarter. That’s on the direct sales channel. We also have hired a number of VARs over the last couple of quarters, and have them started with us, including some in Asia-Pacific, which is a new area, well expanded area for us now.

Brian Murphy - Sidoti & Co.

So just to follow that thread there in terms of the license mix, it seems like things continue to be skewed toward the Voyager side. Do you expect that to continue sort of this quarter and in the near future? When would you expect the Demand Solutions business that to start to come back?

Mike Edenfield

As I look at this quarter, I believe it will probably be more Voyager again than Demand Solutions, which it typically as, but I believe it will remain skewed. Demand Solutions is doing good with the mid size companies. Where the business slowed down for us is on the 100 million and less size companies.

They don’t have the money or the access to credit to invest as much as they traditionally do, but the larger companies do, they don’t have as much, but they still have capital budgets they can allocate to high priority projects and we’ve been able to get out share of the reply there. So, their pipeline is pretty good, but I don’t see them rolling back just yet.

Operator

Your next question comes from Ryan McGaver - Capstone Investments.

Ryan McGaver - Capstone Investments

I was wondering if you touched on it previously, but a comment on the sales cycle. How is it looking you said that the sub $100 million companies are kind of having a hard time; but as far as the other markets you go after, versus previous quarters a comment on the sales cycle?

Mike Edenfield

We have some sales cycles that are getting delayed, because they can’t get the money or they’re getting canceled because they can’t get the money; but we had some pretty brisk sales cycles last quarter in particular. We had July was surprisingly good for us and so the beauty of our solution is it helps people save money and in some cases helps some take market share for them competitors by providing better service.

So a lot of our target markets are still investing even with the downturn because of the quick return on investment they can get in terms of cutting cost in particular. So, when a lot of the sales cycles are really more in the typical I just use Voyager, for example six months to nine months range.

Ryan Mcgaver - Capstone Investments

I was wondering if or you had mentioned that there was a higher proportion of direct sales versus indirect sales, was it particularly material or is it just a slight change there?

Mike Edenfield

I would say its material. That helped them margin quite a bit. The direct was fairly strong. The indirect channel was okay; but not as good as it was a couple of years ago. So when that turns around and if we can keep them both going in the right direction, we’re going to see some decent growth in the license fees.

Ryan Mcgaver - Capstone Investments

Has that dynamic continued into the second quarter of a stronger direct sales force?

Mike Edenfield

Based on the forecast.

Operator

Your next question comes from Sam Rebotsky - SER Asset Management.

Sam Rebotsky - SER Asset Management

Good transition, now you said there was about $800,000 of extra cost in the current quarter and this will go away in the next quarter and what kind of savings do you expect to have in addition to these onetime charges, either for the next year going forward as far as the merger of Logility?

Vince Klinges

The estimate is roughly around $450,000 to $500,000 in savings and that was all actually documented in the tender offer documents that we filed.

Sam Rebotsky - SER Asset Management

This will occur on a quarter-to-quarter basis, or it will be one particular quarter?

Vince Klinges

It’s probably more backend loaded the back half of the year.

Sam Rebotsky - SER Asset Management

Is there anything that occurs in the last month of the quarter, any better deals that are given for people to close the transaction or are they basically you just work harder to get a transaction to close in the last month?

Mike Edenfield

Yes. I mean, typically what the buyers are better educated and they know your quarters, they know your year end. That the fact of matter, there has to be compelling event for these sometimes just to get them off the dime a lot of the times they’re not in a huge hurry to do anything, but that’s something that we can use as a closing event.

Sam Rebotsky - SER Asset Management

Is there any plans as far as visibility now I assume, as Logility is 100% owned going forth into next quarter? Will there be any differentiation to sort of differentiate the revenues, license fees, or how will that sort of be discerned?

Mike Edenfield

We do segment reporting on our Qs. So when you see the 10-Q in a few days.

Vince Klinges

When the 10-Q gets filed in it will probably be about September 14, somewhere around there. We do segment reporting and breaks out the revenues and the operating earnings.

Sam Rebotsky - SER Asset Management

Also now that you’ve gone to the, some of your assets or gone from one to three years, does that mean you’re less prone to be looking at acquisitions going forward? What’s your thought about acquisitions going forward?

Mike Edenfield

We went from one to three years just to get a better yield. They’re still very liquid assets and we are looking for acquisitions just as much as we are before.

Sam Rebotsky - SER Asset Management

Operator

(Operator Instructions) Your last question comes from Jackson Spears - The Robins Group.

Jackson Spears - The Robins Group

Congratulations on your numbers. It must be good to lead in a more normal environment now than versus a year ago. Your G&A number was up a bunch I assume that was the tender offer cost?

Vince Klinges

Yes, it is, yes.

Jackson Spears - The Robins Group

A recovery of doubtful accounts was that a one time account or is that more than one?

Vince Klinges

It was one large one. We have one customer actually went bankrupt and then subsequently, a private equity firm bought the company, and then they paid us.

Jackson Spears - The Robins Group

There’s so much talk about real estate, and you have a real estate portfolio. Could you give us some color on your investment income whether is there any problems in your real estate, or whether it’s all very current? Your rental income number, for instance?

Vince Klinges

It’s a little over a $100,000 a quarter that we’re getting from our rental income and that’s pretty stable.

Jackson Spears - The Robins Group

So you had no problem accounts there as well?

Vince Klinges

No, no problem accounts.

Jackson Spears - The Robins Group

So your $600,000 also was due to the lack of equity losses, I assume?

Vince Klinges

Yes.

Jackson Spears - The Robins Group

So is that number going forward, the $600,000 more accurate on that level without the equity losses?

Vince Klinges

It depends on how the market does, yes.

Operator

It appears that we have no further questions at this time.

Mike Edenfield

Thank you, everyone for your participation on the call. We look forward to talking with you next quarter.

Operator

This does conclude today’s teleconference. You may disconnect your lines. Thank you and have a great day.

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Source: American Software Inc. F1Q10 (Qtr End 31/07/09) Earnings Call Transcript
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