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American Software, Inc. (NASDAQ:AMSWA)

F4Q 2014 Earnings Conference Call

June 25, 2014 17:00 ET

Executives

Mike Edenfield - Chief Executive Officer

Vince Klinges - Chief Financial Officer

Analysts

Kevin Liu - B. Riley & Company

Operator

Good day, everyone and welcome to today’s American Software Fourth Quarter and Fiscal Year 2014 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 this 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, Chief Financial Officer of American Software. Please go ahead, sir.

Vince Klinges - Chief Financial Officer

Good afternoon and welcome to American Software’s Fourth Quarter 2014 Earnings 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 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 products and services, the timely availability and market acceptance of these products and services, the effect of 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.

Mike Edenfield - Chief Executive Officer

Thanks, Vince. Good afternoon, everyone and thank you for being on the call. During fiscal 2014, we introduced our cloud services offering providing customers the additional flexibility to deploy our solutions at a SaaS, hosted or on-premise model with either perpetual or subscription pricing models. The response has been very positive with both existing and new customers choosing a deployment method that suits their business today while selecting a supply chain solution suite that will meet their business needs for the long term. Customers are also expressing significant great interest in our managed services, which leverage our company resources to assist and augment the customer’s technical and operational needs on a day-to-day basis. The use of our managed services are helping customers gain even greater value from our portfolio of solutions.

During fiscal 2014, we welcomed 59 new customers. We signed license agreements with customers in 18 different countries. We continued our aggressive investment in research and development and continued to expand our global presence. Logility’s acquisition of MID Retail announced on May 30 of this year extends our reach into retail operations and expands our ability to help customers improve their Omni-Channel performance. We are now uniquely positioned to optimize demand-driven integrated business planning from raw materials sourcing and manufacturing through inventory optimization and distribution to specific store level requirements and customer delivery.

Retailers are managing their supply chains and getting more involved in the management of supply planning, transportation, and inbound management. Brand owners are no longer just suppliers, many are now retailers. This makes them manufacturers, wholesalers and retailers. They now face the merchandising challenges of assortment and allocation by store and by channel.

The dynamics of the consumer markets are rapidly changing, blurring the traditional line between a retail and supplier business model. In addition, retailers are investing aggressively in technology to allow them to understand and manage their businesses with greater precision. With merchandise applications, retailers can move from spreadsheets to merchandise financial planning applications to manage their budgets, selections, and channels with more precision. In combination with Logility’s replenishment, the VMI and inventory management capabilities, this provides a strong solution set for retailers.

Omni-Channel is also one of the big defining movements, where retailers and wholesalers will have to significantly change, not only how they sell, but how and where they manage their distribution networks and their inventory. We have required some new customers from this transaction, MID Retail. We have Abercrombie & Fitch, Anna’s Linens, Big Lots, Bon-Ton, Finish Line, Orvis, Tuesday Morning, Urban Outfitters and Wet Seal among others. And we also acquired a state-of-the-art merchandising and allocation solution with a compatible architecture, which is also developed on the Microsoft stack to integrate with the Logility Voyager Solutions. We also have acquired some seasoned retail veterans who understand the complex challenges facing retailers today and who can assist in successful project deployments.

Now, moving to some other highlights for the quarter, notable new and existing customers placing orders with the company in the fourth quarter include: 5.11 Tactical, Arizona Nutritional, BBC International, Ferguson Enterprises, Melissa & Doug, KIK Custom Products, Pinnacle Foods, Pioneer Foods, Pacific World Cosmetics, and Tyndale Company. During the quarter, software license agreements were signed with customers located in the following seven countries: Australia, Canada, Colombia, South Africa, Sweden, the United Kingdom and the United States.

During the quarter, Logility announced the general availability of Logility Voyager Solutions V8.5. The latest version of Logility’s award-winning supply chain solution suite has been architected for the cloud and features flexible deployment options including SaaS, hosted and on-premise, but also has advanced scalability to support broad product portfolios and multiple enterprise global supply chain complexity.

NGC Software announced it was selected by the editors of Inbound Logistics magazine as a recipient of the Inbound Logistics Top 100 IT Providers. This marks the sixth year NGC Software has been recognized for enabling logistics and supply chain excellence and delivering solutions that are designed for a responsive, flexible global supply chain and efficient implementation.

So, I’d now like to turn it back to Vince for the numbers.

Vince Klinges - Chief Financial Officer

Thank you, Mike. First, I’d like to compare the fourth quarter of fiscal ‘14 with the same period last year. Total revenues increased 3% to $25.9 million compared to $25.2 million. License fees decreased 1% to $5.6 million compared to $5.7 million for the same period last year. Services and other revenues increased 3% to $11.3 million for the current quarter and that compared to the same period last year.

Services revenues increased 27% at Logility due to increased implementation project work and as Mike indicated an increase in our Logility’s Cloud Services, which has an annualized run rate of over 700,000, compared to zero in fiscal ‘13 last year. So, if you combine this with new generation computing cloud services, the total company at an annual run rate going into fiscal ‘15 of over $1 million in cloud services. This services increase was partially offset by a 6% decrease in our services and our IT consulting unit due to timing of project work and a 13% decrease in our ERP business unit due to completion of a large implementation project at New Generation Computing last year that was not replaced.

Looking at maintenance revenues that increased 5% to $9 million compared to $8.6 million. That’s primarily due to increased license fees in recent quarters and also improved customer retention when compared to last year. Looking at cost, our overall gross margin was up to 59% for the current quarter. That compares to 56% in the same quarter last year. The license fee margin increased 84% for the current period compared to 75% in the same period last year. That’s primarily due to lower software amortization expense as a result of completion of amortization of our Voyager project release at the end of the first quarter of ‘14. And during the quarter, we released Voyager 8.5 as Mike indicated and also the decrease in the license fees is also due to a decrease in commissions as a result of lower license fees through our VAR channels.

The services margin increased to 32% for the current quarter and that compares to 29% in the prior year quarter and that’s due to higher services revenues and improved billing utilization at our IT solutions and NGC units. Our maintenance margin was 77% for the current quarter and that’s pretty much in line with 78% in the prior year gross margins.

Operating expenses, the gross R&D expenses were 12% of total revenues for both the current quarter and the same quarter last year. As a percentage of revenues, sales and marketing expenses were 23% of revenues for the current quarter and that compares to 21% from prior year period. The increase was due to cost related to our customer confidence compared to last year when the confidence we incurred in the second quarter of ‘13 and then also increased commissions due to the mix of sales quotas and also increased marketing costs. G&A expenses were 13% of total revenues for the current quarter compared to 12% in the same quarter last year and that’s primarily due to increased variable bonuses and also audit-related fees.

So, our operating income decreased 9% to $3.2 million this quarter and that compares to $3.5 million the same quarter last year. Adjusted EBITDA, which excludes stock-based compensation, was $4.3 million this quarter compared to $4.9 million same period last year. Our GAAP net income was $2.6 million or earnings per diluted share of $0.09 compared to net income of $3.1 million or $0.11 earnings per diluted share for the same period last year.

Adjusted net income was $2.9 million or adjusted earnings per diluted share of $0.10 for the fourth quarter and that compares to net income of $3.4 million or adjusted earnings per diluted share of $0.12 for the same period last year. And these adjusted numbers exclude amortization of intangibles, expenses-related acquisitions and stock-based compensation expense. International revenues this quarter were approximately 17% of total revenues for the current quarter and that compares to 14% for the same period last year.

Taking a look at the full year 12 months ended April 30, 2014, total revenues year-to-date was $11.6 million and that compares to $100.6 million compared to $100.5 million in the same period last year. License fees year-to-date were $20 million and that compares to $21.2 million. Services revenues for the year were $44.4 million that compares to $45.3 million last year. And maintenance revenues for the year were $36.2 million compared to $34 million last year.

Looking at cost, our overall gross margin was 57% for the full year compared to 55% in fiscal ‘13. License fees margins increased to 80% compared to 72% and that’s primarily due to lower amortization expense by $1.6 million as a result of completion of our amortization of our Voyager project released at the end of the first quarter ‘14. Services margin was 29% compared to 30% in the same period last year and our maintenance margin was 78% for the year compared to 77% for the year prior to that, so pretty much in line.

Looking at operating expenses, our R&D expenses were 12% of revenues for both this year and the prior year. And as a percentage of total revenue, sales and marketing expenses were 20% for both the current and prior year. And G&A expenses were 12% for both the current year and last year, the prior year. So, operating income for the year increased 5% to $14.5 million and that compares to operating income of $13.8 million.

On an adjusted EBITDA basis, the full year ‘14 was $18.6 million compared to $19.4 million same period last year and GAAP net income was $10.3 million for the year or $0.37 of earnings per diluted share that compares to net income of $10.4 million or $0.38 earnings per diluted share. Adjusted net income for the year was $11.6 million or earnings per diluted share of $0.41 compared to net income of $11.7 million or earnings per diluted share of $0.42. International revenues for the full year were up 17% of total revenues compared to 14% in the prior year.

Taking a look at the balance sheet, our financial position remains strong with cash and investments of approximately $79.6 million at the end of April 30, 2014. And this is a $13.2 million increase compared to the prior year. Some other aspects of our balance sheet are billed accounts receivable of $15.4 million, unbilled is $3.2 million for a total of $18.7 million of accounts receivables. Deferred revenues current were up to $23.6 million. Deferred revenues long-term were about $700,000. Shareholder equity is $92.6 million. Our current ratio was 2.7 as at the end of April 30, 2014 and that compares to 2.8 the same period last year. Our day sales outstanding as of the end of April 30, 2014 was approximately 66 days versus 62 days the same period last year.

So at this time, I would like to turn the call over to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Kevin Liu with B. Riley & Company. Please go ahead.

Kevin Liu - B. Riley & Company

Hi. Good afternoon. I was hoping you would talk a little bit more about the MID Retail acquisition specifically how much did you guys pay for it, what sort of revenue contribution do you anticipate this year, maybe anything on the lines of what sort of margin profile they have?

Vince Klinges

Sure, Kevin. This is Vince. We actually (netted) cash with working capital adjustment we paid $7.2 million for it. On a calendar basis, they were roughly about a $3.8 million company, of which about $1.3 million was maintenance. Of course, the first year after an acquisition you have to fair value the maintenance, so we are not going to have that contribution, but if you adjust for that, we do assume there is going to be a contribution this year of roughly somewhere between $800,000 and $1 million.

Kevin Liu - B. Riley & Company

Got it. And just with respect to the kind of the strategic, maybe if you could talk about the number of shared customers you guys might have today. And since the announcement of the acquisition, I know it’s been fairly recent, but has that sparred on some additional conversations in terms of up-sell opportunities you might have for deals within the pipeline as well as just new interests coming from perspective customers?

Mike Edenfield

Yes. We do have that interest, where we are selling the traditional product line integrated with the retail line. What we are seeing is we are getting in deals, because we are having the retail and they should be bigger.

Kevin Liu - B. Riley & Company

Great. And just with respect to kind of the Logility license performance within the quarter, I am wondering if you could talk about how much revenues came in to the supply chain products this period and then maybe talk about what you are seeing in sales cycles at the high end versus the low end?

Vince Klinges

Yes. Kevin, this is Vince. Of the $5.6 million in license fees, majority of that came from Logility, which is about – revenues were about $17.3 million.

Kevin Liu - B. Riley & Company

Great. And I know you talked about lower commissions coming from the research, maybe just talk a little bit about what you are seeing what story the Demand Solutions platform, is there anything you guys feel you can be doing to drive more revenues from that channel or is it simply a function of the current environment?

Mike Edenfield

I think the current environment has not been good for them in the past when we have a good economy, Demand Solutions does a lot better, but they seem to take it harder than say Voyager does when the economy is down. So, they have been very weak. They are selling a little size of lives this quarter, but it’s quite too early to tell. And so Voyager has been pretty steady and that’s not obviously what drove it. We need Demand Solutions chip in as well there.

Kevin Liu - B. Riley & Company

Got it. And one last one for me, were there any large weakness in kind of high six figures maybe seven-figure transactions within the quarter? And then also what’s the outlook or the pipeline look like for the I/O project as head into fiscal ‘15 here?

Mike Edenfield

I don’t believe there were any seven-figure deals last quarter. And we do have some interesting opportunities, some with I/O and some not with I/O in the pipeline.

Kevin Liu - B. Riley & Company

Thanks. That’s all I got. Thank you.

Mike Edenfield

Thank you.

Operator

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

Mike Edenfield - Chief Executive Officer

Well, thank you for participating on the call and we look forward to the next call. Bye-bye.

Operator

This concludes today’s program. We appreciate your participation. You may now disconnect. Have a great day.

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