American Software (AMSWA) Q1 2015 Results - Earnings Call Transcript

Aug.28.14 | About: American Software, (AMSWA)

American Software, Inc. (NASDAQ:AMSWA)

Q1 2015 Results Earnings Conference Call

August 28, 2014 05:00 PM ET


Vince Klinges - Chief Financial Officer

Jim Edenfield - Chairman


Kevin Liu - B. Riley & Company

Matthew Galinko - Sidoti


Good day, everyone and welcome to American Software’s First Quarter of Fiscal Year 2015 Preliminary Results. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during a 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 program over to Vince Klinges, Chief Financial Officer. Please go ahead, sir.

Vince Klinges

Thank you. Good afternoon and welcome to American Software’s first quarter 2015 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. 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 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 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 Jim Edenfield, Chairman of American Software.

Jim Edenfield

Good afternoon, everyone, and thank you for being on the call. Our first quarter which ended on July 31st was marked by increased uncertainty within the worldwide markets that we operate. This uncertainty translates through our operations in the form of delays in making decisions by our prospective customers. We have also noted delays in plans to increase capital expenditures. Sales cycles have been lengthened. That having been said, we were able to increase license fees 36% and our total revenues by 7% as compared to the first quarter last year, resulting in a 10% increase in our gross margin.

However, operating earnings were down primarily as a result of timing on a major R&D effort which resulted in a reduction in the percentage of research and development being capitalized, also an initial impact from the acquisition of MIDRetail was absorbed. Net earnings were also down as a result of a higher effective tax rate.

During the quarter, we booked new license agreements with customers in nine countries Australia, Canada, Ireland, Italy, Nicaragua, South Africa, Sweden, the United Kingdom and the United States.

Looking ahead to the results for the second quarter, we should note that it will be the most difficult quarterly comparison for the current year. It is encouraging to also note that we have a sufficient sales pipeline to achieve the desired results. However, these prospective deals will have to be closed within the remaining point of time.

Last year, 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. Response was 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 need for the long-term.

Customers are also expressing significant interests in our managed service which leverage our company resources to assist and augment the customer’s technical and operational need on a day-to-day basis. The use of our managed services are helping customers gain even greater value from our portfolio of solutions.

Our acquisition of MIDRetail announced on May 30 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 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. As a part of the acquisitions some new customers including Abercrombie & Fitch, Anna’s Linens, Big Lots, Bon-Ton, Finish Line, Orvis, Tuesday Morning, Urban Outfitters and Wet Seal among others were added to our customer list.

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 acquired some seasoned retail veterans who understand the complex challenges facing retailers today and who can assist in successful project for us.

We are working through the integration of the operation and solution and to the Logility footprint, we’re actively in the marketplace promoting the solution to the retailers and brand owners who are establishing a retail presence and traditional manufacturing companies who have products in short supply.

We are establishing market awareness and have begun to build a pipeline for the new products. Based on our preliminary activity, we anticipate that the acquisition will begin contributing to license fees in the second half of the fiscal year.

At this time, I would like to turn the call back to Vince.

Vince Klinges

Thanks Jim. Comparing the first quarter fiscal ‘15 with the same period last year, total revenues increased 7% to $24.9 million compared to $23.3 million in the same period last year. This is primarily due to increased license fees of 36% to $4.4 million compared to $3.2 million for the same period last year. The breakdown of that is Logility increased 34% and ERP increased 48% compared to last year.

Services and other revenues decreased 2% to $11 million for the current compared to the same period last year and the service revenue decreased at New Generation Computing as a result of lower license fees in recent periods and The Proven Method as a result of timing of project work.

This decrease was partly offset by 15% increase in Logility due to increased implementation project work from increased license fees in recent periods and also service revenues from the recent MIDRetail acquisition.

Maintenance revenues increased 7% to 9.5 million compared to 8.9 million, primarily due to increase in license fees in recent quarters, and the revenue from recent MIDRetail acquisition.

Looking at the gross margin, our overall gross margin was up to 54% for the current quarter and that compares to 52% in the same period last year. Our license fee margin decreased to 60% for the current period compared to 64% for the same period last year, primarily due to higher software amortization expense as a result of beginning amortization of Voyager 8.5 project released at the end of the fourth quarter last year. The increase in cost of license fees was also due to an increase in commissions as a result of higher license fee through our indirect VAR channel.

Our services margins increased 1 percentage point to 29% for the current quarter compared to 28% in the prior year and that’s primarily due to improved billing utilization at our IT solutions and also New Generation Computing units. Maintenance margin increased again 1 percentage point to 79% for the current quarter and that compares to 78% and that’s primarily due to increased maintenance revenue.

Looking at operating expenses, our gross R&D expenses were 14% of total revenues that compares to 12% for the same quarter last year. As a percentage of sales and marketing expenses, they were 19% of revenues for the current and prior year periods. And G&A expenses were 13% for the - total revenues for the current quarter and that compares to 14% for the same quarter that’s primarily due to increased revenue.

Operating income decreased 9% to 2.2 million for this quarter and that compares to 2.4 million for the same quarter a year ago. As Jim mentioned, the operating results were impacted by several items such as the effect of the MIDRetail operating loss of approximately $300,000 for the quarter and an increase in software amortization noted earlier and the timing of capitalized R&D efforts resulted in lower capitalization of over $500,000 which increased our net R&D expense when compared to last year.

Adjusted EBITDA, which excludes stock-based compensation, increased 5% to $4 million this quarter and that compares to $3.8 for the same period last year. So, on a GAAP net income, we reported $1.5 million or earnings per diluted share of $0.05 per share compared to net income of $1.6 million or $0.06 earnings per diluted share for the same period last year.

Adjusted net income increased 5% to $2 million or adjusted earnings per diluted share of $0.07 and that compares to net income of $1.9 million or adjusted earnings per diluted share of $0.07 for the same period last year. These adjusted numbers exclude the impact of the MIDRetail acquisition, the amortization of intangibles, expenses-related to other acquisitions and stock-based compensation expense. International revenues this quarter were approximately 17% of total revenues for the current quarter and that compares to 18% same period last year.

Looking at the balance sheet, the company’s financial position remains strong with cash, short and long-term investments of approximately $72.4 million at the end of July 31, 2014. The company increased cash investments by approximately $1.9 million when compared to the July 31, 2013. Since initiating the current dividend policy 10 years ago, in July of 2004 the company has paid approximately $96.9 million in dividends.

Some other aspects of our balance sheet are billed accounts receivables of $12.9 million, and unbilled $3.8 million for a total of $16.7 million of accounts receivable. Deferred revenues current are $23.6 million; deferred revenues long-term are approximately $600,000. And shareholder equity is $91.9 million. So our current ratio is 2.5 as of July 31, 2014 and that compares to 3, the same period last year.

Our day sales outstanding as of July 31, 2014 was approximately 62 days versus 52 days the same time last year and that’s due to timing of sales and related collections.

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

Question-and-Answer Session


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

Kevin Liu - B. Riley & Company

Hi, good afternoon. Just Jim you mentioned some longer sales cycles that you guys are now seeing out there. Is that [coupling][ph] across our all time product lines and geographies or is it concentrated in any particular areas of your business?

Jim Edenfield

Pretty much across the board, I think we see that we’re all aware of what’s going on in Europe. We had the weather problem here and still in the quarter in the U.S. the other macro issues that are all on the minds of executives, I think it’s kind of somewhere across the board and a positive set. So I think as our pipelines become larger and we have more opportunities [inaudible] a long time ago [inaudible] come back into focus.

So, I think that, we’ve got a great job in building the pipelines and I think that’s our brand going forward.

Kevin Liu - B. Riley & Company

Got it. And just drilling down into that a little bit, I mean can you talk a little bit about how your [inaudible] the pipeline compares to this time last year and you did mention Q2 being a kind of more difficult comp. How confident are you guys in your ability to grow license revenues over - with the levels that you put up last year?

Jim Edenfield

So, as I said earlier, we got the pipeline to do it and but it has to be done. The pipeline is our friend and time is our enemy. And so we could blow it out or we could not blow it out. So, that’s sort of where we are at this point.

Kevin Liu - B. Riley & Company

Understood. And Vince just wondering with the revenue contribution for MIDRetail was within Q1 and then maybe more generally for both of you if you could talk a little bit about how MIDRetail has contributed to the pipeline whether you are you seeing more standalone deals or whether both of the deals would be kind of bundled in with your Logility Voyager platform?

Vince Klinges

Yes Kevin, it’s Vince. We only had MIDRetail for two months, so we booked roughly about 300,000 for the quarter. Obviously it’s broken down between services and maintenance we did not have any deals closed in that two month period but the pipeline is active with deals in pipeline and I would say there is a mix in the pipeline between standalone deals and also with some bundled in for us with our legacy suite also.

Kevin Liu - B. Riley & Company

And kind of a related question I remember you said the deferred revenues looked a little bit stronger than usual for Q1 I think typically you would see it drop, was that a flattish number from Q4 pretty much just the acquisition impact or did you guys have any meaningful subscription bookings in the period?

Jim Edenfield

No, we didn’t have any meaningful subscription and bookings this period, [primarily on that] [ph].

Kevin Liu - B. Riley & Company

Got it. And one last one from me. Just wondering what the pipeline for Logility I/O deals looks like and whether you guys are able to close any such deals within Q1?

Jim Edenfield

We closed several I/O deals principally as a fleet. In our forecast they’re playing an important part of what we expect to be doing this coming quarter or the quarter we’re now in.

Kevin Liu - B. Riley & Company

Okay, thanks a lot.


Thank you. (Operator Instructions). We’ll go next to Matthew Galinko with Sidoti. Please go ahead.

Matthew Galinko - Sidoti

Hey guys, thanks for taking the question. I guess first quick one is I think you mentioned in the press release that MID would be accretive within the next 12 months, just hoping for clarification is that sort of on a full year basis that you are looking at or sort of as we look towards the end of the fiscal year on a quarterly basis?

Jim Edenfield

That will be on a quarterly basis, Matt.

Matthew Galinko - Sidoti

Got you. Thanks. And then how is or where are you in terms progress and bring MID sort of in line with any kind of interface work you’re doing in terms of any technical integration work you need to do?

Jim Edenfield

You have to remember that they have only been with us a couple of months. And so, it takes time to do things like interfacing and making the products look the same and feel the same. So, the effort is on the way to do that. And the MIDRetail Company is fine company before we bought them and of course it still is, but they really did not have a sales force so to speak. The sales were done by one of the owners and the technical sales support was done by another owner. And so that was it. And so, we have had to educate our sales people on the product and we are getting to hire additional sales people that would sort of specialize in that product-line and the same thing is true on technical sales support. So, it’s going to take a little time to build-up to the full potential that we expect we’ll achieve.

Matthew Galinko - Sidoti

Sure. And I guess follow-up to that is, is there sort of an education process [that you need to go along] [ph] with indirect channel to sell that product as well or do you see that as something that needs to be more for a direct sale?

Jim Edenfield

It will probably be more of a direct sale for sometime although, if the indirect channel comes up with the prospect, we would probably -- we certainly would take advantage of it and we would probably have to bear the brunt of the sale. Indirect channel has to bear the brunt of the sale. We would love to have that [off candidly] [ph].

Matthew Galinko - Sidoti

Got you. Alright, that’s all for me. Thanks.


Thank you. It appears we have no further questions at this time. I’ll turn it back to our speakers for any final remarks.

Jim Edenfield

Thank you very much for participating in this call. We appreciate it and we look forward to speaking to each one of you soon.


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

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