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American Software Inc. (NASDAQ:AMSWA)

B. Riley Conference

March 14, 2007 2:15 pm ET

Executives

Vince Klinges - CFO

Presentation

Moderator

All right, we will go and get started with our next presentation. I'm happy to have American Software here at our conference again, and today we have Vince Klinges, CFO.

Vince Klinges

Thank you for having me Justin. Good morning or afternoon whatever it is. I'll be talking about American Software and breaking down the business. Underneath the American Software, we really have three diversified business segments that I'll be talking about. We have about 1,500 customers on active maintenance.

We are kind of known in the space of being a best-of-breed player in the supply chain space, as having a rapid deployment of our products and a fast return on investment.

We have an indirect and a direct sales channel, which I'll go a little bit more in detail. From a financial point of view, we have been profitable for over the past six years. We have been growing revenue for the past three years in double digits. We have a dividend, which is unique for a software company, paying out over 4% yield. We have over $70 million in cash and investments.

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So, the three business segments, to breakdown American Software, we sell into the supply chain space under the brand Logility. That's a fairly big piece of our company right now, about 50% of the revenues and I'll be talking most of the presentation about that piece of the business.

American Software USA is our legacy ERP piece of business. That's where American Software started way back in the 70s as a legacy play under the mainframe and AS/400 platform. We have about 100 customers on active maintenance there and then the proven method is in IT staffing and solutions business. It primarily is in the Southeast region. The biggest customer they have is Home Depot at this time.

So there is the revenue breakdown on a trailing 12 basis. We have an April fiscal, so January 31, '07 is our third quarter. We're about $82 million in revenues. So, you could see Logility is about half of the revenue stream.

The ERP piece of the business is 26% of the revenue stream and the IT solution is about $20 million. Another unique thing about us is American Software owns 88% of Logility, the rest of it stated on NASDAQ under LGTY. I'm the CFO of both of those companies.

So diving down to the different business units; Logility, as I indicated is a best-of-breed supply chain company. It has over 1,100 customers on an active maintenance in 70 countries. It has a two-brand strategy for the high-end area of the market, about $1 billion and over companies. We go to the market with a direct sales channel model.

For the low-end market, in the small mid-size space, we have a VAR or value-added reseller model. We have 23 VARs that attack that space. So we have kind of a two brand strategy.

We're focused on the key verticals of the consumer packaged goods, retail space and we have a very experienced development and implementation and support staff.

This is a chart from AMR. I won't go in too much detail. But basically they are showing the supply chain software space growing, pretty materially actually between ‘05 and '06. So we're pretty excited about that space. Driving down a little bit more, this is another AMR chart that basically segments the space and they are showing a lot of opportunity in the SMB space.

The adoption rate has been very high in the higher segment of the market. In other words companies like i2 and Manugistics and ourselves have competed at the high-end of the space. But we think because of the adoption rate, it is pretty low in the SMB market and there is a lot of opportunity to grow there. That's where our products play very well in that space as well at the high-end.

These are some of the factors that are driving supply chain purchases right now. The globalization that everybody knows about is a lot of our companies and prospects are moving all their manufacturing overseas. What that does is, creates longer lead times.

With longer lead times you have to be more accurate on what you're ordering from overseas. And on top of that, a lot of our customers sell to the Wal-Marts and the K-Marts of the world, and there is a lot more pressure on these guys to make sure that the quality and the quantity and the delivery is on time of their products.

So, they are getting kind of squeezed at both ends. They have longer lead times and they also have to make sure that all their products and the fill rates are fairly high. So, that causes the need for better demand forecasting and better supply chain forecasting.

Our products are known as best as to return on investment, easy to go in. Our products help companies become more efficient of the distribution channels. In other words, moving their product's transportation supply chains and also warehousing of the products. Rising fuel costs is causing a lot of these companies to become more efficient in this distribution channels.

This is another AMR chart. It's not by revenue but it's actually active installed supply chain companies and Logility is being the number one list on that. And there are some of our other competitors mentioned there.

This is the breakdown of the customers and the verticals we sell to. Our main verticals we sell to are consumer goods and soft goods. You can recognize some of the names there. Some companies like this will our full enterprise suite; some companies just have one module. Like Pfizer has demand planning and it has to deploy that globally. So there is a lot of other opportunities to upsell more products in these companies.

These are some of the other verticals we sell to, the service parts, durable goods arena, specialty retail furniture. Furniture has been kind of a hot space for us in the past 12 to 18 months. As we all know, the furniture industry is going through a fairly rapid transformation of moving lot of their manufacturing overseas, and they really have to play catch-up on the technology front. So, we actually have some good wins in the furniture industry.

This is a Gartner Magic Quadrant slide; it kind of gives you a feel for who our competitors are and where we are in the competition with them. There is no one in the leadership box in the upper right hand side. So, the second box you want to be in is the visionary box in the lower right. We are there, that’s Logility, i2 and SAP are in the visionary box.

I would say our main competitor right now is Manugistics. But they are fairly distracted because they just got acquired by JDA Software right now.

i2, we don't see as much as we used to in the past. Their product is more complex and not a packaged type solution and it doesn't really play us well in the verticals we sell to.

These are the competitive differentiators that our customers tell us why they bond with us. They like the fact that we are fast to deploy. Our average time to deploy, in which a SKU can actually get up and running, low end on a six month, high end on a nine month timeframe, which is fairly low in this industry. Our functionality is very vertically focused and we can really implement and we know the problems of our customers.

And they also like the fact, that we do the planning side. In other words the demand planning and understanding your supply chain planning. And we also do execution, which is the warehousing and transportation. And we also have a global sourcing product that actually helps companies source from China, for instance.

The next slide here is basically some stats of these customers. These are select success stories. Customers have given us these percentages that they've achieved when they implemented our software. All these items here are millions of dollars worth of cost savings for these companies.

In fact, (inaudible) actually spoke at our user conference a year-ago and actually really touted the improvement. They were amazed at the efficiencies they were able to obtain. While I don't have it up there, but their cash-to-cash cycle went from 130 days to less than 25 days, which is very important in the retail space. Basically the time that cash goes out and cash comes back on the products. So these are all kind of great stories.

So how do we plan to grow? We continue to divest in R&D. Even though we are a profitable company, we are investing a pretty material amount of our percentage of revenues back in the R&D over 19%. And if you go back into the '03 timeframe, it was actually closer to 20% to 24%.

We're increasingly adding functionality to our products to the verticals we sell to. We're also trying to expand our distribution channels. We have open sales positions right now to increase the direct model at the high-end and also we're trying to get more value-added resellers into our channel.

And recently we announced, we have an SAP relationship. Even though we compete with SAP in the high-end, they are actually reselling our demand solutions product in the mid SMB market because they don't have a solution.

And then acquisitions; we're constantly looking for other acquisitions. And this is the criteria we are looking for where we want to make sure it's synergistic with Logility, because that's where we really see the opportunity to grow the business.

It could be in a new market or a new vertical or it has got to have a productive sales channel, and it would be nice actually to increase our international presence, where about 17% of our revenues are international. We'd like to actually increase that, and it should be accretive.

And this is an acquisition we did 2.5 years ago. The reason why we have still have it on here is because it actually gives a good feel for our thinking about what we're looking for acquisitions. We paid a little, under one-times revenues and we were able to obtain over 800 customers on active maintenance.

And again, that's a great distribution channel of 23 dedicated value-added resellers internationally. And really enabled us to expand our footprint, not only for the demand management products that tucked under Logility, but actually there was lot of cross-selling opportunities between the two entities.

The demand management product is considered kind of a lower-end product or less functionality than the Voyager product, which is the high-end. And we were able to upsell a lot of these customers who are on active maintenance.

And also by having more feet on the street from the VAR channel, they were actually aware of lot more deals that were out there. And they passed some of them up to the higher-end type solutions.

So looking at our financials, we've been profitable for the past 24 consecutive quarters. We've been buying back Logility stock and American Software stock over the past couple of years. And American Software has a quarterly dividend of $0.08 per share. And we have almost $70 million in cash investments, EBITDA is 12.2, trailing 12 and no debt.

We just announced our third quarter '07 results. This is the January results. The license fees grew 16% year-over-year. Total revenues increased to 5%. And our operating income increased 40%, to $3 million for the third quarter. And I mentioned the cash already. The cash is actually a year-over-year increase of $11.4 million.

This is a visual on the revenue increase, you can see the trends for the last three years has been up nicely on the revenues. We're really seeing a real improvement on Logility side and as far as selling in the supply chain space.

And this is the driving indicator of a software company's increase to be able to treat your license fees. So, that's the revenue growth on the license fee side, you can see the light green increase, we had a little bit of a drop in the third quarter, but that's one or two deals for us. So, it's just timing of deals. And you can see in the third quarter it came up very nicely.

And with that increase, being a software company, a lot of it drops at the bottom-line since you get to a certain inflection point and as you can see with the operating income increasing pretty materially over the last three years up to $3 million for the third quarter.

And on top of increasing license fees, we also like to have the recurring revenue stream, which actually is nice to have because it's perpetual. We have an over 90% retention rate on our customers renewing maintenance. So it's nice having that annuity there and that's nicely increasing as you can see over the years. And then also our services are relatively recurring revenue stream.

So, why a dividend for a software company, people ask me that? And, saying well I guess one of the reasons we answer is because we can. Since we implemented a dividend back in '04 we had $66.4 million of cash and investments at that time. And since we implemented dividend, we paid over $20 million of dividends out. We've actually purchased demand management in the process that was in that year, fiscal '05 for $8.6 million and we've repurchased $3 million worth of stock and investments in that period and now at the end of that 3.5 year period or 2.5 year period, we have more cash than we started with.

So, we are able to buy a company and actually pay a pretty aggressive dividend and still have more cash than we started with. So, we are pretty comfortable with our cash generation right now.

This is just a financial metric slide on where we are on our EV to EBITDA. It's about a little less than 10 times right now and about 1.5 times sales EV to revenues.

And one other thing I didn't mention is that building you see there is we actually own that building, so that's kind of a hidden asset within the balance sheet, that's carried on the balance sheet of about $7 million, but that's in the heart of the Buckhead, Atlanta and it's about five acres. So we think its way up above $7 million value right now. So, just want to mention that. Any questions, yeah.

Question-and-Answer Session

Unidentified Audience Member

[Question Inaudible].

Vince Klinges

Right now Logility is not under 404 of Sarbanes Oxley, so it doesn't have the massive burden of 404 right now. It varies on accounting department, so there's not a lot of cost synergies that would be saved by pulling Logility in.

The feeling right now, both Boards are considering it. Its just that timing isn't right now to do it. We feel like we are executing on the business side. We just don't have a distraction of having to deal with doing a tender right now on financial engineering, we just wanted to make sure that we're executing on the business front.

We really think have an opportunity because a lot of our competitors have either gone away or been acquired and we think it's a really great opportunity for us to really excel on the business front.

Financial engineering right now would be a little bit of a distraction for the management team.

Unidentified Audience Member

[Question Inaudible].

Vince Klinges

There are two separate Boards, yeah. There are two separate boards from Logility. As far as Logility's operating, it has separate sales force, separate development focus, separate R&D, separate support. American Software shares one accounting function that would be me, the CFO.

Unidentified Audience Member

[Question Inaudible].

Vince Klinges

Yeah. So, there will be some cost savings by pulling the public entity about $400,000 a year. We have one last audit to do on Logility from KPMG and things like that. But it won't be a huge number.

Unidentified Audience Member

[Question Inaudible].

Vince Klinges

That's not to say we really wouldn't consider it. It's just, whenever the timing is right.

Unidentified Audience Member

[Question Inaudible].

Vince Klinges

Logility has. American has had a pretty aggressive share repurchase program, which it actually is still authorized to do. But once we institute the dividend, we're paying about $2 million a quarter out in cash for the dividend. So we've slowed down the American Software buyback since then.

Unidentified Audience Member

[Question Inaudible].

Vince Klinges

No, we initiated six, and went to seven and now it's at eight. So it has sequentially gone up.

No further questions? Well thank you very much. I appreciate it.

TRANSCRIPT SPONSOR

Hayden Communications ("HC") is a premier information resource to institutions, hedge funds, independent portfolio mangers, buy-side and sell-side analysts, small to large retail brokerage firms and accredited individual investors. With integrity and knowledge, the team of investment professionals at HC draw from “Wall Street” and media backgrounds and continuously strive to maximize the ongoing corporate visibility and market capitalization of clients though a multi tier proactive program. Confidence is essential for a client to attract key investors, customers, and employees. Through a proven track record of exceptional performance, Hayden Communications has established confidence in the marketplace one investor at a time.

Read all investor conference presentation transcripts here.

To sponsor an investor conference presentation transcript please contact us.

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