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American Software Inc. (NASDAQ:AMSWA)

F2Q08 (Qtr End 10/31/07) Earnings Call

December 06, 2007 5:00 pm ET

Executives

Vince Klinges - CFO

Mike Edenfield - EVP and CEO of Logility

Analysts

David Soetebier - Dutton Associates

Jim Rainey - UBS

Drake Johnstone - Davenport

Sam Rebotsky - SER Asset Management

Operator

Welcome to today's teleconference. At this time, all participants are in a listen-only mode. Later there will be an opportunity to ask questions during our Q&A session. Please note this call maybe recorded.

I will now like to turn the program over to Mr. Vince Klinges. Go ahead, sir.

Vince Klinges

Thanks, Karen. Welcome to the second quarter of fiscal 2008 earnings call for American Software. 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 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 would like to turn the call over to Mike Edenfield, Executive Vice

President, of American Software, and CEO of Logility.

Mike Edenfield

Thanks, Vince. Good afternoon, everyone and thank you for participating on this call. We are extremely pleased to report the results of American Software's second quarter for fiscal year 2008, quarter ended on October 31. The second quarter marked our 27th consecutive quarter of profitability, and for the 14th consecutive quarter total revenues increased over those attained in the previous year's quarter. The increase for the second quarter revenues was 17% year-over-year. Some of the highlights of the quarter from a revenue perspective were license fee growth of 11%, net services growth of 25%. We also had good increase in maintenance of 9% compared to second quarter last year.

Our earnings were very good. Second quarter operating earnings were approximately $2.8 million, up 56% over the same period last year. Besides some great customers up, some noble, new and existing customers placing orders in the second quarter included ATEK Medical, CooperVision, Cypress Medical, Henkel North America, Nike, PPG Refinish, Premier Farnell, Electrolux and SanMar Corporation.

We added 27 new customers in the quarter. During the quarter, we signed license agreement with customers located in 13 different countries. Those countries were Australia, Brazil, Canada, China, France, Germany, Italy, Malaysia, South Africa, Switzerland, Thailand, the United Kingdom and the United States.

We continue to encourage our number of new customers licensing our products. The customers are source of future maintenance and implementation services revenue as well as being excellent prospects for additional product sales. The company's balance sheet at the end of the quarter remained strong with cash and investments of over $76 million and no debt. Drilling down a little bit, Logility had another good quarter for the second quarter revenue was about $11 million, which is 11% increase compared to the same quarter last year. All revenue streams grew lead by services with 28% year-over-year growth, maintenance increased 12% and license fees were up 2% over last year.

Operating earnings were $2.2 million for Logility, which is an increase of 49% over the second quarter last year. The two-brand strategy, we've implemented continues to work for Logility. The Demand Solutions brand and Logility Voyager Solutions brand enable us to provide solutions across the entire spectrum of corporations ranging from Fortune 100 enterprises to very small companies. This substantially increases the market we can provide our supply chain solutions to.

During the quarter, we also expanded our distribution channel for Demand Solutions with a new [aura] focusing on the US government, selling into that market, and also our first aura on the name of China, which is based in Shanghai.

Regarding our outlook for the third quarter of fiscal 2008, the third quarter has an opportunity to be better than last year's third quarter. As we have discussed in the past, our license fee revenue has been somewhat seasonal. Trend based on the last few years is approximately 40% to 45% of license fees coming in the first half of the fiscal year and 55% to 60% generated in the second half of the fiscal year. If that trend continues, we should have an, excellent quarters in fiscal 2008 even better than the good start we had so far.

Our pipeline gives us the opportunity to finish the year strongly, but as usual closure rates will [dip in].

I would now like to turn the call over to Vince for a detailed review of the financial results.

Vince Klinges

Thanks, Mike. Taking a look at total revenues for the quarter, as Mike indicated, they increased 17% to $23.6 million, compared to $20.2 million the same quarter last year. This is driven by license fees, which increased 11% to 4.8, compared to 4.3 for the same period last year. Services and other revenues increased 25% to $11.6 million, and that was due to Logility, which grew 28% same period last year. And then the other business units increased 25% compared to the same period last year. Maintenance revenues also increased 9% to $7.1 million compared to $6.6 million during last year and that's primarily due to increases at Logility which increased 12% compared to the same period last year.

Taking a look at overall gross margin it was 50% compared to 52% the prior year quarter. Our license fee margin was 68% compared to 63% in the prior year and that's due to increases in the license fees. Our services margins decreased to 27% compared to 32% for the same period last year and that's primarily due to majority of the services revenue coming from our IT consulting business which had lower margins. Our maintenance margins increased to 74% compared to 73% for the same quarter last year and that's primarily due to increased maintenance revenue.

Looking at our operating expenses our gross R&D expenses were 10% of total revenues compared to 11% from the prior year and as percentage decreased due to higher revenues. As a percentage of revenue sales and marketing expenses were 16% of revenues or $3.8 million for the quarter, and that compares to 17% for the same quarter last year and that decreased and the percentages also due to higher revenue.

G&A expenses were $3.2 million or 14% of total revenues and that compares to 16% for the same period last year, and again that was due to higher revenues driving the percentage of revenues down for G&A. So, operating income expense increased 56%, $2.8 million for the quarter and that compares to $1.8 for the same quarter last year. Our EBITDA was $3.8 million compared to $2.9 million for the same period last year. So our GAAP net income increased to 40% to $2.5 million or earnings per diluted share of $0.10 and that compares to net income of $1.8 million or $0.07 earnings per diluted share for the same period last year.

On an adjusted net income basis, which excludes the amortization of intangibles related to our DMI acquisition and stock based compensation expense was $2.8 million or adjusted earnings per diluted share of $0.11 for the second quarter and that compares to a net income of $2.1 million or adjusted diluted share of $0.08 for the same period last year.

International revenues this quarter were approximately 9% of total revenues and that compares to 10% in the same quarter last year.

Looking at the numbers for the six months ended October 31,'07 total revenues year-to-date increased 12% to $45.3 million, license fees increased 14% to $9.9 million compared to $8.7 million same period last year. Services revenues increased 16% to $21.4 million and our maintenance revenues also increased 6% to $14 million compared to $13.1 million last year.

Our overall gross margin year-to-date is 51% and that compares to 52%. Last year's year-to-date license fees margins increased to 67% compared to 65% year-to-date last year. Services margins were a 29% compared to 30% in the same period last year and the maintenance margins were 74% year-to-date compared to 73% for the same period last year.

Looking at operating expenses on the year-to-date basis our gross operating expenses were 11% of total revenues for both this year and the same period last year, as the percentage of total revenues sales and marketing expenses were 16% of revenues compared to 17% same period last year. And D&A expenses were 15% of revenues compared to 16% same period last year. So, our operating income year-to-date increased 54% to $5.3 million compared to $3.4 million last year.

Our EBITDA was $7.4 million compared to $5.7 million same period last year, so our GAAP net income was $4.5 million year-to-date or $0.17 earnings per share that compares to a net income of $3.1million or $0.12 earnings per share last year.

On an adjusted basis our year-to-date was $5 million or earnings per diluted share of $0.19 and that compares to a net income of $3.7 million or earnings per diluted share $0.14 for the same period last year.

International revenues year-to-date were approximately 9% of total revenues compared to 10% for the same period last year.

Looking at the balance sheet our financial position remained strong with cash investments of approximately $76.4 million as of the end of October 31st, 2007 and no debts. This is a sequential increase of over $800,000 and an increase year-over-year from the same period last year of $11.3 million.

Other aspects of our balance sheet, our accounts receivable billed was $12 million, our unbilled was $5.2 million for a total of $17.3 million of accounts receivable. Our working capital $70.3 million, our deferred revenues are $15.3 million. And our shareholder equity is $88.9 million.

Our current ratio increased to 3.7 compared to 3.2 same period last year. Our Day Sales Outstanding as of October 31st, 2007 decreased to 66 days compared to 79 days, same time last year.

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

Question-and-Answer-Session

Operator

(Operator Instructions) We'll take our first question from the side of Drake Johnstone of Davenport. Go ahead please. It looks like he withdrew his question; we can take our next question from the side of David Soetebier of Dutton Associates. Go ahead please.

David Soetebier - Dutton Associates

Good afternoon gentlemen.

Mike Edenfield

Hi, David.

David Soetebier - Dutton Associates

It looks like NGC and The Proven Methods had very good quarters: has something changed in that business versus we had couple of years they were quite down?

Mike Edenfield

While New Generation did have a strong quarter and we've got a good pipeline and off to a strong start this quarter. So, they have actually looked at the long-term trends, and they have been growing. So, they are just continuing that trend. The Proven Method did have an increase in services, which we anticipated and a large customer who had paused for a while got back on track. So, that's the main thing that drove that.

David Soetebier - J.M. Dutton Associates

And second one on Logility, maintenance revenues: are the maintenance renewals running at normal rates? Have there been any changes in that?

Mike Edenfield

Not about where it's normally been.

David Soetebier - J.M. Dutton Associates

All right. Thank you.

Operator

(Operator Instructions) Our next question comes from the side of [Jim Rainey] of UBS. Go ahead please.

Jim Rainey – UBS

Good quarter, guys, thanks. I’m recently building the position in stock and some of my retail clients ask me, and since the Logility is 80% owned by American Software: what benefits does American Software receive from having a separate kind of tracking stock? And then: how those benefits outweigh the extra expenses that must be involved with having two different corporations?

Mike Edenfield

Well, if you go back to the reasons, we structured it this way, I guess about ten years ago now, at the time Logility was growing much faster than American. And recently, although it wasn’t in this quarter, but recently it’s been doing that, particularly on the earnings line. But it was hidden, those sort of hidden assets within American. And so, it was to highlight the fact that we did have good asset that was growing quite fast in hot markets [front-end] management market. So, the expenses aren’t necessarily as large as some people think they are. We’ve been able to economize, while there are some extra expenses, but we think at this time anyway the pluses outweigh the minuses.

Jim Rainey - UBS

Thank you.

Operator

And our next question will come from the side of Drake Johnstone of Davenport. Go ahead please.

Drake Johnstone - Davenport

Hey, guys, if any of the questions have been asked, I apologize, I got cutoff momentarily. Nice quarter.

Mike Edenfield

Thank you.

Vince Klinges

Thanks.

Drake Johnstone - Davenport

A question I had for you, and I realize that you provide those detail in your 10-Q, that may because a lot of people recall, you might provide some more details on this call. And that is when you look at the license revenue services and maintenance obviously -- generally you breakup some details there: could you breakout on the call here how much of the services came from The Proven Method?

Mike Edenfield

Sure, Drake. Yeah of the $11.6 that we reported approximately $7 million was The Proven Method.

Drake Johnstone - Davenport

Okay. And then: could you provide more color on the maintenance revenue, to what extent was that maintenance revenue, in there any sort of price increases versus maintenance derived from new software license sales?

Mike Edenfield

Oh, the increase. You are talking about the increase. You are talking about the increase in maintenance.

Drake Johnstone - Davenport

Yes. Yeah correct.

Mike Edenfield

Yes, most of it is due to the momentum we had in license fees the last two, three years now. There have been some price increases, but not to that extent.

Drake Johnstone - Davenport

And then, you mentioned that you had was it 24 new clients and the question I would have is: if you look at your software revenue line in the second quarter, what percent of the license revenue can be attributed to new clients to the firm versus existing clients?

Vince Klinges

For our 27 new customers for American Software in the quarter, it's been running, and I don't know whether this quarter is been running over 50%, 55% to 60%. It fluctuates, as you can imagine from quarter-to-quarter.

Drake Johnstone - Davenport

Okay. That's great. And the other question, also, it looks like that in this quarter that NGC had a pretty strong quarter, which drew nicely to results in the end and the legacy in American Software, it looks like you have added some business? And Mike, maybe you could comment on with Logility, I feel you had -- and I realize that as a small company, quarters tend to be lumpy in terms of signing customers, but I noted majority you had 42% software license growth. Did you feel that you have a pretty solid pipeline across the company not only in the ERP side but also the majority going into third quarter?

Mike Edenfield

Yes we do. We're pleased with our pipeline, we have only into the third quarter here, and we're pleased where we are year-to-date. I mean, obviously, we would have liked to have done a little more on Logility for Q2 in the license fees, but Logility actually had a great Q1.

Drake Johnstone - Davenport

Yes.

Mike Edenfield

First half is weak for us and Q1 didn’t look weak at all, was very strong, and that was coming off of a very strong Q4. And so, as you referenced, we've said this, the last several calls, that we can be lumpy possibly and sometimes not as possibly as we would like, but I am -- we're pleased where we are and pleased with the pipeline going into the third quarter.

Drake Johnstone - Davenport

So you are feeling that notwithstanding [recurring] on the economy that the companies have [buying slack] in software, even the demand appears to remain unabated for this slack in software?

Mike Edenfield

Yeah. So far that's what we feel. I know there is a lot in the press about: “recession this or recession that”, but we hadn't really seen it yet (inaudible), I would probably be saying the same thing in the next call.

Drake Johnstone - Davenport

All right, great! Thank you very much.

Mike Edenfield

Thank you.

Operator

And our next question will come from the side of Sam Rebotsky of SER Asset Management. Go ahead please.

Sam Rebotsky - SER Asset Management

Good afternoon gentlemen.

Mike Edenfield

Hi, Sam.

Vince Klinges

Hi, Sam.

Sam Rebotsky - SER Asset Management

Did you feel, how are you doing against your competition? Do you think you're taking any [shares] from them as far as business that you have been doing?

Mike Edenfield

Yes, I think, we're, I mean: if you look at our main competitors, traditional competitors from the past, their license fees have shrunk dramatically and ours have grown. I am speaking primarily on the supply chain market here.

Sam Rebotsky - SER Asset Management

Yet in the whole software industry, I guess, there has been a lot of consolidation.

Mike Edenfield

That's right.

Sam Rebotsky - SER Asset Management

SAP, IBM and Oracle trying to sort of consolidate: do you see more consolidation going forward and what do you see relative to American Software and Logility? Do you think that you should be making acquisitions or you should be acquired? Do you have any thoughts about what is, sort of, an ideal status? Should you be making acquisitions on companies that you may build to sell to the same customers that you're selling to now?

Mike Edenfield

Well, I do think there is going to be more consolidation in the software industry and there has been evidence of that as recently as the last as we follow it, not last week. Yes, I think one of the things that really helped us to keep going a few years ago was, when we made a very good acquisition of Demand Management. So, we're constantly looking for good acquisitions. However, we are very conservative, just because we have $76 million doesn't mean we want to go out and buy companies for the sake of buying them and have a short-term benefit here.

We want to look for something that we understand, that is very complimentary for the market we are in, that comes with some assets, like a good customer base, a good recurring revenue stream and a productive sales channel. I mean: we've got a lot of products to sell with the sales force we have. We don't necessarily want to go by the technology and clamp that into our sales channels, although, I wouldn't rule that out. But in general, we're looking for companies that can sell the product that we're buying as well, that have a channel. So, we're evaluating them every week. And our requirements are pretty stringent, so, hopefully, we'll have one in the near future, but we might not.

Sam Rebotsky - Ser Asset Management

So, at this point, it appears that maybe some of the prices maybe higher than you're willing to pony up to, at this point in time? Or: is that that you have not seen anything or haven't made a transaction?

Mike Edenfield

Well, when we find what we like, generally the price might be higher then we think it's prudent to pay, then we look at a lot that we determine we don't like, and no matter what price is.

Sam Rebotsky - Ser Asset Management

So, it could go both ways, but I guess at the end of the day, at some point in time, if the prices that are being bid up for a company, say like American Software and Logility, I guess an exit strategy might be appropriate to, I guess, just to get the prices right, is that on the table also or is that less of spending any time with --

Mike Edenfield

As a public company I think, we have a fiduciary responsibility if someone is interested in acquiring us at a fair price to listen to it. So, I can't say it’s off the table.

Sam Rebotsky - Ser Asset Management

Well good luck. Keep doing the good work you're doing.

Mike Edenfield

Thank you very much.

Operator

And it appears we have no further questions.

Mike Edenfield

Thank you very much for participating on the call and your interest and support of American Software. We look forward to publishing good results next quarter. Thank you.

Operator

This concludes today's teleconference. You may disconnect at anytime. Thank you. And have a great day.

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