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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'steleconference. At this time, all participants are ina listen-only mode. Later there will be an opportunity to ask questions duringour Q&A session. Please note this call maybe recorded.

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

Vince Klinges

Thanks, Karen. Welcome to the secondquarter of fiscal 2008 earnings call for American Software. To begin, I wouldlike to remind you that this conference call may contain forward-lookingstatements including statements regarding, among other things our business strategyand growth strategy. Any such forward-looking statements speak only as of thisdate.

These forward-looking statementsare based largely on our expectations and are subject to a number of risks anduncertainties, some of which cannot be predicted or quantified and are beyondour control. Future developments and actual results could differ materiallyfrom those set forth in, contemplated by or underlying the forward-lookingstatements.

There are a number of factorsthat could cause actual results to differ materially from those noticeanticipated by statements made on this call. Such factors include, but are notlimited to changes in general economic conditions, the growth rate of themarket for our products and services, the timely availability and marketacceptance of these products and services, the effect of competitive productsand pricing and the irregular pattern of revenues. In light of these risks anduncertainties, there can be no assurance that the forward-looking informationwill prove to be accurate.

Atthis 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 pleasedto report the results of American Software's second quarter for fiscal year2008, quarter ended on October 31. The second quarter marked our 27thconsecutive quarter of profitability, and for the 14th consecutive quartertotal revenues increased over those attained in the previous year's quarter.The increase for the second quarter revenues was 17% year-over-year. Some ofthe highlights of the quarter from a revenue perspective were license feegrowth of 11%, net services growth of 25%. We also had good increase inmaintenance of 9% compared to second quarter last year.

Our earnings were very good. Second quarter operatingearnings were approximately $2.8 million, up 56% over the same period lastyear. Besides some great customers up, some noble, new and existing customers placingorders in the second quarter included ATEK Medical, CooperVision, CypressMedical, Henkel North America, Nike, PPG Refinish, Premier Farnell, Electroluxand 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 licensingour products. The customers are source of future maintenance and implementationservices revenue as well as being excellent prospects for additional productsales. The company's balance sheet at the end of the quarter remained strongwith cash and investments of over $76 million and no debt. Drilling down alittle bit, Logility had another good quarter for the second quarter revenuewas about $11 million, which is 11% increase compared to the same quarter lastyear. 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 isan increase of 49% over the second quarter last year. The two-brand strategy,we've implemented continues to work for Logility. The Demand Solutions brandand Logility Voyager Solutions brand enable us to provide solutions across theentire spectrum of corporations ranging from Fortune 100 enterprises to verysmall companies. This substantially increases the market we can provide oursupply chain solutions to.

During the quarter, we also expanded our distributionchannel for Demand Solutions with a new [aura] focusing on the US government, selling into that market, andalso 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 thirdquarter. As we have discussed in the past, our license fee revenue has beensomewhat seasonal. Trend based on the last few years is approximately 40% to45% 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, weshould have an, excellent quarters in fiscal 2008 even better than the goodstart we had so far.

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

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

Vince Klinges

Thanks, Mike. Taking a look at total revenues for thequarter, 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, whichincreased 11% to 4.8, compared to 4.3 for the same period last year. Servicesand other revenues increased 25% to $11.6 million, and that was due toLogility, which grew 28% same period last year. And then the other businessunits increased 25% compared to the same period last year. Maintenance revenuesalso increased 9% to $7.1 million compared to $6.6 million during last year andthat's primarily due to increases at Logility which increased 12% compared to thesame period last year.

Taking a look at overall gross margin it was 50% compared to52% the prior year quarter. Our license fee margin was 68% compared to 63% inthe prior year and that's due to increases in the license fees. Our servicesmargins decreased to 27% compared to 32% for the same period last year andthat's primarily due to majority of the services revenue coming from our ITconsulting business which had lower margins. Our maintenance margins increasedto 74% compared to 73% for the same quarter last year and that's primarily dueto increased maintenance revenue.

Looking at our operating expenses our gross R&D expenseswere 10% of total revenues compared to 11% from the prior year and aspercentage decreased due to higher revenues. As a percentage of revenue salesand 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 andthe percentages also due to higher revenue.

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

On an adjusted net income basis, which excludes theamortization of intangibles related to our DMI acquisition and stock basedcompensation 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 millionor adjusted diluted share of $0.08 for the same period last year.

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

Looking at the numbers for the six months ended October 31,'07total revenues year-to-date increased 12% to $45.3 million, license feesincreased 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 revenuesalso increased 6% to $14 million compared to $13.1 million last year.

Our overall gross margin year-to-date is 51% and thatcompares 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 to30% 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 ourgross operating expenses were 11% of total revenues for both this year and thesame period last year, as the percentage of total revenues sales and marketing expenseswere 16% of revenues compared to 17% same period last year. And D&Aexpenses were 15% of revenues compared to 16% same period last year. So, ouroperating income year-to-date increased 54% to $5.3 million compared to $3.4million last year.

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

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

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

Looking at the balance sheet our financial position remainedstrong with cash investments of approximately $76.4 million as of the end of October 31st, 2007 and nodebts. This is a sequential increase of over $800,000 and an increaseyear-over-year from the same period last year of $11.3 million.

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

Our current ratio increased to 3.7 compared to 3.2 sameperiod last year. Our Day Sales Outstanding as of October 31st, 2007 decreased to 66 dayscompared 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 fromthe side of Drake Johnstone of Davenport. Go ahead please. It looks like hewithdrew his question; we can take our next question from the side of DavidSoetebier 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 goodquarters: has something changed in that business versus we had couple of yearsthey were quite down?

Mike Edenfield

While New Generation did have a strong quarter and we've gota good pipeline and off to a strong start this quarter. So, they have actuallylooked at the long-term trends, and they have been growing. So, they are justcontinuing 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 backon track. So, that's the main thing that drove that.

David Soetebier -J.M. Dutton Associates

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

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 theside of [Jim Rainey] of UBS. Go ahead please.

Jim Rainey – UBS

Good quarter, guys, thanks. I’m recently building theposition in stock and some of my retail clients ask me, and since the Logilityis 80% owned by American Software: what benefits does American Software receivefrom having a separate kind of tracking stock? And then: how those benefitsoutweigh the extra expenses that must be involved with having two differentcorporations?

Mike Edenfield

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

Jim Rainey - UBS

Thank you.

Operator

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

Drake Johnstone - Davenport

Hey, guys, if any of the questions have been asked, Iapologize, 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 providethose detail in your 10-Q, that may because a lot of people recall, you mightprovide some more details on this call. And that is when you look at thelicense revenue services and maintenance obviously -- generally you breakupsome details there: could you breakout on the call here how much of theservices came from The Proven Method?

Mike Edenfield

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

Drake Johnstone - Davenport

Okay. And then: could you provide more color on themaintenance revenue, to what extent was that maintenance revenue, in there anysort of price increases versus maintenance derived from new software licensesales?

Mike Edenfield

Oh, the increase. You are talking about the increase. Youare 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 licensefees the last two, three years now. There have been some price increases, butnot to that extent.

Drake Johnstone - Davenport

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

Vince Klinges

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

Drake Johnstone - Davenport

Okay. That's great. And the other question, also, it lookslike that in this quarter that NGC had a pretty strong quarter, which drewnicely to results in the end and the legacy in American Software, it looks likeyou 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 majorityyou had 42% software license growth. Did you feel that you have a pretty solidpipeline across the company not only in the ERP side but also the majoritygoing into third quarter?

Mike Edenfield

Yes we do. We're pleased with ourpipeline, we have only into the third quarter here, and we're pleased where weare year-to-date. I mean, obviously, we would have liked to have done a littlemore on Logility for Q2 in the license fees, but Logility actually had a greatQ1.

Drake Johnstone - Davenport

Yes.

Mike Edenfield

First half is weak for us and Q1 didn’tlook 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 canbe 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 thirdquarter.

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 knowthere 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 thesame 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 SamRebotsky of SER Asset Management. Go ahead please.

Sam Rebotsky - SERAsset Management

Good afternoon gentlemen.

Mike Edenfield

Hi, Sam.

Vince Klinges

Hi, Sam.

Sam Rebotsky - SERAsset Management

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

Mike Edenfield

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

Sam Rebotsky - SERAsset Management

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

Mike Edenfield

That's right.

Sam Rebotsky - SERAsset Management

SAP, IBM and Oracle trying to sort of consolidate: do yousee more consolidation going forward and what do you see relative to American Softwareand Logility? Do you think that you should be making acquisitions or you shouldbe 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 tothe same customers that you're selling to now?

Mike Edenfield

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

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

Sam Rebotsky - SerAsset Management

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

Mike Edenfield

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

Sam Rebotsky - SerAsset Management

So, it could go both ways, but I guess at the end of theday, 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 exitstrategy might be appropriate to, I guess, just to get the prices right, isthat on the table also or is that less of spending any time with --

Mike Edenfield

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

Sam Rebotsky - SerAsset 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 yourinterest and support of American Software. We look forward to publishing goodresults next quarter. Thank you.

Operator

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

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