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

Dec. 7.07 | About: Logility Inc. (LGTY)

Logility, Inc. (LGTY) F2Q08 Earnings Call December 7, 2007 9:00 AM ET

Executives

Vincent C. Klinges - Chief Financial Officer

J. Michael Edenfield - President, Chief Executive Officer,Director

Analysts

Drake F. Johnstone - Davenport & Co.

David Soetebier - Dutton Associates

Sam Rebotsky - SER Asset Management

Operator

Welcome to today’s teleconference. (Operator Instructions) Iwill now turn the program over to Vincent Klinges, Chief Financial Officer. Goahead, sir.

Vincent C. Klinges

Good morning and welcome to Logility's second quarter fiscal’08 conference call. To begin, I’d like to remind you that this conference callmay contain forward-looking statements, including statements regarding amongother things our business strategy and growth strategy. Any suchforward-looking statements speak only of this date. These forward-lookingstatements are based largely on our expectations and are subject to a number ofrisks and uncertainties, some of which cannot be predicted or quantified andare beyond our control.

Future developments and actual results could differmaterially from those set forth in, contemplated by, or underlying theforward-looking statements. There are a number of factors that could causeactual results to differ materially from those anticipated by statements madeon this call. Such factors include but are not limited to changes in generaleconomic conditions, the growth rate of the market for our products andservices, the timely availability and market acceptance of these products andservices, the effect of competitive products and pricing, and the irregularpattern of revenues.

In light of these risks and uncertainties, there could be noassurance that the forward-looking information will prove to be accurate.

At this time, I would like to turn the call over to MikeEdenfield, CEO of Logility.

J. Michael Edenfield

Thanks, Vince. Good morning, everyone and thank you forparticipating in this call. I have some comments on the second quarter. Vincewill review the details on the financial results and then we will take yourquestions.

Logility had another good quarter. For the second quarter,revenue was $11.1 million, an 11% increase compared to the same quarter lastyear. All revenue streams contributed to growth led by services, with 28%year-over-year growth. Maintenance also grew 12% year over year and licensefees were up 2% over last year.

Operating earnings were excellent, coming in at $2.2million, an increase of 49% over second quarter last year.

Some of the notable new and existing customers closed in thesecond quarter include Atek Medical,CooperVision, Cypress Medical, Henkel North America, Nike, PPG Refinish,Premier Farnell, Electrolux, and SanMar Corporation.

We added 24 new customers in the quarter. Customers from 12countries signed license agreements with Logility in the quarter. Thosecountries include Australia, Brazil, China, France, Germany, Italy, Malaysia,South Africa, Switzerland, Thailand, the United Kingdom and the United States.

We continue to be encouraged by the number of new customerslicensing our products. Customers are a source of future maintenance andimplementation services revenue, as well as being excellent prospects foradditional product sales.

The company continues to have a strong balance sheet withcash and investments of almost $40 million and no debt. Logility's strongfinancial position and organizational stability continues to be a competitiveadvantage versus many of our competitors. Our two brand strategy continues towork. These brands Demand Solutions and Logility Voyager solutions enable us toprovide solutions across the entire spectrum of corporations ranging fromFortune 100 enterprises to very small companies. This substantially increasesthe market we can provide our supply chain solutions to.

We also expanded our distribution channel for DemandSolutions with a new var focusing on the federal government marketplace and anew var 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. The trend based on the last few years is approximately 40%to 45% of licensees coming in the first half of the fiscal year; 55% to 60%generated in the second half of the fiscal year. If that trend continues, wewill have a terrific close for fiscal 2008.

The pipeline gives us the opportunity to finish the yearstrongly. As usual, close rates will be key.

I would now like to turn the call over to Vince for adetailed review of the financial results for the second quarter andyear-to-date.

Vincent C. Klinges

Thanks, Mike. Comparing the second quarter of fiscal 2008with the same period last year, as Mike indicated our overall revenuesincreased 11% to $11.1 million compared to $10.0 million last year. Ourlicensees increased 2% to $3.4 million compared to $3.3 million in the sameperiod last year. Services and other revenues increased 28% to $2 millioncompared to $1.6 million the same period last year, and that was due toincreased implementation project work from increased license fees in the priorquarters and also better billing utilization.

Our maintenance revenues increased 12% to $5.7 million forthe quarter compared to $5.1 million for the same quarter last year, primarilydue to increased license fees. Our overall gross margin increased to 66% forthe current quarter compared to 65% for the same quarter last year. Our licensefee margin was 55% for both periods. Services margins increased to 50% for thecurrent period compared to 47% last year and that again is due to increasedimplementation work from prior license fee sales and improved buildingutilization. Maintenance margin was 78% for this quarter when compared to 76%at the same time last year and that’s due to increased revenues.

Looking at operating expenses, our gross R&D expensesincreased 11% compared to last year due to increased investments in our productdevelopment. As a percentage of revenues, the gross R&D expenses are downto 17% compared to 18%, and that’s due to higher revenues. As a percentage oftotal revenues, sales and marketing expenses were 22% or $2.4 million for thequarter, and that compares to 24% for the same quarter last year.

G&A expenses as a percentage of revenue were 12% for thecurrent quarter compared to 13% for the prior year quarter and that’s also dueto higher revenues. So our operating earnings increased 49% to $2.2 million forthe current quarter compared to operating earnings of $1.5 million for the samequarter last year.

Our EBITDA was $3 million compared to $2.3 million lastyear. Our GAAP net income increased 50% to $1.7 million or $0.13 earnings perdiluted share for the quarter and that compares to a net income of $1.1 millionor $0.08 earnings per diluted share for the same period last year.

Adjusted net income, which excludes the amortization ofintangibles related to acquisitions and stock option compensation expense, was$1.8 million or $0.14 earnings per diluted share compared to $1.3 million or$0.10 earnings per diluted share last year.

International revenues for the quarter were up to 16% oftotal revenues compared to15% for the same quarter last year.

Looking at the six months ended October 31 ’07 compared tothe same period last year, total revenues year-to-date increased 18% to $23.1million compared to $19.6 million last year, and this was mainly due to licensefees which increased 22% to $8.1 million compared to $6.6 million over the sameperiod last year. Also, services revenues increased 35% to $4.1 millionyear-to-date compared to $3 million last year. Maintenance revenues alsoincreased 10% to $11 million compared to $10 million in the same period lastyear.

Our overall gross margins year-to-date increased to 67%compared to 64%. License fees margins increased to 61% compared to 57% lastyear. Our services margins were 50% compared to 44% for the same period lastyear and our maintenance margin also increased to 79% when compared to 75% lastyear.

Looking at operating expenses year-to-date, our grossR&D expenses were 17% of total revenues compared to 18% in the same periodlast year. As a percentage of total revenues, sales and marketing expenses were21% year-to-date compared to 25%. G&A expenses were 11% compared to 12% ofrevenues last year.

Logility year-to-date had operating income increase of 91%to $5.2 million compared to operating income of $2.7 million last year. OurEBITDA was $6.8 million compared to $4.4 million last year, so GAAP net incomewas $3.5 million, or earnings per diluted share of $0.26 compared to net incomeof $2 million, or earnings per diluted share of $0.15.

Adjusted net income year-to-date was $4.2 million, or $0.31earnings per diluted share. That compares to $2.4 million earnings per dilutedshare of $0.18. International revenues year-to-date were approximately 16% oftotal revenues and that compares to 15% year-to-date last year.

Looking at the balance sheet, the company’s financialposition remains strong with cash and investments of approximately $39.7million as of the end of October 31, 2007, with no debt. That is a sequentialincrease $3.5 million and a year-over-year increase of $9.9 million.

Looking at other aspects of the balance sheet, our billedaccounts receivables approximately $5 million. Our unbilled is $1.4 million,for a total of $6.3 million. Working capital is $33.4 million. Our deferredrevenues are $10.8 million and our stockholder equity is $44.6 million.

Our current ratio is up to 2.8 compared to 2.0 in the sameperiod last year. Our day sales outstanding improved to 52 days as of the endof October 31, 2007, and that compares to 86 days the same time last year. Thisdecrease is primarily due to timing of license fee sales closing towards theend of last year’s quarter, which temporarily raises accounts receivablebalance and therefore the DSO last year, and also improved collections in thecurrent quarter.

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

Question-and-AnswerSession

Operator

(Operator Instructions) We’ll take our first question from DrakeJohnstone with Davenport. Go ahead, sir.

Drake F. Johnstone -Davenport & Co.

A question for you; so Logility in the first half of fiscal’08 grew software license revenue 22% year over year and you had lower growththere in Q2 and it was strong in Q1. From what you’ve said, it sounds like you’vegot a strong pipeline for Logility. So the question I have is do you think[it’s staying [inaudible]] at the pace you expected, has good potential togenerate software license growth up in that range? That 20 -- sort of in the20s [would be sort of] typical for Logility?

J. Michael Edenfield

We have the potential to do that, Drake. We’ve got a goodpipeline for the third quarter, better than we had last quarter and we’reexcited about the opportunity. As we discussed in the past, the quartersometimes might not be strong in third quarter and we might be weaker in fourthquarter or vice versa. I think last quarter or last year for third quarter, wethought we were going to do super and it really ended up we did good, but wedid super in fourth quarter. But we are very excited about the pipeline we havegoing into third quarter and we think we’ll have a strong second half.

Drake F. Johnstone -Davenport & Co.

Okay, and then to what -- is your pipeline, do you feel it’sstrong for both Logility and Demand Solutions? Is it sort of balanced betweenthe two or is it skewing towards one more than the other?

J. Michael Edenfield

No, it’s strong for both.

Drake F. Johnstone -Davenport & Co.

And to what extent do your new vars, you’ve got a new varfor Demand Solutions for the [inaudible] side, a new var targeted atgovernment, also a new var in Shanghai. Do you already have potential ordersassociated with those vars?

J. Michael Edenfield

Well, there’s going to be some start-up time for the newvars. We do have -- the government one, in particular, is going to take sometime. The one in China does have a nice prospect but we’re not really countingon anything there. That would be a pleasant surprise in the next quarter ortwo.

But we’ve also been working hard to increase the size of thedistribution channel within the existing var channel by help coaching them toexpand their sales force. So we have on board more sales people within theexisting var network than we did this time last quarter, and definitely than wedid this time last year.

So we’re not only expanding the vars, many of our vars aregetting on board and expanding their sales channel within their existingterritories.

Drake F. Johnstone -Davenport & Co.

And if you looked at the type of business that DemandSolutions has orders in the pipeline for and also Logility, is the deal sizeacross all ranges or are [A deals] doing larger than before?

J. Michael Edenfield

I’d say Demand Solutions probably has more six-figure dealsthan they did this time last year. That’s the -- the new management there hasdone a good job of focusing on increasing the average sales price. And thenLogility is probably about the same as it normally is, deal size. Maybe alittle bigger.

Operator

Thank you. We’ll take our next question from David Soetebierwith Dutton Associates. Go ahead, please.

David Soetebier -Dutton Associates

Good morning, gentlemen. Could you talk about the size ofthe contracts in the quarter? Were there a number of big contracts? And do youhave a number of big contracts in the pipeline?

J. Michael Edenfield

I would say the size was about normal. There wasn’t anythingvery large in the quarter, just typical, I would say, for both brands.

This coming quarter we do have a couple of nice sized dealsin the quarter that -- in the pipeline, I should say, for the quarter thatcould make a difference. We’ll have to see if we get those or not.

David Soetebier -Dutton Associates

And could you quantify the increase in the Logility in-housesales force now versus a year ago?

J. Michael Edenfield

I think we have two or three more people in the salesorganization than we had this time last year.

David Soetebier -Dutton Associates

And on the -- there was a sequential -- you know, you wereup against a tough compare in the licensee sales, $3.4 million versus lastquarter. Would that basically be maybe last quarter had two more sales?

J. Michael Edenfield

You’re talking about Q1 versus Q2?

David Soetebier -Dutton Associates

Right, Q2 versus Q1, right. Did Q1 have maybe two moreLogility sales?

J. Michael Edenfield

It had a pretty large contract in the quarter in Q1 andprobably had another -- I haven’t looked back at Q1, to be honest with you, butprobably had another incremental sale or two.

David Soetebier -Dutton Associates

All right. Thank you very much.

Operator

(Operator Instructions) We’ll take our next question fromSam Rebotsky with SER Asset Management. Go ahead, please.

Sam Rebotsky - SERAsset Management

Good morning, gentlemen. The 52 days outstanding of accountsreceivable is indicative that you had sales in the pipeline that might close inthe beginning of the next quarter. How significant was your expected sales inthe beginning of the next quarter compared to this particular quarter?

Vincent C. Klinges

The DSO is a function of how fast you collect youroutstanding receivables. This doesn’t link to any kind of future pipelineinformation but what it does show you is that we are collecting our accountsreceivables very timely.

Sam Rebotsky - SERAsset Management

I guess my question is not -- I’m making an inference thatif you made a sale at the end of the quarter, the days outstanding would haveincreased. That’s what you --

Vincent C. Klinges

Oh, yes, that’s true, yes.

Sam Rebotsky - SERAsset Management

So I’m sort of making a judgment that you had a lot of salesthat you would have liked to make at the end of this quarter that will go intothe next quarter, so is that fairly significant?

J. Michael Edenfield

I wouldn’t say it’s anymore significant than any otherquarter.

Sam Rebotsky - SERAsset Management

Okay, and as far as not closing any sales, is there any --in other words -- you don’t think it’s anymore significant. Okay, now let meask, as far as -- I guess the stock of Logility the last quarter, I thinkAmerican Software bought some more. Is there any other buying taking place ofLogility? What’s the ability to buy Logility stock in the open market? What isthe open supply there?

Vincent C. Klinges

Last quarter, the first quarter we purchased 30,000 Logilitystock --

J. Michael Edenfield

Logility purchased.

Vincent C. Klinges

Logility purchased.

Sam Rebotsky - SERAsset Management

Okay, and --

Vincent C. Klinges

We did not have any activity in the second quarter. Thecurrent authorization is roughly around 250,000 shares.

Sam Rebotsky - SERAsset Management

Is this another -- one of those things that you expressedthat it’s a good idea for Logility to be public and American Software, so ifyou continue buying stock, is that a good idea or is it preferable to do atransaction as one company? What’s your thoughts about continuing to buy thestock, being less stock out there or which is -- even though it meets the priceyou want when you do the purchase.

J. Michael Edenfield

Well, we have a lot of cash and if somebody presents a blockto us and we think it’s a reasonable price, we might buy it, depending on, youknow, the circumstances at the time.

Sam Rebotsky - SERAsset Management

And the -- with the $30 million in cash, about $3 a sharefor Logility, it would appear that if an acquisition came along, you would --of a company, you would presumably do that in Logility or is there a preferenceor what’s your thoughts about doing the acquisition in American Software orLogility?

J. Michael Edenfield

It would depend on the company we were looking at and wherethey best fit. Both companies are looking to make acquisitions. I’m focused onlooking at them for Logility, obviously, but both companies would -- it woulddepend on the acquisition and where it fit best, in our opinion.

Sam Rebotsky - SERAsset Management

And as far as the cash dividend from Logility, I guessthere’s been no decision on that, even though there’s this $3 per share incash?

J. Michael Edenfield

No, I don’t -- we haven’t been contemplating a cashdividend, to my knowledge, anyway.

Sam Rebotsky - SERAsset Management

All right. Sounds good. Logility's done very well and alongwith American Software. Good luck.

Operator

We appear to have no further questions at this time, sir.

J. Michael Edenfield

Well, thank you everyone for being on this call and yourinterest in and support of Logility and we look forward to the next successful conferencecall. Bye.

Operator

This concludes today’s teleconference. Thank you for yourparticipation and you may disconnect at any time.

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