Logility, Inc. F4Q08 (Qtr End 4/30/08) Earnings Call Transcript

| About: Logility Inc. (LGTY)

Logility, Inc. (LGTY) F4Q08 Earnings Call June 19, 2008 9:00 AM ET

Executives

Vincent C. Klinges - Chief Financial Officer

J. Michael Edenfield - Chief Executive Officer and President

Analysts

Patrick Flavin - Flavin, Blake & Company

Operator

Welcome to today's teleconference. (Operator Instructions) I will now turn the program over to Vince Klinges.

Vincent C. Klinges

Good morning and welcome to Logility's fourth quarter fiscal 2008 earnings conference call. On the call with me is Mike Edenfield, CEO of Logility.

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 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 and contemplated by or underlying the forward-looking statements.

There are a 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 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 effective 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'd like to turn the call over to Mike Edenfield.

J. Michael Edenfield

I have some comments on the fourth quarter and fiscal 2008 results. Vince will review the details on the results for the quarter, full fiscal year, and then we'll take your questions.

Logility had a strong quarter from an operating earnings perspective and fiscal 2008 was our best year ever from a revenue perspective. The fourth quarter review was $11.9 million, an 8% decrease compared to fourth quarter last year, which was our best quarter ever.

Operating earnings were $2.4 million, which was a decrease of 23% over fourth quarter last year but a 260% sequential increase over the third quarter. The third quarter did have a noncash write-down of capitalized software of approximately $1.2 million that impacted earnings. Without that write-down, the sequential increase in operating earnings would be 30%.

Twenty-five new customers signed license agreements in the fourth quarter. Customers from 12 countries signed license agreements with Logility in the quarter. Those countries include Australia, Canada, Colombia, France, Ireland, the Netherlands, New Zealand, Russia, Sweden, Switzerland, the United Kingdom, and the United States. Some of the notable new and existing customers include Barry Controls, Berry Plastics Corporation, CNC Group, Electrolux Home Products, Fedco, Fastenal, Masterpet, PPG Industries Europe, RC Willey Furniture, Reliable Automatic Sprinkler, and [RxNorth].

We continue to be encouraged by the number of new customers licensing Logility's products. New customers are a source of future maintenance and implementation Services revenue as well as being excellent prospects for additional product sales.

Fiscal 2008 total annual revenues were a record $44.9 million, an increase of 3% over last year's record revenues. License fees for the year were $14.6 million, a 10% decrease from last year. Maintenance revenues were a record $22.5 million, which represented 50% of total revenues for the company. We're pleased to have that much recurring revenue in our business model.

Our operating earnings for fiscal 2008 were $8.3 million, which was a 3% decrease compared to fiscal 2007. Excluding the noncash write-down of capitalized software I mentioned earlier, the operating earnings would have been over $9 million for fiscal 2008.

In the full fiscal year Logility signed 101 new customers and we extended our relationship with many existing customers. Software license agreements were signed with both new and existing customers located in 26 different countries.

Logility made significant strides in expanding its indirect sales channels this fiscal year. For the U.S., we added distributors in Virginia, Colorado and Iowa. Outside of the U.S. we expanded our distribution locations to include Mexico City, Italy, Moscow, and three locations in China - Shanghai, Guangzhou and Hong Kong. These contributed minimal revenues in fiscal 2008, but we expect all to contribute in fiscal 2009. We also expect to add additional coverage in the Americas, Asia, and Europe in fiscal 2009.

So in summary, fiscal 2008 was a good year for Logility. Our business model is in excellent shape from a profit generation perspective, and we've expanded our ecosystem and coverage of the marketplace with a continued successful execution of our two-brand strategy. The company also continues to have a strong balance sheet, with cash and investments of almost $43 million, which is an increase of over $10 million from this time last year.

I would now like to turn the call over to Vince for a detailed review of the financial results for the fourth quarter and fiscal 2008.

Vincent C. Klinges

Comparing the fourth quarter of fiscal 2008 to the same period last year, total revenues decreased 8% to $11.9 million. That's compared to $12.9 million in the same period last year.

License fees decreased 27% to $4.1 million compared to $5.7 million in the same period last year.

Services and other revenues decreased 11% to $1.8 million compared to $2.1 million in the same period last year due to lower implementation and project work.

Maintenance revenues increased 16% to $5.9 million for the quarter, and that compared to $5.1 million in the same period last year, primarily due to increased license fees in the prior period.

Taking a look at costs, our overall gross margin was 69% for both the current and prior year quarter.

License fee margin was 64% for the current quarter compared to 71% last year, and that's a result due to lower license fees this quarter.

Services margins increased to 50% for the current period and that compares to 45% due to improved billing utilization.

Maintenance margin was 77% for both the current quarter and the same period last year.

Looking at operating expenses as a percentage of revenues, our gross R&D expenses were 16% in the current quarter compared to 18% in the same period last year.

As a percentage of total revenue, sales and marketing expenses were 24% or $2.4 million for the quarter, and that compares to 21% for the same quarter last year. And that's higher primarily due to higher headcount and marketing related costs, and to a lesser extent lower revenues.

G&A expenses as a percentage of revenues were 10% for the current quarter, and that compares to 12% for the prior year quarter due to lower variable compensation costs and timing of audit and other Sarbanes Oxley related costs when compared to the same period last year.

Operating earnings decreased 23% to $2.4 million for the current quarter, and that compares to operating earnings of $3.2 million for the same quarter last year.

Our EBITDA for the quarter was $3.1 million, and that compares to $4 million last year.

And our GAAP net income was $1.7 million or $0.13 earnings per share for the quarter, and that compares to net income of $2 million or $0.15 earnings per share.

Adjusted net income, which excludes the amortization of intangibles related to acquisitions and stock option compensation expense was $1.8 million or $0.14.

Earnings per diluted share compared to 2.1 or $0.16 earnings per diluted share last year.

International revenues for the current quarter were approximately 17% of total revenues, and that compares to 12% for the same period last year.

Now I'd like to look at the full year fiscal 2008 compared to the same period last year.

Total revenues increased 3% to $44.9 million and that compares to $43.8 million last year. License fees decreased 10% to $14.6 million compared with $16.2 million. Services revenues increased for the full year 14% to $7.8 million. That compares to $6.8 million.

Maintenance revenues also increased 9% to $22.5 million, and that compares to $20.7 million in the same period last year. Overall gross margins were 67% for both the current year and last year, fiscal year. License fee margin decreased to 59% compared to 64% last year. Our Services margin increased to 51% for the full fiscal 2008 compared to 46% for fiscal 2007. Maintenance margin increased to 78% for fiscal 2008 compared to 77% for fiscal 2007.

Operating expenses. Our total gross R&D expenses were 17% of total revenues for both fiscal 2008 and 2007. As a percentage of total revenues, sales and marketing expenses were 23% for fiscal 2008 compared to 22% last year. G&A expenses were 10% compared to 12% of revenue, and this is lower due to variable compensation costs for the year and timing of audit and other Sarbanes Oxley compared to the same period last year.

Logility had an operating income for the year decrease 3% to $8.4 million compared to an operating income of $8.5 million last year. Excluding the $1.2 million of non-cash write-down on cap software, the adjusted operating income was $9.5 million or 12% higher than the same period last year.

Our EBITDA for the full year was $12.6 million compared to $11.7 million last year, so our GAAP net income for fiscal 2008 and 2007 was $6 million or earnings per diluted share of $0.45. Adjusted net income for 2008 was $7.5 million or adjusted earnings per diluted share of $0.56, and that compares to adjusted net income for 2007 of $6.4 million or adjusted earnings per diluted share of $0.49 for the same period last year.

International revenues for fiscal 2008 were 17% of total revenues, and that compares to 15% for last year.

Taking a look at the balance sheet, the financial position of the company remains strong, with cash investments of $42.7 million as of April 30, 2008 and no debt. That's a sequential increase of $1.4 million compared to the previous quarter and a $10.4 million increase compared to April 30, 2007.

During the quarter the company repurchased 114,000 of its common stock under its authorized repurchase program for $787,000. For the total fiscal 2008, the company repurchased 144,000 shares for a total of $1.1 million.

Other aspects of the balance sheet, the billed accounts receivable was $6.8 million, unbilled, $1.4 million, for a total of $8.3 million.

Deferred revenues are $12.6 million and stockholder equity is $46.4 million. The current ratio of the balance sheet is 3.1 and that compares to 2.7 last year. Our days sales outstanding is approximately 64 days as of the end of April 30, 2008, and that compares to 65 days at the same time last year.

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

Questions-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Patrick Flavin - Flavin, Blake & Company.

Patrick Flavin - Flavin, Blake & Company

Vince, with the share repurchase during the year, what percentage of the company does American Software now own?

Vincent C. Klinges

88%

Patrick Flavin - Flavin, Blake & Company

It remains at 88%?

Vincent C. Klinges

It went up from 87% to 88%.

Patrick Flavin - Flavin, Blake & Company

Oh, okay. So that indicates, then, a 12% float?

Vincent C. Klinges

Yes.

Patrick Flavin - Flavin, Blake & Company

And Mike, can you give us a read into - obviously this is a difficult economy and there's much turmoil everywhere  can you give us a read into the sales pipeline and into the extent to which this economic malaise is holding back new license awards?

J. Michael Edenfield

Well, the pipeline's okay, about the same as it was last quarter, but there is a lot of uncertainty in the marketplace, as you alluded to, and it seems like people are slower to pull the trigger or they don't pull the trigger at all.

I think the good thing about things that are happening in the economy from our selfish perspective is it's, particularly with the rising fuel costs, is we're much more sensitive to managing our costs, now, and that's what our software does for them. So that's a good thing, and that could actually drive business our way.

But since the economy hasn't really settled down, particularly in terms of the rising fuel costs, there's that uncertainty factor out there. I think if it would just settle down, even if it was, you know, prices would stay high, it would be a good thing because at least there'd be a little certainty about what everybody was dealing with.

So that's what we see. People aren't quite sure how bad they're going to be impacted in the future, and I think that causes a lot of people to hesitate before making investments.

Patrick Flavin - Flavin, Blake & Company

Are you seeing, in terms of the impact of this, are you seeing cancellations of interest in doing licenses or simply deferments?

J. Michael Edenfield

It's usually they push it out.

Patrick Flavin - Flavin, Blake & Company

So what you're looking at is you said the pipeline remains as full as it was before, so the prospects are there. They just aren't pulling the trigger and the question is when that happens?

J. Michael Edenfield

And then they might defer six months or nine months or three months, and then they might defer again or they might start up. You know, you just don't know until you get there.

Operator

And it looks like we have no further questions.

J. Michael Edenfield

Thank you for participating on this call, and we look forward to speaking with you soon.

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