American Software's (AMSWA) CEO Michael Edenfield on Q4 2016 Results - Earnings Call Transcript

| About: American Software, (AMSWA)
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American Software, Inc. (NASDAQ:AMSWA) Q4 2016 Earnings Conference Call June 23, 2016 5:00 PM ET

Executives

Vincent C. Klinges - CFO

Michael Edenfield - President, CEO, Director and COO

Analysts

Matthew Galinko - Sidoti & Company

Kevin Liu - B. Riley & Co.

Operator

Good day and welcome to the fourth quarter of fiscal year 2016 preliminary results. All lines are currently in a listen-only mode. Later you will have the opportunity to ask questions during the question-and-answer session, and please note today's call is being recorded. It is now my pleasure to turn the conference over to Vincent Klinges, Chief Financial Officer of American Software.

Vincent C. Klinges

Good afternoon and welcome to American Software's fourth quarter 2016 earnings conference call. 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 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 and uncertainty 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 other competitive pressures, and the irregular and unpredictable 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, CEO of American Software.

Michael Edenfield

Thanks, Vince, and thanks to all of you for participating in today's call. We had a great quarter with license fee revenues increasing 30% and total revenues by 5%, which increased operating earnings by 13% compared to the same period of the prior year. Also our maintenance revenues increased 5% in the quarter while our maintenance retention rates continued to be strong at approximately 94% to 95%.

More customers are leveraging our cloud services and SaaS offerings to accelerate their deployments and enhance their operations, and we are pleased to report a 37% increase in cloud services annual contract value, ACV, when compared to the same quarter last year.

During fiscal year 2016, we increased license fee revenue by 32% and total revenues by 11%, which increased operating earnings by 45% compared to the prior year. During fiscal year 2016, we welcomed 54 new customers, signed agreements with customers in 16 countries and continued our aggressive investment in research and development and continued to expand our global presence.

Some of the notable new and existing customers placing orders with the Company in the fourth quarter include Ashley Furniture, Blu Dot, Dreamwear, Elan International, Gerald Lighting, J.A. Cosmetics, Jenny Yoo Collections, Le Creuset, Mount Franklin Foods, Outdoor Voices and Zevia.

During the quarter, software agreements were signed with customers in the following nine countries; Australia, Canada, Finland, Japan, Mexico, Sweden, Switzerland, the United Kingdom, and the United States.

Logility announced Shelley Kiley, the Vice President of Global Supply Chain and Global Distribution and Logistics at Moen, North America's #1 faucet brand, was named as Supply & Demand Chain Executive 2016 Pros to Know. Ms. Kiley was selected from more than 350 nominations submitted for the 16th annual listing and is recognized for helping Moen improve its supply chain planning capabilities, ensure product availability and service commitments, and improve working capital efficiency through the use of Logility Voyager Solutions.

NGC also announced a win with Canada Goose Inc., a rapidly growing manufacturer of luxury apparel, implementing NGC's Extended PLM, which combines fashion PLM and Supply Chain Management into a fully integrated end-to-end solution.

During the quarter, Demand Management was selected by industry publication, Inbound Logistics, as a Top 100 IT Provider for 2016. This is the 19th consecutive year for Logility and the sixth year for Demand Management to be recognized by Inbound Logistics for helping companies solve their complex supply chain challenges and fast-changing transportation needs.

So we had a great quarter, but I'll turn it over to Vince for the details.

Vincent C. Klinges

Thank you, Mike. Comparing the fourth quarter of 2016 to the same period last year, as Mike indicated, in the quarter we increased revenues 5% to $28.9 million compared to $27.6 million, and this is primarily increased due to license fees which increased 30% to $6.6 million compared to $5 million for the same period last year.

Our services and other revenues decreased 6% to $12 million for the current quarter compared to the same period last year, and that's due to a decrease in our IT staffing business, The Proven Method, as a result of a project ending. Offsetting this decline was Logility, which increased services 19% due to increased implementation project work, from increased license fees in recent quarters and also an increase in cloud services. Also, our ERP business unit increased services revenue by 15%. So, the overall services revenue would have increased by 18% if you exclude the IT consulting business decline.

At the end of the quarter, we increased our cloud services ACV, which include SaaS and managed services revenue, 37% to $3.8 million compared to $2.8 million in the same period last year. Our maintenance revenues also increased 5% to $10.3 million compared to $9.8 million, primarily due to additional license fees.

Taking a look at costs, our overall gross margin increased to 55% for the current quarter compared to 51% in the prior year quarter. Our license fee margin increased to 71% for the current quarter compared to 57% in the same period last year, and that's primarily due to license fee increases. Services margin was 29% for both the current and prior year quarter. Our maintenance margin was 75% for the current quarter and that compares to 77% in the prior year quarter.

Looking at operating expenses, our gross R&D expenses were 13% of total revenues for both the current and prior year quarter. As a percentage of revenue, sales and marketing expenses were 21% of revenues for the current quarter, and that compares to 18% from the prior year, due to increased headcount and commissions from higher license fees.

G&A expenses were 9% of total revenues for the current period, and that compares to 12% from the prior year. This is lower due to a state employer tax withholding credit of $613,000 which related to the current quarter. This is a partial catch-up from prior years. We expect this credit to be approximately $400,000 annually going forward.

Operating income increased 13% to $3.9 million for the quarter compared to $3.4 million in the same period last year a year ago. Adjusted EBITDA, which excludes stock based compensation, increased 6% to $5.6 million, and that compares to $5.3 million in the same period last year. So, our GAAP net income increased 32% to $3.4 million or earnings per diluted share of $0.12, compared to net income of $2.6 million or $0.09 earnings per diluted share in the same period last year.

Our adjusted net income was $3.3 million or adjusted earnings per diluted share of $0.11 for the fourth quarter, and that compares to the net income of $2.9 million or adjusted earnings per diluted share of $0.10 in the same period last year. These adjusted numbers exclude amortization of intangible expenses related to acquisitions, stock based compensation expense and discrete tax adjustments in both periods.

International revenues this quarter were approximately 14% of revenues, and that compares to 15% in the same period last year.

At this time, I would like to look at the full year. The total revenues year-to-date increased 11% to $114 million, compared to $102.9 million last year. License fees increased 32% to $22 million compared to $16.7 million. Services revenues also increased 8% to $51.1 million compared to $47.2 million. And also our maintenance revenues increased 5% to $40.7 million compared to $38.9 million.

Looking at gross margins for the full year, the overall gross margin was 52%, and that compares to 51%. The license fee margin increased to 65% from 54% last year due to increased license fees. Services margin was 27% for the current year, and that compares to 28% last year. And our maintenance margin was 77% for the current year, compared to 78% in the prior year period.

So, looking at operating expenses, our gross R&D expenses were 13% of total revenues for the current and prior year fiscal years. As a percentage of total revenues, sales and marketing expenses were 19% for the current year compared to 18%, and G&A expenses were 11% of revenues for the current year and that compares to 13% for the same period last year.

So, our operating income for fiscal 2016 increased 45% to $13.5 million compared to $9.3 million, and adjusted EBITDA for 2016 was $20.7 million compared to $16.7 million for the same period last year, and GAAP income increased 26% to $10.2 million or $0.35 earnings per diluted share and that compares to a net income of $8.1 million or $0.28 earnings per diluted share last year.

On an adjusted net income basis, our fiscal 2016 was $10.5 million or earnings per diluted share of $0.36, and that compares to a net income of $8.2 million or earnings per diluted share of $0.29 for the same period last year. International revenues for fiscal 2016 were 17% of revenues, and that compares to 16% for the same period last year.

The Company's financial position remained strong with cash and investments of approximately $77.9 million at the end of April 30, 2016, and this is an increase of $2.5 million when compared to April 30, 2015. During the year, the Company paid approximately $11.5 million in dividends to shareholders.

Some other aspects of the balance sheet, the AR billed receivable was $17.1 million at the end of April 30, 2016 and unbilled is $3.4 million. Deferred revenues current and long-term are $28.6 million and our shareholder equity is $94.9 million at the end of the year. Our current ratio is 2.4 as of April 30, 2016, and that's up from 2.2 in the same period last year, and our day sales outstanding as of April 30, 2016 and the prior year were 65 days.

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

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Matthew Galinko with Sidoti. Please go ahead.

Matthew Galinko

I guess last quarter you talked about having a pretty solid pipeline. In fact, I think you've talked about it the last couple of quarters. I'm just curious…

Michael Edenfield

Excuse us but it's very garbled.

Matthew Galinko

Okay, let me take out the headset. Hold on a second. Can you hear me better now?

Michael Edenfield

That's a lot better, Matt.

Matthew Galinko

So I guess in terms of your deal pipeline, I know you've been talking about some pretty healthy pipeline in the last couple of quarters. So I'm just curious how that played out versus your expectations and kind of versus how things have closed historically? Are there deals still lingering, and if there's any hesitation, why is there? And then lastly, how is that factoring into the conversation now, is it being decided early in the decision-making process or is it coming down to the wire that people decide how they are deploying the product?

Michael Edenfield

It seems to be a pretty good selling environment, particularly when you have a new platform coming in like SaaS. It stimulates demand. But still, it's not going 100% for us so far, and we kind of like having a mixed mode to tell you the truth, but it's really we focus on what the customer wants. If they want perpetual, we love to work with them. If they want SaaS, we love to work with them. So the great thing is that we have platforms to do both.

Matthew Galinko

Got you. And you mentioned the selling environment being pretty healthy. Can you just go over some of the macro events? Obviously there's some stuff going on in the U.K. today and then of course in the job report a few weeks ago it was a little bit tepid and the Fed backed off of their plans and got a little more cautious in their language. So do you feel anything around those events or do you feel anything in the macro environment that has you at all concerned?

Michael Edenfield

We're concerned even if everything is great. But no, we think we're in pretty good shape, but obviously if something serious happens in the macro environment, we'd be concerned, but no, we don't really see – we see a good situation right now. When a new platform comes out, a lot of people want to get on it. So it stimulates buying, and that's what SaaS is doing.

Matthew Galinko

Got you. Maybe one more question about SaaS. License has clearly moved around a little bit I think maybe exiting last year. If you look at the full year license fees, we've made a [modest thaw in it] [ph] especially given the pickup in the cloud ACV in the last year, maybe that would be shifting a little more towards cloud demand and it seems like license came in quite a bit stronger this year. So I'm just curious, as you look out, do you see it getting a little bit stronger on the SaaS side or do you think it's still primarily something that people want to consume as a deployed or premise license product?

Michael Edenfield

I think it's not 100% one way and 0% the other but it's not being adopted by some of our larger customers. They might want to have a private SaaS but not a public SaaS or they might just go with the old perpetual – not old but the perpetual pricing. So the good thing about it is there is demand for both and we have options for both.

Matthew Galinko

Got it. All right, thanks. I'll jump back in the queue.

Operator

We'll take our next question from Kevin Liu with B. Riley & Co.

Kevin Liu

Just was hoping you guys could provide a little bit more color on the contributors to the strong license growth in the period, specifically wondering if there were any large deals over $1 million that perhaps contributed a lot of that or if you were seeing pretty broad-based strength? And then also just wanted to know whether you were seeing more demand for kind of the Logility platform versus some of the retail offerings that you have?

Michael Edenfield

It was primarily the supply chain systems and we did have one over $1 million, one deal over $1 million in license.

Kevin Liu

Got it. And just how would you kind of compare the demand right now as kind of the lower-end versus the higher-end enterprises? Are you seeing the Demand Management platform start to rebound a bit here and whereas most of that strength is on the high-end large enterprises?

Michael Edenfield

The way it's working out, and [indiscernible] this is, Demand Management, while they compete for perpetual deals and win them, it's more of a midmarket type thing. But what they are really positioned well for is SaaS in the small and medium space. They've got a great platform on Azure. It's a one-click update, multi-tenant. And so their license fees aren't as big as usual but they have and they're going to end up I think eventually having much more SaaS than perpetual.

And on the high end, we can do some very big SaaS deals and we already have some nice SaaS deals, but most of the deals want to be perpetual so far with cloud services where we will maintain the system for them. So it's SaaS but it's not a multi-tenant SaaS. It's private SaaS.

Kevin Liu

Understood. And as you look at your pipeline heading into fiscal 2017, between the strong quarter of bookings you just had versus what you had [sitting into] [ph] the quarter, how do you feel you are set up now for continued license growth in the current year?

Michael Edenfield

I didn't hear the first part of the question, Kevin.

Kevin Liu

Just wondering if your pipeline is robust heading into fiscal 2017 and supportive of continued growth on the license side?

Michael Edenfield

Yes, I think it is. We've already had a sizable deal closed, and first quarter is the toughest quarter for us, but we're off to a good start.

Kevin Liu

Okay. And lastly for me, just with the return of some of the higher license growth levels you've seen in recent quarters, what are your hiring plans like as we head into the current fiscal year?

Vincent C. Klinges

This is Vince. We actually – at Voyager level of the high-end product we actually are at 21 dedicated salespeople. That's up from 14 this time last year. So that's a pretty big percentage increase for the Company. So we do plan to incrementally grow that from here but we're going to try to see the fruits of that increase of people this year first.

Kevin Liu

All right, sounds great. Congrats on the strong quarter.

Operator

[Operator Instructions] We have no further questions.

Michael Edenfield

Okay, all right. Thank you very much and we look forward to talking to you next quarter.

Operator

This concludes today's program. You may now disconnect your lines and have a wonderful day.

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