American Software, Inc.
Q3 2017 Earnings Call Transcript

Published: 24 Feb 2017

[Operator:]

Good day everyone. And welcome to today's Third Quarter Fiscal Year 2017 Preliminary Results. At this time, all participants are in a listen-only mode. Later, you'll have the opportunity to ask questions during the question-and-answer session [Operator Instructions] Please note this call is being recorded. I will be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Vincent Klinges, CFO of American Software. Please go ahead, sir.

[Vincent Klinges:]

Good afternoon. And welcome to American Software's Third Quarter of 2017 Earnings Conference Call. On the call with me is Mike Edenfield, CEO of American Software and Allan Dow, 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 such forward-looking statements speak only as of this day. These forward-looking statements are based largely on our expectations and are subject to a number of risk 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'd like to turn the call over to Mike Edenfield.

[Mike Edenfield:]

Thanks, Vince. And thanks for all of you to be on the conference call. As a result of more customers leveraging our SaaS and cloud services offerings, we are pleased to report a 47% increase in cloud services ACV when compared to the same quarter and the prior year. While this transition to SaaS is important, we continue to offer our customers the choice of both subscription and perpetual license options to support their strategic goals. Based on each customer choice, our license fee revenue recognition -- license fee revenue recognition will continue to fluctuate quarter-to-quarter, but we intensify that deployment preference over the long-term will be dominated by SaaS subscriptions which will provide the company a more predictable revenue for cloud. We remain optimistic about our fourth quarter and overall 2007 performance despite the contingent global macroeconomic sluggishness which does impact fiscal year 2017.

[Vincent Klinges:]

At this time, I'd like to turn the call over to Allan Dow.

[Allan Dow:]

Thanks, Vince, and welcome everybody to the call. Our close rate in the third quarter was consistent with our performance over the past few years. However, as Mike said we're seeing a continued trend towards subscription licenses for our solutions and that caused a little bit of downward pressure on our quarterly reported revenue, specifically on the license fees. Although, the markets picked up with a new calendar year there remain some macroeconomic sluggishness as prospects were through multiple stages and iterations on their investment and CapEx approvals. With that said, we're encouraged, our pipeline remained strong and we anticipate that the fourth quarter will be consistent with historical trends with some possible upside for additional SaaS contracts. We are seeing an up tick in the retail planning opportunities. However, the continued shakeout, recent closings of stores, the bankruptcies and volatility of traditional brick and mortar retailers is putting some downward pressure on overall capital spending in this space. However, demand for optimization solutions remained strong and has the potential that increased the average selling price and the overall scope of our global services engagements. This gives us better predictability of the revenue picture going forward, in fact our services backlog continues to grow as a result of our AdapChain acquisition which was announced back in August and our success in optimization focused initiatives and assisting with more upgrade projects as customers are leveraging our latest product innovations. We're well-positioned to absorb the additional workload, serve our customers, and respond to the increased preference for SaaS deployments. Since we offer our customers the option of SaaS or perpetual contracts based on their preferred business model, our ability to forecast the recognized license fees in any given quarter has become more challenging. In the long run, we win regardless of the deployment model that our customers choose and we feel strongly that's important to make that option available to them. With our global reach, we're pleased to report that we executed contracts in eight different countries during the third quarter of the fiscal year. In summary, we're continuing to monitor the global economic conditions in our sales team's progress to move our healthy pipeline and to sign contracts. The current outlook is very good for the fourth quarter and fiscal year which ends on April 30th. As our perspective customers finalize their calendar year 2017 investment plans and get those approvals in place, we see a strong possibility to build on our third quarter momentum and show continuous improvement as the economy picks up steam into 2017. At this time, I'll turn the call back over to Vince.

[Vincent Klinges:]

Thanks, Allan. Comparing the third quarter of 2017 to the same period last year, our total revenues for the quarter decreased 2% to $26.4 million that compares to $27.1 million the same time last year. Our license fees decreased 22% to $4 million compared to $5 million for the same period last year. Our services and other revenues were 11.8% for both periods. At the end of the quarter, we increased our cloud services annual contract value or ACV by approximately 47% to $4.9 million for the quarter ended January 31, 2017 and that compares to $3.3 million for the same period last year. So the total ACV is comprised of two components, one is pure SaaS ACV of $2.6 million and that compares to $1.6 million during the same period last year and other cloud services such as managed services and hosting was $2.3 million ACV compared to $1.7 million in the same period last year. Our maintenance revenues increased 4% to $10.7 million compared to $10.2 million and that's primarily due to additional license fees in the prior periods and also on a better retention and better increases of renewals. Looking at cost, our overall gross margin increased to 53% compared to 50% for the quarter last year. License fee margin decreased to 47% for the current quarter compared to 63% for the same period last year and that's due to lower license fees. Our services margins increased to 32% for the current quarter compared to 22% in the prior year quarter. All business units improved their margin due to improved utilization rates. Our maintenance margin was 79% for the current quarter and that compares to 76% in the prior year quarter. Operating expenses, our gross R&D expenses were 15% of total revenues for the current quarter and that's up a percentage point from 14% in the prior year quarter primarily due to our acquisition of AdapChain. As a percentage of revenue, sales and marketing expenses were 18% of revenues compared with the current quarter compared to 19% for the prior year quarter and that's a percentage lower due to lower sales commissions from lower license fees. G&A expenses were 13% of total revenues for the current quarter and that compares to 10% in the prior year quarter. This percentage increase was due to a -- we had a one-time state employer tax with holding credit of 637,000 in the prior year quarter that reduced that number. Operating expenses decreased 3% to 2.5% for the quarter compared to the same period last year. Adjusted EBITDA which excludes stock-based compensation increased 11% to $4.8 million for this quarter compared to $4.3 million in the same period last year. So our GAAP net income increased 6% to $2.2 million, our earnings per diluted share of $0.08 that compares to net income of $2.1 million or $0.07 earnings per diluted share the same period last year. Our adjusted net income was $2.7 million or $0.09 earnings per diluted share and that compares to $1.8 million or $0.06 the same period last year. And these adjusted numbers exclude the amortization of intangible expenses related to acquisitions, stock-based compensation expense and for last year's quarter discrete tax adjustments related to an R&D tax credits. International revenues this quarter were approximately 17% of total revenues for the current quarter and that compares to 19% for the quarter last year. Now I'd like to look at the full year-to-date numbers, total revenues year-to-date decreased 6% to $80 million compared to $85 million last year. License fees decreased 24% to $11.7 million compared to $15.5 million last year. Our services revenues decreased 7% to $36.4 million compared to $39.1 million last year and our maintenance revenues increased 5% to $31.9 million compared to $30.4 million last year. Looking at costs for the nine month period, our overall gross margin was 51% compared to 52%. License fee margin decreased to 53% from 63%, and that's due to lower license fees. Services margins actually increased to 28% compared to 27% in the same period last year, due to improved utilization margins and the maintenance margin was 77% for both periods. Looking at operating expenses, gross R&D expenses were 15% of total revenues for the nine month period ended January 31, 2017 compared to 13% for the same period last year. Our sales and marketing expenses were 19% for both current and last year period and G&A expenses were 13% of revenues compared to 12% the same period last year. Our operating income year-to-date was $4.8 million compared to operating income of $9.7 million. Our adjusted EBITDA was $11 million compared to $15.1 million same period last year and our GAAP net income was $4.3 million or $0.15 per earnings diluted share compared to $6.8 million or $0.24 earnings per diluted share. Our adjusted net income year-to-date was $5.6 million or earnings per diluted share of $0.19 and that compares to $7.2 million compared to earnings per diluted share of $0.25 last year. International revenues year-to-date are 17% of total revenues and that compares to 18% the same period last year. One other noted item subsequent to the end of the quarter, the company divested in excess real-estate amounting to approximately 40% of our land holdings for approximately $13.4 million, the after-tax gain will be approximately $7.9 million and recorded in the fourth quarter of fiscal 2017. Other aspects of our balance sheet, we ended the quarter with $79.3 million of cash and investments. During the quarter, we paid $3.3 million in dividends. Our accounts receivables $15.1 million billed and unbilled is $2.4 million for a total of $17.5 million AR. Deferred revenues current and long-term are $28.7 million and our shareholder equity ended the quarter at little over $95 million. Our current ratio was $2.4 million as of the end of January 31, 2017 and is up from $2.3 million the same period last year. Our day sales outstanding as of the quarter were 60 days compared to 69 days the same period last year. At this time, I would like to turn the call over to questions.

[Operator:]

[Operator Instructions] Now we'll take our first question from Matthew Galinko of Sidoti. Please go ahead.

[Matthew Galinko:]

Hi, good afternoon guys. I'm curious if the pressures you stated on capital spending amongst your customers might be influencing the up tick in SaaS in your current type deals that you are signing, or do you see this as really a sustainable shift in how your customers are consuming your products? And maybe just secondarily, if it is a sustained shift, what did you see that is being kind of the trigger that it as to push your customers over towards more of a current type structure.

[Allan Dow:]

Yes. Fundamentally we're seeing a shift towards the SaaS and the subscription contracts. There are two factors that play in there. One is the economic factor and it is moving some contracts in that direction. But I think the more important one is the fundamental shift from a thought process that customers are willing to move these kinds of applications that have highly confidential information in them and move them out to a cloud environment. So they overcome that barrier where few years ago, they were saying there is no way, the data is not going to move outside of our four walls where today it's being received as a more natural place to do with the security parameters there. We can meet those criteria for them and they are willing to move in that environment and that freeze up internal resources and capital for other more strategic investments. So we think it's a fundamental shift that will stay in play.

[Matthew Galinko:]

All right. And maybe you did say that it's more kind of the cost efficient to them to maybe moving that direction. So do you see or do you still see the cloud is being in SaaS fields a lever that can kind of accelerate your ability to capitalize on the pipeline that as kind of maybe eluded you year-to-date?

[Vincent Klinges:]

I don't see it really as a method of accelerating maybe overcoming some barriers and allowing the pipeline to stay at a good level, at a high level and continue to increase. To be honest right now, it adds another layer of complexity, so if anything its couple of more cycles to go through around the discussions about those. As I mentioned, security just one example of that, so when they were going to take the solution internally keep the data internally, they had less dialog about that. Now, there is another layer of evaluation that needs to be done around whether the adequate security is in place. So it adds one more layer of discussion. It can accelerate the deployment and it shifts from a capital expense to -- from CapEx to an expense on their P&L. So in some ways, it allows projects to move which may not otherwise moved at all as supposed to maybe accelerating them. Does that makes sense?

[Matthew Galinko:]

All right. It does. Yes, thank you.

[Operator:]

[Operator Instructions] We'll take our next question from Kevin Liu of B. Riley & Company. Please go ahead.

[Zach Cummins:]

Hi, good afternoon. This is actually Zach Cummins, I'm on for Kevin today, but talking some more about those global macro sluggishness that you mentioned a few times. Is there anything in particular that's calling customers about their external spending?

[Mike Edenfield:]

No. I don't think there is anyone we talked about this on the last call a bit. Zach, there is a variety of factors that are still in play, Brexit is one of those. It's still going on, some uncertainty there. I don't think anyone would be surprised by the fact, there is still some uncertainty here in the United States, although we're getting a bit of a bump but I think there is still a big lingering question mark out there of what's happening and what's going to happen next. And what we're seeing right now is that the level of scrutiny on spending whether it's CapEx or expense, it's still at a very high level, multiple iterations, the threshold for expenditures is probably high or higher than it has been in years passed. So, we aren't seeing an acceleration yet, but we certainly aren't seeing any pullback or seeing the projects are getting approved and funded and there is just a number of different things that are out there that put that question mark on people's minds.

[Zach Cummins:]

That's great. Thanks for that. And then just talking a little bit more about your pipeline of potential deals, over the past couple of quarters, you said you're still see very strong pipeline, is that still the case right now and then what you say being able to offer some SaaS capabilities to your customers as opening up more opportunities or whether just helped to accelerate some of the important current opportunities in pipeline.

[Mike Edenfield:]

So couple of questions in there, I think three of them, I'll see if I can tick them off, if I don't get them all, let me know. First of all, the level of the pipeline is consistent with we're expanding the last couple of quarters, there is any given weaker or month or showed that up and down, but overall pipeline is staying pretty steady in that area. The fourth quarter one is very strong. The fourth quarter is always very strong for us just for those natural selling cycles. So we're encouraged by that. That we are back to historical periods similar to what we've seen in the past. The SaaS is opening up some more opportunities. Our ability to deliver and proof of delivery and the number of customers we have in that environment, it gives us a proof point. Some confidence from folks that we are in the SaaS business and available to deliver on their expectations and meet all the criteria that they may put out there. So it's allowing us to put more deals on the pipeline, but again, I don't see it as actually accelerating the closure rate, its one more factor that allows us to bring in contracts so we might not otherwise then able to participate in.

[Zach Cummins:]

All right. Great. That was helpful. And then talking kind of along you announced some cost savings initiatives in the prior quarter if I'm remembering correctly. And then, particularly on the sales and marketing line, it came in at quite a bit lower than what we are expecting. So was there any particular initiatives that you're in this quarter? And then, can you kind of talk about some of your future hiring plans for sales and marketing at this point?

[Mike Edenfield:]

Yes. We're always open for adding the right people in the right locations. On the last call, we talked about making some adjustments we actually did some realignments and focused on the areas that are positives that we were seeing upside in. So we moved some things around. We did take some action on some contract folks that were doing some work for us that was wrapping up. And then, we saw that from an opportunity to have some cost savings in there. So we were concerned about where we were with the expense ratio and the tremendous uncertainty that was in play at the close of the last quarter when we had those discussions. So we put those actions in place. We've been status quo since then, so we made no major changes either up or down, but we are looking for opportunities to bring in additional people where that make sense and we have some capacity to maybe expand on that. But, I don't think we'll see anything dramatic in the direction -- either direction on that in the coming quarter or maybe even the next one.

[Zach Cummins:]

Great. And then, just one final question from me, you've divested some excess real-estate in this quarter, can you provide a little more color on that sale? And then, are there any plans for additional transactions in the coming quarters?

[Vincent Klinges:]

Zach, this is Vince. So we divested about 40% of the property in Atlanta here. We actually -- the building we're in right now is the remaining land component which is basically the remaining 60%. So the 40% was adjacent to this building that we're in. And we weren't really utilizing it. We had some tenants in there, but we really weren't utilizing it. So that's was the reason behind the sale and also we had a nice price for it. As far as future sales, there is nothing pending.

[Zach Cummins:]

All right, great. Thanks again for taking my questions. [Operator Instructions] It appears that we have no further questions at this time.

[Mike Edenfield:]

Okay. Thank you for joining us for this call and we'll see you next quarter, bye.

[Operator:]

This concludes your teleconference. Thank you for your participation. You may now disconnect.