American Software, Inc.
Q3 2015 Earnings Call Transcript

Published: 27 Feb 2015

[Operator:]

Good day, everyone and welcome to American Software's Third Quarter Fiscal Year 2015 Preliminary Results. At this time, all participants are in a listen-only mode. Later you'll have the opportunity to ask questions during a Q&A session. Please note, today's program is being recorded and I'll be standing by, should you need any assistance. It is now my pleasure to turn the program over to Vince Klinges, CFO of American Software. Please go ahead sir.

[Vince Klinges:]

Good afternoon and thank you for joining us on American Software's third quarter earnings conference call. To begin, I'd 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 qualified 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 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 timing, availability and market acceptance of these products and services, the effective competitive product 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, CEO of American Software.

[Mike Edenfield:]

Thanks, Vince. Hello everyone. Thank you for participating in this call. We're pleased with our performance from the third quarter and are excited about finishing the year strong based on our product line. While we're still closing the majority of our deals under the traditional software license model, we're transitioning our business model to include SaaS and perpetual license deals that include our services. As a result of this transition we're closing deals that require us to spread contracted revenue over the life of the contract period. As of January 31, 2015, our current bookings or deferred revenue increased 94% to $4.9 million, compared to $2.5 million same time last year. Since the end of Q3 '15, we've closed an additional $1.7 million in SaaS and filed services. With the end of Q3 '15, we're excited to announce that we've closed our first Voyager retail optimization deal this quarter from our May 2014 acquisition of MID Retail. We're pleased to announce the MID Retail acquisition is GAAP accretive three quarter after the acquisition date. We've several deals in the pipeline to sell the retail optimization products to our customer base and new constructive customers. We're also seeing increased interest in our inventory optimization products that have several large deals in the pipeline. I would like to turn the call back over to Vince.

[Vince Klinges:]

Thanks Mike. As Mike indicated, we're seeing a kind of a transition in our business model and our revenue this quarter increased 6% to $25.8 million compared to $24.4 million. Our license fees decreased 13% to $4.3 million, compared to $5 million for the same period last year. In addition to the $4.3 million and license revenues, during the quarter we closed two seven figure deals that included cloud services that required us to spread the revenue of the life of these contracts. If these two deals were closed under our traditional model, carving out the licensing component of the SaaS related deals, we would have recorded additional $1.9 million in license fees for a total of $6.2 for the third quarter of 2015. Looking at services and other revenue, they increased 15% to $11.7 million for the current quarter and that compares to the same period last year. Services revenues increased at NGC by 17% as a result of higher license fees in recent periods. Also our [indiscernible] method, which is our staffing business increased 11% as a result of increased project work. Logility increased 21% due to increased implementation work from prior recent quarter license fees increases and additional services revenue from our recent MID Retail acquisition. Maintenance revenues also increased 6% at $9.8 million and that compares to $9.3 million, primarily due to increased license fees in recent quarters, improved retention and maintenance revenues from our recent MID Retail acquisition. Looking at cost, our overall gross margin was 50% for the current quarter and that compares to 57% from the same period last year. License fee margin decreased to 54% for the current quarter, compared to 85% in the same period last year, and that is primarily due to higher amortization expense of $900,000 this quarter, compared to zero last year and that's a result of the release of our Voyager 8.5 project release in the fourth quarter of '14 last year and also to our lower license fees. Services margins increased 25% -- increased to 25% for the current quarter, compared to 24% in the same period last year and that's primarily due to increase in services revenue. Our maintenance margin was 78% for the current and prior-year quarter. Looking at operating expenses, our total 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 18% of revenues for the current period, compared to 21% for the prior period and this is lower primarily due to lower sales commission. G&A expenses were 12% for the total revenues for both the current and prior year quarter. So our operating income decreased 33% to $2.4 million for this quarter, compared to $3.5 million in the same quarter a year ago. Our adjusted EBITDA basis, which excludes stock-based compensation, EBITDA decreased 3% to $4.2 million this quarter compared to $4.4 million in the same period last year. Our GAAP net income increased 15% to $2.8 million, or earnings per diluted share of $0.10 compared to net income of $2.5 million or $0.09 earnings per diluted share for the same period last year. On an adjusted net income basis was -- we reported $2 million or adjusted earnings per diluted share of $0.07, for the third quarter compared to $2.8 million or adjusted earnings per diluted share of $0.10 for the same period last year. These adjusted numbers exclude two to three tax adjustments this quarter. One would be the R&D tax credit, which was reviewed by Congress this quarter. So we had a catch-up from prior periods of about $161,000. Also we removed evaluation allowance on our tax credit for approximately $1 million, due to lapse of the statute of limitations on that credit. The other aspects of the adjustments were amortization of intangibles related to an acquisition expenses and stock-based compensation expense. These adjusted numbers excluded our May 2014 mid retail acquisition since it became GAAP accretive this quarter due to closing several retail optimization deals. International revenues for this quarter were approximately 15% of total revenues for the current prior and that compares to 17% the same time last year. At this time, I would like to look at the full year-to-date numbers. Total revenues year-to-date increased 1% to $75.3 million, compared to $74.7 million last year. Year-to-date license fees were $11.7 million compared to $14.4 million. Services revenues were $34.4 million compared to $33.1 million and our maintenance revenues were $29.1 million compared to $27.2 million last year. Looking at cost the overall gross margin was 51% for year-to-date, compared to 56%. Our license fee margins decreased to 53%, compared to 78% last year. Our services margins were 27%, compared to 28% in the same period last year and our gross margins year-to-date for maintenance were 78% and that compares to 78% last year. Looking at operating expenses, our gross R&D expenses were 14% of total revenues for the nine months period ending January 31, 2015, and that compares to 12% for the same period last year. Those costs are up primarily due to the MID Retail acquisitions. As a percentage of total revenues, sales and marketing expenses were 18% of revenues compared to 19% for the same period last year. G&A expenses were 13% of total revenues year-to-date, compared to 12% the same period last year, and that's primarily due to the MID Retail acquisition. Operating income year-to-date $5.9 million compared to operating income of $11.3 million last year. Adjusted EBITDA year-to-date was $11.4 million compared to $14.3 million and our GAAP net income was $5.6 million year-to-date or $0.19 earnings per diluted share and that compares to $7.8 million or $0.28 earnings diluted share. Our adjusted net income year-to-date was $5.3 million or earnings per diluted share of $0.19, and that compares to net income of $8.7 million or $0.31 for the same period last year. And these adjusted numbers exclude the two discrete tax items I mentioned earlier amortization of intangibles related to acquisitions, and stock-based compensation expense. International revenues year-to-date were approximately 16% of revenues compared to 17% for the same period last year. Taking a look at the balance sheet the company's financial position remained strong with cash in investments of approximately $71 million at the end of January 31, 2015. During the third quarter the company purchased approximately 36,000 shares of its common stock for approximately $320,000 under its authorized stock repurchase program and it paid $2.8 million in dividends. Some other aspects of the balance sheet, our billed receivables were $14.8 million, unbilled was $2.6 million, for a total of $17.5 million in AR. Deferred revenues current are $25.8 million and deferred revenues long term are approximately $400,000. Our shareholder equity is $90.6 million. Our current ratio is $2.2 million as of January 31, 2015 compared to $2.7 million in the same period last year. Our days sales outstanding as of January 31, 2015 was approximately 62 days and that compares to 78 days in the same time last year. At this time, I'd like to turn the call over to questions.

[Operator:]

[Operator Instructions] Our first question comes from Matthew Galinko with Sidoti. Please go ahead.

[Matthew Galinko:]

Hey you guys, thanks for taking my question. I guess you changed how you sell your staff products are you seeing a shift in how customers are looking at them?

[Mike Edenfield:]

Can you repeat the question?

[Matthew Galinko:]

Hey sorry, I guess I'm curious, it seems your cone is a little different on staffs today than maybe we've heard in the past. So I'm just curious if you're changing how you go to market with the staff products or how you're selling it or if it's more of a change in how customers are demanding it?

[Mike Edenfield:]

I think we are getting over a million for SaaS and we support both type of performance, it's really, we want to sell to customers, they want a perpetual, we're selling the perpetual improvements. But the SaaS, we can sell them the SaaS and so we have qualify it early and make sure we know what they really want and sometimes it changes by the way. They think they want SaaS and then they change their mind to perpetual and large [more so] [ph] and we're fortunate we got both and so we can stick with them.

[Matthew Galinko:]

Got you, thanks. And then again can you give us any help in terms of expectations on how gross margin by trend if more of these deals start transitioning to SaaS as opposed to perpetual license or term license?

[Mike Edenfield:]

Yeah Matt, I don’t think I can give you any guidance on that, but obviously the gross margins on services are going to be impacted at least initially as we perform work and that will spread the revenue over the period of timeframe. But eventually should see some improvements in those margins as we start selling more of SaaS because right now our SaaS deals are actually rolling up under services and other. So as they come into the model those margins will improve, but initially they'll go down.

[Matthew Galinko:]

Got you. All right, that's all from me, thank you.

[Operator:]

[Operator Instructions] We'll go next to Kevin Liu with B. Riley & Company. Please go ahead.

[Kevin Liu:]

Hi, good afternoon guys. It seems like currency rates did improve relative to the prior quarter than the year, just revenues perhaps getting more on a ratable basis. And could you just comment on your close rates in the quarter, where they in line with your expectations or did you continue to see any deal slippages?

[Mike Edenfield:]

So every quarter you have deal slippages. We never have any deal slippages we don't have enough pipeline. So yes, some deals did slip, but we had a pretty good looking pipeline going into it and we've got a very good top line this quarter and we're far along with some of the deals as well.

[Kevin Liu:]

Great and you had mentioned that you had several of these Logility I/O deals within that pipeline. I guess how much are these deals and what sort of assumptions are you making sort of how many of these larger deals could close within the fourth quarter?

[Mike Edenfield:]

Yeah, I think we could close multiple 20 or anything like that because, but we think, we've got and just in I/O we could probably get a couple this quarter, maybe more we got more in the pipeline but two look real good right now and we have several other very nice prospects that are close.

[Kevin Liu:]

Got it and just with respect to the release of version 8.5 I'm just curious as to what sort of initial interest you are actually for upgrades to that platform and whether there are any incremental license sales that could come about from this release?

[Mike Edenfield:]

Well, it's your own maintenance you getting by for no cost other than training and things like that. So there wouldn’t be any additional licenses to the existing customers on maintenance. But it is helping us and we've signed up some really nice customers and they were hard fought battles than we want and then we got some other really nice companies this quarter, some we've already gotten and some are right in the [building] [ph]. So every time we do a new release it's really more for our self perseverance we're trying to be more competitive and win more T/Os by leveraging our R&D dollars. But of course our customers are on maintenance we want them to stick with us and so the R&D goes to really to help R&D too are on the maintenance as well.

[Kevin Liu:]

Okay and just lastly from me, when you look at kind of your sales comp of structure your sales force incentivized one way or the other to sell more perpetual or SaaS and do you have any plans to change that?

[Mike Edenfield:]

Yeah, we have, so the compensation for SaaS is going to be different from perpetual.

[Kevin Liu:]

All right, thank you.

[Operator:]

[Operator Instructions] And gentlemen, it appears we have no further questions at this time, I'll turn it back to you for any final thoughts.

[Mike Edenfield:]

Thank you for being on the call and we appreciate your support and I look forward to the next call.

[Operator:]

This concludes today's program. We appreciate your participation. You may disconnect at any time and have a great day.