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Edited Transcript of AMSWA earnings conference call or presentation 28-Aug-19 9:00pm GMT

Preliminary Q1 2020 American Software Inc Earnings Call

Atlanta Sep 11, 2019 (Thomson StreetEvents) -- Edited Transcript of American Software Inc earnings conference call or presentation Wednesday, August 28, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* H. Allan Dow

American Software, Inc. - President

* Vincent C. Klinges

American Software, Inc. - CFO

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Conference Call Participants

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* Matthew Charles Pfau

William Blair & Company L.L.C., Research Division - Analyst

* Zachary Cummins

B. Riley FBR, Inc., Research Division - Analyst

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Presentation

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Operator [1]

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Good day, everyone, and welcome to today's American Software First Quarter 2020 Earnings Call. (Operator Instructions) Please note that today's call is being recorded, and I will be standing by should you need any assistance.

It is now my pleasure to turn the call over to Vincent Klinges, CFO of American Software. Please go ahead.

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Vincent C. Klinges, American Software, Inc. - CFO [2]

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Thank you, Denisha. Good afternoon, everyone, and welcome to the American Software's First Quarter of Fiscal 2020 Earnings Conference Call. On the call with me is Allan Dow, President of American Software. I will review the numbers, and then Allan will give some remarks after that. But 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 in, 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 in 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.

So taking a look at the first quarter revenue numbers, they were $27.4 million for both the current and prior year period. Subscription fees increased 41% to $4.5 million for the quarter compared to $3.2 million the same period last year, while software license revenues increased 4% to $1.8 million for the current quarter compared to $1.7 million the prior year period as we continue to transition to a SaaS engagement model.

Our Cloud Services annual contract value or ACV increased by approximately 54% to $20.3 million for the current quarter and that compares to $13.2 million in the same period last year. Our professional services and other revenues decreased 8% to $10.1 million for the current quarter compared to $11 million the same quarter last year, and that was primarily due to a decrease in our IT consulting business unit, The Proven Method, as a result of timing of project work. This was partially offset by an increase on our supply chain management unit due to stronger bookings of late, and our backlog remains strong heading in Q2.

Maintenance revenues decreased 4% to $11 million compared to $11.5 million. Our combined recurring revenue streams of Maintenance and Cloud Services were 56% of total revenues for the current quarter and that compares to 46% the same period last year.

Looking at cost, our overall gross margin was 56% for the current quarter compared to 54% in the prior year quarter. Our license fee margin was 22% for the current quarter compared to a negative 1% in the same period last year. And that's due to lower agent commission fees to our resellers and lower amortization of cap software that is noncash.

Subscription fee margin decreased to 52% compared to 66% for the same period last year, and that's primarily due to increase in the allocation of amortization of cap software, which is approximately $766,000 of the $2.1 million in cost. And that's due to increase of subscription revenue mix.

In the first quarter of '20, gross margins without the noncash cap software allocation would have been 70%. So our services margin increased to 27% compared to 21% for the same period last year, and that's due to a higher portion of our professional services revenue coming from a higher margin supply chain business unit. Our maintenance margin increased to 83% for the current quarter compared to 81% in the same period last year, and that's due to containment efforts.

Looking at operating expenses. Our gross R&D expenses were 17% of total revenues for the current and prior year period or as a percentage of revenue sales and marketing expenses were 20% of the revenues for the current period compared to 19% in the same period last year, and that's primarily due to increase in sales commissions and headcount costs.

Our G&A expenses were 18% of total revenues for the current period compared to 15% in the prior year period. That increase was due to variable compensation and some legal fees. So our operating income increased 31% to $797,000 for this quarter and that compares to $607,000 for the same quarter a year ago. Our adjusted EBITDA, which excludes stock-based compensation, increased 24% to $3.5 million for the quarter and that compares to $2.8 million the same period last year.

Our GAAP net income decreased 17% to $1.2 million or earnings diluted share of $0.04 for the current quarter, that compares to net income of $1.4 million or $0.04 in the earnings -- $0.04 of earnings diluted share. Adjusted net income was $2.1 million or adjusted earnings per diluted share of $0.06 for the first quarter and that compares to net income of $2.2 million or adjusted earnings per share of $0.07 in the same period in the last year. And these adjusted numbers exclude the amortization of intangibles expenses related to acquisitions and stock-based compensation expense. International revenues this quarter were approximately 22% of total revenues for the current quarter, and that compares to 20% the prior year quarter.

Looking at our balance sheet. The company's financial position remains strong, with cash and investments of approximately $88 million at the end of July 31, 2019. During the quarter, we also paid $3.4 million in dividends. Other aspects of the balance sheet, our accounts receivable billed was $17.5 million, unbilled $3 million, for a total of $20.5 million. Deferred revenues, current and long term, were $32.7 million, and our shareholder equity was $114 million. Current ratio was 2.6 as of July 31, 2019, and that compares to 2.8 the same period last year. And our day sales outstanding was 68 days, and that compares to 58 days in the same period last year.

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

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H. Allan Dow, American Software, Inc. - President [3]

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Well, thank you, Vince. During the first quarter, we saw a marked improvement in the close rate, with a strong preference for the Software-as-a-Service engagement model that was evidenced by the 41% year-over-year increase in subscription revenue and the 54% growth in annual contract value that Vince mentioned earlier.

As I stated on the June call, the quarter started strong with a couple of contracts that were targeted for Q4 closing early in the first quarter, but we are able to keep that momentum up all the way to the end of the quarter. The annual contract value for Cloud Services associated with new contracts increased from $13.2 million in Q1 of our last fiscal year to $20.3 million last quarter as we added 16 new logos to our customer accounts.

Furthermore, we're off to a good start in the second quarter with a number of new contracts already signed. We remain confident in our ability to achieve solid ACV growth in fiscal year 2020 and beyond. Based on the close rate in Q1, we are now operating our supply chain services organization at near full capacity, which will drive higher seasonally adjusted services revenues as we progress through the year.

During the first quarter, our recurring revenue streams of Maintenance and Cloud Services represented about 56% of the total revenues. That was compared to 54% in the same period in the prior year due to the growth in our subscription contracts. We expect that percentage of recurring revenue to continue trending higher into the future based on the strong preference for subscription contracts, with that rate approaching 60% before the fiscal year-end.

The growth of recurring revenue improves the financial predictability and profitability of our company. Overall, we had a very good quarter, and we're pleased with our team's achievements. As we look forward, we're continuing to see an uptick in the transformational projects, which will leverage our digital supply chain solutions and take advantage of the optimization depth, the advanced analytics, machine learning capabilities and the optimized simulation capabilities of our platform. Customers are looking for supply chain agility to help them navigate the global trade uncertainty while simultaneously seeking a reduction in the time to bring their products to the market to gain a higher brand awareness and mitigate risk. Our ability to help them transform their supply chains to continuous and autonomous planning allows our customers to leverage their supply chain as a strategic market advantage.

In summary, we're encouraged by the progress we're making in our go-to-market execution as we strive for continued success. We will continue to focus on making our customers more successful as we look to expand our relationships with customers and grow our recurring revenue streams. We are confident that we can continue to grow both revenue and profitability in the year ahead and are proud to be delivering incremental benefits to our customers.

Denisha, at this time, we'd like to open up the call for any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll go ahead and take our first question from Matt from William Blair.

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Matthew Charles Pfau, William Blair & Company L.L.C., Research Division - Analyst [2]

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Nice job on the quarter. Just wanted to hit on the momentum you're seeing in the business and the ACV growth acceleration and the improvement in close rates, maybe if you can just give us some more details on what's driving that and is that partly due to your new head of sales and maybe some changes that he's made?

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H. Allan Dow, American Software, Inc. - President [3]

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Vince, I'll take that one. So Matt, yes, thank you for joining us and the question. It's a combination of things. We're seeing -- certainly, with Mac coming in, we talked about that the last couple of quarters. He's had an influence on the business. We're excited about that. We're up and running under his direction now and following his leadership for the sales organization and activities. That certainly has had an impact, a positive impact, and we're excited about that.

We're also seeing that it more or less seems like people have gotten comfortable with the market dynamics and trade wars and tariffs and all the different things that are happening and a new surprise seems to be around almost any corner these days. But people have settled into the fact that, that's become more of the norm and they need to be prepared for and they're taking action to deal with some of those things that are impacting their business. So I think we hit a double whammy there where both events are coming together at the same time period.

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Matthew Charles Pfau, William Blair & Company L.L.C., Research Division - Analyst [4]

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Got it. And then the interest we've seen in the subscription SaaS deployment model, is that primarily from the new customers you're signing or have you also seen some of your existing customers start to queue up or prefer or want to transfer over to that model as well?

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H. Allan Dow, American Software, Inc. - President [5]

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We're seeing a very slight interest in transferring. So we're not seeing a lot of that happening yet, although there's some good discussions going on. As existing customers are expanding the solution footprint, that's where that brings that dialogue up, so it's not just a one-for-one kind of transfer. But we're seeing almost exclusively at this point that new projects, new customers and significant add-on projects for existing customers are going in the direction of the subscription business. It appears though, looking forward, that our license fee business will be the small incremental add-on activities with existing customers.

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Matthew Charles Pfau, William Blair & Company L.L.C., Research Division - Analyst [6]

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Got it. And on the transformational projects that you're seeing, is that being driven by you incorporating more the acquired functionality into your products or maybe just give us some more details on what's driving the transformational projects?

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H. Allan Dow, American Software, Inc. - President [7]

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Certainly, the detailed analytics and data analysis is a key factor in these transformational projects. It's the driver behind it. But also part of that the acquisition we made around data administration, data management, is a key factor in those transformational projects as well. They can't be successful without that. But it really comes down to how to realign their supply chain for this new reality in the marketplace today, and the automatic planning, artificial intelligence, machine learning capabilities are really driving efficiencies in their supply chain operations, giving them a better answer, giving them -- freeing up resources to actually work on more strategic initiatives, and that's really the transformational element.

So all of that's coming together with analytics, data management, machine learning and artificial intelligence to really facilitate a pretty dramatic shift in the way they operate their supply chains. So that combination is really what's making happen these days.

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Operator [8]

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(Operator Instructions) We'll go ahead and take our next question from Zach from B. Riley FBR.

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Zachary Cummins, B. Riley FBR, Inc., Research Division - Analyst [9]

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Allan and Vincent, congrats on the strong ACV performance in the quarter. But just talking about the 16 new customer wins, can you talk about the competitive landscape that you've seen in these deals, and what has really been the key differentiator for you to win these deals?

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H. Allan Dow, American Software, Inc. - President [10]

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The competitive landscape is still all over the map. We're seeing some traditional supply chain vendors that we've competed with for many, many years. The -- we see at some points the ERP players are coming in strong, but then other times we see some momentum picking up around maybe some frustration with their development or the pace at which they're bringing out the new capabilities that are necessary to support today supply chains. So that's driving some new opportunities for us as well. But there's still a bias towards the ERP player if there's been a major investment out there. So it's a mixed environment. There are some new entrants coming in, so it's not as predictable as it was 5 years or 10 years ago.

We had a pretty focused team and there's a lot of new players in the marketplace today, but predominant to some of the traditional folks that we're up against, the real advantage we have in the marketplace today is the speed at which we can bring a solution to the marketplace, we have packaged applications where some of the competitors are having somewhat of a toolkit and a turnkey implementation. That brings risk to the project and it brings a much longer time to get return on the investment. So we have a competitive advantage there, and we are a market leader in the artificial intelligence and machine learning capabilities, which has also drawn attention to us and really making a difference in the way they can cooperate with a more efficient supply chain.

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Zachary Cummins, B. Riley FBR, Inc., Research Division - Analyst [11]

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Understood. That's helpful. And then I think Vince addressed this a little bit early in his commentary, but can you talk a little bit more around the drivers of the year-over-year decline in the professional services group? And it sounds like the project backlog is beginning to improve, so how should we be thinking about that business over the coming quarters as you accelerate this shift towards the subscription model?

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H. Allan Dow, American Software, Inc. - President [12]

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Vince, why don't you take that one?

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Vincent C. Klinges, American Software, Inc. - CFO [13]

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Yes, Zach, the decline in special services primarily The Proven Method, our IT consulting business, as I mentioned. The supply chain business actually slightly increased a couple of basis points year-over-year. And now that we've closed all this new SaaS business, we actually have filled up the backlog of work as Allan indicated in his discussion that we anticipate the professional services line to go higher year-over-year in the next couple of quarters.

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Zachary Cummins, B. Riley FBR, Inc., Research Division - Analyst [14]

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Understood. And just one more question for you Vince, I know you addressed this a little bit in the commentary as well, for the subscription gross margin, it seems like it was impacted by highly capitalized software that's now being allocated to that. Is this -- should we think of this is a more of a one-time thing or is it going to be sort of something that depresses the overall reported subscription margin over the next couple of quarters?

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Vincent C. Klinges, American Software, Inc. - CFO [15]

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Well, as we actually sell more SaaS business, it becomes more material inside our mix, and license fees becomes less. We have to allocate more to cap software to that cost, and that's what's driving the year-over-year cost increase in cap software amortization. So it will be inside the number going forward.

The other element that happened is, we actually closed a fairly large project during the quarter, and we started amortizing about $400,000 more than we did last year. So you have more being allocated to that area and also more cost itself in general.

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Operator [16]

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(Operator Instructions) And it doesn't look like we have any further questions on the phone line at this time.

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H. Allan Dow, American Software, Inc. - President [17]

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All right. Well, thank you, Denisha, and thank you all for participating in our call this evening. We certainly thank you for your time, and look forward to speaking to you again in the future.

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Operator [18]

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This does conclude today's program. Thank you for your participation. You may now disconnect.