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Edited Transcript of MAMS earnings conference call or presentation 10-May-19 1:00pm GMT

Q3 2019 MAM Software Group Inc Earnings Call

BLUE BELL May 15, 2019 (Thomson StreetEvents) -- Edited Transcript of MAM Software Group Inc earnings conference call or presentation Friday, May 10, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian H. Callahan

MAM Software Group, Inc. - CFO & Executive VP

* Michael G. Jamieson

MAM Software Group, Inc. - CEO, President & Director

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Conference Call Participants

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* Aman Raj Gulani

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

* James Carbonara

Hayden IR, LLC - Partner of IR Strategy & Operations

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Presentation

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Operator [1]

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Good day, and welcome to the MAM Software Third Quarter Fiscal 2019 Earnings Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to James Carbonara. Please go ahead, sir.

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James Carbonara, Hayden IR, LLC - Partner of IR Strategy & Operations [2]

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Thank you. Good morning, and welcome once again to MAM Software's Fiscal Year 2019 Third Quarter Earnings Call. With me on the call are Michael Jamieson, President and Chief Executive Officer; and Brian Callahan, MAM Software's Executive Vice President and Chief Financial Officer.

I'd like to begin the call by reading the safe harbor statement. All statements made on this call, with the exception of historical facts, may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Although the company believes that the expectations reflected in such forward-looking statements are reasonable, it can make no assurances that such expectations will prove to have been correct. Actual results may differ considerably from the company's expectations due to changes in operating performance and other technical and economic factors.

During the course of this meeting and any question-and-answer period afterwards, representatives of the company may make forward-looking statements regarding future events or the future financial performance of the company, including statements about future events based on current expectations, potential product developments, near and long-term objectives, potential new business strategies, organization changes, changing markets, future business performance and outlook. Such statements are predictions only, and actual events and results may differ materially from those made in any forward-looking statements due to a number of risks and uncertainties. Actual results and trends may differ materially from historical events or those projected in any such forward-looking statements, depending on a variety of factors.

For a discussion of such risks and uncertainties which could cause actual results to differ from those contained in forward-looking statements, see Risk Factors in the company's reports on forms 10-K and 10-Q as well as other reports that the company files from time to time with the Securities and Exchange Commission. All forward-looking statements are qualified in their entirety by this cautionary statement, and the company undertakes no obligation to update publicly any forward-looking statements for any reason, except as required by law, even as new information becomes available or other events occur in the future.

Now I will turn the call over to Michael Jamieson, President and Chief Executive Officer of MAM Software Group. Mike, please proceed.

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Michael G. Jamieson, MAM Software Group, Inc. - CEO, President & Director [3]

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Thank you, James. Good morning, everyone, and thank you for joining us today to review our fiscal year 2019 third quarter results.

Following on from the second quarter of fiscal year 2019, the VAST Online team once again drove a significant portion of our operational performance in the third quarter, and we now have a total of 22 locations live on the software. The software was rolled out to an additional 14 corporate-owned Goodyear stores during the quarter, taking the total number running VAST Online to 17. The live stores have provided valuable feedback to the team, and we are pleased with the overall effectiveness of the pilot phase of the project. We have been able to identify some changes that are required before we can move to a full rollout. Overall, customer feedback has been encouraging, with users commenting on the intuitiveness and the ease of use of the software and the improved experience of onboarding new associates.

As a reminder, VAST Online is the redesigned cloud-based version of our popular VAST software, a solution that we've been selling into the tire and service dealer market for many years. VAST Online is a major investment in the future of our business. And to-date, we have invested over $8 million in this next-generation platform, and we are excited about the opportunities we can generate.

For some time now, the MAM team have been working in close partnership with Goodyear to design, build, test and implement our new cloud-based solution. With the 17 corporate-owned locations now up and running, we are now in a period of stabilization. Ultimately, Goodyear is committed to replacing its current GBMS software with VAST Online across their entire network of corporate-owned locations, numbering just under 600.

VAST Online has been designed to also meet the needs of the independent tire and service market, including the Goodyear dealers of which they are just under 500 locations running Goodyear's GBMS software. We now have 5 independent dealer locations up and running, and our current plan will see us adding more dealers on a monthly basis from this point onwards.

Our top priority is aligned with Goodyear's, and that is to complete the rollout of VAST Online throughout the Goodyear network as soon as we can. We continually challenge ourselves to move this process along at a faster pace, but we need to maintain and manage a deployment schedule that delivers a quality product with demonstrated value as quickly as possible. We are now managing a backlog of Goodyear dealers who have communicated that they are eager to move to VAST Online, so interest and, ultimately, demand is there in this channel as well.

We have previously commented on the importance of the Goodyear account and how it has been drawing attention for a number of interested parties from across the industry. The good news is that, that interest in VAST Online is growing, and we continue to have discussions that could potentially bring sizable opportunities. One such exciting opportunity has progressed to a final discovery stage, which includes a pilot. And we expect to get a decision within the next 3 to 6 months. We appreciate that Goodyear has been willing to act as a referenceable account for us on a number of occasions now.

Now from an overall business standpoint, we continue to see steady revenue growth, which was driven by our Software as a Service, or SaaS, business as customers continue to transition to our cloud-based solutions. The revenue in this portion of our business increased 8% for the quarter as compared to last year. While our Data as a Service, or DaaS, business decreased by 1% year-over-year but increased 3% on a constant currency basis. Combined, Software as a Service and Data as a Service revenue represents 60% of total revenues, which is in line with the 60% in the third quarter of fiscal 2018.

Our Autopart Online customer numbers increased again during the quarter and now total 511, up 3% from last quarter. In total, we had 6,204 users subscribing to the service at the end of the quarter, up 7% from last quarter.

Our Autowork Online customer base grew to 3,024 subscribers as at March 31, 2019, an increase of 2% year-over-year.

In the third quarter, our strategic partnership with ALLDATA once again contributed to growth in our Software as a Service business in North America. ALLDATA, a market-leading brand in the North American automotive aftermarket, continue to see MAM as a key partner, and we saw the number of ALLDATA customers using a white-label version of our Autowork Online product increase by 7% over last year, and recurring revenues grew 8% when compared to the same period last year.

We continue to focus on expanding Software as a Service revenues derived from our cloud-based solutions such as Autopart Online, Autowork Online and VAST Online and our Data as a Service solution, Autocat, especially in North America. The North American market remains a priority for our business. The sales pipeline for Autocat, our electronic parts catalog, continues to improve as we promote the product as one of our catalog offerings and generate more interest.

As a reminder for the North American market, we invested in developing a new version of Autocat, which incorporates the underlying technology and data processing techniques that have been tried and tested in the U.K. over many years. Autocat has been integrated with our Autopart and VAST business management solutions and will be integrated with VAST Online. Integration helps to increase the stickiness of those products and the longevity of our customer relationships. We see our existing customers as well as our prospects as potential Autocat opportunities.

Since our last earnings call, we issued a press release that stated that we now had 1,500 locations live on Autocat. In addition, we have a number of customers who are going through the process of implementing Autocat so we expect to see continued momentum during the fourth quarter and into the next fiscal year. Our aim is to replicate the success we've seen in the U.K., where Autocat is an established market-leading brand that complements our business management software.

Our web-driven version of Autocat was first released in the U.K. back in 2008 and has been seen as a market-leading product for many years. Autocat represents just over 10% of total revenues for the U.K. business and is one of our highest gross margin products.

I wanted to provide a quick update on the data services initiative that I've mentioned on the last couple of earnings calls. As a reminder, we see an opportunity to optimize, aggregate and data mine the massive amounts of rich data that resides within our cloud-based platforms, Autocat, Autowork Online and Autopart Online. This could potentially create a valuable big data asset or business intelligence suite of reporting tools for the automotive aftermarket. Uses for this data include helping to analyze parts returns, which has always been a big challenge for the industry, predicting part replacement based on mileage and highlight the common faults based on age and mileage of a vehicle. We continue to work with data scientists from the University of Newcastle in England who are helping us to tap into the value of this data.

To help raise awareness of this initiative and how we can help different businesses within the aftermarket, we intend to launch a new e-bulletin at next month's Automechanika trade show in the U.K. We are already working with a growing number of parts manufacturers offering a data service that not only enhances the quality of their catalog data but also helps to simplify the publishing of their data into Autocat. Our service can improve data quality, therefore reducing costs, enabling smarter, more informed decision-making within our data manipulation, mapping and maintenance reports. Some of the industry's leading manufacturers are realizing significant improvements in the accuracy of their data by working more closely with MAM. The initial focus for our data services is in the U.K. largely due to our significant market presence.

Lastly, I wanted to provide an update on our Trader initiative. As you know, Trader is a rebranded version of our popular Autopart software that we sell into certain other vertical markets involved in the distribution of construction materials. For example, businesses that distribute engineering supplies, builders and plumbers merchants and electrical wholesalers would be on our target list. We continue with our marketing efforts leading up to the NMBS trade show, an annual event which is the largest of its kind in the U.K., and came away with a number of new leads. Our messaging focused not only on Trader but on a new integrated electronic parts catalog, TraderKat, which we consider to be a potential differentiator in those markets. TraderKat utilizes the underlying technology of our automotive catalog.

In support of Trader, we also launched a new website dedicated to the product. In the third quarter, we booked 3 new system sales, which continued the trend we saw in the second quarter, which is an encouraging improvement over prior periods. Trader remains a promising opportunity, but it is not expected to have a significant impact in the near term as we continue to prioritize the automotive initiatives.

In summary, although the rollout of VAST Online will push into fiscal year 2020, we expect to see continued revenue growth from both U.K. and U.S. operations for the remainder of fiscal year 2019 primarily due to growth in each of these markets from expanding our presence in the automotive aftermarket.

In North America, we are seeing more customers than expected choose the SaaS deal over a perpetual deal, which have upfront license and professional services revenue. As we have previously discussed, the number and the timing of these perpetual opportunities will impact our revenue growth in the near term as we fully transition to a SaaS model over time. Brian will provide more details regarding our outlook for the remainder of 2019 later in the call.

I will now turn the call over to Brian Callahan, our Chief Financial Officer, for a detailed review of our financial results for the third quarter and the full year. Brian?

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Brian H. Callahan, MAM Software Group, Inc. - CFO & Executive VP [4]

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Thank you, Mike. I'll review the financial highlights for the third quarter of fiscal year 2019. Additional details, including year-to-date results, can be found in our press release and the 10-Q that was filed yesterday. I would like to remind investors that our business is subject to quarter-to-quarter fluctuations due to changes in foreign currency rates; timing of customer implementations; timing and nature of new sales, including the clients decisions between SaaS and perpetual deals; and other factors.

Consolidated net revenues were $9.5 million, an increase of 4% as compared to $9.1 million for the third quarter of fiscal year 2018. Foreign currency translation had a negative impact in the third quarter as the exchange rate was $1.30 as compared to $1.39 in the same quarter last year and $1.29 last quarter. On a constant currency basis, revenues increased 8.5% over the same period last year.

At the beginning of fiscal year 2019, we adopted the new revenue recognition standard for Topic 606. And the adoption of 606 increased revenues by $46,000 in the third quarter fiscal year 2019 but is not expected to have a material impact to fiscal year 2019 revenues. We adopted 606 using the modified retrospective transition method so we did not restate results from the prior period. Additional detail is in the footnotes of the 10-K.

MAM U.K.'s revenues decreased 1% year-over-year for the third quarter of fiscal year 2019 and increased by 6% on a constant currency basis as we continued transitioning existing customers to SaaS.

MAM North America revenues increased 14% for the third quarter of fiscal year 2019 due to the increase in recurring revenues from DaaS and implementation of new SaaS customers and also the increase in our recurring revenues from higher perpetual sales, including to existing customers. The recurring revenues for the third quarter of fiscal year 2019 were 84% of net revenues, which was consistent with the third quarter of last year. The total SaaS revenues for the third quarter of fiscal year '19 were $3.2 million, an increase of 8% as compared to prior year. Our SaaS revenue for the third quarter included Autowork Online revenue of $1.7 million, a 0.2% decrease year-over-year but increased 2% on a constant currency basis. And Autopart Online revenue of $1.5 million, an 18% increase year-over-year.

DaaS revenue for the third quarter of fiscal year 2019 was $2.5 million, a 1% decrease year-over-year, but increased 3% on a constant currency basis.

At the end of the third quarter of fiscal year 2019, our implementation backlog included $1 million in annualized revenue not including ALLDATA or Goodyear and approximately $1 million of licensed professional services revenues from perpetual deals. The gross profit for the third quarter was $5 million or 53% of net revenues as compared to $5 million or 55% of net revenues in the same quarter last year. The lower margin is due to the investments in people and infrastructure we have made to support our growth initiatives, including the rollout of VAST Online and Autocat.

Gross margins are impacted quarter-to-quarter by the timing of perpetual license sales and professional services as well as the amortization of capitalized software. We expect to see an increase in expenses in fiscal year 2020 related to the capitalized software as we begin to amortize development costs of VAST Online. While this increase will have a direct impact on our cost of revenue, it does not impact our adjusted EBITDA since this is added back as amortization expense.

The cost of goods sold for the third quarter 2019 included $67,000 of amortization expense as compared to $78,000 for the third quarter of last year. The small decrease from last year was due to fully amortizing certain projects during the second half of fiscal year 2018.

For the quarter, total operating expenses of $3.8 million were relatively flat as compared to the third quarter of last fiscal year. R&D did increase due to additional resources focused on growth initiatives and lower capitalized costs. G&A expenses, however, were lower primarily due to timing of professional fees and annual incentive accruals.

The interest expense for the third quarter of fiscal year 2019 was $81,000, down from $95,000 in the prior year, which was primarily attributable to lower outstanding debt balances.

The provision for income taxes was $220,000 or an effective rate of 20% for the third quarter of fiscal year 2019 as compared to an income tax benefit of $89,000 or an effective tax rate of negative 8% for the prior year quarter. The change in the effective tax rate was primarily due to lower R&D tax credits in the prior year -- compared to the prior year. We expect the overall effective tax rate for the full fiscal year 2019 to be approximately 20%.

Net income for the third quarter of fiscal year 2019 was $890,000 or $0.07 per basic and diluted share as compared to $1.2 million or $0.10 per basic and diluted share for the same quarter last year. The adjusted earnings before interest, taxes, depreciation and amortization, adjusted to exclude noncash stock-based compensation, or adjusted EBITDA, was $1.5 million or 15% of net revenues for the third quarter as compared to $1.5 million or 17% of net revenues for the third quarter of last year. A reconciliation of net income to adjusted EBITDA can be found at the end of the third quarter earnings release. Adjusted EBITDA is commonly used by management and investors as an indicator of operating performance and liquidity. Adjusted EBITDA is not considered as a measure of financial performance under GAAP, and it should not be considered as an alternative to net income or other financial data presented in accordance with GAAP in our consolidated financial statements.

Turning to the balance sheet. At March 31, 2019, we had cash, cash equivalents of $5.1 million as compared to $4.2 million at June 30, 2018. As of March 31, 2019, we had outstanding debt of $5.1 million under our term loan, which is a reduction of $1.3 million as compared to $6.4 million at the end of fiscal year 2018. We do not have any borrowings outstanding under our $2.7 million revolver.

Our balance sheet continues to improve, as evidenced by our cash balance exceeding our total debt balance this quarter. This has been driven by higher cash from operations and diligent management of capital expenditures and operating expenses.

For the first 9 months of fiscal year 2019, the operating cash flow generated $3.5 million as compared to $5.2 million last year. The difference is primarily due to timing of payments, accounts receivable, accrued expenses and income taxes.

Capital expenditures included capitalized software development costs of $636,000 for the first 9 months of fiscal year 2019 as compared to $1.4 million for the same period last year. The capital expenditures for each period relates primarily to capitalized software costs directly attributed to our VAST Online development project, which we continue to self-fund with funds provided by operating cash flow.

Our Board of Directors authorized the repurchase of $2 million of common stock effective September 19, 2018. The stock repurchase may be made through open-market, private-negotiated transactions at times and in such amounts as management deems appropriate. As of March 31, 2019, the company repurchased 41,765 shares of common stock under the stock repurchase plan for a total cost of approximately $320,000.

As we enter the last quarter of fiscal year 2019, the timing and nature of certain client opportunities may cause the revenue growth for the year to fall short of the previously announced revenue growth guidance of 10% on a constant currency basis. These timing issues include the rollout of VAST Online as well as perpetual sales from professional services projects. We've also seen more opportunities than expected select SaaS option over the perpetual license. However, we are reiterating our adjusted EBITDA guidance of between $6.2 million and $6.7 million on a constant currency basis.

We also expect R&D investments to be approximately $7 million on a constant currency basis. More of the investment will be period expense as opposed to capitalized cost, which will have a direct impact on adjusted EBITDA, all of which is included in our guidance.

Our projections are based on executing key project initiatives, timing of getting to customers live, timing of new sales and the clients' decisions between SaaS and perpetual deals.

I will now turn the call back over to you, Mike.

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Michael G. Jamieson, MAM Software Group, Inc. - CEO, President & Director [5]

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Thank you, Brian. So in summary, for the third quarter of fiscal year 2019, we continue to make steady progress across various areas of the business, including VAST Online and Autocat. But we are also very encouraged and excited by the opportunities that we are pursuing.

This concludes our prepared remarks. Thank you for participating in today's conference call. Brian and I will now take any questions you may have.

Operator, please open the lines for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will take our first question from Aman Gulani with B. Riley.

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Aman Raj Gulani, B. Riley FBR, Inc., Research Division - Associate Analyst [2]

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Can you talk about the pace of VAST Online rollout? It looks like there was, 15th of January, at what pace is the install happening today? And how many locations do you think you can hit this year?

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Michael G. Jamieson, MAM Software Group, Inc. - CEO, President & Director [3]

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Well, there's a number of dynamics that would impact the rollout, I think. We -- the pilot has worked well for us in identifying certain changes that we identified, that Goodyear identified. And there's ongoing discussion as to which are absolutely required before rollout can start and which items can be deployed post rollout. So that can impact the timing. I think we expect to see -- right now, we expect to see a few more locations go live next month. And in addition to that, we'll have a few more independent dealers go live in May, June, July. And really once -- so right now, there's a lot of discussion about what it is we really need to build into the released version. And that will impact the timing and the rate at which we roll these stores out. There's a real appetite to get this done as soon we can practically do so.

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Aman Raj Gulani, B. Riley FBR, Inc., Research Division - Associate Analyst [4]

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Got it. That's helpful. Okay. Now are you able to disclose any other large enterprise opportunities for the software? And are you able to disclose who the customer might be?

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Michael G. Jamieson, MAM Software Group, Inc. - CEO, President & Director [5]

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Not really. I did reference one particular opportunity. I gave a little bit of context about it. Right now, we're seeing a lot of interest. For us, we see VAST Online as being a solid offering for the enterprise-type business out there, of which we are speaking to a number. One in particular has decided that MAM and VAST Online will be the solution subject to a successful pilot. So we're very excited about that. But no, I cannot disclose any details right now or any more details.

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Aman Raj Gulani, B. Riley FBR, Inc., Research Division - Associate Analyst [6]

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Got it. Okay. Just one more question for me. What sort of risks are you seeing to your top line growth? I know in the press release you sort of -- you mentioned timing was called out. So if you can just give a little bit more color on that.

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Brian H. Callahan, MAM Software Group, Inc. - CFO & Executive VP [7]

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Sure. I mean as we've talked about, more and more of our deals are going SaaS, but we still do, particularly in North America or to existing customers, sell perpetual licenses. So the fluctuation in the timing of those deals and whether it's happening, whether it happens in May or June, or it happens in July and August, obviously, has an impact on the fiscal year. As well as professional services projects when we do sell deals -- perpetual deals and when those are slotted to ramp up. So as you can imagine, with those versus SaaS, you have a lot more upfront revenue so that can be choppy. Just a couple deals here or there going from one month to the other creates some volatility, so we constantly manage those, obviously. We also said we have less and less deals going perpetual but we still did have some of our forecast this year, and we saw more than we expected go to SaaS from perpetual. So that trend has been continuing, accelerated a little bit more in North America this year, which long term, is good for us just when you're talking about timing of revenue. Obviously also, like the timing of the rollout of VAST Online, that timing as well impacts the growth we are expecting for fiscal year '19 versus '18.

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Michael G. Jamieson, MAM Software Group, Inc. - CEO, President & Director [8]

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Just to add to the point about perpetual deals. I mean right now, we have some nice-sized opportunities in our pipeline, and we're working those opportunities in the hope that we can bring those in before the end of Q4. But ultimately, that decision may be beyond our control. So we're doing what we can there. But the good news is that the opportunities are there in the pipeline. We can't always control the timings of those decisions.

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Operator [9]

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(Operator Instructions) There are no further questions. Therefore, this concludes today's call. Thank you for your participation. You may now disconnect.