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Edited Transcript of MAMS earnings conference call or presentation 12-Feb-19 2:00pm GMT

Q2 2019 MAM Software Group Inc Earnings Call

BLUE BELL Feb 12, 2019 (Thomson StreetEvents) -- Edited Transcript of MAM Software Group Inc earnings conference call or presentation Tuesday, February 12, 2019 at 2:00:00pm 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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* Sarkis Sherbetchyan

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 Second Quarter 2019 Earnings Call. Today's call is being recorded. And at this time, I'd 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 Second 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 would 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 section -- 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 development efforts, 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 the 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, and thank you for joining us for this earnings call. The achievements of our VAST Online team were again a highlight of our operational performance in the second quarter of fiscal year 2019. We completed the second phase of the pilot with Goodyear, with the installation of 2 additional corporate-owned retail locations in the month of December. As with the first location, customer feedback has been encouraging, with users citing the intuitiveness and ease of use of the software. As a reminder, VAST Online is the redesigned cloud-based version of our VAST platform. To date, we have invested more than $8 million in the platform and have been working in close partnership with Goodyear to design, build, test and implement a cloud-based solution that will not only meet their needs but be marketable to other automotive customers.

With the 3 corporate-owned locations up and running and operationally stable, the next stage of the project will see a number of additional locations go live in February, followed by a further period of stabilization and then the acceleration of the rollout over the coming months. In the end, we will install VAST Online across Goodyear's entire network of just under 600 corporate-owned locations. One pleasing aspect of our work over recent months has been our ability to hit key milestones in accordance with our revised project plan. I see this as a positive sign as we move forward. We also have full independent dealer locations that have gone live with the product, and we expect to see a number of additional independent dealers go live in the coming months. There are just under 500 dealer locations running the current version of Goodyear's software, GBMS, that we will be targeting with VAST Online. Our top priority in the near term is to maintain and manage a deployment schedule that delivers a quality product with demonstrated value and a clear return on investment for our customer.

We attended the 3-day Goodyear Dealer Conference last month. This event provided us with the opportunity to interact with many of the 500 dealer locations running GBMS as well as dealers running other software solutions. Being the only approved point-of-sale software vendor in attendance at the event, this was a great opportunity to demonstrate our VAST Online product to a captive audience. Feedback was generally positive, and there is a clear desire on the part of many of the dealers to move to VAST Online, many dealers making the point that they have been waiting for some time. We were invited by Goodyear to deliver a 20-minute information session, which we did in conjunction with one of our customers already using VAST Online. We drew a large crowd to this session, and we were encouraged by the dealers' enthusiasm for the product, which again reaffirmed our investment decision and technology's direction.

The Goodyear account is high profile and has been drawing attention for a number of interested parties. Some of that interest has resulted in meaningful and ongoing discussions that I would describe as sizable opportunities. As part of the process, Goodyear has been willing to act as a referenceable account for us. We expect to know the outcome of these discussions by the end of the third quarter.

Our financial results were in line with our expectations, which were driven by a growth in 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 13% for the quarter as compared to last year, while our Data as a Service, or DaaS, business increased by 3% year-over-year. Combined Software as a Service and Data as a Service revenue represents 61% of total revenues compared to 60% in the second quarter of fiscal 2018.

Our Autopart Online customer numbers increased again during the second quarter and now total 494, up 2% from last quarter. In total, we had 5,815 users subscribing to the service at the end of the quarter, up 4% from last quarter.

Our Autowork Online customer base grew to 3,001 subscribers as of December 31, 2018, an increase of 2% year-over-year.

In the second fiscal quarter, our strategic partner with ALLDATA, once again, contributed to growth in our Software as a Service business in North America as we saw the number of customers increase 5% over last year, and recurring revenues grew 10% as compared to the same period last year. We also attended the SEMA and AAPEX trade shows in Las Vegas during the second quarter. These premier automotive specialty trade events drew industry professionals and exhibits from around the world, providing us with the opportunity to showcase our products, including VAST Online and Autocat to prospects as well as our customers. We are currently following up on a number of new leads and opportunities that resulted from our engagement at the conferences.

At the high level, we remain focused on expanding Software as a Service revenues derived from cloud-based delivery and our Data as a Service solution for North America. The North American market continues to be a priority for our business. The sales pipeline for Autocat, our electronic parts catalog, continues to improve as we generate more interest in the product. For many years now in North America, MAM has primarily resold third-party catalog solutions to our customers, but the introduction of Autocat will increase the number of choices that we can offer.

For North America, we developed a new version of Autocat, which we incorporated -- which incorporated the underlying technologies and data processing techniques that have been tried and tested in the U.K. Autocat has been integrated with our Autopart and VAST business management solutions as we see those existing customers as well as our prospects as potential opportunities. Since our last earnings call, we have added a small number of customers to the list of those who have either gone live or in the process of implementing Autocat. I expect to see momentum build during the third and fourth quarters and beyond.

Autocat will also be integrated with VAST Online software in the future. This approach to integration will help us to replicate the success that we have seen in the U.K. where Autocat is established as a market-leading product that complements our business management software. Autocat represents just over 10% of total revenues in the -- for the U.K. business and is one of our higher-gross margin products.

During the earnings call in September, I spoke about a new data initiative that we were researching. We believe there is an opportunity to optimize the massive amounts of rich data that resides within our cloud-based platforms to create a valuable big data or business intelligence suite of reporting tools for the automotive aftermarket. MAM solutions like Autocat and Autowork Online gather rich data from thousands of users on a daily basis and once aggregated and data mined, can help with analyzing returns rates, predicting part replacement based on mileage and highlight common faults based on age and mileage. To explore the opportunity in further detail, we are working with data scientists from The University of Newcastle in England. We already offer a data service to parts manufacturers, providing a simple and effective way to publish their data to MAM's market-leading Autocat parts catalog. We offer data manipulation, mapping and maintenance as well as a variety of reports that can help to identify gaps in the suppliers' range and incorrect data, which improves data quality, therefore, reducing costs, enabling smarter, more informed decision-making.

We are working with some of the industry's leading parts manufacturers who are realizing significant improvements in the accuracy of their data by working more closely with MAM. The initial focus of our data services will be in the U.K., largely due to our significant market presence, but we expect that there will be additional opportunities to supply the same data analytics for the benefit of all of our customers.

Lastly, interest in pursuing opportunities with our Trader software in certain other vertical markets remains in our radar, albeit a little lower on the list of priorities as we continue to work on the near-term automotive opportunities. We did book 2 pieces of new business in the second quarter, and we expect at least one more booking to occur in the third quarter. Following increased marketing activity, we have seen a positive impact on our sales pipeline.

For the remainder of fiscal year 2019, we expect to see continued revenue growth from both our U.K. and U.S. operations. We expect growth in each of these markets to be driven primarily by expanding our presence in the automotive aftermarket within North -- with North American growth centered around our VAST Online and Autocat products as well as growing our established products, such as Autopart.

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. We are reiterating our guidance for revenue growth of approximately 10% on a constant currency basis, but this is based upon certain assumptions, including the number, size and timing of certain perpetual deals in our pipeline. We are also reiterating our guidance for adjusted EBITDA of between $6.2 million and $6.7 million for the fiscal year 2019 on a constant currency basis.

I will now turn the call over to Brian Callahan, our Chief Financial Officer, for a detailed review of our financial results for the second 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 second quarter of fiscal year 2019. Additional details can be found in our press release and 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 deal and other factors. Consolidated net revenues were $9 million, an increase of 5% as compared to $8.5 million for the second quarter of fiscal year 2018. Foreign currency translation had a negative impact on the second quarter as the exchange rate was $1.29 as compared to $1.33 in the same quarter last year and $1.30 last quarter. On a constant currency basis, revenues increased 8% over the same period last year.

At the beginning of fiscal year 2019, we adopted the new revenue recognition standard, Topic 606. The adoption of 606 reduced revenues by $20,000 for the second quarter of fiscal year 2019 and 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 prior periods. There are additional details in the footnotes to the 10-Q.

MAM U.K.'s revenues increased 5% year-over-year for the second quarter of fiscal year 2019 or 9% on a constant currency basis as we continued to transition existing customers to SaaS and grew our DaaS business. MAM North America revenues increased 6% for the second quarter of fiscal year 2019, primarily due to overall growth of SaaS and DaaS services. The recurring revenues for the second quarter of fiscal year 2019 were 85% of net revenues, which was consistent with the second quarter of last year. The total SaaS revenues for the second quarter of fiscal year 2019 were $3 million, an increase of 13% as compared to the prior year. Our SaaS revenue for the second quarter included Autowork Online revenue of $1.6 million, a 6% increase year-over-year and Autopart Online revenue of $1.4 million, a 22% increase year-over-year. The DaaS revenue for the second quarter of fiscal year 2019 was $2.4 million, a 3% increase year-over-year.

At the end of the second quarter of fiscal year 2019, our implementation backlog included $1.6 million in annualized revenue, not including ALLDATA or Goodyear and approximately $0.9 million of licensed professional service revenues from perpetual deals. The gross profit for the second quarter was $4.9 million or 55% of net revenues as compared to $4.5 million or 53% of net revenues in the same quarter last year. We're continuing to invest in people and infrastructure to support our growth initiatives, including the rollout of VAST Online and Autocat.

The gross margins are impacted quarter-to-quarter by timing of perpetual license sales and professional services as well as the amortization of capitalized software. We expect to see an increase in amortization expenses in the second half of fiscal year 2019 related to the capitalized software as we begin to amortize the development cost 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 second quarter 2019 included $67,000 of amortization expenses compared to $84,000 for the second 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 $4 million were up 8% year-over-year as compared to $3.7 million for the second quarter of fiscal year 2018. The increase was primarily from R&D due to an increase in resources focused on growth initiatives and lower capitalized cost. G&A expenses were also slightly higher, primarily due to timing of professional fees.

The interest expense for the second quarter of fiscal year 2019 was $92,000, down from $109,000 in the prior year, which was primarily due to lower outstanding debt balances. Our provision for income taxes was $110,000 or an effective rate of 14% for the second quarter of fiscal year 2019 as compared to income taxes of $793,000 or an effective tax rate of 111% for the prior year quarter. The decrease in the effective tax rate was primarily due to the lower U.S. federal statutory rate effective January 1, 2018, as per the Tax Cuts and Jobs Act, tax benefits from equity compensation and the revaluation of our net deferred tax assets at the lower U.S. federal statutory rate and the onetime repatriation tax, redeemed repatriation of historical earnings in foreign subsidiaries in the prior year as per the Tax Act, partially offset by lower R&D tax credits. We expect the overall effective tax rate for the full year fiscal year 2019 to be close to approximately 20%.

Net income for the second quarter of fiscal year 2019 was $704,000 or $0.06 per basic and diluted share as compared to a net loss of $79,000 or negative $0.01 per basic and diluted share for the same quarter last year. The adjusted earnings before interest, taxes, depreciation, amortization, adjusted to exclude noncash stock-based compensation, or adjusted EBITDA, was $1.2 million or 14% of net revenues for the second quarter of fiscal year 2019 as compared to $1.1 million or 13% of net revenues for the second quarter of last year. A reconciliation of net income to adjusted EBITDA can be found at the end of the second 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 a measure of financial performance under GAAP, and it should not be considered as an alternative to net income or other financial statement data presented in accordance with GAAP in our consolidated financial statements.

Turning to the balance sheet for just a moment. At December 31, 2018, we had cash and cash equivalents of $3.9 million as compared to $4.2 million at June 30, 2018. As of December 31, 2018, we had outstanding debt of $5.7 million under our term loan, which is a reduction of $791,000 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 financial position continues to improve with consistent cash on hand, lower debt and shares repurchased, all of which are being driven by higher cash from operations and diligent management of capital expenditure and operating expenses.

For the first 6 months of fiscal year 2019, operating activities generated cash flows of $1.8 million as compared to $3.1 million last year. The difference was primarily due to the timing of payments of accounts receivable, accrued expenses and income taxes.

Capital expenditures, including capitalized software development costs, were $617,000 for the first 6 months of fiscal year 2019 as compared to $924,000 for the same period last year. The capital expenditures for each period relate primarily to the capitalized software costs directly attributed to our VAST Online development project, which we continue to self-fund with funds provided by operating cash flows. Our Board of Directors authorized the repurchase of $2 million of its -- of our common stock effective September 19, 2018. The stock repurchases may be made through open-market and private negotiated transactions at times and in such amounts as management deems appropriate. As of December 13, 2018, the company repurchased 39,969 shares of common stock under the stock repurchase plan for a total cost of approximately $0.3 million.

As Mike mentioned, we're reiterating our fiscal year 2019 guidance for revenue growth approximately 10% on a constant currency basis and adjusted EBITDA between $6.2 million and $6.7 million on a constant currency basis, which includes an investment R&D of approximately $7 million including capitalized software development cost. Year-over-year, we expect our fiscal 2019 R&D investment will be roughly on par with the level of investment we made in fiscal year 2018. However, 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, including VAST Online rollout, continued deployment of Autocat in North America and continued growth in our SaaS business, including our relationship with ALLDATA. Our projections are also based on many other assumptions, including timing of getting new 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. In summary, the second quarter of fiscal 2019 was as we expected and in line with our business plans. Financially, we remain on track to achieve our full year objectives for the fiscal year 2019, and operationally, we continue to make progress with the implementation of our VAST Online product with Goodyear. All in all, we are satisfied with our progress and performance and encouraged by the opportunities that are presenting themselves.

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) And we will take our first question from Sarkis Sherbetchyan at B. Riley FBR.

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Sarkis Sherbetchyan, B. Riley FBR, Inc., Research Division - Associate Analyst [2]

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So I guess, just want to get a better understanding of the rollout plan or the schedule. Any kind of comment you can give us? I know you mentioned the Goodyear network has about 600 locations. You have just under 500 dealer locations and that you can also tap into from the independent, it sounds like. So given that you have 3 corporate locations and 4 independent, like can you give us a sense for what the ramp schedule looks like? Just wanted to kind of gain some clarity there.

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

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Yes, I mean -- the -- from a Goodyear retail standpoint, we expect to see, obviously, the number of additional locations coming up in February and really view that as being at the next phase of the pilots, if you like. So we will have another 18 stores live in February, taking us to a total of 21 at the end of February. Then after that, we'll go through a short period of stabilization and make sure everything is working at the front end, at the back end. And then from a retail standpoint, they want to be pretty aggressive in terms of rolling out to the network. I'm not going to quote exact time frames, that wouldn't be right. But they want to move very quickly on this. So it's an aggressive time frame for completing the rollout to the -- just under 600 locations. With regards to the independent dealers then, once we have a firm view on how the Goodyear retail rollout is moving, then we will start -- we already have a number of dealers who are in the queue, waiting to go. We will bring a small number live in April, May and June. And then as resources free up from the retail rollout, then we will accelerate the rollout to the independent dealers as well. And we're talking to a number of other opportunities about VAST Online that may or may not impact the rollout as well. We now have -- we recruited a number of training personnel over the last few months. So they're getting up to speed in preparation for the rollout, and we -- so that's a positive sign because we always said we would manage that diligently. When we believe that this -- the rollout is just about to commence, that's when we would -- in advance of that, we would commence our hiring program, and yes, we're pretty pleased with the results on that. So things that we -- if things go well in February and March, then we expect things to ramp up pretty aggressively.

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Sarkis Sherbetchyan, B. Riley FBR, Inc., Research Division - Associate Analyst [4]

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Understood. And is that aggressive time frame that you mentioned that Goodyear kind of wants to roll out on, is that contemplated in your existing guidance? Or is that something where if you're able to satisfy that rollout or ramp, there is an opportunity to take the guide up? Just kind of want to understand the level of conservatism in your guidance.

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Brian H. Callahan, MAM Software Group, Inc. - CFO & Executive VP [5]

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I think that would be factored in our current guidance.

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Sarkis Sherbetchyan, B. Riley FBR, Inc., Research Division - Associate Analyst [6]

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Sorry, just to be clear, the ramp is factored into the guidance currently?

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Michael G. Jamieson, MAM Software Group, Inc. - CEO, President & Director [7]

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Correct.

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Sarkis Sherbetchyan, B. Riley FBR, Inc., Research Division - Associate Analyst [8]

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Okay. Got you. Good. And then you did mention you're talking to a number of other opportunities for the VAST Online platform. Any sense you can give us as to the order of magnitude? Is it another entity where they have 500-plus locations or close to a 1,000 locations, just the order of magnitude?

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Michael G. Jamieson, MAM Software Group, Inc. - CEO, President & Director [9]

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Yes. We -- there's a number of people that we're talking to right now and yes, enterprise-type opportunities that I would describe -- I would put them in the category that you've just outlined, Sarkis, between those 2 numbers that you mentioned.

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Sarkis Sherbetchyan, B. Riley FBR, Inc., Research Division - Associate Analyst [10]

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Got it. And then as it relates to the economics of just kind of the Goodyear platform -- the VAST Online platform, any difference between what we see kind of today in your, call it, operating model or gross margin model versus what we should be expecting, better or worse?

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Brian H. Callahan, MAM Software Group, Inc. - CFO & Executive VP [11]

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Well, the hosted VAST Online model is going to be at higher margins than some of our hosted models, just because of the way we've designed and the efficiency with which it uses the hosted infrastructure and lower cost from everything, especially licensing cost and everything. So yes, I would say VAST Online is comparable to like Autopart Online is going to be a cheaper hosted from a direct cost standpoint. But obviously, as we're ramping up the infrastructure for VAST Online, we have to put the trainers in place, support people in place and the infrastructure in place. It takes a little while to ramp up to that profitability, but over time it will be more profitable than, for example, the Autopart Online hosting environment.

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Sarkis Sherbetchyan, B. Riley FBR, Inc., Research Division - Associate Analyst [12]

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Understood.

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Brian H. Callahan, MAM Software Group, Inc. - CFO & Executive VP [13]

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Keep in mind, Sarkis, that's not including the amortization. That will start easing cost. I'm talking about just the hosting and support cost. Obviously, we'll have amortization expense start to come into the cost of revenues as it rolls out.

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Operator [14]

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At this time, there are no further questions. So that will conclude today's call. We thank you for your participation.