Q3 2024 American Software Inc Earnings Call
Participants
Vincent Klinges; Chief Financial Officer; American Software Inc
Allan Dow; Chief Executive Officer, President, Director; American Software Inc
Willow Miller
Matthew Galinko; Analyst; Maxim Group
Anja Soderstrom; Analyst; Sidoti & Company
Zach Cummins; Analyst; B. Riley Securities
Presentation
Operator
Hello and welcome to the third-quarter fiscal year 2024 earnings results conference. (Operator Instructions)
Please note that this call is being recorded and I will be standing by should you need anything.
I would now like to turn the conference over to Vince Klinges, CFO of American Software. Please begin.
Vincent Klinges
Thank you and good afternoon, everyone, and welcome to American Software's third-quarter fiscal 2024 earnings call. With me on the call is Allan Dow, President and CEO of American Software. Alan will provide some opening remarks and then I will review the numbers.
But first, our Safe Harbor statement. 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 a number of risks -- a number of factors that could cause actual results to differ materially from those anticipated by statements made on this call. Such factors include, but are not limited to changes and uncertainty in general economic conditions, the growth rate of the market for our products and services, the timely availability and market acceptance of these products and services, the effective competitive products and pricing and other competitive pressures, and the irregular and unpredictable pattern of revenues.
In light of these risks and uncertainties, there can be no assurance that the forward-looking information will prove to be accurate.
At this time, I'd like to turn the call over to Allan for opening remarks.
Allan Dow
Thank you, Vince. Good afternoon, everyone, and thank you for joining us today. Our third quarter was one of the busiest periods we've seen in the last year and a half, particularly as we entered into the new calendar year. Our clients and prospects are reengaging on transformational supply chain initiatives that have been in the works for some time.
And while we continue to experience some delays in the larger deals, the demand environment appears to be improving. Against this backdrop, our third-quarter results were in line with our expectations, and we remain on track to deliver the fiscal year 2024 guidance we provided last quarter.
Before I review the third-quarter results in more detail, I'd like to provide an update on the integration of Garvis, which we've rebranded as demand AI. plus and represents the next generation demand intelligence platform. Our teams have been fully integrated and we're actively collaborating on both sales opportunities in our product roadmap.
From a go-to-market perspective, we've continued to leverage pilots to gain access to new strategic accounts. However, the primary emphasis with both new prospects and our existing client community is to drive towards rapid deployment of demand, AI plus into full production use as quickly as possible. We expect to close several longer-term engagements in the fourth quarter, which resulted from winding down the previous pilot engagements and converting them to long-term contracts with broader production deployments. In addition, our pipeline of lift and shifts has increased dramatically as we continue to drive awareness of our AI native demand forecasting capabilities and the first production where the use of generative AI capabilities to streamline decision making for supply chain planning across our client community. In fact, we've already seen some existing fragility accounts, a document, a i plus one is a rapid growing US-based coffee brand with a highly promoted product line. The DAI. plus solution will help them better manage the spikes in demand. They often experience and determine the most cost effective promotions to profitably go grow their company. We are encouraged by this early success and believe that demand AI plus will play a critical role in the migration of our existing clients to the cloud in the coming years.
Turning back to our third quarter results, we're pleased to see another sequential uptick in our backlog as our clients and prospects began to reengage on previously stalled initiatives. Our revenues largely tracked our internal expectations, but we note that the declines in our maintenance and service revenues respectively, were exacerbated by the divestiture of our transportation group and the lower utilization during the holiday period.
From a profit standpoint, our adjusted EBITDA margin held steady on a sequential basis despite the inclusion of services expenses for the full quarter and some additions to our product development team. Overall, we continue to see signs of improvement in the demand environment. We have a robust pipeline for entering Q4, leaving us poised for a strong finish to our fiscal year. Our guidance for fiscal 2024 remains unchanged, and we continue to expect to see recurring revenue between 85,000,088 million. Adjusted EBITDA between 14.5 and $16 million and total revenue between 100 to 104 million. Given our performance to date, though we anticipate reaching at least the midpoint on these respective guidance ranges.
Finally, I want to provide an update on other initiatives that have been discussed previously. We bought back over 5 million in stock during the third quarter and have now repurchased all of the shares remaining under our prior authorization.
Yesterday, we announced that our Co-Founder, Executive Chairman and Treasurer, Jim and field, retired from the Board as well as his role as the Company's Treasurer. After over 50 years of leadership for the Company, Jim was was not only a steadfast leader of our company, which will be forever grateful, but he was also a visionary for our industry as a whole. We appreciate Jim's willingness to continue as an adviser to our Board. And to me, Jim Miller, who has been our Board member since 2020 22 accepted the role as Chairman and along with other Board members, will guide us through the strategic initiatives we had previously laid out Furthermore, in regards to our dual-class structure, we remain engaged with our Class B shareholder to consider various options. Jim's retirement has no impact on the previously announced timeframe for that work at this time, I'll turn the call over to Vince, who will provide details of our financial results.
Vincent Klinges
Thanks. Thanks, Alan. Before I discuss our results in more detail, I want to remind everyone that due to the divestiture in the second quarter of our IT staffing business unit, The Proven Method, our financial statements have been recast to show the proven method as discontinued operations. So our discussion of the current and comparable periods will focus focus only on the continuing operations from this point on of the total revenues for the third quarter came in at $25.5 million, a decrease of 7% from $27.4 million same period last year, and that's primarily due to lower revenues from professional services and maintenance. Our subscription fees increased 9% year over year to $14.1 million from $13 million in the same period last year. Our software license revenue was 0.3 and that compares to $1 million in the prior year period. Our professional services and other revenues decreased 28% to 3.4 million from 4.8 million of the same period a year ago. And that's for reflecting lower utilization during the holiday, our holiday period and our decision to offload more services to our SI partners. Our maintenance revenues declined 11% year over year to $7.7 million, reflecting the normal falloff rate for the quarter as well as divestiture of our transportation group, which reduced our maintenance revenues by approximately $250,000 for the quarter. Our total recurring revenues comprised of both subscription and maintenance fees represented 86% of our total revenues for the third quarter, and that's up from 79% in the same period last year. And our gross margin was 64% for the current period compared to 66% in the same period last year. Our subscription fee margin was 65% in the current period compared to 69% in the same period last year. But if you exclude the non-cash amortization of intangible expense of $1.1 million, our subscription gross margin was 72% in both the current and prior year period, the amortization of intangible expense was 425,000 in the same period last year. License fee margin was 80% compared to 65% in the same period last year. Our gross margins for services decreased to some 21% from 26% last year due to lower lower revenues, primarily from a dramatically acquired quieter holiday period this year, our maintenance margin was 81% for both the current and prior year period. Our gross R&D expenses were 18% of total revenues for the current period, and that compares to 16% in the same period last year as we fill open roles during the quarter and had a full quarter of expenses from our acquisition of Garlock, our sales and marketing expenses were 20% of revenues for the current period, and that compares to 18% in the same period last year. Our G&A expenses were 23% of total revenues for the current quarter, and that compares to 21% last year. On a GAAP basis, our operating income was $0.8 million for this quarter compared with 2.7 the same period last year, primarily due to lower revenues and also the costs related to the golf garbage acquisitions.
Our net income was $4.1 million, or earnings diluted share of $0.12 compared to net income of 3.2 or $0.09 per diluted share, including a net income gain of 1.4 million related to the sale of our transportation group on an adjusted basis, which excludes noncash amortization of intangible expenses related to acquisitions and stock-based compensation expense our adjusted operating expenses was $3.6 million, and that compares to 4.3 million same period last year. Our adjusted EBITDA was $4 million, and that compares to 4.8 same period last year. And adjusted net income was $6.4 million or adjusted earnings per diluted share of $0.19 for the third quarter and that compares to adjusted net income of 4.4 or $0.13 in the same period last year.
Looking at international revenues, this quarter was approximately 22% of revenues that compared that's up from 20% last year.
Our remaining performance obligation we exited the quarter with RPO or what we call is backlog of $119 million looking at our balance sheet, our financial position remained strong with total and cash investments of $78.2 million at the end of the quarter. During the quarter, we paid 3.8 million in dividends and repurchased over 0.5 million shares at a total cost of $5.4 million. Our days sales outstanding at the end of January 31st, 2024 was 86 days, and that is down from 101 days same period last year.
Turning to the 2024 outlook our guidance remains. As Alan said, our guidance remains unchanged and reflects only our continuing operation, and we believe we will achieve the midpoint of these ranges as the most likely scenario given our year-to-date performance. So we anticipate revenues in the range of 100 to $104 million, including recurring revenue, 85 to $88 million and adjusted EBITDA, we anticipate in the range of 14.5 to 16 million.
Question and Answer Session
Operator
(Operator Instructions)
Willow Miller.
Willow Miller
I am Alan Miller on for Matt far. Thanks for taking your question. So starting off, how are sales cycles year to date on? It sounds like they're improving on similar to last quarter? And are there any changes on how customers are thinking about budget for 2024?
Allan Dow
We will thank you for joining us, and thank you for the questions. The sales cycles are still extended beyond where they were in years past come.
It's really the scrutiny on budgets and whatnot, but we are seeing them start to break loose now so big as we move forward, that time has already passed on many of those projects, and we're trying to get them up and running now. But as we're anticipating with the energy in the market right now that as we get into the later in the spring and into the summer, that will have seen those sales cycles start to close up now because people are moving a little bit more quickly. Our in regards to budget, very encouraging, some much more activity going on this time period than we were coming into the holiday season, say, six months ago, things have really picked up, and we're quite excited about the growth in our pipeline that we're seeing now as a result of that. So a really positive trend for the future.
Willow Miller
Got you. That's helpful. And just one last question. So earlier this month, we released a press release about adding JNI capabilities to Logility. So just wanted to know what the goal is here to stay competitive on keep up to date with technology or is it to monetize that longer term on it?
Allan Dow
There's enough value added to customers. It was tremendous value add, actually, and it's a leapfrog. We were first to market with production ready capabilities around generative AI that generative a I would many of us are familiar when we talk to our phone or maybe talk to our car get directions and that sort of thing. It's a similar technology. We're applying it specifically to the supply chain planning and at its at its beginning stages at its lowest level. What generative AI brings is more insights more quickly to a broader community. So the ability to make decisions faster, come as a result of that. Some of the same information you could get by pounding on the keyboard, you can get through the same method, but it's much more intuitive, much easier and it opens up the insights that are capable through our system to a much broader audience. So it's more inclusive around the decision making strategic decisions that need to be made around the applications.
We look at generative AI in four phases.
The first phase is insights, and that's kind of the phase we're in now where people are really starting to get their arms around it.
Phase two will be directed activity.
We're starting to introduce that into the platform today. Directed activity helps now where a user can issue a command or request to action. And after that, we move to more autonomous capabilities. We have autonomous capabilities today, but directed through the generative AI capabilities and ultimately, really starting to automate many more things through user interaction and some of the Stage four Stage one is available today. Stage two is coming to the marketplace really starting to come into play and stage three and four long horizon oriented. So it will be breakthrough technology that will radically change the way people use supply chain planning applications.
Willow Miller
Yes, that's helpful color. Thanks for taking my questions.
Thank you.
Operator
Matthew Galinko, Maxim Group.
Matthew Galinko
on the quarter and thanks for taking my questions. I think you touched on transformational deals beginning to move again on. So can you to add a little bit more color on and just how quickly they're moving along and what do you expect opposed to any to get across the finish line in the next four quarters? Or and what do you think specifically contributed to them starting to move again?
Allan Dow
Yes, I think our confidence, Matthew, thank you for the question.
First of all, confidence in the the economy stabilizing. I want to know every day you wake up with swings one, but one way or the other, you know, interest rates are going to go down and they're going to stabilize and they're going up. But overall, what we're seeing, what we're hearing people talk about our clients, our prospects talk about a stabilization around their business and continued improvement going forward. So their willingness to commit to wave a bigger investment willing to put more resources at the table to accomplish more is really what's stimulating the need for a transformational project that hasn't changed. But the nervousness about the kind of investment it takes to call two to really tackle something like that. And they were very anxious about that. So they the pace had slowed. So yes, we're seeing an uptick. We see more of those those projects coming into the pipeline and over the next four quarters. Certainly, we would anticipate that they'll come to fruition and we'll get started on those projects, start implementing them and get more and more of that activity going. So have a nice add-ons, a nice lift and ship capability, nice several capabilities projects going on. But then these transformational ones kicking in will help us in the long term as well.
Matthew Galinko
Thank you. And as a follow up there, you just mentioned lift and shift and I think you said that it accelerated again with that. Is that partially just confidence in your customers coming back in? Or is there some element of your com new AI approach in sort of cloud native of that?
No, and opening more opportunities too, to shift legacy to ARM kind of premise to cloud? Just maybe talk a little bit about that.
Allan Dow
Yes. There's really three things that are driving it right now. The predominance of it is the new capabilities we brought to the market, including DAI. plus demand, AI plus bringing new capabilities that are only available in the cloud. So that's been an incentive for more and more clients to look at that and say it's time.
So that's probably representing half of that growth.
And just the new capabilities that are available, the generative AI capabilities only available in the cloud from the out of the remaining 50%, another 25% is the budget that we just talked about.
People now have the wanted to move.
They wanted to get an update. They wanted to get some new technology, but now have access to funds. So that's probably helped to stimulate another a quarter of the overall pipeline growth and the other quarter is coming from the continued exposure to risk that our clients have in housing, their own applications and the data environment.
It's quite shocking.
The number of those incidents that have come about in the marketplace, not necessarily directly against our applications, but in their IT data center, which gave me a lot of Harper. And so more and more of that is coming to table now where clients are basically saying we need to be out of this business. We need to have professional management, a better, robust, more robust data center better administration and stay up to date, and that's that's stimulating some of the demand as well.
Matthew Galinko
Thank you.
Allan Dow
Thank you.
Operator
Anja Soderstrom.
Anja Soderstrom
Brian, thank you for taking my questions and congratulations on the progress in the quarter. And I'm just curious and with that, you're saying that deals has been starting to lift up, but you see the larger deals are taking longer. How should we think about the fiscal 2025 and beyond?
In terms of that, should we expect the revenue growth accelerate helped by those larger deals coming through or?
Vincent Klinges
Yes, we're it's early in that phase now. It's I know it's only February, but for fiscal 25 for us, starts in May and runs out for another 12 after that, but we're anticipating the same thing on here. We're seeing the budgets that are freeing up. We're seeing that people are serious about it that many clients are on a calendar year. So they are now just getting access to those budgets and kicking off the projects in anticipation of launching them and starting spending in calendar year 2024, which would predominantly fall into our fiscal year 2025. So we're quite bullish about it. We think that the momentum is coming around as we anticipated for the spring and into the summer and are looking forward to have a robust year, a very busy year ahead of us.
Anja Soderstrom
Okay, thank you.
Alan tested agenda AI., and you said they were cut off in the first phase they're going into the second out of four cases. Do you think that might be a roadblock in terms of the sales cycle, your customer will have to wait and see how that pans out before they make any decisions.
Allan Dow
No, I don't think so. It's so it's such a novel and unique capability that people are clamoring for it. It's a natural progression anyway, what we're seeing in the marketplaces that come with the excitement, there's a little bit of fear and concern. One of the things we've done very successfully is to is to put a wrapper around it to give them assurance that and our generative AI within our application is not going to be out surfing the the worldwide web and coming up with the risk factors around that sort of thing or exposing their data in any way to the outside world. So we've we've given we've given our clients confidence around that. Now they want to get started. They want to get a feel for what this means to build momentum and build credibility and trust and then be willing to take the next step. So the evolution of the technology and the ability for people to absorb it and really understand it and appreciate and build the trust is going in lockstep. So we don't anticipate any delay in deals because of the evolution of this technology.
Anja Soderstrom
Okay, thank you. And sorry if you mentioned this, but if you exhausted the authorized buyback program, did you did you approve a new one or do you expect that to be occur or how you're thinking about buybacks going forward?
Allan Dow
We we haven't made any decision about what to do next. We just completed that rate as the holidays were coming together and and wrapped up the last, the last one that had been had been on the approved for many years now, we had the availability to make that buyback happened. And so we'll take that up in the new fiscal year and consider all possibilities as we as we said, we're still sitting on a healthy balance sheet with cash available just short of 80 million. And some you will in the new year new fiscal year, we'll make some decisions about how best to deploy that.
Anja Soderstrom
Okay.
And I suppose up to that, what do you see in the M&A market now?
Yes.
Allan Dow
Interesting market, it's kind of mixed right now. Of what's out there. There's some interesting things we would be we would take an eye to, but we don't that we don't have any specific announcements around this time. We've not exited that market. We're still interested.
We're still engaged.
And when we find the right thing and get a mutual agreement on that, we'll make some announcements about that next move.
Okay. Thank you.
Our thoughts on this front.
Thank you.
Thank you.
Operator
Our next question comes from Zach Cummins.
Zach Cummins
Hi, Alan.
Hi, Vince.
Thanks for taking my questions. Alan and I was curious in terms of your go-to-market strategy with ServiceNow now rebranded as demanding? And can you talk about just the progression of going through these initial pilots? And it sounds like some of these are on the verge of committing to pretty substantial upside is in longer-term contracts. So you get a sense of the potential uplift. You can see if you're able to sign kind of a full longer term contract with demand AI with some leasing prospects?
Allan Dow
Yes. So at the point of acquisition of Gavis, that team was was very successfully building a book of clients and getting momentum and proof points with the product in the marketplace using the pilot strategy very effective from a start-up standpoint. And what we're seeing is many of those pilots have already matured to the point where we are actively engaged in finalizing some contracts for the long term, us pretty substantial upside in those those opportunities when we convert those two long term because the pilots we're really built to manage the entire enterprise. They were maybe a product line or few product lines or segment a division of the business or maybe a regional area or something of that nature. So the upside on it is that because you said is quite significant. If we end up in coming about we anticipate that we'll have some of those transactions completed in our fourth quarter.
More of them coming on the heels of that in the first quarter.
Some of those clients are substantial and complex can be difficult to negotiate contracts with. So we just really got engaged with them at the beginning at the end of the calendar year last year, beginning of this year and rolling up our sleeves and diving in.
So we're quite excited about that. We've retained that model.
We see it's quite effective, many clients of particular, larger companies that have significant investments maybe in any ERP enterprise like an SAP or something like that are hesitant to bring new applications in. So this is proving to be a good model to penetrate into the account, get some proof points, build momentum and then and then grow it from within.
So we like the model, but we are only doing so when when there's a clear opportunity to develop a long-term relationship.
We're not in the business of running pilots for extended period of time. So we're really looking that as a as a strategy. So yes, we see that as a a whole new market and channel and approach to the market go to market for us, something we've never done before, but we've learned from that team that came in from Harvest, and we were seeing some advantages in keeping that model in place.
Zach Cummins
Got it. That's great to hear encouraging on that front to potentially secure some longer-term opportunities.
Final question for me, Alan, is just really around the pipeline. Can you give us a sense of the size of the pipeline versus maybe where you were a year ago going into this point and kind of give us a little bit of understanding of the mix of lift-and-shift opportunities versus completely new engagements within that pipeline?
Allan Dow
Yes, I would say the growth where there's really three areas that are that are driving the pipeline. One is the lift and shift that we referenced.
It's representing about a third of the new opportunities that are coming into the pipeline. The other is to extend the relationship with existing clients and those that are already in the cloud that were adding new functionality, expanding to new regions on new user communities, new new product line, something along those along that nature. So it's an extension of what we currently have. As I mentioned in my earlier talk, for example, we had the demand AI plus sold to an existing client that was already in the cloud. So it was an extension to their their footprint.
And then, of course, the new clients that are coming.
And those those opportunities are typically larger by a factor of two or three times an add-on or a lift-and-shift. And so those it doesn't take a lot of those to add to the pipeline. So but it's roughly three equal parts that are helping us build the build pipeline. And if we look at our pipeline over where we were this time last year, we're up about 40%. So it's pretty six, pretty substantial. So it's a we're seeing and we're seeing a growth in our pipeline month after month after month we've been seeing that for the last three or four months now. So it's quite encouraging. It wasn't just one pop and then we're running off of that. It's continuing to grow every month as we march forward.
Zach Cummins
Got it.
Well, sounds great and best of luck in your fiscal 4Q.
Thank you very much.
Allan Dow
Thank you for joining us today.
Operator
Thank you.
So quick reminder, if you'd like to ask a question, you may press star one. There are no additional questions at this time.
I'd like to now turn it back to our presenters for any closing remarks for I will thank you all for joining us today.
Allan Dow
We really appreciate the time you spent with us some great questions. Thank you for those as well.
And we look forward to chatting with you again someday in the near future. Have a good afternoon.
Operator
Thank you, ladies and gentlemen. This concludes today's presentation. You may now disconnect.
