FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q (this "Quarterly Report") contains
forward-looking statements relating to our future financial performance,
business strategy, financing plans and other future events that involve
uncertainties and risks. You can identify these statements by forward-looking
words such as "anticipate," "intend," "plan," "continue," "could," "grow,"
"may," "potential," "predict," "strive" "will," "seek," "estimate," "believe,"
"expect," and similar expressions that convey uncertainty of future events or
outcomes. Any forward-looking statements we make herein are pursuant to the safe
harbor provision of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements include statements concerning future:
•results of operations;
•liquidity, cash flow and capital expenditures;
•demand for and pricing of our products and services;
•cloud services annual contract value ("ACV");
•viability and effectiveness of strategic alliances;
•industry conditions and market conditions;
•acquisition activities and the effect of completed acquisitions; and
•general economic conditions.
Although we believe that the goals, plans, expectations, and prospects that our
forward-looking statements reflect are reasonable in view of the information
currently available to us, those statements are not guarantees of performance.
There are many factors that could cause our actual results to differ materially
from those anticipated by forward-looking statements made herein. These factors
include, but are not limited to, continuing U.S. and global economic
uncertainty, the timing and degree of business recovery, unpredictability and
the irregular pattern of future revenue, dependence on particular market
segments or customers, competitive pressures, delays, product liability and
warranty claims and other risks associated with new product development,
undetected software errors, market acceptance of our products, technological
complexity, the challenges and risks associated with integration of acquired
product lines, companies and services, as well as a number of other risk factors
that could affect our future performance. All forward-looking statements
included in this Quarterly Report are based upon information available to us as
of the filing date of this Quarterly Report. We undertake no obligation to
update any of these forward-looking statements for any reason. These
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause our actual results, levels of activity,
performance, or achievements to differ materially from those expressed or
implied by these statements. We discuss certain factors in greater detail in
"Business Overview" below.
ECONOMIC OVERVIEW
For fiscal 2022, we expect the global economy to improve modestly when compared
to recent periods. We believe improved economic conditions and increasingly
complex supply chain challenges may be driving some businesses to focus on
achieving more process and efficiency enhancements in their operations and to
invest in solutions that improve operating margins, rather than make large
infrastructure-type technology purchases. If this trend continues, we believe it
may tend to favor solutions such as our supply chain solutions, which are
designed to provide a more rapid return on investment and are targeted at some
of the largest profit drivers in a customer's business. While we do not expect
that the COVID-19 pandemic will cause any material adverse changes on our
business or financial results for fiscal 2022, we are unable to accurately
predict the impact that the coronavirus will have due to various uncertainties,
including the ultimate geographic spread of the virus, the severity of the
disease, the duration of the outbreak, and actions that may be taken by
governmental authorities.
Corporate capital spending trends and commitments are the primary determinants
of the size of the market for business software. Corporate capital spending is,
in turn, a function of general economic conditions in the U.S. and abroad and in
particular may be affected by conditions in U.S. and global credit markets. In
recent years, the weakness in the overall global economy and the U.S. economy
has resulted in reduced expenditures in the business software market.
In October 2021 , the International Monetary Fund ("IMF") provided an update to
the World Economic Outlook for 2021. The update noted that, "The global economy
is projected to grow 5.9 percent in 2021 and 4.9 percent in 2022 (0.1 percentage
point lower for 2021 than in the July 2021 World Economic Outlook (WEO) Update).
The downward revision for 2021 reflects a downgrade for advanced economies-in
part due to supply disruptions-and for low-income developing countries, largely
due to worsening pandemic dynamics. This is partially offset by stronger near
term prospects among some commodity-
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exporting emerging market and developing economies.Employment is generally
expected to continue lagging the recovery in output."
BUSINESS OVERVIEW
American Software was incorporated as a Georgia corporation in 1970. We develop,
market and support a portfolio of software and services that deliver enterprise
management and collaborative supply chain solutions to the global marketplace.
We have designed our software and services to bring business value to
enterprises by supporting their operations over intranets, extranets,
client/servers or the Internet. References to "the Company," "our products,"
"our software," "our services" and similar references include the appropriate
business segment actually providing the product or service.
The Company enables enterprises to accelerate their operations from product
concept to customer availability. Our brands - Logility and Demand Solutions -
provide a single platform spanning eight supply chain process areas, including
demand optimization, inventory optimization, supply optimization, retail
optimization, quality and compliance, product lifecycle management, sourcing
management and integrated business planning. Our platform includes advanced
analytics and is fueled by supply chain master data, allowing for the automation
of critical business processes through the application of artificial
intelligence and machine learning algorithms to a variety of internal and
external data streams.
Our primary operating units under our SCM segment include Logility, Inc. and
Demand Management, Inc. ("DMI"). Logility is a wholly-owned subsidiary of the
Company, and DMI is a wholly-owned subsidiary of Logility . In addition to our
core SCM software business, we also offer technology staffing and consulting
services through our wholly-owned subsidiary, The Proven Method, Inc. , in the IT
Consulting segment. The Other segment consists of software and services provided
to our legacy enterprise resource planning ("ERP") customers, as well as
corporate overhead and other common expenses.
We derive revenue primarily from four sources: software licenses, subscriptions,
professional services and other, and maintenance. We generally determine
software license and SaaS fees based on the depth of functionality, contractual
term, number of production deployments, users and/or sites licensed and/or
subscribed. Professional services and other revenue consist primarily of fees
from software implementation, training, and consulting services. We bill
primarily under time and materials arrangements and recognize revenue as we
perform services. SaaS and maintenance agreements typically are for a one- to
three-year term, commencing at the time of the initial contract. We generally
bill these fees, monthly, quarterly and annually in advance under agreements
with terms of one to three years, and then recognize the resulting revenue
ratably over the term of the agreement. Deferred revenue represents payments or
billings for subscriptions and services and maintenance in advance of the time
we recognize the related revenue.
Our cost of revenue for licenses and subscriptions includes amortization of
capitalized computer software development costs, amortization of acquired
developed technology, royalties paid to third-party software vendors, and agent
commission expenses related to revenue generated by the indirect channel,
primarily from DMI. Costs for maintenance and services include the cost of
personnel to conduct implementations and customer support, consulting, other
personnel-related expenses, and agent commission expenses related to maintenance
revenue generated by the indirect channel, primarily from DMI. We account for
the development costs of software intended for sale in accordance with the
Software topic of the FASB ASC. We monitor the net realizable value of our
capitalized software on a quarterly basis based on an estimate of future product
revenue. We currently expect to fully recover the value of the capitalized
software asset recorded on our Condensed Consolidated Balance Sheets; however,
if future product revenue are less than management's current expectations, we
may incur a write-down of capitalized software costs.
Our sales and marketing expenses mainly include the salary and commissions paid
to our sales professionals, along with marketing, promotional, travel and
associated costs. Our general and administrative expenses mainly include the
salary and benefits paid to executive, corporate and support personnel, as well
as facilities-related costs, utilities, communications expenses, and various
professional fees.
We currently view the following factors as the primary opportunities and risks
associated with our business:
•Acquisition Opportunities. There are opportunities for selective acquisitions
or investments to expand our sales distribution channels and/or broaden our
product offering by providing additional solutions for our target markets.
•Dependence on Capital Spending Patterns. There is risk associated with our
dependence on the capital spending patterns of U.S. and international
businesses, which in turn are functions of economic trends and conditions over
which we have no control.
•Acquisition Risks. There are risks associated with acquisitions of
complementary companies, products and technologies, including the risks that we
will not achieve the financial and strategic goals that we contemplate at the
time of the transaction. More specifically, in any acquisition, we will face
risks and challenges associated with
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the uncertain value of the acquired business or assets, the difficulty of
assimilating operations and personnel, integrating acquired technologies and
products and maintaining the loyalty of the customers of the acquired business.
•Competitive Technologies. There is a risk that our competitors may develop
technologies that are substantially equivalent or superior to our technology.
•Competition in General. There are risks inherent in the market for business
application software and related services, which has been and continues to be
intensely competitive; for example, some of our competitors may become more
aggressive with their prices and/or payment terms, which may adversely affect
our profit margins.
A discussion of a number of additional risk factors associated with our business
is included in our Annual Report for fiscal 2021. Additional information and
other factors that could affect future financial results may be included, from
time to time, in our filings with the Securities and Exchange Commission
("SEC").
Recent Accounting Pronouncements
For information with respect to recent accounting pronouncements, if any, and
the impact of these pronouncements on our condensed consolidated financial
statements, if any, see Note A in the Notes to Condensed Consolidated Financial
Statements included elsewhere in this Quarterly Report.
COMPARISON OF RESULTS OF OPERATIONS
Three-Month Comparisons. The following table sets forth certain revenue and
expense items as a percentage of total revenue and the percentage changes in
those items for the three months ended October 31, 2021 and 2020:
Three Months Ended October 31,
Percentage of Total Pct. Change in
Revenue Dollars
2021 2020 2021 vs. 2020
Revenue:
Subscription fees 33 % 25 % 49 %
License 2 % 2 % 79 %
Professional services and other 35 % 37 % 5 %
Maintenance 30 % 36 % (9) %
Total revenue 100 % 100 % 12 %
Cost of revenue:
Subscription fees 11 % 11 % 16 %
License 1 % 2 % (64) %
Professional services and other 24 % 27 % (2) %
Maintenance 6 % 7 % (10) %
Total cost of revenue 42 % 47 % (2) %
Gross margin 58 % 53 % 24 %
Research and development 14 % 16 % (1) %
Sales and marketing 19 % 19 % 9 %
General and administrative 18 % 16 % 25 %
Total operating expenses 51 % 51 % 11 %
Operating income 7 % 2 % 326 %
Other income:
Other, net 3 % - % nm
Earnings before income taxes 10 % 2 % 514 %
Income tax expense(benefit) 1 % - % nm
Net earnings 9 % 2 % 379 %
nm - not meaningful
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-------------------------------------------------------------------------------- Table of Contents Six-Month Comparisons. The following table sets forth certain revenue and expense items as a percentage of total revenue and the percentage changes in those items for the six months endedOctober 31, 2021 and 2020: Six Months Ended October 31, Percentage of Total Pct. Change in Revenue Dollars 2021 2020 2021 vs. 2020 Revenue: Subscription fees 33 % 24 % 51 % License 2 % 2 % 5 % Professional services and other 34 % 36 % 1 % Maintenance 31 % 38 % (9) % Total revenue 100 % 100 % 10 % Cost of revenue: Subscription fees 11 % 10 % 16 % License 1 % 2 % (71) % Professional services and other 24 % 28 % (6) % Maintenance 6 % 7 % - % Total cost of revenue 42 % 47 % (3) % Gross margin 58 % 53 % 21 % Research and development 14 % 15 % 3 % Sales and marketing 20 % 18 % 18 % General and administrative 17 % 16 % 13 % Total operating expenses 51 % 49 % 12 % Operating income 7 % 4 % 194 % Other income: Other, net 2 % 2 % 10 % Earnings before income taxes 9 % 6 % 108 % Income tax expense(benefit) (1) % - % nm Net earnings 10 % 6 % 130 % nm - not meaningful COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDEDOCTOBER 31, 2021 AND 2020 REVENUE Three Months Ended October 31, % of Total Revenue 2021 2020 % Change 2021 2020 (in thousands) Subscription fees$ 10,361 $ 6,966 49 % 33 % 25 % License $ 805 450 79 % 2 % 2 % Professional services and other 10,779 10,242 5 % 35 % 37 % Maintenance 9,266 10,223 (9) % 30 % 36 % Total revenue$ 31,211 $ 27,881 12 % 100 % 100 % 23
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Six Months Ended October 31,
% of Total Revenue
2021 2020 % Change 2021 2020
(in thousands)
Subscription fees $ 20,149 $ 13,329 51 % 33 % 24 %
License $ 1,297 1,237 5 % 2 % 2 %
Professional services and other 20,308 20,056 1 % 34 % 36 %
Maintenance 18,728 20,537 (9) % 31 % 38 %
Total revenue $ 60,482 $ 55,159 10 % 100 % 100 %
For the three months ended October 31, 2021 compared to October 31, 2020 revenue
increased by 12% attributable primarily to a 79% increase in license revenue, a
49% increase in subscription fees and a 5% increase in professional services and
other revenue, partially offset by a 9% decrease in maintenance revenue when
compared to the same period last year.
For the six months ended October 31, 2021 compared to October 31, 2020 revenue
increased by 10% attributable primarily to a 51% increase in subscription fees,
a 5% increase in license revenue and a 1% increase in professional services and
other revenue, partially offset by a 9% decrease in maintenance revenue when
compared to the same period last year.
Due to intense competition in our industry, we sometimes discount license fees
from our published list price. Numerous factors contribute to the amount of the
discount provided, such as previous customer purchases, the number of customer
sites utilizing the software, the number of modules purchased and the number of
users, as well as the overall size of the contract. While all these factors may
affect the discount amount of a particular contract, the overall percentage
discount has not materially changed in the recent reported fiscal periods.
The change in our revenue from period to period is primarily due to the volume
of products and related services sold in any period and the number of products
or modules purchased with each sale.
International revenue represented approximately 16% of total revenue in the
three and six months ended October 31, 2021 compared to 15% for the same periods
in the prior year. Our revenue, particularly our international revenue, may
fluctuate substantially from period to period, primarily because we derive most
of our license and subscription fee revenue from a relatively small number of
customers in a given period.
Subscription Fees
Three Months Ended October 31,
2021 2020 % Change
(in thousands)
Supply Chain Management $ 10,361 $ 6,966 49 %
Total subscription fees revenue $ 10,361 $ 6,966 49 %
Six Months Ended October 31,
2021 2020 % Change
(in thousands)
Supply Chain Management $ 20,149 $ 13,329 51 %
Total subscription fees revenue $ 20,149 $ 13,329
51 %
For the three and six months endedOctober 31, 2021 , subscription fees revenue over the same periods last year increased 49% and 51%, respectively primarily due to an increase in the number of contracts, contracts with a higher cloud services ACV, as well as an increase in multi-year contracts. This is evidenced by our successful transition to the cloud subscription model. License Revenue 24
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Three Months Ended October 31,
2021 2020 % Change
(in thousands)
Supply Chain Management $ 800 $ 434 84 %
Other 5 16 (69) %
Total license revenue $ 805 $ 450 79 %
Six Months Ended October 31,
2021 2020 % Change
(in thousands)
Supply Chain Management $ 1,276 $ 1,221 5 %
Other 21 16 31 %
Total license revenue $ 1,297 $ 1,237 5 %
For the three and six months ended October 31, 2021 , license fee revenue
increased 79% and 5%, respectively when compared to the same periods in the
prior year. In the three months ended October 31, 2021 , license fee revenue from
our SCM segment increased 84%, partially offset by a decrease in our Other
segment of 69% when compared to the corresponding period in the prior year. The
majority of our current license fee revenue is generated from additional users
and expanded scope from our existing on-premise customers. For the three and six
months ended October 31, 2021 and 2020, our SCM segment constituted
approximately 99%, 96%, 98% and 99% of total license fee revenue, respectively.
Our Other segment license fee revenue increased by 31% for the six months ended
October 31, 2021 when compared to the same period in the prior year primarily
due to timing of sales to our existing ERP customers.
The direct sales channel provided approximately 98% and 96% of license fee
revenues for the three and six months ended October 31, 2021 , compared to
approximately 65% and 77% in the comparable periods last year due to larger
customers obtained through our direct sales channel moving to the Cloud platform
faster than those in the mid-sized market that are primarily served by our
indirect sales channel. For the three and six months ended October 31, 2021 , our
margins after commissions on direct sales were approximately 90% and 89%,
compared to 83% and 84% in the comparable periods last year. The increase in
margins is due to the mix of sales commission rates based on each individual
salesperson's quotas and related achievement. For the three months ended
October 31, 2021 and 2020, our margins after commissions on indirect sales were
approximately 67% and 57%, respectively. For the six months ended October 31,
2021 and 2020, our margins after commissions on indirect sales were
approximately 65% and 55%, respectively. The indirect channel margins for the
fiscal year increased compared to the same periods in the prior year due to the
mix of value-added reseller ("VAR") commission rates. These margin calculations
include only commission expense for comparative purposes and do not include
other costs of license fees such as amortization of capitalized software.
Professional Services and Other Revenue
Three Months Ended
2021 2020 % Change
(in thousands)
Supply Chain Management $ 5,263 $ 4,981 6 %
IT Consulting 5,226 5,033 4 %
Other 290 228 27 %
Total professional services and other revenue $ 10,779 $ 10,242 5 %
Six Months Ended October 31,
2021 2020 % Change
(in thousands)
Supply Chain Management $ 10,099 $ 9,556 6 %
IT Consulting 9,702 10,059 (4) %
Other 507 441 15 %
Total professional services and other revenue $ 20,308 $ 20,056 1 %
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For the three and six months endedOctober 31, 2021 , professional services and other revenue increased by 5% and 1%, respectively due to the increased professional services and other revenue from our Other and SCM segments. For the three and six months endedOctober 31, 2021 , ourIT Consulting segment's revenue increased 4% and decreased 4%, respectively when compared to the same period in the prior year due to the demand of project work from existing customers during the applicable period. This was partially offset by an increase in professional services and other revenue from our SCM and Other segments. For the three and six months endedOctober 31, 2021 , our SCM segment's revenue increased 6%, primarily due to a higher ramp up of implementation project work due to an increase in subscription fees revenue in recent periods. For the three and six months endedOctober 31, 2021 , our Other segment's revenue increased 27% and 15%, respectively due to the timing of project work with existing customers. We have observed that there is a tendency for services and other revenue, other than fromIT Consulting , to lag changes in license and subscription revenue by one to three quarters, as new licenses and subscriptions in one quarter often involve implementation and consulting services in subsequent quarters, for which we recognize revenue only as we perform those services. Maintenance Revenue Three Months Ended October 31, 2021 2020 % Change (in thousands) Supply Chain Management$ 8,956 $ 9,916 (10) % Other 310 307 1 % Total maintenance revenue$ 9,266 $ 10,223 (9) % Six Months Ended October 31, 2021 2020 % Change (in thousands) Supply Chain Management$ 18,107 $ 19,927 (9) % Other 621 610 2 % Total maintenance revenue$ 18,728 $ 20,537 (9) % For the three and six months endedOctober 31, 2021 , maintenance revenue decreased 9% when compared to the same period in the prior year. Our SCM maintenance revenue decreased 10% and 9% for the three and six months endedOctober 31, 2021 , respectively when compared to the same period last year due to a normal customer attrition rate. The SCM segment accounted for 97% of total maintenance revenue for the three and six months endedOctober 31, 2021 and for the same periods in the prior year. Typically, our maintenance revenue have had a direct relationship to current and historic license fee revenue, since licenses are the source of maintenance customers. 26 -------------------------------------------------------------------------------- Table of Contents GROSS MARGIN The following table provides both dollar amounts (in thousands) and percentage measures of gross margin: Three Months Ended October 31, Six Months Ended October 31, 2021 % 2020 % 2021 % 2020 % Gross margin on subscription fees$ 6,957 67 %$ 4,020 58 %$ 13,521 67 %$ 7,624 57 % Gross margin on license fees 607 75 % (103) (23) % 940 72 % 9 1 % Gross margin on professional services and other 3,302 31 % 2,618 26 % 5,821 29 % 4,602 23 % Gross margin on maintenance 7,520 81 % 8,282 81 % 15,008 80 % 16,823 82 % Total gross margin$ 18,386 58 %$ 14,817 53 %$ 35,290 58 %$ 29,058 53 % For the three and six months endedOctober 31, 2021 , our total gross margin percentage increased by 5% when compared to the same periods in the prior year primarily due to higher margins on subscription fees revenue, license fee and professional services and other revenue, partially offset by a decrease in maintenance revenue. Gross Margin on Subscription Fees For the three months endedOctober 31, 2021 , our gross margin percentage on subscription fees revenue increased from 58% to 67% when compared to the same period in the prior year, primarily due to the increased subscription revenue and related cost efficiencies. For the six months endedOctober 31, 2021 , our gross margin percentage on subscription fees revenue increased from 57% to 67% when compared to the same period in the prior year, primarily due to the portfolio shift from license fee to subscription revenue. Gross Margin on License Fees License fee gross margin percentage for the three and six months endedOctober 31, 2021 increased by 98% and 71%, respectively, when compared to the same period in the prior year. License fee gross margin percentage tends to be directly related to the level of license fee revenue due to the relatively fixed cost of computer software amortization expense, amortization of acquired software and the sales mix between our direct and indirect channels. Gross Margin on Professional Services and Other Our gross margin percentage on professional services and other revenue increased from 26% to 31% for the three months endedOctober 31, 2021 andOctober 31, 2020 , primarily due to an increase in revenues, improved utilization and better billing rates. Our gross margins percentage in our SCM segment services increased to 40% from 35% for the three months endedOctober 31, 2021 and 2020, respectively. This is primarily the result of an increase in professional services and other revenue, which is being driven by an increase in billing rates and utilization. Our Other segment professional services gross margin increased to 42% from 39% for the three months endedOctober 31, 2021 and 2020, respectively, due to higher margin projects year to date. OurIT Consulting segment professional services gross margin increased to 21% of revenue when compared to 16% the same period last year due to higher margin project work. Professional services and other gross margin is directly related to the level of services and other revenue. The primary component of cost of services and other revenue is services staffing, which is relatively inelastic in the short term. For the six months endedOctober 31, 2021 andOctober 31, 2020 , our SCM segment gross margins decreased to 29% from 34%, respectively, due to lower billing utilization, an increase in vacations and customers delaying project start dates compared to the same period in the prior year. Our Other segment professional services gross margin increased to 43% from 41% for the six months endedOctober 31, 2021 and 2020, respectively, due to higher margin projects year to date. OurIT Consulting segment professional services gross margin increased to 21% from 16% for the six months endedOctober 31, 2021 and 2020, respectively, due to higher margin projects in the current quarter. Professional services and other gross margin is directly related to the level of services and other revenues. Gross Margin on Maintenance Maintenance gross margin percentage remained flat at 81% for the three months endedOctober 31, 2021 andOctober 31, 2020 , and decreased from 82% to 80% for the six months endedOctober 31, 2021 andOctober 31, 2020 , respectively. The decrease is primarily due to lower maintenance revenue and increase in personnel costs, compared to the same period in the prior year. The primary cost component is maintenance staffing, which is relatively inelastic in the short term. 27 -------------------------------------------------------------------------------- Table of Contents EXPENSES Three Months Ended October 31, Six Months Ended October 31, % of Revenue % of Revenue 2021 2020 2021 2020 2021 2020 2021 2020 (in thousands) (in thousands) Research and development$ 4,278 $ 4,337 14 % 16 %$ 8,702 $ 8,432 14 % 15 % Sales and marketing$ 5,892 $ 5,429 19 % 19 %$ 12,012 $ 10,173 20 % 18 % General and administrative$ 5,476 $ 4,367 18 % 16 %$ 10,010 $ 8,831 17 % 16 % Amortization of acquisition-related intangible assets$ 53 $ 53 - % - % $ 106$ 106 - % - % Other income (expense), net$ 930 $ (42) 3 % - %$ 1,367 $ 1,290 2 % 2 % Income tax expense(benefit)$ 303 $ (103) 1 % - %$ (434) $ 80 (1) % - % Research and Development Gross product research and development costs include all non-capitalized and capitalized software development costs. A breakdown of the research and development costs is as follows:
Three Months Ended
2021 2020 % Change
(in
thousands)
Total capitalized computer software development costs $ -$ 126 (100) % Percentage of gross product research and development costs - % 3 % Total research and development expense$ 4,278 $ 4,337 (1) % Percentage of total revenue 14 % 16 %
Total gross product research and development expense and
capitalized computer software development costs
$ 4,278 $ 4,463 (4) % Percentage of total revenue 14 % 16 % Total amortization of capitalized computer software development costs * $ 807$ 1,042 (23) % Six Months Ended October 31, 2021 2020 % Change (in thousands) Total capitalized computer software development costs $ -$ 371 (100) % Percentage of gross product research and development costs - % 4 % Total research and development expense$ 8,702 $ 8,432 3 % Percentage of total revenue 14 % 15 %
Total gross product research and development expense and
capitalized computer software development costs
$ 8,702 $ 8,803 (1) % Percentage of total revenue 14 % 16 %
Total amortization of capitalized computer software
development costs *
$ 1,710 $ 2,260 (24) %
*Included in cost of license fees and subscription fees.
For the three and six months endedOctober 31, 2021 , gross product research and development costs decreased 4% and 1%, respectively when compared to the same period in the previous year, primarily due to a decrease in the use of third-party contractors. Capitalized software development costs decreased inOctober 31, 2021 compared to the same period in the prior year, due to an increase in agile software programming that accelerates the software releases from months to weeks. We expect capitalized software costs to be zero in fiscal 2022. For the three and six months endedOctober 31, 2021 , amortization of capitalized software development costs decreased 23% and 24%, respectively, when compared to fiscal 2021 as some projects were fully amortized. Costs included in gross product development are salaries of product development personnel, hardware lease expense, computer software expense, telephone expense and rent. 28 -------------------------------------------------------------------------------- Table of Contents Sales and Marketing For the three months endedOctober 31, 2021 , sales and marketing expenses remained flat at 19% of revenue when compared to the same period last year due to marketing cost containment. For the six months endedOctober 31, 2021 , sales and marketing expenses increased from 18% to 20% of revenue when compared to the same period last year due to increased marketing spend and variable compensation. General and Administrative For the three and six months endedOctober 31, 2021 , general and administrative expenses increased by 2% and 1%, respectively, when compared to the same periods a year ago, primarily due to an increase in variable compensation, personnel costs and insurance. AtOctober 31, 2021 , the total number of employees was 426 compared to 442 atOctober 31, 2020 . Operating Income/(Loss) Three Months Ended October 31, Six Months Ended October 31, 2021 2020 % Change 2021 2020 % Change (in thousands) (in thousands)
Supply Chain Management$ 6,718 $ 3,983 69 %$ 12,073 $ 8,087 49 % IT Consulting 336 103 226 % 499 209 139 % Other* (4,367) (3,455) 26 % (8,112) (6,780) 20 % Total Operating Income$ 2,687 $ 631 326 %$ 4,460 $ 1,516 194 %
* Includes all corporate overhead and other common expenses.
Our SCM segment operating income increased by 69% and 49%, respectively for the three and six months endedOctober 31, 2021 , compared to the same periods in the prior year primarily due to improved gross margins. OurIT Consulting segment operating income increased by 226% and 139%, respectively for the three and six months endedOctober 31, 2021 , compared to same periods last year primarily due to a decrease in expenses related to sales and third-party contractors. Our Other segment operating loss increased by 26% and 20%, respectively for the three and six months endedOctober 31, 2021 , when compared to the same periods in the prior year due primarily to an increase in variable compensation and stock option expenses. Other Income Other income is comprised of net interest and dividend income, rental income, exchange rate gains and losses, and realized and unrealized gains and losses from investments. For the three months endedOctober 31, 2021 , the increase in other income is mainly due to higher unrealized gains on investments when compared to the same period last year. We recorded unrealized gains of approximately$0.8 million and realized gains of approximately$0 for the three months endedOctober 31, 2021 from our trading securities portfolio. The increase in other income for the six months endedOctober 31, 2021 is mainly due to an increase in unrealized gains of$1.2 million compared to$0.8 million for the same period last year. This increase was partially offset by higher exchange rate losses of approximately$0.2 million for the six months endedOctober 31, 2021 compared to$0 for the same period last year. For the three and six months endedOctober 31, 2021 , our investments generated an annualized yield of approximately 1.33% and 2.98%, respectively, compared to approximately 1.69% and 3.72% for the same periods in the prior year. Income Taxes We recognize deferred tax assets and liabilities based on the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their tax bases. We measure deferred tax assets and liabilities using statutory tax rates in effect in the year in which we expect the differences to reverse. We establish a deferred tax asset for the expected future benefit of net operating losses, credit carry-forwards and nonqualified stock options. Under the Income Tax Topic of the FASB ASC, we cannot recognize a deferred tax asset for the future benefit of our net 29 -------------------------------------------------------------------------------- Table of Contents operating losses, tax credits and temporary differences unless we can establish that it is "more likely than not" that the deferred tax asset would be realized. During the three and six months endedOctober 31, 2021 , we recorded an income tax expense of$303,000 and an income tax benefit of$433,000 , respectively, primarily due to discrete stock compensation benefits of$439,000 and$1.6 million , respectively, net of normal income tax expense from operations. During the three and six months endedOctober 31, 2020 , we recorded an income tax benefit of$103,000 and an income tax expense of$80,000 , respectively, primarily due to discrete stock compensation benefits of$38,000 and$272,000 respectively, net of normal income tax expense from operations. Before adjusting for these discrete tax benefits, our effective tax rate would have been 19.8% in the both the three and six months endedOctober 31, 2021 compared to our effective tax rate of (11.2%) and 12.5%, respectively, in the three and six months endedOctober 31, 2020 . In addition, research and development and foreign tax credits reduced our effective tax rate by 5.4% and 0% in the six months endedOctober 31, 2021 , compared to reductions of 10.8% and 1.3% in the six months endedOctober 31, 2020 . Operating Pattern We experience an irregular pattern of quarterly operating results, caused primarily by fluctuations in both the number and size of software license and subscription contracts received and delivered from quarter to quarter and our ability to recognize revenue in that quarter in accordance with our revenue recognition policies. We expect this pattern to continue. LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION Sources and Uses of Cash Historically we have funded, and we continue to fund, our operations and capital expenditures primarily with cash generated from operating activities. The changes in net cash that our operating activities provide generally reflect the changes in net earnings and non-cash operating items plus the effect of changes in operating assets and liabilities, such as investment trading securities, trade accounts receivable, trade accounts payable, accrued expenses and deferred revenue. We have no debt obligations or off-balance sheet financing arrangements, and therefore, we used no cash for debt service purposes. The following table shows information about our cash flows and liquidity positions during the six months endedOctober 31, 2021 and 2020. You should read this table and the discussion that follows in conjunction with our Condensed Consolidated Statements of Cash Flows contained in Item 1 in Part I of this Quarterly Report and in our Annual Report for fiscal 2021. Six Months EndedOctober 31, 2021 2020
Net cash provided by operating activities
Net cash used in investing activities
(615) (534)
Net cash used in financing activities (1,554) (4,265)
Net change in cash and cash equivalents
For the six months endedOctober 31, 2021 , the net increase in cash provided by operating activities when compared to the same period last year was due primarily to the following: (1) an increase in net earnings, (2) a relative smaller decrease in deferred revenue due to timing of revenue recognition, (3) a relative smaller decrease in accounts payable and other accruals compared to the same period last year due to timing of payments, (4) an increase in stock-based compensation expense, (5) a relative larger decrease in customer accounts receivables caused by the timing of closing customer sales and related collections, (6) a decrease in deferred income taxes and (7) a decrease in purchases of trading securities. This increase in cash provided by operating activities was partially offset by: (1) a relative increase in prepaid expenses when compared to a decrease in the same period last year due to the timing of purchases, (2) a decrease in the proceeds from the maturity and sales of trading securities, (3) a decrease in depreciation and amortization and (4) higher gains on investments than in prior year. The increase in cash used in investing activities when compared to the same period in the prior year was mainly due to an increase in purchases of property and equipment, which was partially offset by a decrease in capitalized computer software development costs. 30 -------------------------------------------------------------------------------- Table of Contents The decrease in cash used in financing activities compared to the prior year was due primarily to an increase in proceeds from exercise of stock options, which was partially offset by an increase in dividends paid. The following table shows net changes in total cash, cash equivalents, and investments, which is one measure management uses to understand net total cash generated by our activities: As of October 31, (in thousands) 2021 2020 Cash and cash equivalents$ 94,201 $ 81,786 Short and long-term investments 17,163 12,829 Total cash and short and long-term investments 111,364 94,615
Net increase/(decrease) in total cash and investments (six months ended
Our total activities used less cash and investments during the months endedOctober 31, 2021 , when compared to the prior year period, in the course of normal business operations. Days Sales Outstanding in accounts receivable were 65 days as ofOctober 31, 2021 , compared to 69 days as ofOctober 31, 2020 . This decrease is primarily due to the timing of billings and cash collections. Our current ratio was 3.0 to 1 onOctober 31, 2021 and 2020. Our business in recent periods has generated substantial positive cash flow from operations, excluding purchases and proceeds of sale of trading securities. For this reason, and because we had$111.4 million in cash and investments with no debt as ofOctober 31, 2021 , we believe that our sources of liquidity and capital resources will be sufficient to satisfy our presently anticipated requirements during at least the next twelve months for working capital, capital expenditures and other corporate needs. However, at some future date we may need to seek additional sources of capital to meet our requirements. If such need arises, we may be required to raise additional funds through equity or debt financing. We do not currently have a bank line of credit. We can provide no assurance that bank lines of credit or other financing will be available on terms acceptable to us. If available, such financing may result in dilution to our shareholders or higher interest expense. OnAugust 19, 2002 , our Board of Directors approved a resolution authorizing the repurchase of up to an additional 2.0 million shares of our Class A common stock. We have made and will make these repurchases through open market purchases at prevailing market prices. The timing of any repurchase will depend upon market conditions, the market price of our common stock and management's assessment of our liquidity and cash flow needs. Under this repurchase plan, throughOctober 31, 2021 , we have repurchased 1,053,679 shares of common stock at a cost of approximately$6.2 million . As ofOctober 31, 2021 , under all repurchase plans previously authorized, including this most recent plan, we have repurchased a total of 4,588,632 shares of common stock at a cost of approximately$25.6 million . CRITICAL ACCOUNTING POLICIES AND ESTIMATES We have based the following discussion and analysis of financial condition and results of operations on our condensed consolidated financial statements, which we have prepared in accordance withU.S. GAAP. The preparation of these condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Note 1 to the Consolidated Financial Statements for the fiscal year ended in our Annual Report for fiscal 2021, describes the significant accounting policies that we have used in preparing our condensed consolidated financial statements. On an ongoing basis, we evaluate our estimates, including, but not limited to, those related to revenue/collectability. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results could differ materially from these estimates under different assumptions or conditions. We believe the critical accounting policies listed below affect significant judgments and estimates used in the preparation of the financial statements. Revenue Recognition. 31 -------------------------------------------------------------------------------- Table of Contents Subscription. Subscription fees include Software-as-a-Service ("SaaS") revenue for the right to use the software for a limited period of time in an environment hosted by the Company or by a third party. The customer accesses and uses the software on an as needed basis over the Internet or via a dedicated line; however, the customer has no right to take delivery of the software. The underlying arrangements typically include a single fee for the service that is billed monthly, quarterly or annually. The Company's SaaS solutions represent a series of distinct services that are substantially the same and have the same pattern of transfer to the customer. Revenue from a SaaS solution is generally recognized ratably over the term of the arrangement. License. Our perpetual software licenses provide the customer with a right to use the software as it exists at the time of purchase. We recognize revenue for distinct software licenses once the license period has begun and we have made the software available to the customer. Our perpetual software licenses are sold with maintenance under which we provide customers with telephone consulting, product updates on a when and if available basis, and releases of new versions of products previously purchased by the customer, as well as error reporting and correction services. Professional Services and Other. Our professional services revenue consists of fees generated from consulting, implementation and training services, including reimbursements of out-pocket expenses in connection with our services. These services are typically optional to our customers, and are distinct from our software. Fees for our professional services are separately priced and are generally billed on an hourly basis, and revenue is recognized over time as the services are performed. We believe the output method of hours worked provides the best depiction of the transfer of our services since the customer is receiving the benefit from our services as the work is performed. Reimbursements received from customers for out-of-pocket expenses were recorded in revenue and totaled approximately$12,000 and$40,000 for the three and six months endedOctober 31, 2021 and$12,000 and$16,000 for the three and six months endedOctober 31, 2020 , respectively Maintenance and Support. Revenue is derived from maintenance and support services, under which we provide customers with telephone consulting, product updates on a when and if available basis, and releases of new versions of products previously purchased by the customer, as well as error reporting and correction services. Maintenance for perpetual licenses is renewable, generally on an annual basis, at the option of the customer. Maintenance terms typically range from one to three years. Revenue related to maintenance is generally paid in advance and recognized ratably over the term of the agreement since the Company is standing ready to provide a series of maintenance services that are substantially the same each period over the term; therefore, time is the best measure of progress. Support services for subscriptions are included in the subscription fees and are recognized as a component of such fees. Indirect Channel Revenue. We record revenue from sales made through the indirect sales channels on a gross basis, because we control the goods or services and act as the principal in the transaction. In reaching this determination, we evaluate sales through our indirect channel on a case-by-case basis and consider a number of factors including indicators of control such as the party having the primary responsibility to provide specified goods or services, and the party having discretion in establishing prices. Sales Taxes. We account for sales taxes collected from customers on a net basis. Significant Judgments. Many of our contracts include multiple performance obligations. Our products and services generally do not require a significant amount of integration or interdependency; therefore, our products and services are generally not combined. We allocate the transaction price for each contract to each performance obligation based on the relative standalone selling price (SSP) for each performance obligation within each contract. We use judgment in determining the SSP for products and services. For substantially all performance obligations, except on-premise licenses, we are able to establish SSP based on the observable prices of products or services sold separately in comparable circumstances to similar customers. We typically establish an SSP range for our products and services which is reassessed on a periodic basis or when facts and circumstances change. Our on-premise licenses have not historically been sold on a standalone basis, as the vast majority of all customers elect to purchase on-premise license support contracts at the time of a on-premise license purchase. Support contracts are generally priced as a percentage of the net fees paid by the customer to access the on-premise license. We are unable to establish the SSP for our on-premise licenses based on observable prices given the same products are sold for a broad range of amounts (that is, the selling price is highly variable) and a representative SSP is not discernible from past transactions or other observable evidence. As a result, the SSP for a on-premise license included in a contract with multiple performance obligations is determined by applying a residual approach whereby all other performance obligations within a contract are first allocated a portion of the transaction price based upon their respective SSPs, with any 32 -------------------------------------------------------------------------------- Table of Contents residual amount of transaction price allocated to on-premise license revenue. Maintenance and support contracts are generally priced as a percentage of the net fees paid by the customer to access the on-premise license. 33
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