Edited Transcript of AMSWA earnings conference call or presentation 21-Nov-19 10:00pm GMT

Maintenance revenues decreased 7% to $10.8 million compared to $11.6 million due to normal retention falloff combined with lower license fees in recent quarters. Our combined recurring revenue streams of Maintenance and Cloud Services were 58% of total revenues for the current quarter, and that compares to 53% from the same period last year.

Looking at costs, our overall gross margin was 54% for the current quarter compared to 52% in the same period last year. Our license fee margin was 4% in the current quarter compared to 13% in the same period last year. That’s primarily due to lower license fee revenue compared — and with the relatively fixed costs related to noncash amortization of cap software and intangibles from recent acquisitions.

Our subscription fee margins decreased to 52% compared to 61% for the same period last year, and that’s primarily due to an increase in the allocation of amortization of cap software, which is $1.2 million or 46% of the total $2.6 million in costs. Due to increase in subscription revenue, more revenue gets allocated to subscription margins. The second quarter ’20 gross margin without noncash cap software allocation would have been 73% compared to 70% in the same period last year.

Our service margin increased to 30% compared to 27% in the same period last year, and that’s due to a higher portion of professional services revenue coming from our higher-margin supply chain business, which had margins of 37% compared to 28% in the same period last year. Our maintenance margin increased to 83% for the current quarter compared to 81% in the same period last year, and that’s due to cost containment efforts.

Taking a look at operating expenses, our gross R&D expenses were 17% of total revenues for the current period compared to 16% in the same period last year. As a percentage of revenue, sales and marketing expenses were 18% of revenues for the current quarter compared to 19% from the prior year, and that’s primarily due to timing of marketing-related costs. G&A expenses were 17% of total revenues for the current period compared to 16% from the prior year quarter, and that’s primarily due to increased variable compensation and, to a lesser extent, insurance and legal fees.

So our operating income decreased 45% to $843,000 this quarter compared to $1.5 million in the same quarter a year ago. Adjusted EBITDA, which excludes stock-based compensation, decreased 9% to $3.5 million for this quarter compared to $3.5 million compared to $3.9 million same period last year. GAAP net income increased 42% to $1.8 million or earnings diluted share of $0.05 for the current quarter, and that compares to net income of $1.2 million or $0.04 earnings per diluted share. Adjusted net income was $2.5 million or adjusted earnings diluted share of $0.08 for the second quarter, and that compares to net income of $2.2 million or adjusted earnings diluted share of $0.07 for the same period last year. And these adjusted numbers exclude amortization of intangible expense related to acquisitions, and stock-based compensation expense. Both GAAP and adjusted net income include a discrete tax benefit of approximately $400,000 this quarter associated with the exercise of employee stock options. While we continue to anticipate a normal tax rate — effective rate of approximately 13% on the balance of the year, future option exercise may continue to affect this reported tax rate.

International revenues this quarter were approximately 19% of total revenues compared to 20% in the same period last year. Taking a look at the year-to-date numbers for the 6 months ended October 31, 2019, year-to-date, we were at $55.6 million compared to $55.4 million. Subscription fees were $10 million year-to-date, a 53% increase compared to $6.5 million in the same period last year, while software license revenues were $2.8 million or a 24% decrease compared to $3.7 million in the same period last year and again, reflecting our continued transition to the SaaS engagement model.

Services revenue decreased 5% to $21 million year-to-date compared to $22.1 million and that — last year due to lower revenue at the proven method. This was partially offset by a 9% increase at our supply chain business unit. Maintenance revenues decreased 6% year-to-date to $21.9 million, and that compares to $23.1 million year-to-date last year.

Taking a look at costs. Our overall gross margin was 54% for the current year-to-date period compared to 51%. License fees increased to 15% gross margin compared to 6% year-to-date, and subscription fee gross margin decreased to 52% year-to-date compared to 64% in the same period last year, and that’s due to increase in allocation of amortization of cap software costs. Our gross margin was 29% year-to-date compared to 24% the same period last year, and that’s due to increased service revenues coming from our higher-margin supply chain management unit.

Our maintenance margins are 83% year-to-date compared to 81% same period last year due to cost containment efforts. Our gross R&D expenses were 17% of total revenues for the year-to-date compared to 16% same period last year. As a percentage of total revenue, sales and marketing expenses were 19% for both the current and same period last year. G&A expenses were 18% of revenues for the current year-to-date period compared to 16% same period last year. So our operating income year-to-date decreased 23% to $1.6 million compared to operating income of $2.1 million last year. Adjusted EBITDA year-to-date increased 5% to $7 million compared to $6.7 million in the same period last year. Our GAAP net income increased 11% to $2.9 million or $0.09 earnings per diluted share, and that compares to $2.6 million or $0.08 the same period last year.

Our adjusted net income year-to-date was $4.5 million or earnings per diluted share of $0.14. And that compares to net income of $4.6 million or $0.15 earnings per diluted share.

International revenues year-to-date were 21% of total revenues compared to 20% same period last year. Taking a look at our balance sheet. The company’s financial position remains strong, with cash and investments of $94.7 million at the end of October 31, 2019, and this increased approximately $12 million since the same period last year. During the current quarter, we paid $3.5 million in dividends. Some other aspects of the balance sheet are: Billed accounts receivables, $15.4 million; Unbilled’s $2.7 million for a total a little over $18 million in accounts receivable; Our deferred revenues current — both current and long term are $32.6 million; and our shareholder equity is $117.9 million.

Our current ratio was 2.7 as of October 31, 2019, and that compares to 2.8 the same period last year. Our days sales outstanding as of October 31, 2019, was 58 days compared to 68 — excuse me, 66 days the same period last year.

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

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

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Thank you, Vince. During the second quarter, we saw strong growth in our cloud revenue driven by the Software-as-a-Service engagement model, which was evidenced by the 64% year-over-year increase in subscription revenue and the 55% growth in the annual contract value for Cloud Services over the prior year period. The Cloud model is our standard today, so going forward, we expect that traditional — perpetual licenses will be limited to smaller incremental expansions within the existing customer community.

This was a good quarter for customer acquisition. We added 10 new logos across 12 different countries, which brings us to 26 new customers year-to-date. The annual contract value for Cloud Services associated with new contracts increased from $14.5 million in Q2 of last fiscal year to $22.4 million last quarter.

We’re pleased to see our growth rate in the ACV exceeded the 50% level for the second consecutive quarter. Furthermore, we are off to a good start in the third quarter, which is traditionally our strongest quarter, having gotten the summer period behind us with the ability to leverage both the year-end funding as well as the beginning of the new calendar year spending authorizations coming available. Given our performance to date and a robust pipeline, we — which includes several significant opportunities, we remain confident in our ability to achieve solid ACV growth in fiscal ’20 and beyond.

Based on the close rate in Q1 and Q2, we are now operating our supply chain services organization at near full capacity, which is evidenced by the 16% growth in our supply chain services revenue. This quarter, we will be battling the Thanksgiving and Christmas holiday period, which is a drag on the number of billable hours that are available, but we do expect to show strong growth when compared to Q3 of last year and continued services revenue growth as we progress through the year.

During the second quarter, our recurring revenue streams for Maintenance and Cloud Services represented approximately 58% of the total revenues as compared to 53% in the same period of the prior year due to the growth in our subscription contracts. This trend toward a higher mix of recurring revenue is on track with our prior expectations, and thus, we’re confident we can achieve the 60% level before the end of the fiscal year that I stated on the last call. Obviously, the growth in recurring revenue improves the financial predictability and the profitability of our company, but more importantly, it is a strong reflection of our customers’ belief that this business model drives higher value for them and opens doors for incremental expansion of our services within the existing customer community. Overall, we had a very good quarter, and we’re pleased with our team’s achievements.

Looking forward, we are continuing to see an uptick in the transformational projects, which leverage our digital supply chain solutions and take advantage of the optimization depth, the advanced analytics, the machine learning capabilities and the optimized simulation capabilities of our platform. Customers are looking for greater supply chain agility and dramatically shorter time to market for their new products as they strive for higher customer service levels to achieve and retain brand loyalty. Our ability to help them transform their supply chain to continuous and autonomous planning allows our customers to leverage their supply chain as a strategic market advantage.

In summary, we are encouraged by the progress we’re making in our go-to-market execution on these transformational projects. We will continue to focus on making our customers more successful as we look to expand our relationships with existing customers and continue to expand our customer community. As we achieve that mission, we will see an acceleration of our recurring revenue streams. We’re confident that we can continue to grow both revenue and profitability in the year ahead and are proud to be delivering incremental benefits for our customers.

So David, at this time, we’d like to open the call for any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we’ll take our first question from Matt Pfau with William Blair.

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

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Just hoping to dig into a little bit more detail on this ACV growth acceleration now 2 quarters in a row, looks pretty good. What — any more details on specifically what is driving that acceleration? And related to that, Mac has now been in the sales seat for roughly 3/4 of a year or so. Is — are some of the changes that he’s made in the sales organization starting to become evident in the ACV number?

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

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Yes, a couple of things. Well, first of all, we don’t provide guidance — any specific guidance, but as we maintain the pace of ACV bookings over the last couple of quarters, we should be able to sustain or accelerate that growth rate. And Mac is having an impact. We’re seeing his influence on the timing of contracts, being able to get them closed a little faster and actually, the scope of some of those contracts. As we look forward, the scope of the projects are starting to increase, so we’re seeing some larger deals in the pipeline as we look forward. So certainly, he’s starting to have an influence on our P&L.

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

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And what have you done in terms of sales capacity? I guess, how has that trended since Mac’s been there?

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

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We are up a couple of headcount. We’ve had some turnover in the time period that Mac’s been onboard, I don’t attribute that specifically to him, but we’ve had a little bit of turnover there. And we will see, in the quarter forward, we have a number of offerings out and acceptances, so our headcount will grow as we look forward. So this time next quarter when we’re talking, I think we can be able to share with you even some additional headcount increases that will be coming into effect then.

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

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Got it. And on the — in terms of the mix of the pipeline, should we think of the pipeline now as just primarily the cloud business versus license given the comments you made? And have you seen existing customers that are running the old on-premise product transition over to cloud? Or is it still primarily new sales that’s driving the ACV number?

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

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As we look forward, we are not seeing a — just a lift and shift conversion of customers into the cloud. So that’s not there. What we are seeing is that, as existing customers are expanding their footprint, which is a really exciting news that they’re doing that, we have a number of those contracts that we’re in the process of working our way through, where they will lift and shift the existing capability that they have and already licensed, they’ll move those to the cloud. So we’re going to — we anticipate that, looking forward, we’ll see some lift and shift those — some conversions, but they will be primarily driven by expansion projects that are bringing that lift and shift with it.

So there’ll be a bit of a mix in that flavor. But not just a lift and shift, we’re not seeing that. We are seeing that the pipeline, as we look forward, is substantially all subscription with the exception, as I said, that the small incremental add-ons are — if they’ve got an existing perpetual license, they’re doing a small add-on, they’ll probably stay in that model. They’ll not convert just for that purpose. Other than that, I think it would be something exceptional that they may drive a transaction towards the license fee, but we’re not even seeing that at this point.

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Matthew Charles Pfau, William Blair & Company L.L.C., Research Division – Analyst [8]

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Got it. Last one for me. One of your comments — last comments was on the cloud opens a door for incremental expansions within customers. With some of the early cloud customers that you’ve had, how have those expansions progressed? And I guess what’s typically the catalyst for a customer to expand the scope of their engagement with you?

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H. Allan Dow, American Software, Inc. – President [9]

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Some of the earlier ones, we’re doing projects on an incremental basis, so they anticipated larger scope, and now we’re moving into Phase 2 of the deployment where they’re coming back and adding the second tier or second phase of that implementation. In a few cases, there was actually new functionality that they’ve — that we’ve brought to market where they’re actually expanding as well into that area. So that’s — that has been incremental for us in some areas.

One of the other influences that Mac has had on us is to actually structure projects. Some of the more transformational projects are structured around tiered deployment, so they’re actually committing upfront. So in a few of those contracts may — as they play out and they take longer for us to move to a true Phase 2 because the phases have been built in. But that’s a bit of a contrast to the way our experience was at the beginning of our subscription experience where the customer was taking the first bite, and then they wait for the second bite until they finish the first one, and then they’d step up to the second one. So we’re still seeing some of that, but these transformational projects, they’re looking at the whole project in its entirety and looking at how do we phase those together.

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Operator [10]

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(Operator Instructions) We’ll take our next question from Zach Cummins with B. Riley FBR.

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

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I guess it was nice to see kind of the solid rebound there in the professional services team for supply chain management. It sounds like you have a pretty solid backlog going into Q3. How are you feeling about the capacity you have? Or the number of headcount that you have to service that backlog as we move forward going here?

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

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A couple of things are in play there. We have — because of the backlog, we have actually expanded the team, and we’ve been able to pull in some very solid talent to help us in a variety of areas. We’ve actually also redeployed some resources in areas that are stronger than maybe in other areas. And we’ve also been able to leverage some third parties to help us with that backlog as well and bringing them into the mix, which is always a nice mix as well. We build the ecosystem. We build their knowledge base. They, in turn, go on and create additional demand for us out there. So that combination of resources of being able to expand our team, flex our team and leverage third parties has been a really positive influence. And right now we’re servicing the projects at the level that we need to be servicing them, so we’re running at the pace that the customer deployment model allows. We’re not constraining that model at this point. We do see it continue to build, and we’ll look to leverage all 3 strings there, pull the resources on whatever direction we need to make sure we’re servicing the customers and capitalizing on that revenue opportunity for us and them.

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Zachary Cummins, B. Riley FBR, Inc., Research Division – Analyst [13]

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Understood. That’s helpful. And then in terms of the sales team, it sounds like there’s a little bit of turnover, but it sounds like you do have some new people coming to the door there. I mean how are you feeling currently about the ability to service your large pipeline of opportunities? And what really is the expected ramp-up time for some of these expected new hires?

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H. Allan Dow, American Software, Inc. – President [14]

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What’s exciting about it right now is we’re a known commodity in the marketplace. There’s this uptick. The positive results that we’re showing are really making us attractive for people that understand our industry and know the market. So the ramp-up time for them is pretty efficient. Right now we’re seeing some good productivity out of the people that started just a few months ago. They’re not closing transactions yet, but they’re active. They’re productive. They’re working transactions, executing sales strategy. So we feel good about the headcount adds that we’ve made, those that are onboard. We feel really good about the folks that are — we’re anticipating to join us here in the coming weeks. So I think the ramp-up time is going to be even faster with this pool of resources than we’d experienced in years past.

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Zachary Cummins, B. Riley FBR, Inc., Research Division – Analyst [15]

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Understood. And then just kind of final question for me. When you think about the current macro environment, how are you viewing customer spending trends compared to, say, this time 12 months ago?

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H. Allan Dow, American Software, Inc. – President [16]

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It’s settled dramatically. I think 12 months ago, we were seeing some severe influence on the macro behaviors out there. Now that said, still, people got a watchful eye out into what’s going on, but it’s not a reason that we’re seeing right now. I think one of the other challenges we face is the — as the deal size grows, those — just getting the overall approval on a larger transaction is a little more complicated and sometimes can be protracted. But the pace at which we’re getting through those today is much better than we were 12 months ago.

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Operator [17]

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(Operator Instructions) And there are no further questions on the line at this time. I’ll return the program to our speakers.

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H. Allan Dow, American Software, Inc. – President [18]

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All right. David, thank you very much. And for all those who joined us this afternoon, we appreciate your time and attention and look forward to speaking with you again in 3 months.

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Operator [19]

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This does conclude today’s program. Thank you for your participation, and you may now disconnect.