Aug 25, 2016
Executives
Michael Edenfield - President and Chief Executive Officer Allan Dow - President, Logility, Inc. Vincent Klinges - Chief Financial Officer
Analysts
Kevin Liu - B. Riley & Co.
Matthew Galinko - Sidoti & Company
Operator
Good day, everyone, and welcome to today's program. At this time, all participants are in a listen-only mode.
Later, you’ll have the opportunity to ask questions during the question-and-answer session. [Operator Instructions] Please note this call may be recorded.
I will be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Mr.
Vincent Klinges, CFO of American Software. Please go ahead, sir.
Vincent Klinges
Thank you. And good afternoon, everybody.
Welcome to American Software's first quarter 2017 earnings conference call. To begin, I’d like to remind you that 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 risk 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 and contemplated by or underlying the forward-looking statements. There are 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 effect of competitive products and pricing and other competitive pressures, and the irregular and unpredictable pattern of revenues. At this time, I’d like to turn the call over to Mike Edenfield, CEO of American Software.
Michael Edenfield
Thanks, Vince. And thanks for everybody on the call.
Also on the call is Allan Dow, our President of Logility, our largest and most profitable business unit. Allan will give you an overview of our operating results and our recent acquisition of AdapChain.
Allan?
Allan Dow
Thank you, Mike. I have got three topics I want to cover, as Mike said.
I will give you some insight into the first quarter results at a high level from a business perspective. Second, we will spend a few minutes on the pipeline and what are we currently seeing in the marketplace for potential going forward.
And the third thing, as Mike said, I will cover the most recent acquisition that we made, AdapChain, that we announced just on Tuesday of this week. So let me start with the first quarter.
In spite of some of the crazy market dynamics that are out there and the economic swings, currency shifts and the elections that we are facing, we actually performed much better than first look at the numbers may make one wonder about. We actually had – in the first quarter of 2016, we had a catch up of revenue of about $1.5 million.
That was predominantly made up of one major project that we took the revenue on in that quarter. We had spent the better part of the prior-year actually working on that project, so the expenses associated with that project that were recognized in 2015, but in the first quarter of 2016, we are able to then recognize the revenue associated with that project.
That was a very unique situation. It was the kind of contract that we had never done before and have not done since, don’t anticipate doing in the future.
But it allowed us to enter into a major new market in a very predictable way. We were confident that the results would come through that we’d be able to deploy that project successfully.
But to help the customer through that that allowed us to get into the market, we did some unique things that – we decided that the best approach to that was to defer the revenue until we completed the project, which wrapped up in the first quarter of 2016. If you back that $1.5 million out, you would quickly see that we were about even, just up slightly on the first-quarter results.
So we actually performed much better than one may have expected just from an initial look at the results that we published. So with that, let’s talk about where we are today.
The current overall pipeline, which for us is a 12-month look forward, is as strong as we’ve seen since this summer of 2012. So that’s a full-year look-back.
And where we sit today, it’s a very strong pipeline for going forward. Of course, a number of those opportunities that are in that pipeline represent business potential that is 6 to 12 months out.
Given the time period that that business would fall in, clearly, we’re dependent on budgets getting approved, which have not yet been achieved. So there is a number of anomalies that could play out and we hope to see how things come together on those budgets.
But on a consistent basis over the way that we track and report the overall pipeline, we’re seeing a very strong opportunity looking ahead. If we look a little bit shorter than that, looking at the second quarter opportunity that lies ahead, the second quarter potential is consistent with some of the strongest quarters we've had in the company.
We’re seeing a very healthy mix of both software-as-a-service opportunities as well as perpetual licenses. That mix is still continuing to shift.
Generally, what we are seeing is that there is a stronger demand for the software-as-a-service business model at the division level of large enterprises and in the small to medium business segment. The enterprise level, the demand there that we are seeing is more strategic than it is a broad-based shift at this time.
From a strategic perspective, what I mean by that is that companies are assessing whether they want to invest from a capital perspective or take an expense approach to a project. They may have outsourced IT entirely where they no longer have the resources to install and sustain an operational application inside.
Or they just have a limitation on resources and to avoid further delay, they want to make sure that they can move the project forward and are looking for and outsourcing some of those activities. Overall, we expect to see this trend to continue, with a strong growth in our overall cloud services business and an acceleration of the SaaS opportunities or SaaS bookings in the small to medium business as the targeted investments we’ve made in this area continue to gain momentum.
Next, I’m going to talk about our most recent acquisition that we announced. Just two days ago, we announced the conclusion of our acquisition of a company called AdapChain based in West Chester Pennsylvania.
AdapChain is focused on an integration strategy. We saw about five years ago an emerging trend where customers needed additional support around the integration of data into projects like Logility.
And this allowed them to deploy best-of-breed strategies against their supply chain as opposed to leveraging the enterprise-wide solutions. Fortunately, for us, the much-anticipated ERP addressing all of the IT requirements never came true, but that left our customers with the need for continuing integration strategies and they were struggling with the approach to make that successful.
So we set out to redefine the space, to have a better way and allow the supply chain solution to match the business requirements, with the flexibility to evolve over time. We didn’t want to have the same approach where there was a structured or turnkey or custom developed integration simply to get the data out of the ERP system and into the supply chain system.
Customers were struggling with that. But at the same time, we wanted to make sure that there was a strategy, a better approach to integrating the ERP into a single – that an ERP as a single solution could even offer.
So we partnered with AdapChain, an integration specialist company, as I mentioned, to do just that. So over the last four years, we’ve developed and deployed an integration application not just in custom configuration, but an application with configured templates to most of the major ERP systems that we encounter.
So what do our customers get from that? Well, first of all, they get an off-the-shelf integration solution.
No more custom development. They have a sustainable solution that’s covered by traditional support and maintenance services.
So they get upgrades, enhancements and fixes from a company that is responsible for developing that application. You can’t get that with a custom integration.
They also get an evergreen set of templates that are updated for new releases of the Logility applications or the ERP system. We take on that responsibility.
They get a robust set of functionality that’s not found anywhere else, including net change capabilities, data mining, error detection and correction, and notification to the user who is responsible for a data element if it’s out of spec. They get distributive processing and we provide the transformation of data to convert the information that they find in the ERP system to a usable format for their supply chain solution.
So what are the benefits of that approach? Well, they get virtually a turnkey integration, very limited resources from the customer's IT organization.
They get robust functionality that can be used to improve the data integrity. We don’t just have to be reliant on what's in the ERP system any longer.
They get a much faster and more timely data transfer with less burden on those other applications, whether it's the data warehouse or the ERP system or any other data source. We’re offloading that burden.
They get the ability to design the supply chain solution to match the business requirements versus bending the solution to be designed around the financial systems configuration or the MDM system’s configuration. So we are now addressing the business needs.
They get the flexibility to do real-time scenarios. The data is available and ready whenever they want to launch a scenario plan.
And they get reliable, predictable, lower cost solution in less time on the first integration of the implementation and the future upgrades to accelerate the benefits they can reap out of their supply chain solution. And then, what does Logility get from this effort?
Well, we’ve got the ability to overcome the barriers to get projects started and to get them finished on time. We get a much more predictable resource plan around both the initial implementation and the upgrade associated with the integration effort.
We get a platform to continue developing the capabilities and to leverage the Internet of Things to accelerate the business decisions. And we get a basis to fundamentally change the approach to supply chain operations and redefine the landscape for on-demand optimization.
We’re really excited about this acquisition. We see that it will be accretive very quickly for us and a lot of opportunity that lies ahead.
So at this time, I'm going to return the call back to Vince, who will review the financials for us.
Vincent Klinges
Thanks, Allan. Comparing the first quarter of fiscal 2017 to the same period last year, total revenues for the quarter decreased 5% to $27.4 million and that compares to $28.9 million for the same quarter last year.
As Allan noted, our prior year’s results did include the completion of a project with customer acceptance for approximately $1.5 million in revenue, while the costs of that project were incurred in the prior periods. License fees decreased 5% to $4.6 million compared to $4.9 million for the same period last year.
Logility, which includes both our Voyager and DMI product, increased license fees by 7%. Our ERP decreased 49% due to lower license revenue in new generation computing due to timing of closing of deals in the apparel vertical.
And also, last year, in the first quarter, they closed over $1 million of license fees, which made it a tough comparison. However, we believe that the pipeline is strong in this area and will improve in subsequent quarters.
Services and other revenues decreased 12% to $12.2 million for the current quarter and compared to the same period last year due to the 26% decrease at our IT staffing business. That is The Proven Method.
That’s as a result of a project ending at the end of the second quarter of last year that resulted in that decline. Partially offsetting this decrease was an increase at Logility of 4% due to the increased implementation of project work and cloud services.
And as also noted in the first quarter of last year, Logility had that additional $800,000 in services revenue related to that contract that required customer acceptance. If you exclude that revenue, the adjustment of Logility’s services revenue would have increased 20%.
At the end of the quarter, we increased our cloud services annual contract value or ACV by approximately 36% to $4 million for the current quarter, and that compares to $3 million in the same period last year. So our total ACV is comprised of software-as-a-service ACV of $2.1 million compared to approximately $1.5 million in the same period last year and other cloud services such as managed services and hosting of $1.9 million ACV compared to $1.5 million in the same period last year.
Our maintenance revenues also increased 4% to $10.6 million compared to $10.1 million in the prior-year, and that’s due to additional license fees. Looking at costs, the overall gross margin decreased to 50% for the current quarter compared to 53% in the prior-year quarter.
Our license fee margin increased slightly to 61% for the current quarter compared to 60% for the same period last year. Services margins were at 26% for the current quarter.
That compares to 32% in the prior-year quarter. This was lower due to lower margins of our IT consulting business and the additional $800,000 of services revenue recorded in the prior-year period that resulted in a higher gross margin than trend.
The maintenance margin was 74% for the current quarter and that compares to 79% on the prior-year quarter. This is lower due to increased headcount at our Logility business unit.
Looking at other aspects of our operating expenses, our gross R&D spend was 14% of total revenues for the current quarter compared to 12% for the same period last year and that’s due to additional headcount. As a percentage of revenues, sales and marketing expenses were 20% of revenues for the current quarter compared to 18% for the prior-year periods, also due to investment in additional heads in the sales and marketing area and related expenses.
G&A expenses were 13% of total revenues for the current period compared to 12% in the prior-year quarter. So our operating income decreased 57% to $1.6 million for this quarter compared to $3.8 million for the same period a year ago.
Adjusted EBITDA, which excludes stock-based compensation, decreased 39% to $3.4 million for the quarter compared to $5.6 million in the same period last year. GAAP net income decreased to $1.7 million or earnings per diluted share of $0.06.
And that compares to net income of $2.6 million or $0.09 earnings per diluted share in the same period last year. Adjusted net income was $2 million or adjusted earnings per diluted share of $0.07 for the first quarter and that compares to $2.9 million or adjusted earnings of $0.10 for the same period last year.
These adjusted numbers exclude the amortization of intangibles related to acquisitions and stock-based compensation expense. International revenues for this quarter were approximately 17% of total revenues and that compares to 21% for the same period last year.
The company’s financial position remains strong with cash and investments of approximately $78 million at the end of the July 31, 2016. That is an increase of $1.2 million when compared to the same period last year.
Other aspects of the balance sheet – our accounts receivable build is $13.4 million, unbilled $4.6 million for a total of $18 million in accounts receivables. Our deferred revenues, current and long-term, are $26.9 million and our shareholder equity is $95.2 million.
Our current ratio is up to 2.6 as of the end of July 31, 2016, and that compares to 2.4 the same period last year. Our days sales outstanding as of July 31, 2016 was 60 days versus 54 days the same period last year.
At this time, I'd like to turn the call over to questions.
Operator
[Operator Instructions] And we’ll take our first question from Kevin Liu with B. Riley & Company.
Please go ahead. Your line is open.
Kevin Liu
Hi. Good afternoon.
You kind of covered some of the comparisons to the prior year that were more difficult. But maybe address the comment in the press release that did mention that you guys fell short of your internal expectations.
What areas caused that miss and do you expect these to be corrected relatively quickly over the remainder of the year or are some of these issues expected to persist?
Allan Dow
Hi, Kevin. It’s Allan Dow speaking.
Predominantly, the miss, we had some pretty significant projects across the company for each one of the segments that we had expected to close for a number of reasons. One of them as strange as a plant caught on fire and deferred a project and some economic turmoil and everything else that was going on out there just caused a bit of a delay.
We’ve actually picked up ground against those projects already and have started to book those back into the second quarter. So we do expect an uptick to be able to recover much of that revenue.
We don't know exactly. Some of those will get deferred into the next calendar year or next financial year for some of those customers, but we do expect to be able to recover that business.
It wasn't lost or any major significant shift in the market.
Kevin Liu
Got it. And with respect to your pipeline comments, you mentioned it's as strong as it was back in 2012.
At that time, American Software was generating license revenues in excess of $6 million, $7 million in some quarters. Just curious if you’re implying that you guys can get back to that level, given the pipeline you have today, or if there's anything conversion-wise or perhaps the shift towards SaaS that would preclude you from getting there?
Michael Edenfield
There is a shift towards SaaS, of course. So that – as we all know, that spreads the revenue out.
So we have strong hope and desire to get back to that license revenue level in spite of the fact that we have more SaaS business. As I said, the SaaS business that we’re seeing, the strongest push there is in the small to medium segment.
Those transactions would be somewhat smaller anyway, if they’re even perpetual licenses. So as we see the enterprise business continuing to stay strong, that should give us the ability to help recover that ground.
And then we have the recurring predictable stream associated with the SaaS business. So…
Kevin Liu
Great. And just lastly, you talked about the strategic aspect of the AdapChain acquisition.
Any insight you guys can provide in terms of what their revenue run rate was or what it might contribute to your business for fiscal 2017?
Vincent Klinges
Yeah. Kevin, the run rate was about $1.2 million.
They had some – most of their – Logility was their biggest customer. So most of that revenue will be ours going forward.
So…
Kevin Liu
Got it.
Vincent Klinges
The transaction was roughly $4 million in cash and there is a $2 million earn-out over three years.
Kevin Liu
All right. Appreciate the details.
Operator
[Operator Instructions] Our next question comes from Matthew Galinko with Sidoti. Please go ahead.
Your line is open.
Matthew Galinko
Hey, good afternoon. You touched on customers may be looking at SaaS or managed services' options if there are budgetary restrictions.
Can you talk about how much – how influential that's been in recent quarters? Are you seeing an uptick of maybe having a deal go into the pipeline as a perpetual license kind of arrangement and come out as a more current arrangement?
Allan Dow
Yeah. Allan speaking again.
Yes – well, first of all on the managed services business, that’s more of a strategic business or a staffing limitation than it would on capital. If you look at just those aspects of our cloud services revenue, some of that cloud services business is associated with new projects.
So there may be a perpetual license and they’ve decided that strategically they don't have the resources or don't want to build the resource team around supporting the application. So that wouldn’t really fall into the category of capital versus expense.
But there is a shift around the overall projects that are in the marketplace and what's happening out there. We do see some changing of the minds where we think that they’re going to start out in a perpetual license model and then ultimately decide to switch to a software-as-a-service model for some capital constraints or just because it's – maybe not a constraint, but just a strategy from a financial strategy standpoint.
And we see the other way go as well where they start out thinking about a software-as-a-service model and then by the time that CapEx rolls all the way up to the CFO’s desk and they reassess where they sit, they may make a mind shift there. Our objective for the marketplace today is to make sure that we do what's best for the customer.
Whatever strategy they would like to play, we want to make sure that we’re able to offer that. So there's no financial barrier, financial incentive, there’s no technical barrier to the approach to this business.
Whatever direction suits the customer best, whether that’s strategic, a financial decision, a staffing decision, we want to be able to approach the business with them and make sure we can address that need and get the project started as soon as possible.
Matthew Galinko
Got it. All right.
And then I think you mentioned that headcount at Logility was up and talked about the maintenance margin being off a little bit on that. Can you talk a little bit about recent hires you've made at Logility?
Allan Dow
Yeah. There were two area that Vince touched on.
Let me speak to the sales and marketing side first you had made mentioned there. We have made investments in the sales area.
With the recent acquisition and market penetration, we’ve actually opened a number of new offices in the particular regions. The most recent was down in Australia that we announced a few months back.
So some investments there on the sales and marketing area to support that expansion, but also brings about the opportunity for us to expand our implementation services and our support services activities into some of those segments as well. The cloud service business is continuing to grow.
So we are making some investments, leading that revenue pool. When the customer signs the contract, they expect us to be ready to perform the services and that contract will become effective anywhere from maybe a couple of days to at most a couple of weeks.
So we estimate the investments ahead of time to be prepared to support that – potential in that business and we’re seeing that model continue to grow. So we’ve made some investments in that area to be prepared for that market shift as it continues to come towards us and the opportunities that present themselves.
But it gave us a bit of a hit as we made those investments.
Matthew Galinko
And then maybe lastly, can you just talk about how the sales cycle compares if you’re talking about a deal that goes in, planning to be perpetual and closes perpetual versus a deal that starts as SaaS and close as – ends pipeline of SaaS.
Allan Dow
Well, I think probably the better answer to that question is really what segment are we selling into than it is about the construct of the contract. If you look at enterprise project, the sales cycle, regardless of the strategy, is still running in the nine-month range.
Some of them are as quick as a few months, four months. It could be as long as multiple years in some cases.
But we don't see a significant difference between software-as-a-service business approach and the timeframe to close, although, as I mentioned, in some cases, it may allow a further postponement, so we can shift that strategy around and keep it in a nine-month strategy – or a nine-month timeframe as opposed to maybe slipping out significantly longer because of a lack of resources. So it really has given us maybe more consistency around the close rate, but not accelerating them significantly inside the nine-month window.
If you shift to a small and medium business market where we’ve made significant investments over the years past to develop our approach, our applications in the demand management space and the team and the support structure around that, we’re able to see the closes coming much faster. So we're seeing an opportunity there where we are expecting to see a rise in the volume of transactions associated with SaaS in the small to medium segment or the smaller divisions of large enterprise companies that want a different approach.
So that is definitely an area where we can accelerate the transaction count as we see that software-as-a-service model kick in for us.
Matthew Galinko
I apologize to harp, but maybe if I could add just one more there. If you had to just chop up the pipeline a little bit in terms of enterprise versus SMB, are you – do you feel like you're filling a more significant portion of the pipeline with SMB today?
Allan Dow
The count is much higher. If you get into the SMB space, there’s many more companies out there.
Those companies are growing or they’re running their operations on Excel spreadsheets today and they’re observing the opportunity to move up to an enterprise kind of system that’s an application as opposed to home-developed. So if you looked at deal count in the pipeline, I think you would see that there is probably a higher count there.
Transaction size is smaller. But I don't think that we’ve seen a major shift on the front from the standpoint of the number of transactions at the enterprise level.
We’ve also made an investment at the SMB space around tele-sales and that’s really giving us an opportunity to do a much faster and broader reach into the marketplace and really start to penetrate those who we may not otherwise reach or can’t make the investment to go see some of these companies. So our tele-sales operations just got up and running in the last few months.
So we are seeing some good early results associated with the efforts in that area. Team is coming online and we are starting to see the benefits of that in both pipeline and some closure rates.
And we believe that we can continue to grow that operation and really accelerate that over time. That tele-sales operations, I think, would be obvious, but it’s focused really on the SaaS business model, not on the enterprise sales.
Matthew Galinko
Got it. All right, great.
That’s all from me. Thank you.
Allan Dow
Sure.
Operator
Thank you. [Operator Instructions]
Michael Edenfield
If there’s no questions, we’ll close the call. And thank you for being on this call and we’ll look forward to in the next one.
Operator
And that does conclude today’s program. We’d like to thank you for your participation.
Have a wonderful day. And you may disconnect at any time.