Vincent Klinges - CFO Allan Dow - President

Matthew Galinko - Sidoti & Company Kevin Liu - B.Riley & Company

Good afternoon everyone and welcome to American Software's first quarter fiscal 2018 earnings conference call. On the call with me is Allan Dow, President of American Software.

I will review the numbers first and then Allan will give some remarks after that. But first, I would 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 day. 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. In light of these risks and uncertainties there can be no assurance that the forward-looking information will prove to be accurate.

Looking at the first quarter, total revenues decreased 2% to $26.9 million compared to $27.4 million in the same quarter last year. License fees decreased 13% to $4 million compared to $4.6 million for the same period last year.

Services and other revenue was down slightly 1% to $12 million for the current quarter. At the end of the quarter, we increased our cloud services annual contract value or ACV by approximately 92% to $7.7 million for the current quarter compared to $4 million for the same period in the prior year.

The total ACV is comprised of two components; one is software as a service ACV of $5.4 million which increased 155% compared to approximately $2.1 million during the same period last year; and two, the other cloud services such as managed services and hosting increased 22% to $2.3 million ACV compared to $1.9 million during the same period last year. Looking at maintenance; maintenance increased 2% to $10.8 million compared to $10.6 million.

Taking a look at the overall gross margin, it increased to 57% for the current quarter compared to 50% in the prior year quarter. The license fee margin increased to 62% for the current quarter compared to 61% for the same period last year and that's due to a mix of more license fees from our direct sales channel.

Our services margin increased to 34% for the current quarter compared to 26% in the same quarter last year. All business units improved their margin due to improved utilization rates and the increase in higher margin cloud services.

Our maintenance margin also increased to 79% for the current quarter compared to 74% in the prior year quarter due to higher maintenance revenue and also cost containment efforts. Looking at operating expenses, our total gross R&D expenses were 14% of total revenues for the current and prior year quarter.

As a percentage of revenue, sales and marketing expenses were 19% of revenues for the current quarter compared to 20% for the prior year period, and that's primarily due to lower sales commissions from lower license fees. G&A expenses were 13% for total revenues for the current and prior year quarter; so our operating income increased 120% to $3.6 million for this quarter compared to $1.6 million the same quarter a year ago.

Adjusted EBITDA which excludes stock-based compensation increased 55% to $5.3 million for this quarter compared to $3.4 million in the same period last year. So our GAAP net income increased 61% to $2.7 million, our earnings per diluted share of $0.09 for the current quarter compared to net income of $1.7 million or $0.06 earnings per diluted share.

Adjusted net income was $3.1 million or adjusted earnings per diluted share of $0.10 for the first quarter compared to net income of $2 million or adjusted earnings per diluted share of $0.07 for the same period last year. And these adjusted numbers exclude the amortization of intangible expenses related to acquisitions and stock-based compensation expense.

International revenues this quarter were up to 20% of total revenues for the current quarter compared to 17% the prior year quarter. Looking at the balance sheet, our -- the Company's overall cash and short-term investments remain strong with $90.6 million at the end of July 31, 2017, which increased $12.6 million compared to the same period last year.

During the current quarter, we paid $3.3 million in dividends. Some other aspects of the balance sheet, our billed accounts receivables close to $14 million, our unbilled $2.4 million for a total of $16.4 million.

Our deferred revenues current and long-term are $28.6 million and our shareholder equity is $104 million. Current ratio is upto 2.7 for the current quarter compared to 2.6 the same period last year, and our days sales outstanding as of July 31, 2017 was 55 days, down from 60 days in the same period last year.

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

Thank you, Vince. The first quarter was very strong, and as predicted, the transition to SaaS has accelerated.

As Vince indicated, our annual contract value of the cloud revenue recognized in the quarter jumped 92% over the first quarter of last year with a pure SaaS ACV increase of 155%, that's a very significant move. To give you a sense of this progression; when we look at the count of material contracts signed in the fourth quarter of last fiscal year, roughly 28% of the contracts were SaaS.

In Q1 of this fiscal year, 35% of our contracts were SaaS. However, when you consider only the net new customer, that ratio jumps to 55% preferring SaaS and the forward-looking pipeline is even better where this quarter is projected at 60% overall SaaS.

That progression from 28% to 35% to a potential of 50% or more of our contracts being software as a service creates a very exciting opportunity for us. There is no assurance the contracts will close based on that forecasted delivery model because in the end we're going to do what's right for our customers, but clearly this progression is a sign that the market preference is shifting towards a software as a service business model.

There is no exact translation of the value of the software as a service contract to the equivalent perpetual contract value. However, based on an approximation, if the Q1 SaaS contract had been licensed as perpetual contracts, we estimate that the year-over-year license revenue would have been up approximately 20%.

So you can understand from that why we're pleased with our very strong first quarter results. We achieved a substantial 120% increase in operating earnings despite the conclusion of a few large service projects that concluded late last year and resulted in a slight decline in our reported services revenue.

Additionally, the conversion to the SaaS delivery model where the subscription fees stand over the contract horizon is putting downward pressure on operating income when compared to the traditional perpetual license model, which recognizes the revenue upfront. However, as you can see by the results, this transition is taking us to a much higher margin business model and expanding the portfolio of high value services we are providing.

Overall, we're pleased to report that we are on track with our thoughtful and measured transition to a software as a service engagement model while accelerating our profitability, a rare achievement in the software industry. This transition has been enabled by several years of strategic investments in our products, organizational practices, and the individual skills to fulfill the needs of our customer community as they leverage our expertise in managing the applications on their behalf and accelerate their adoption for the latest and most innovative planning capabilities available.

Our cloud based solutions provide customers the increased visibility and accuracy necessary to become part of a connected enterprise and migrate towards fully automated supply chain. As they take advantage of our advancements in algorithmic planning, the advanced supply chain analytics, supply chain management, spend or compliance, and leverage our advancements in artificial intelligence to improve their operating performance; they will also overcome the supply chain talent shortage that maybe hampering their profitable growth and speed to market.

Vince already indicated that our cash and investments increased to approximately $91 million which gives us a strong foundation for operating model and sufficient room for strategic investments and new product and service offerings to enhance the results our customers can achieve as we enable them to move towards fully automated supply chain planning. We signed agreements with customers in 10 different countries including Australia, Canada, Finland, Germany, Ireland, Mexico, The Netherlands, Sweden, United Kingdom, and of course, The United States.

Many of these customers operate global or multi-national businesses, so the breadth of our engagements clearly shows our global reach and an ever increasing focus on managing multi-enterprise supply chains. Diving a little deeper into some specific markets trends that we're observing, we are continuing to see an uptick in advanced retail planning opportunities and are working with both existing customers that are expanding their footprint, as well as new customers selecting us as their partner of choice.

Demand for our optimization solutions remains very strong across a number of industry segments with integrated business planning as a hard topic in most of the projects today. Factory scheduling has become more prevalent in our pipeline, an indicator that production utilization is getting quite high.

And demand for our supply chain management, quality and vendor combined solutions is accelerating. In summary, we're continuing to closely monitor the global economic conditions and our sales team's progress to move our healthy pipeline to signed contracts.

We are very pleased with the overall results from our first quarter and remain optimistic about the potential ahead for the balance of fiscal year 2018. We continue to focus on our mission to exceed customers' expectations and truly believe that we can achieve profitable growth during this transition to a preferred software as a service engagement model that will deliver incremental benefits for our customers.

Alice [ph], at this time, we'd like to open the call for any questions.

Thank you for taking my question and congrats on the strong quarter. Can you go into a little bit more depth on the mix of that pipeline and relative to the size of the customer or the product; is there any trend that you can indicate or that you could kind of color in our thinking on, on who exactly is or how is that -- that move to 50% in the pipeline for SaaS; and what's fueling that?

Sure Matt, this is Allan. I will see if I can give you some more insight into what's going on there.

A couple of interesting metrics; if you look across the three divisions of American Software that are licensing products, Voyager, Demand Management, and the New Generation Computing Organization, NGC; we're seeing the same trend across those. They have kind of different scale and scope of projects, so I don't think it's the size of the company that's really driving it, we're seeing an adoption.

In fact if anything maybe at the higher end, the larger companies are adopting maybe faster than we otherwise expected, that's a bit surprising because they really have -- traditionally had the bandwidth and capability to deploy projects internally, but that's accelerating in the space. We're not seeing an industry trend either, I think if anything -- maybe the high technology companies are a little more conservative, consumer goods organizations have jumped on the band wagon, chemicals organizations have jumped on; so there is no one trend that's driving it like we're seeing an overall uplift in our pipeline leaning towards the software as a service model.

Got you, appreciate that. And then you touched on the higher utilization across all three segments, I think on the services line; is that at sustainable level as long as we're kind of ticking along at this rate or just -- what's kind of your outlook for that?

Right now, we have sufficient bandwidth to deliver against the projects that are coming at us. We've -- over the years and we continue today to look for additional talent that we could bring into that space.

We do expect that overtime that that will continue to grow and what our customers are asking of us will continue to expand. So we're constantly looking for the right talent to bring in, have enough bandwidth, could be able to get them educated and trained so that they can do a super job of delivering for the customers but we have adequate bandwidth right now to deliver against the backlog that we have.

Great, thank you.

Hi, good afternoon. In terms of the booking strength that you're seeing right now on the SaaS side, can you talk about whether that's primarily driven by -- kind of the net new customers you're adding or you're also seeing conversions from your on-premise space contributing for that?

We're seeing both Kevin. Again, Allan answering the question here, we are seeing both.

There are some conversions, that's a relatively small piece whether converting existing licenses over -- from a -- to a subscription model, but they are reaching out to us for additional services whether that's hosting or the administration elements of the cloud services arena. We have a surprisingly high number of existing customers when they are expanding their footprint in the new area that are leaning towards software as a service, that's a bit of a surprise for me, I thought they would stay with the model that they have deployed already.

But once you change the mix to the new customers that are coming onboard, the percentage focused on software as a service goes even higher.

Got it. And certainly it sounds like conversion rates against your pipeline have improved relative to where you were a couple of quarters ago.

How are you feeling about kind of the size of the pipeline now? And is there anything that would give you a pause about kind of the conversion rates continuing at similar levels going through the rest of this fiscal year?

No indication, it's going to change dramatically, it is up from where it was maybe two quarters or three quarters ago; so we're feeling good about that conversion rate, it's quite solid right now. The indications are that that will continue through the end of the year and then the other interesting dynamic we have coming in now is we approach the end of the year, there is left over capital money out there as well as people preparing for their new budget year, so the energy and -- I guess the bullishness seems to be picking up a little bit, so we're anticipating maybe an uplift in the pipeline as we head into the new budget season.

Got it. And then just wanted to clarify some comments you made in your script.

I think you mentioned that you're seeing an uptick in some retail opportunities there that would seem like an industry that's under some pressure. So just kind of curious what sort of initiatives you're seeing going on there?

How -- I mean whether that should be kind of a meaningful driver of growth in the next few quarters?

I think it has a potential for that Kevin, that's a good point, good observation. You know, it's -- over the years as we've been in this industry, what we see is that people kind of get settled into the new reality.

I think that's happening in the retail space today that the new reality has set in, these organizations aren't giving up, they want to grow and they want to foster, so the strong organizations are making investments to try to improve their business conditions and that's what's driving some of our projects.

Great. Well, congrats on the strong quarter, and thanks for taking my questions.

Thank you.

Alright, Alice [ph], thank you very much. Thank you all for participating in our call today.

We're very excited about the results that we've announced and look forward to the call at about three months from now. Thank you very much.