Dec 3, 2013
Executives
Vince Klinges - CFO Mike Edenfield - President and CEO
Analysts
Kevin Liu - B Riley & Company
Operator
Good day, everyone and welcome to today’s Second Quarter Fiscal 2014, Preliminary Results Conference. At this time, all participants are in a listen-only mode.
Later you will have the opportunity to ask questions during the question-and-answer session. Please note this call is being recorded.
I'll be standing by should you need any assistance. It is now my pleasure to turn the call over to Mr.
Vince Klinges. Go ahead sir.
Vince Klinges
Good afternoon and welcome to American Software Second Quarter Fiscal ’14 Earnings Conference Call. To begin I would like to remind you that 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 risks and uncertainties, some of which cannot be predicted or quantified and are beyond our control.
Future developments and actual results could differ materially from those set forth in, contemplated by or underlying the forward-looking statements. There are a number of 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 the changes and uncertainty in general economic conditions, the growth rate of the market for our products and services, the timely availability and market acceptance of these products and services, the effective competitive products and pricing and other competitive pressures and the regular and unpredictable pattern of revenues in light of these risks and uncertainties, there can be no assurance that the forward-looking information will prove to be accurate. At this time, I'd like to turn the call over to Mike Edenfield, CEO of American Software.
Mike Edenfield
Thanks, Vince, good afternoon, everyone. And thank you for participating on this call.
I have some comments on the second quarter results and the business. Vince will review the details of the financial results and then we'll take the questions.
American Software had a terrific quarter. Second quarter revenues were $26.9 million which is an increase of 3% year-over-year and a 15% increase sequentially.
License fees increased 13% year-over-year and 92%, sequentially. Maintenance revenues, which were recurring, increased 7% year-over-year for the quarter.
Our operating income for the quarter was $5.4 million, and an increase of 27% year-over-year and a sequential increase to over a 126% as the company continue to be profitable for the 51st quarter on a run. Regarding customer news, we had 22 new customers sign license agreements in the second quarter which was double the number of new customers in the first quarter.
Some of the notable new and existing customers included AB Enzymes out of Germany, American Woodmark, Baby Trends, Bestseller United, Citizen Watch Company, FMC Corporation, Red Gate Group, Hills Holdings, L'Oréal USA, Mitsubishi Heavy Industries, PharmaCare Labs, SnapAV, SodaStream and Sunny Delight Beverage Company. We had customers from 11 different countries signed license agreements with American Software in the quarter.
Those countries included Australia, Brazil, Canada, China, Columbia, Denmark, Germany, Japan, Sweden, the United Kingdom and the United States As we look at the second half of fiscal 2014, the market adoption of cloud services is changing our business model. Historically we were primarily an on-premise perpetual license model with professional services and customer support.
Customers are now adopting our cloud services such as hosting and managed services and we’re offering a SaaS option to meet our customers’ needs help prioritize our supply chain initiatives. This may result in some revenues being spread over time depending on the type of contracts we enter into.
This quarter, approximately $3 million of revenue will be spread over three years. Approximately $1.1 million of this will be license fees that we booked in the second quarter but did not account in that quarter.
Regarding our pipeline for the third quarter, it looks similar to the second quarter, perhaps slightly better. I’d now like to turn the call over to Vince for a detailed review of the financial results for the second quarter in the first half of fiscal 2014.
Vince Klinges
Thanks Mike. Comparing the second quarter to the same quarter last year, as Mike indicated, total revenues increased 3% to $26.9 million and that compares to $26.3 million in the same quarter last year.
It was primarily due to increase of primarily license fees which increased 13% to 6.2 compared to 5.5 for the same period last year. Services and other revenues decreased 5% to $11.7 million for the current quarter compared to the same period last year.
Services revenues decreased 38% at our ERP business unit due to the completion of a large project at New Generation Computing Lab this time last year. This was offset partially by a 4% increase in our IT staffing business due to timing of project work.
Maintenance revenues increased 7% to $9.1 million, that compares to $8.4 million and that was primarily due to increased license fees this quarter and also improved customer retention when compared to last year. Looking at gross margins, they were 58% for the current quarter and that’s up from 56% for the same period last year.
Our license fee margin was 80% for the current quarter and that compares to 74% for the same period the prior year. And has primarily increased this due to lower software amortization expenses, $625,000 as a result of completion of amortization of our Voyager project released at the end of the first quarter of this year.
We expect the amortization expense to increase in the third quarter of fiscal ’14 when the next major product is released. The decrease in cost of license fees was partially offset by an increase in commissions as a result of the increased license fees through our indirect warrant (Ph) channel.
Services margin was 30% for the current quarter and that compares to 34% in the prior year and that’s primarily due to lower services revenue. Maintenance margin was up 78% for the current quarter compared to 76% and that’s primarily due to the increase in maintenance revenue.
Looking at our gross R&D expenses; they were 11% of total revenues for the current quarter and that compares to 12% for the prior year period; as percentage of revenue sales and marketing expenses were 19% for both the current and prior year period; G&A expenses were 11% of total revenues for the current quarter and that compares to 12% for the same quarter and that’s primarily due to recovery for an doubtful account this quarter when compared to last year. So our operating income increased 27% to 5.4 million for the current quarter and that compares to 4.2 million for the same quarter a year ago.
Adjusted EBITDA, which excludes stock-based compensation, was 6.2 million for this quarter and that compares to 5.7 million for the same, 5.7 million for the same period last year. Our GAAP net income increased 33% to 3.7 million or earnings per diluted share of $0.13, and that compares to 2.8 million or $0.10 earning per diluted share for the same period last year.
Adjusted net income was 4 million or adjusted earnings per diluted share of $0.14 for the second quarter and that compares to the net income of 3.1 million or adjusted earnings per share of $0.11 for the same period last year. These adjusted numbers exclude amortization of intangible expenses related to acquisitions and also the stock based compensation expense.
International revenues for this quarter were up to 17% of total revenues and that compares to 12% in the same period last year. Taking a look at the full year-to-date six months ended October 31, 2013 and compare it to the same period; total revenues decreased 4% to 50.2 million and that compares to 52.2 million in the same period last year; license fees year-to-date is 9.4 million and that compares to the 10.6 million for the same period last year; services revenues year-to-date are 22.9 million compared to 24.8 million; and maintenance revenues year-to-date were 17.9 million compared to 16.8 million last year.
Looking at cost at year-to-date; our overall gross margin was 55% for the current and prior year period; our license fee margin increased to 75% compared to 73% last year; our services margin was 29% compared to 32% for the same period last year and that’s primarily due to lower services revenue. Our maintenance margin was 78% for the current year-to-date period and that’s up a percentage point from 77% in the same period last year.
Looking at operating expenses; our gross R&D expenses were 11% for total revenues for the six month period compared to 12% in the same period last year; as a percentage of total revenues, sales and marketing expenses were 19% for both the current and prior year period; G&A expenses were 12% for both the current and same period last year. So our operating income year-to-date is 7.8 million and that compares to operating income of 8 million last year.
Adjusted EBTIDA year-to-date was 9.9 million year-to-date compared to 10.8 million in the same period last year, and our GAAP net income was 5.3 million year-to-date or $0.19 per earnings diluted share compared to 5.2 million or $0.19 per earnings diluted share last year. Adjusted net income year-to-date was 5.9 million or earnings diluted share of $0.21 and that compares to the net income of 5.8 million or earnings diluted shares or $0.21 also last year.
International revenues year-to-date were approximately 17% of total revenues and that compares to 12% last year. Taking a look at our balance sheet; the Company’s financial position remain strong with cash and short term and long term investments of approximately 70.2 million at the end of October 31, 2013, that’s an increase in cash and investments of approximately 4.1 million when you compare it to the same time last year.
Other aspects of our balance sheet; our billed accounts receivables 12.8 million, unbilled is 4.4 million for a total of 17.2 million of accounts receivable; our deferred revenues current are 19.4 million and deferred revenues long term are 0.5 million; shareholder equity is 87.4 million; our current ratio was 2.8 as of October 31, 2013 and that’s down slightly from 2.9 in the same period last year; and our day sales outstanding as of October 31, 2013 was 58 days and that’s improvement from 65 days in the same time last year. At this time I’d like to turn the call over to questions.
Operator
(Operator Instructions) Our first question comes from Kevin Liu with B Riley & Company. Please go ahead.
Kevin Liu - B Riley & Company
Good afternoon and nice quarter guys. First question here, just in terms of the contributing factors on license performance, could you talk a little bit about to what extent this was enclosure of some of those slip deals from the prior quarter?
What are you felt the macro was trying to help you guys finally? Anything along those lines will be helpful.
Mike Edenfield
Yes, I think, it might have been a little, deals that slip and I think the macro environment has improved and basing that on what I am seeing in the pipeline for this quarter.
Kevin Liu - B Riley & Company
And what about on the sales productivity? Are you seeing broad based improvement across your sales team or was this more a function of certain folks playing into larger deals?
Mike Edenfield
That was broad based.
Kevin Liu - B Riley & Company
And then you mentioned the size of the pipeline is sustained. A lot of these deals also far along enough in the process where you feel like the normal seasonal year end budget flushes that might be helpful for this quarter.
Mike Edenfield
I think we will, yes.
Kevin Liu - B Riley & Company
And then just on SaaS opportunities the 3.2 million in deals, I was wondering if that was one sizeable transaction or whether this was also spread across several transactions?
Mike Edenfield
There were two transactions where we had the spread the revenue. One was bigger, our biggest order of the quarter and it's been spread and another one was just a routine.
Kevin Liu - B Riley & Company
And how about in terms of the composition of the pipeline, are you seeing more SaaS deals make up the pipeline?
Mike Edenfield
No still more perpetual.
Kevin Liu - B Riley & Company
And then just one last one, it looked like you guys did a small acquisition within the quarter; was wondering if it had any sort of impacts among the financials for the quarter and if you could just maybe talk about it a little bit in terms of what this adds to the platform, what sort of impact it has typical forward numbers?
Mike Edenfield
We bought a small company called Taylor Manufacturing and we get two benefits from it for two different channels. For the Voyager, Logility Voyager channel we were primarily more focused on process, manufacturing, companies those are manufacturing product.
And this allows is to go after discreet manufacturers for that product. We still sell other products to discreet manufacturing but it gives us a forward product line for discreet manufacturers.
And then also our demand management subsidiary did not have a manufacturing and planning capability partnered with the third part. So now we own the asset and our margins will be better and I think we can go after more deals from the international perspective.
Kevin Liu - B Riley & Company
And what about the timing of when this is closing whether or not it had much of an impact on your Q2 results?
Vince Klinges
This is Vince. It closed on August 14th, it didn't have a material impact from a cost point of view, we have about 75,000 accounting and legal fees to close it this quarter, better than the G&A numbers.
But we did actually close three small deals with either individually or inside of the deals through DMI through this channel but this product that was during the quarter already, so we’re pretty excited about it.
Operator
Thank you. (Operator Instructions).
And gentleman it appears we have no further questions at time I will turn it back to you for any final remarks.
Mike Edenfield