Vincent Klinges - CFO Mike Edenfield - CEO Allan Dow - President, Logility

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

Thank you, and good afternoon. On the call with me are Mike Edenfield, the CEO of American Software and Allan Dow, the President of Logility.

To begin, 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 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 uncertainty there could 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.

Thanks, Vince. And thanks for all of you participating on this call.

Notable new and existing customers placing orders with the Company in the second quarter include American Nutrition, Jordan’s Furniture, Moderna Alimentos, Antipodes, Antera, Crown Bolt, Nature’s Way Foods, and Sandvik. During the quarter, software license agreements were signed with customers in located the following 10 countries” Canada, Denmark, Ecuador, Finland, Ireland, Mexico, New Zealand, Sweden, and the United States and the United Kingdom.

We had nine new customers and DMI had six of them. Notably, three were SaaS contracts.

I’ll turn it over to Allan Dow, President of Logility for more details on the quarter.

Thank you, Mike. Although, the reported results are below our original expectations for the second quarter, we are encouraged that the pipeline remained strong.

In fact, our total pipeline for the 12 months ahead is near the peak that we’ve seen over the last four years. This fall we saw a significant delay in capital spending from the end of 2016 into the 2017 budgets.

Although, there was no single reason for the delays; various global events, including Brexit, the U.S. presidential elections, caused a great deal of uncertainty and contributed to customer and prospect investment delays.

Furthermore, leading up to the holiday period, much of the retail segment was experiencing softness when comparing same-store sales, putting downward pressure on their capital spending. During the same period, we have continued to see a market shift towards software as a service business model and cloud services.

This increased preference for SaaS deployment is one that we are well-positioned for. In fact, as Mike mentioned during the second quarter, we executed a number of SaaS contracts.

When you consider the equivalent value of the software licenses under these contracts had these agreements been for perpetual licenses, we would have reported numbers much closer to the results from last fiscal year. The significant increase in ACV or the annual contract value for the second quarter reflects these contracts.

Since we offer our customers the option of SaaS or perpetual contracts, it is difficult to predict under which option they may elect to engage with us. That’s our ability to forecast recognized license fees in any given quarter has become more challenging.

However, in the long run, we win regardless of the model they select when we bring on a new customer. We expect to see this trend continuing into 2017, especially as we gain momentum with the demand solutions channel, which is focused on securing new SaaS contracts and customer conversions to SaaS.

Additionally, we’re seeing increased interest at the enterprise level for SaaS projects. We serve more than 1,250 customers in over 80 countries, and the global nature of our business helps to overcome specific regional disruptions and economic stress.

So, as Mike said, we were very pleased to report that license agreements were executed in 10 different countries during the second quarter. For an update on our most recent acquisition, we are pleased to share that the integration of the AdapChain solution and the team into our operations has exceeded our expectations.

We are ahead of plan in regards to operational performance, new projects, and the inclusion of AdapLink in the scope of future projects. In addition to the incremental revenue this acquisition brings to the Company, we anticipate an opportunity to accelerate customer implementation process, uniquely offering our customers a faster return on their investment.

This solution also removes one of the major risks to any enterprise IT project success, thus giving us a significant competitive advantage in the marketplace. In summary, we’re continuing to monitor the global economic conditions and our sales team's progress to move our healthy pipeline to sign contracts.

We’ve made some reductions in our short term investments, discretionary spending, as well as some staff reductions. And as we deem appropriate for the global market conditions, we are ready to make other adjustments if necessary.

The current outlook is very good for the third quarter, which ends on January 31st. The timing for our third quarter offers both 2016 budgetary year-end as well as new 2017 budgetary spending that becomes available in January.

We see the strong possibility to capitalize on this project spending, giving us the opportunity to re-ignite our growth during the third quarter and build on that momentum as the economy picks up steam in 2017. The potential results for the second half of fiscal 2017 appear to be very good.

At this time, I’ll turn the call over to Vince.

Thanks Allan. Taking look at the second quarter of fiscal '17 compared to the same period last year.

Total revenues for the quarter decreased 10% to $26.1 million compares to $29.1 million the same quarter last year. License fees decreased 44% to $3.1 million compared to $5.6 million for the same period last year.

This decrease came from all of our software business units. Services and other revenues decreased 8% to $12.3 million compared to same periods last year, and that’s primarily due to the 22% decrease in our IT staffing business, The Proven Method, as a result of our project ending in the second quarter of last year.

Partially offsetting this decrease was an increase at Logility of 6% due to increase in cloud services. At the end of the quarter, we increased our cloud services annual contract value or ACV by approximately 42% to $4.4 million for the quarter ended October 31, 2016, and that compares to $3.1 million for the same period last year.

So, the total ACV is comprised of software-as-a-service; ACV of $2.3 million and that compares to $1.5 million in the same period last year; and then other cloud services, such as managed services and hosting of $2.1 million ACV compared to $1.6 million in the same period last year. Maintenance revenues increased 6% to $10.7 million compared to $10 million, primarily due to additional license fees in recent periods.

Our overall gross margin decreased to 50% from the current quarter compared to 51% in the same period last year. Our license fee margin decreased to 49% for the current quarter compared to 64% for the same period, and that’s primarily due to lower license fees.

Services margin was up slightly to 27% for the current quarter and that compares to 26% for the same period last year. Our maintenance margin was 77% for the current quarter and that compares to 78% for the prior-year.

Looking at operating expenses, our gross R&D expenses were 16% of total revenues for the current quarter and that compares to 12% in the prior last year. That’s primarily due to increased investments and headcount, and also lower revenues.

As a percentage of revenues, sales and marketing expenses were 20% of revenues for the current quarter and that compares to 19% in the prior-year periods, and that’s again due to increased headcount and related expenses. G&A expenses were 14% of total revenues for the current period when compared to 12% in the same period last year, and that’s primarily due to lower revenues and costs associated with the AdapChain acquisition.

So, our operating income decreased 79% to $708,000 this quarter, and that compares to $3.3 million in the same quarter of last year. Adjusted EBITDA, which excludes stock-based compensation, decreased 47% to $2.7 million for this quarter compared to $5.1 million in the same period of last year.

Our GAAP net income decreased to $412,000 or earnings per diluted share of $0.01 per share compared to net income of $2.2 million or $0.07 earnings per diluted share for the same period last year. Adjusted net income was close to $900,000 or adjusted earnings per diluted share of $0.03 for the second quarter, and that compares to net income of $2.5 million or adjusted earnings diluted share of $0.08 for the same period last year.

And these adjusted numbers exclude amortization of intangible expenses related to acquisitions and stock-based compensation expense. Looking at international revenues for this quarter, they were approximately 17% of total revenues for the current period and that compares to 16% for the same period last year.

Looking at the whole Company year-to-date, total revenues year-to-date decreased 8% to $53.6 million compared to $57.9 million over the same period last year. License fees decreased 26% year-to-date to $7.8 million, and that compares to $10.4 million in the same period last year.

Services revenues decreased 10% to $24.6 million year-to-date compare to $27.3 million. And our maintenance revenues increased 5% year-to-date to $21.2 million compared to $20.2 million last year.

Looking at costs, our overall gross margin was 50% year-to-date compared to 52% same period last year. Our license fee margin decreased to 56% from 62%, and that’s due to lower license fees.

Services margin was 26% compared to 29% in the same period last year, primarily due to lower services revenue. And our maintenance margin was 75% year-to-date compared to 78% for the same period last year.

Operating expenses, our total gross R&D expenses were 15% of total revenues for the six months ended October 31, 2016 compared to 12% for the same period last year. As a percentage of total revenues, our sales and marketing expenses were 20% for the current period year-to-date compared to 18% for the same period last year, and that’s due to increased headcount.

G&A expenses were 13% of revenues year-to-date compared to 12% for the same period last year. So, year-to-date, our operating income was $2.4 million compared to operating income of $7.1 million last year.

Adjusted EBITDA was $6.2 million compared to $10.8 million in the same period last year. And GAAP net income was $2.1 million year-to-date or $0.07 earnings per diluted share compared to net income of $4.7 million or $0.16 earnings per diluted share.

Our adjusted net income year-to-date was $2.9 million or earnings per diluted share of $0.10 and that compares to net income of $5.3 million or adjusted earnings per diluted share of $0.18 for the same period last year. Year-to-date our international revenues were 17% of total revenues and that compares to 18% for the same period last year.

Looking at the balance sheet, the Company’s financial position remained strong with cash, and short and long-term investments of approximately $72.3 million at the end of the October 31, 2016. During the quarter, we paid $3.2 million in dividends and paid approximately $4.4 million for the acquisition of the AdapChain.

Other aspects of our balance sheet, our accounts receivable close to $12 million our unbilled is $3.4 million. Deferred revenues, current and long-term, are $25.6 million and our shareholder equity is $93.6 million.

So, our current ratio was up to $2.5 million as of the end of October 31, 2016 compared to $2.4 million the same period last year. And our day sales outstanding as of the end of October 31, 2016 was 54 days compared to 57 days the same period last year.

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

I was hoping you could be a little bit more specific on what investments you’re pulling back on in this environment?

This is Allan speaking. A number of areas - we looked at all of the discretionary spending and any of those things that are non-critical to the current operations, and delivery to customers, sales and marketing are still critical to our long term success.

So we look at some of the longer term investments. We made some reductions in areas of contractor services that we believe are not critical to short-term performance.

And those are the kind of things that we’re looking at of course discretionary spending as one of those things around travel that you can look at and things of that nature. So, we really wanted to make sure that we focused on the areas that will help us with our customer service and growth, and keep those investments going in the other areas we could differ, we took those actions.

So, I think maybe last quarter, you talked a little bit about building out sales and support staff. Are those investments still underway, and are they progressing as quickly they were last quarter?

We put them on hold. And we’ve had a little bit of attrition in our sales organization as well.

So, it's fair to say that we’re done slightly, from a sales headcount. So we’re not in the growth mode right now.

We’re really trying to capitalize on the investments we’ve already made there, and get that channel productive. We think that’s the best thing to do at this time.

I guess just at a high level, you are on one hand signalling the strong pipeline which we heard, I think, the last couple of quarters, but then on the other hand, pulling back here on investments. So, can you thread the needle and just pull-back over -- clearly, you’re still excited about the opportunity but how long of a malaise are you trenching in here for?

Well, I would say three weeks ago or a month ago, it was far -- we were far less certain about what was going on. One of the -- if you look at the U.S.

election that we’ve gone to some disputed results out there that would have been really troublesome for the business economy. And the prospect of that really had companies putting capital spending on hold is what we saw in the marketplace.

So, at that point, there was a lot of uncertainty. As we sit here today, we see that changing.

But many cases the decision was made to push capital investments out to the 2017 budget year, which starts for most companies in another month. And we’re seeing that pick back up in the amount of activity and the energy going into those projects and getting final decisions and working on contracts has remained very strong.

So that’s why I am bullish about what's happening in our third quarter. And the people are encouraged about the ability to get spending in capital approvals in the beginning of next year.

But time will tell when the year turns over that will happen. There is a very interesting push right now for year-end spending, which is the scramble around between now and Christmas.

So, we feel good about where we sit. But a month ago, the uncertainty was quite strong.

I apologize for piling on here, but if you do get some strong budget [flows] [ph] for year-end spend and capture a decent chunk of that, do you see these investments coming back in and see sort of kind of [inaudible] to the sales organization any of those investments, or how quickly will you get back to that if you have -- if some degree of success in closing out the [inaudible]?

We’ll move right back into it. It was not something we were excited about, and many of those things we can turn back on around programs and activities that we were going to make some investments around marketing.

Headcount is a challenge to find the right people, and that’s the important thing. But we always have an eye for bringing the right individuals into the organization, and we’ll capitalize on that when we see the opportunity exists.

And this pipeline stay strong, and activity start to build, then we’ll move on some of those decisions very quickly.

I guess just in terms of the opportunities that are going to close in Q2 that you might have expected, to what extent have any of those actually come across the finish lines here in the third quarter already? And then more generally, when you look at your pipeline today and you characterize it as being pretty sizable relative to where you have been for the past few years.

And how much of that is kind of late stage where you’re fairly confident that you’ll be awarded, or perhaps or are you even in contracting negotiations already?

There is a few of them that have come through already from that standpoint of what’s been productive. But when we look at the pipeline, it's very interesting.

It’s actually shifted into the mid-term, which makes it in the December, January, February, time period. So, that’s quite strong.

Whereas, three months ago, it was further out-pipeline. So, we’ve seen that shift-in, which really is very indicative of the fact that the projects are still in the same place, and as we’ve moved forward on the calendar, we’re closing it on that.

So, prospects look very good for things coming quickly to decisions.

And then specific to retail, you’ve talked about some of the challenges those customers might have been facing of those prospects. As you look at the pipeline today and have your discussions, what’s your sense in terms of how strong retail could contribute to your business either for the remainder of this year and next?

I think it will come after the holiday season. We’ll have to see what really happens in retail sales in the coming months.

And we probably got three weeks at least going on to that, and we’ll see plays out. But the retailers are very conservative and quite frankly right now their heads down on trying to accomplish their business.

So, there is not a lot of dialogue about what’s going on. But there is a good bit of retail supply chain improvements that are out there in the pipeline.

So, the prospects for that business are good. If their results come-in strong, I expect that they’ll come right back to the table and start working on those projects in the New Year.

And with respect to some of the cost reduction actions you guys talked about in this call. Can you quantify how much those actions should save you in the coming quarters?

And whether any of that was already realized within the second quarter?

Kevin this is Vince. None of it was realized in the second quarter.

It was the actions we’re taking in November. And so, we took a look at the business, and we reduced cost roughly in the $4.5 million annual spend rate.

And just one last one, AdapChain, how much did that contribute in the quarter?

In revenues?

Yes.

Well, we only have two months of AdapChain, it was only about $160,000.

Well, thank you very much for participating on the call. And we look forward to better results next time.