Nov 30, 2017
Executives
Vince Klinges - Chief Financial Officer Allan Dow - President
Analysts
Matthew Galinko - Sidoti Kevin Liu - B. Riley FBR
Operator
Good day everyone and welcome to today's American Software second quarter of fiscal year 2018 preliminary earnings results. At this time, all participants are in a listen-only mode.
Later, you will have the opportunity to ask questions during a Q&A session. Please note, today's call is being recorded and I will be standing by, should you need any assistance.
It is now my pleasure to turn the conference over to Vince Klinges, Chief Financial Officer of American Software. Please go ahead, sir.
Vince Klinges
Thank you Elise and good afternoon everyone and welcome to American Software's second quarter of fiscal 2018 earnings conference call. On the call with me is Allan Dow, President of American Software.
I will review the numbers 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 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 or underlying 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 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.
So taking a look at the second quarter fiscal 2018 compared to same period last year. Total revenues for the quarter increased 1% to $26.3 million and that is compared to $26.1 million.
License fees decreased 22% to $2.4 million compared to $3.1 million for the same period last year which were offset by other revenue streams such as cloud services. Services and other revenue increased 6% to $13 million for the current quarter.
That was partially due to, we increased our cloud services annual contract value or ACV by approximately 123% to $9.9 million for the current quarter and that's compared to $4.4 million in the same period prior year. So the total ACV is comprised of two components.
The first one is Software-as-a-Service or SaaS ACV of $7.2 million which increased 210% compared to approximately $2.3 million during the same period last year. And the second component is other cloud services such as managed services and hosting and that increased 29% to $2.7 million ACV compared to $2.1 million during the same period last year.
Maintenance revenues increased 2% to $10.8 million compared to $10.7 million last year. So our combined recurring revenue streams of maintenance and cloud services were 49% of total revenues for the current quarter and that compares to 45% in the same period last year.
Looking at cost. The overall gross margin increased to 53% for the current quarter compared to 50% in the prior year quarter.
Our license fee margin decreased to 25% for the current quarter compared to 49% in the same period last year and that's primarily due to lower license fees and the mix of more license fees from our indirect sales channel. Our sales margin increased to 37% for the current quarter and that compares to 27% in the prior year quarter.
All business units improved their margin due to improved utilization rates and the increase of higher margin in cloud services. Maintenance margin also increased to 79% for the current quarter compared to 77% in the prior year quarter due to higher maintenance revenues and cost containment improvements.
Looking at operating expenses. Our gross R&D expenses were 15% of total revenues for the current period.
Last year it was 16%. As a percentage of revenue, sales and marketing expenses were 17% of revenues for the current quarter and that compares to 20% in the prior year period and that's primarily due to lower sales commissions from lower license fees and the fact that SaaS revenue commissions are spread over the period if you take the SaaS revenue.
G&A expenses were 14% of total revenues for the current and prior year quarter. Operating income increased 358% to $3.2 million for the current quarter and that compares to $708,000 last year.
Adjusted EBITDA, which excludes stock-based compensation, increased 85% to $5 million this quarter and that compares to $2.7 million in the same period last year. GAAP net income increased 502% to $2.5 million or earnings per diluted share of $0.08 for the current quarter and that compares to $412,000 or $0.01 earnings per diluted share last year.
Adjusted net income was $3 million or adjusted earnings diluted share of $0.10 for the second quarter and that compares to net income of $892,000 or adjusted earnings per diluted share of $0.03 for the same period last year. These adjusted numbers exclude amortization of intangible expense related to acquisitions and stock-based compensation expense.
Our international revenues this quarter were approximately 20% of total revenues for the current period and that compares to 17% the prior year. Looking at the six months ended October 31, 2017 or basically year-to-date, it decreased 1% to $53.2 million and that compares to $53.6 million in the same period last year.
Our license fees decreased 17% to $6.5 million and that's compared to $7.8 million in the same period last year. Our services revenues increased 2% to $25.1 million year-to-date and that compares to $24.6 million.
Our maintenance revenues increased 2% to $21.7 million compared to $21.2 million last year. Looking at cost.
The overall gross margin was 55% for the current year-to-date period and that's up from 50% last year. Our license fees margin decreased to 48% compared to 56% and that's primarily due to lower license fees.
Our service margin was 36% compared to 26% in the same period last year and that's due to higher margin of cloud services. Our maintenance margin was 79% year-to-date and that's up from 75% in the same period of last year and that's due to higher maintenance revenues and also cost containment efforts.
Looking at our operating expenses. Our total gross R&D expenses were 15% of revenues for the six month period and that was the same as last year.
As a percentage of total revenue, sales and marketing expenses were 18% for the current period compared to 20% in the same period last year. G&A expenses were 13% of revenues for both periods.
So the operating income year-to-date increased to 191% to $6.9 million and that compares to operating income of $2.4 million last year. Adjusted EBITDA year-to-date increased 61% to $10.4 million and that compares to $6.2 million in the same period last year.
So our GAAP net income was $5.2 million year-to-date or $0.17 earnings per diluted share and that compares to net income of $2.1 million or $0.07 earnings per diluted share. Adjusted net income year-to-date was $6.2 million or earnings per diluted share of $0.20 and that compares to net income of $2.9 million or $0.10 for the same period last year.
International revenues year-to-date were 20% of total revenues and that's up from 17% in the same period last year. Taking a look at the balance sheet.
The company's financial position remains strong with cash and investments of approximately $91 million at the end of October 31, 2017, which increased $18.7 million when compared to the same period last year. During the quarter, we paid $3.3 million in dividends.
Some other aspects of our balance sheet are billed accounts receivables was $14.1 million, our unbilled $2.5 million for a total of $16.6 million. Deferred revenues for both current and long-term are $27.9 million and our shareholder equity is $107 million.
Our current ratio is up to 2.7 as of October 31, 2017 compared to 2.5 in the same period last year and our days sales outstanding as of October 31, 2017 was 57 days and that compares to 54 days in the same period last year. At this time, I would like to turn the call over to Allan Dow.
Allan Dow
Thank you, Vince. First, I will apologize in advance for my voice.
I am suffering the lingering effects of the inevitable cold that you get from being on the airplanes. But a few things, two important things I want to cover today.
First I will make a few comments on the second quarter results and then we will spend some time on the acquisition that we announced earlier this week. As you heard from Vince, we had another very strong quarter and as predicted, the transition to Software-as-a-Service contracts has continued to accelerate when compared to the second fiscal quarter of last year and the first quarter of this fiscal year.
As Vince indicated, our annual contract value of the Software-as-a-Service revenue recognized in the quarter jumped 210% over last year's Q2. That's a very significant move.
As we have discussed before, this transition to SaaS may cause some confusion in regards to how well we are performing and the changes in our revenue profile, making it more difficult to see the progress compared to our historic perpetual licensing model. There is no exact translation of the value of the SaaS contract to the equivalent perpetual contract value.
However, based on an approximation, if the Q2 SaaS contracts had been licensed as perpetual license contracts, we estimate that the year-over-year license revenue would have been up an estimated 40%. So as you can understand, we are very pleased with our strong second quarter results.
Another measure of the rate of transition is the ratio of SaaS contracts to perpetual contracts. Considering new customers only in Q2 of this fiscal year, 75% of our contracts were SaaS.
That's compared to 55% preferring a SaaS model in Q1 of this fiscal year and only 29% in last year's second quarter. There is no assurance that the future contracts will continue to close based on this trend, because in the end we will definitely do what's right for our customers, but as we look forward to this, the bias towards the subscription model still exists.
This progression is a clear sign that the market preference has shifted towards a Software-as-a-Service model, which is being driven by the improved efficiency and higher level of user adoption and better system performance that customer's experience when leveraging our team to administer and manage their solutions. On the operational performance, we achieved a substantial 358% increase in operating earnings.
The conversion to a Software-as-a-Service delivery model with subscription fees spanning over the contract horizon means we are expanding our portfolio of high value services which delivers improved margins. The subscription model also provides more visibility and will ultimately result in greater predictability of our forward-looking financial performance.
As Vince reported, our recurring revenue now is 49% of total revenue and we expect that to continue rising for the foreseeable future. Overall, we are pleased to report that we are on track with our strategy to transition towards Software-as-a-Service engagement model while also accelerating 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 development of individual skills to fulfill the needs of our customer community. Our cloud-based solutions provide customers the increased visibility, business support and expertise necessary to become part of a connected enterprise and migrate towards a fully automated supply chain planning environment.
Vince already indicated that our cash and investments at the end of the quarter were approximately $91 million. This gives us a strong foundation for our operating model and sufficient room for strategic investments in new product and service offerings to enhance the results our customers can achieve.
Speaking of strategic investments, let's talk about the acquisition of the Halo Business Intelligence which we announced this past Monday morning. As our customers take advantage of our advancements in algorithmic planning, advanced supply chain analytics, supply chain management, vendor compliance and artificial intelligence capabilities to improve their operating performance, they were able to overcome the supply chain talent shortage that may have otherwise hampered their profitable growth and speed to market.
However, in working with our global customer base, we identified opportunities to provide even more insight into what may be impacting their businesses and how to best respond to market opportunities, supply chain disruptions and the accelerating pace driven by the new omnichannel realities of online shopping. These new business dynamics are occurring at the same time that our customers are experiencing an explosion of data that is available to them with a lack of qualified resources to transition that data into knowledge.
By combining the skill sets and the experience of the Halo team plus the advanced analytics and artificial intelligence capabilities they have developed over the last 10 years with the deep supply chain optimization capabilities and skills that we bring from over 40 years in the supply chain space, we believe we have a winning formula to accelerate customer success. Until now, there has not been a specific focus from any supply chain solution provider to successfully address the needs of the extended supply chain operation with deep operational capabilities and superior supply chain master data management.
Halo brings to our portfolio an artificial intelligence platform that will be embedded into our solutions to radically change our customer's understanding of their supply chain performance and enhance their ability to influence demand and respond to market trends. These new artificial intelligence capabilities are being used in a number of ways to enhance supply chain performance.
First, machine learning is leveraged to improve the acquisition, validation and transformation of supply chain data gaining agility and reliability in their master data management process. Second, by leveraging artificial intelligence to both unstructured and structured syndicated data, customers gain new insights from leading indicators that may impact their business performance and supply chain efficiency.
And by applying advanced proprietary algorithms, customers can significantly improve the responsiveness and accuracy of the digital trend thus replacing inventory with knowledge which can reduce costs, improve customer service and drive more profitable growth. We are forging new ground with this powerful combination of the talent and solutions that this acquisition brings to our solution portfolio.
In summary, we are continuing to closely monitor the global economic conditions and our sales team's progress to move our healthy pipeline to sign contracts. We are very pleased with the overall results from our second quarter and remain optimistic about the potential ahead for the balance of fiscal year 2018.
We continue to focus on our mission to exceed customer's expectations and truly believe that we can continue to achieve profitable growth during our transition to a SaaS engagement model that will deliver incremental benefits to our customers. We are really excited about the recent acquisition of Halo, which accelerates delivery of the supply chain in the future and will further differentiate our market position and enhance shareholder value.
Elise, at this time, we would like to open the call for any questions that we may have.
Operator
[Operator Instructions]. Our first question comes from Matthew Galinko with Sidoti.
Please go ahead.
Matthew Galinko
Hi. Good afternoon guys and congrats on the really strong quarter.
Curious, if we could just start with last quarter you touched on the pipeline or the mix of the pipeline between cloud and license. Can you give us of an update on that, if only directionally if it's sort of where it was?
Or if it's pulled back in any way from the aggressive shifts you saw last quarter?
Allan Dow
Matt, that is Allan. I will answer that one for you.
The overall pipeline is equivalent to where we were in the last couple of quarters, which I am quite excited with given the close rate that we had in the past quarter that we are able to maintain and continue to nudge that up a little bit. Relative to the mix of perpetual license to SaaS contracts, we are actually seeing that the bias towards Software-as-a-Service model has actually continued to accelerate.
So our pipeline has even more SaaS opportunities in it now as a percentage of the total than it did in the last quarter.
Matthew Galinko
Great. All right.
And then can you kind of segment that a little bit by high-end versus mid-market?
Allan Dow
It's pretty even actually. When we look at all segments of the market relative to the size or the complexity of supply chains, size of the organizational complexity, it's very consistent across the board, which is quite frankly surprising to me.
I thought the higher end of the market, the more advanced supply chain companies, the bigger companies may be more resistant to the SaaS model and in fact that's not the case. They are right in there with the rest of the marketplace.
Matthew Galinko
Great. All right.
One more from me. Just any, I know it's extremely fresh deal for you at this point, but how long do you expect it to take to integrate Halo's functionality into your products?
Or do you have any visibility on that at this point?
Allan Dow
The actual work to be done is still ahead of us, of course. But during the due diligence process, we put a lot of time and energy and thought into how that would actually come about.
There are many aspects of the solution that are synergistic that will work alongside of the current applications. I didn't comment before, we certainly see the ability to leverage the Halo capabilities into each of our business segments today at the software solution.
So it's across the board going to be universally used. And I think we are only a few months away from having customer deliverables and then probably within the first year to have actually the embedded capability out there.
The nice thing is, the technology is consistent and similar to what we have been using in the past, one of the things we look for in an acquisition. So this transition is going to be quite easy.
Matthew Galinko
Got it. All right.
Thank you.
Operator
Thank you. [Operator Instructions].
We will go next to Kevin Liu with B. Riley FBR.
Please go ahead.
Kevin Liu
Hi. Good afternoon.
I guess first question, just as you are seeing more of these deals come in on the SaaS side, can you talk a little bit about whether what you are seeing happen in terms of the overall sales cycle? And then more generally speaking with the overall economy seeming to be kind of a favorable backdrop, just curious whether there are any parts of your business you consider weak?
Or if you feel like everything is trying to come in pretty strong?
Allan Dow
So two questions in there, Kevin. Again, this is Allan.
Thanks for the questions. The sales cycle, I think, are consistent with the past.
We are not seeing a dramatic shift. We are still seeing that there is a lot of due diligence around any kind of spending in the marketplace.
So a couple of cycles to get through the approval process in some cases but that's been the case for the last couple of quarters and maybe the last couple of years, quite frankly. Relative to softness.
I think the North American market is very strong. It's consistent with the upward trend that we are seeing and I think it's consistent with the general economic conditions that are out there.
We haven't seen any deterioration in Europe, although I guess what we are probably seeing is, it's not accelerating nearly as fast as the North American market. And some of the emerging markets are still quite soft, not making a lot of investments there.
But even with that said, the European market is still a good market. As we reported in the numbers, our ratio of international sales is up compared to the past and I think that's a reflection of maybe the sophistication and complexity of some of the projects that are still ongoing and they are making those investments there.
Kevin Liu
Got it. And just with respect to the Halo BI acquisition.
I am curious if you can share anything in terms of what their annual revenues look like? And just from a business model perspective, were they doing perpetual sales or were they primarily SaaS as well?
Allan Dow
They have been at it for about 10 years, Kevin. So like many software companies, historically they had a perpetual license model, but several years ago, they shifted their focus to really go after the supply chain market.
They saw the same trends that we were seeing and they significantly shifted to a Software-as-a-Service business model. From a revenue standpoint, we hadn't previously announced that, but it's a good question.
We made about a $9 million, just over $9 million investment plus working capital adjustments on that. And what we are going to get out of that is about a $6 million revenue stream.
Kevin Liu
Got it. And then just lastly, maybe this one is for Vince.
I think you guys highlighted that with the shift towards SaaS, it actually benefits the commission expense being spread out. Was there anything else that drove sales and marketing down?
We are just surprised by how low it got to in this particular quarter?
Vince Klinges
Kevin, yes, the majority of the deferral was the commissions, but we are down on sales and marketing headcount, a few folks too.
Kevin Liu
And maybe just kind of following up on that then, are there plans to ramp up the sales force hiring over the coming quarters?
Allan Dow
Yes. A very good question.
Already been ramped and we are in the market. One of the challenges we have here in North America is the market is pretty tight.
So even the ramping is a bit challenging. But we are in the market.
And in every segment of our organization, we are looking to add some additional headcount. So if there is anybody on the call that's interested, please send us your resume.
Kevin Liu
Great. Well, thanks for taking the question and congrats on the strong quarter.
Allan Dow
Thank you.
Operator
Thank you. It appears we have no further questions at this time.
I will turn it back to our speakers for any additional remarks.
Allan Dow
Well, I want to thank everyone for joining us this afternoon. We certainly appreciate the participation and those who had the questions for us to get a little more clarity, we thank you for that.
Elise, I think we will wrap up the call for this afternoon and we appreciate your support as well.
Operator
Thank you gentlemen. This does conclude today's conference.
We appreciate your participation. You may disconnect at any time and have a great day.