Vince Klinges - Chief Financial Officer Allan Dow - President

Zach Cummins - B. Riley FBR

Thank you, Alisa, and good afternoon everyone and welcome to American Software second quarter and fiscal 2019 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 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 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 changes and uncertainty and 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 irregular and unpredictable pattern of revenues. In light of these risks and uncertainties there can be no assurance of the forward-looking information will prove to be accurate.

So taking a look at our second quarter fiscal 2019 compared to the same period, total revenues for the quarter increased 6% to $28 million compared to $26.3 million, the same quarter last year mostly driving that growth is subscription fees which were $3.3 million for the quarter ended October 31, 2018, 64% increase compared to $2 million in the same period last year while software license revenues were $2 million or 18% decrease compared to $2.5 million in the same period last year. And this reflects our continued transition to the fast engagement model.

Our cloud services annual contract value or ACV increased by 46% to $14.5 million for the current quarter and that compares to $9.9 million in the same period last year. Our services and other revenues were $11.1 million for the current quarter and that compares to $11 million in the same quarter last year.

Maintenance revenues increased 7% to $11.6 million compared to $10.8 million primarily due to the Halo acquisition in the third quarter last year. Our combined recurring revenue streams of maintenance and cloud services were 53% of the total revenues in the current quarter and that compares to 49% in the same period last year.

Taking a look at costs for the quarter, our overall gross margin was 52% for the current quarter compared to 53% in the prior year quarter. The license fee margin was 13% for the current quarter compared to 33% in the same period last year that's primarily due to lower license fees.

Our subscription fees margins increased to 61% compared to 56% in the same period last year and that's due to increased cloud revenue. Services margin decreased to 27% compared to 32% in the same period last year due to timing of some implementation projects and due to increase in services revenue from our lower margin IT consulting business.

Our maintenance margin increased to 81% for the current quarter compared to 79% in the same period that's due to increased maintenance revenue. Looking at operating expenses, our total gross R&D expenses were 16% of total revenues for the current period compared to 15% in the same period last year.

And that's primarily due to increased headcount from our Halo acquisition last year in the third quarter. As a percentage of revenue sales and marketing expenses were 19% of revenues for the current quarter compared to 17% in the prior year period, and again, due to increased headcount from the Halo acquisition.

Our G&A expenses were 16% of total revenues for the current quarter and that compares to 14% from the prior year and primarily due to expenses related to the Halo acquisition there also. So our operating income was decreased 53% to $1.5 million for the current quarter compared to $3.2 million the same period a year ago.

Our adjusted EBITDA which excludes stock-based compensation decreased 23% to $3.9 million for this quarter compared to $5 million the same period last year. Our GAAP net income decreased 50% to $1.2 million, our earnings diluted share $0.04 compared to the net income of $2.5 million or $0.08 earnings for diluted share last year.

Adjusted net income was $2.2 million or adjusted earnings diluted share of $0.07 for the second quarter and that compares to net income of $3 million or adjusted earnings to diluted share of $0.10 in the same period last year. And these adjusted numbers exclude amortization of intangible expense related to acquisitions and stock-based compensation expense.

International revenues this quarter were approximately 20% of the revenues for the current quarter and prior year quarter. Looking at the full year numbers year-to-date, the total revenues year-to-date increased 4% to $55.4 million and that compares to $53.2 million last year.

Our subscription fees were $6.5 million year-to-date 78% increase compared to $3.7 million same period last year, while software license revenues were $3.7 million a 43% decrease compared to $6.5 million in the same period last year, again reflecting our continued transition to this fast engagement model. Our services revenues increased 3% to $22.1 million year-to-date compared to $21.4 million.

Our maintenance revenues increased 7% to $23.1 million compared to $21.7 million same period last year. Looking at overall costs for the six month year-to-date period, our overall gross margin was 51% this year-to-date compared to 55% last year.

Our license fee margin decreased to 6% from 54% last year -- compared to last year due to lower license fees and our subscription fee gross margin increased to 64% year-to-date compared to 52% in the same period last year. That's primarily due to increased SaaS deployments.

Looking at our services margin was 24% year-to-date compared to 31% the same period last year. Our maintenance margin was 81% year-to-date compared to 79% year-to-date last year.

So looking at our operating expenses for the year, our gross R&D expenses were 16% of total revenues compared to 15% in the same period last year. As a percentage of total revenue sales and marketing expenses were 19% year-to-date compared to 18% in the same period last year.

And our G&A expenses were 16% of revenues year-to-date compared to 13% in the same period last year. So operating income year-to-date decreased 69% to $2.1 million compared to $6.9 million last year.

Adjusted EBITDA year-to-date decreased 35% to $6.7 million compared to $10.4 million in the same period last year. So our GAAP net income was $2.6 million year-to-date or $0.09 per earnings diluted share compared to net income of $5.2 million or $0.17 earnings diluted share last year.

Our adjusted net income year-to-date was $4.6 million or earnings diluted share of $0.15 compared to net income of $6.2 million or $0.20, the same period last year. International revenues year-to-date were 20% of revenues and also for this period and also the same period last year.

So looking at our balance sheet, the company's financial position remains strong with cash and investments of approximately $82.7 million at the end of October 31, 2018. During the quarter, we paid $3.4 million in dividends.

Some other aspects of the balance sheet or billed accounts receivable ended with $17.4 million, our unbilled was 3.1 for a total of $20.5 million. Our deferred revenues were $29.4 million and our shareholder equity is $114 million.

Our current ratio is 2.8 as of October 31, 2018 compared to 2.7 and our day sales outstanding as of October 31, 2018 was 66 days and that compares to 57 days the same period last year. At this time, I like to turn the call over to Allan Dow.

Thank you, Vince. We can continue to see the transition to a software as a service engagement model which was evidenced by the 64% increase in subscription revenue and the 46% growth in the annual contract value for cloud services over the same period last year.

We're pleased that we continued to achieve our financial objectives during this transition specifically we have continued growing revenue which increased by 6% and have remained profitable achieving the $3.4 million EBITDA in the second quarter, which is an increase of $1 million over the fiscal first quarter of our 2019 financial year. This was another good quarter for customer acquisition adding 15 new logos to our customer community and completing subscription or licensing transactions in 10 different countries.

We're pleased with our team's achievements and their alignment to our customer's buying objectives which continue to trend towards the preference for subscription model over the traditional on-premise model which requires more internal customer resources to the [buoy] [ph] and sustained the successful use of these applications. The preference for subscriptions is driven by our ability to deliver a solution faster and provide better long-term support for the applications.

Our recurring revenue streams of maintenance and cloud services represented 53% of total revenues in the second quarter. That's compared to 49% in the same period last year which Vince highlighted a few minutes ago.

We expect this trend to continue higher in the future. In time, the compounding effect of the continued growth of recurring revenue will improve our overall predictability and the profitability for our P&L.

We're pleased to report that we're on track with our business strategy to deliver a digital planning suite to enable our customers to better manage their businesses from product concept to customer delivery achieving increased visibility, digital planning and new insights necessary to create a more connected enterprise and transform into the automated digital supply chain. As evidence of achieving this important shift in capabilities to address market needs, was the recognition we gained in August for both the Logility Voyager Solutions and the demand solutions being announced as leaders in the 2018 Gartner Magic Quadrant for supply chain planning systems of record.

Our customers are leveraging the latest capabilities to gain new insights and make better decisions faster. Looking forward, we're continuing to see an up tick in the manufacturing planning opportunities which can be attributed to increased factory capacity utilization in many different segments.

This is also driving increased interest in our supply chain management strategic sourcing and vendor compliance solutions which is further stimulated by the new realities of the consumer driven omni channel retail marketplace. In summary, we're pleased with the overall results for this quarter as we work for continued success.

We continue to focus on our core purpose which is to make our customers more successful and will leverage the investments to help them achieve a supply chain competitive advantage. We're confident that we can continue to grow both revenue and profitability during our transition to the SaaS engagement model and are proud to be delivering incremental benefits to our customers.

The results are exciting and continue to fuel our investments to maintain a leadership role in the supply chain and retail planning space. Alisa at this time we'd like to open the call for any questions.

Good afternoon Allan and Vince. Congratulations on the really strong subscription revenue growth.

It seems like you're making some really good progress in transitioning to the SaaS model. My first question is really around the overall macro environment.

Can you give a little bit of feedback of what you've been hearing from customers specifically in the retail segment and maybe some of the purchasing activity given the ongoing potential trade war that we have with China at this point?

Zach, this is Alan. Yes.

Happy to give you some insights there. We're certainly seeing a lot of discussion in that area, but we don't really see that as a significant delay or deferral or causing projects to not move forward.

There's always pockets of delays and projects that don't move. But in essence we're really leveraging that opportunity to help people appreciate and understand that having a solid supply chain solution that extends the footprint throughout their supply chain from again as I said before product concept all the way to delivery to the consumer or their customer really helps them navigate those challenges that they may be facing and that landscape continues to shift.

I think we'll see that can not change. There's not going to be a static environment there.

I think there's enough dynamics in the world to see those that landscape will continue to shift on them and having a solid supply chain solution in place will only help them respond more effectively to those dynamics that are happening out there. So people are engaging us in that dialogue and we feel pretty good about that and keeping us on track and letting us continue to grow our pipeline and hopefully close effectively in the coming months and quarters ahead.

Great. I appreciate the color.

And then, in terms of the pipeline for instance you mentioned that. Can you talk about the current pipeline of opportunities and then provide a little bit of additional color around the mix of license versus SaaS opportunities?

Yes. We're continuing -- as far as the mix goes, I'll answer that question first.

We're continuing to see it lean towards the software as a service model. I don't think, recently not done an exact calculation on it, but I would say more than half of our opportunities upwards to 60% or probably in the area of the subscription model versus perpetual licenses, most of the perpetual licenses that are in the pipeline are related to existing customers that are already on-premise and they may be extending the applications in some way and -- so that's what's hitting those.

We still occasionally find some segments in the market that just haven't embraced the software as a service model or subscription model yet. So we're happy to accommodate that.

We enjoy having them as a customer or whatever model suits them best. Overall pipelines are stable in some segments, it's actually growing, our overseas pipeline is actually growing at this point little more quickly than our North American pipeline.

So we're seeing a slight upward trend and feel pretty good about that. It's a great season right now, we're seeing people that are wrapping things up by getting confirmation on budgets for next calendar year that aligns with their fiscal year and we're seeing some projects come to light -- with the budgets coming getting firmed up now.

Understand. I appreciate that color.

And then, finally, around the backlog for your professional services business, I know you've had a little bit of a delay in starting some new projects last quarter. So it seems like there was a little up tick in terms of margin as well as maybe related to improved utilization rates with your reps.

So could you just talk about how you're feeling about your current backlog and the professional services side of the business and how you're anticipating utilization rates will trend over the next couple of quarters?

The backlog is very good. It has continued to trend up and the pipeline that we're looking at has got an interesting mix.

It will continue to improve our utilization rates. So we're feeling really good about that.

The only cautionary thing which is on a third quarter for us -- third quarter comparison to third quarter, you'll see that's traditionally the lightest quarter for us for services anyway in the North American business we had the Thanksgiving holiday, we get the Christmas holiday and the anomaly this year where Christmas and New Year's fall on a Tuesday is going to probably blow two weeks for us pretty quickly. So we'll see that impact, but when we compare this year to last year, we believe we'll be on track or up for overall services revenue.

Understood. Well, thank you again for taking my questions and good luck with the rest of the quarter.

Well, thanks for joining us Zach.

Alisa, thank you very much. We'd like to thank everyone for joining us this afternoon.

We appreciate your attention and joining us on the call. We look forward to speaking with you again in the near future.

Have a good evening.