Feb 22, 2018
Executives
Allan Dow - President Vince Klinges - CFO
Analysts
Matthew Galinko - Sidoti & Company
Operator
Good day, everyone and welcome to today's third 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 at American Software. Please go ahead.
Vince Klinges
Thank you, Elise. Good afternoon everyone and welcome to American Software's third quarter 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 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 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. So taking a look at the third quarter of fiscal ’18, this quarter we increased revenues 14% to $30.1 million, compared to $26.4 million in the same period last year.
That’s primarily due to license fees, which increased 50% to $6 million compared to $4 million for the same period last year. Our services and other revenues also increased 9$ to $12.9 million for the quarter.
We increased our cloud services’ annual contract value or ACV, by approximately 125% to $10.9 million for the current quarter. And that compares to $4.9 million in the same period last year.
Total ACV is comprised of two components, software-as-a-service ACV of $8.1 million, and that increased 217% compared to approximately $2.6 million during the same period last year. And the other component is other cloud services such as managed services and hosting, and that increased 22% to $2.8 million ACV compared to $2.3 million last year.
Our maintenance revenues also increased 5% to $11.2 million, compared to $10.7 million, and that's primarily due to increased license fees. So our combined recurring revenue streams of maintenance and cloud services were 46% of total revenues for the current quarter, and that compares to 45% in the same period last year.
Looking at cost, our overall gross margin increased to 57% for the current quarter, compared to 53% in the same period last year, and that's primarily due to the license fee margin, which increased to 67% for the current quarter, compared to 47% in the same period last year. Our services margins were 32% for the current and prior year quarter.
And our maintenance margin was also 79$ for the current and prior year quarter. Looking at operating expenses, our gross R&D expenses were 14% of total revenues for the current period, and that compares to 15% for the same period last year.
And as a percentage of revenues, sales and marketing expenses were 18% for the current and prior year period. Our gross - our G&A expenses were 14% of total revenues for the current period.
That compares to 13% for the prior year quarter. So our operating income increased 71% to $4.2 million this quarter compared to $2.5 million for the same quarter last year.
Our adjusted EBITDA, which excludes stock based compensation, increased 28% $6.1 million for the current quarter, and that compares to $4.8 million in the same period last year. So our GAAP net income increased 149% $5.6 million or earnings per diluted share of $0.18 for the current quarter, compared to net income of 2.2 million or $0.08 per diluted share last year.
Adjusted net income was $5.1 million, adjusted for diluted earnings share of $0.17 for the third quarter, and that compares to $2.7 million or adjusted earnings per diluted share of $0.09 last year. And these adjusted numbers exclude amortization of intangible expense related acquisitions, our stock based compensation expense and this quarter, a discrete tax benefit related to the Tax Reform and Jobs Act of 2017.
International revenues this quarter were approximately 20% of total revenues for the current period, and that compares to 17% prior year. Looking at the numbers year to date, for the nine months ended January 31, 2018, total revenues increased 4% to $83.3 million, and that compared to $80 million same period last year.
Licensee fees increased 6% to $12.4 million compared to $11.7 million. And services revenue increased 4% to $38 million year to date compared to $36.4 million.
Maintenance revenues also increased 3% to $32.9 million, and that compares to $31.9 million last year. Looking at cost, our gross margin was 56% year to date, compared to 51%.
License fees margins increased to 57% compared to 53% last year, and that's primarily due to increased license fees and an increase in the mix of license fees from our direct channel. Services margin was 35% compared to 28% in the same period, and that's due to higher services margins, including higher margin cloud services.
Our maintenance margin was 79% compared to 77% in the same period last year. Looking at operating expenses, our gross R&D expenses were 14% of total revenues for the nine month period compared to 15% last year.
As a percentage of total revenues, our sales and marketing expenses were 18% compared to 19% in the same period last year. And our G&A expenses were 14% of revenues, compared to 13% in the same period last year.
So operating income year to date increased 130% to $11.1 million compared to $4.8 million last year. Our adjusted EBITDA year to date increase 50% to $16.5 million compared to $11 million.
And our GAAP net income increased 148% to $10.8 million or $0.36 earnings per diluted share. And that compares to net income of $4.3 million or $0.15.
Adjusted net income year to date was $11.3 million or earnings per diluted share of $0.37, compared to net income of $5.6 million or earnings per diluted share of $0.19 last year. And again, these adjusted numbers include amortization of intangible stock based compensation expense and a discrete tax benefit due to the Tax Reform Act.
International revenues year to date were 20% of total revenues and that compares to 17% last year. Looking at the balance sheet, the company's financial position remained strong, with cash and short and long term investments of approximately $88.4 million at the end of January 31, 2018, which increased $9.2 million when compared to the same period last year.
And during the quarter, we paid $3.3 million of dividends and $9.3 million for the purchase of the Halo Business Intelligence acquisition we made during the quarter. Other aspects of the balance sheet are billed accounts receivables of $20.5 million, unbilled, $2.7 million for a total of $23.2 million outstanding accounts receivables.
And deferred revenues, current and long term are up to $34.1 million. And our shareholder equity is $112 million.
Our current ratio is 2.3 as of January 31, 2018, and that compares to 2.4 in the same period last year. Our day sales outstanding as of January 31, 2018 was 70 days compared 60 days the same period last year, and that's primarily due to a large increase in sales at the end of the current quarter.
At this time, I'd like to turn the call over to Allan Dow.
Allan Dow
Thank you, Vince. On today's call, I’ll make a few comments on the third quarter results, and then provide an update on the Halo acquisition we announced on November 27.
As you heard from Vince, we had another very strong quarter. In fact, we hit a record revenue quarter looking back over the 20 years that Vince and I have been involved in the business.
While at the same time, we continued to transition to a software-as-a-service engagement model. As Vince indicated, our initial contract value of the software-as-a-service revenue recognized in the quarter, jumped 125% over last year's Q3, driven in part by the $8.1 million of SaaS subscription revenue, an increase of more than 200% over the previous year period.
While accelerating our cloud business, we also grew license fees by 50% over the same period last year. This puts us year to date up 4% in total revenue and drove 147% increase in net income.
On our last call, I shared an approximate license revenue based on a conversion of the SaaS contracts to traditional perpetual licenses. Again, there's no exact translation of the value of a SaaS contract to the equivalent potential contract value.
However, based on a similar conversion approach we used in Q2, if the Q3 SaaS contracts had been perpetual license contracts, we estimate that the license revenue would have been $9 million. So as you can see, this is a very strong quarter, which is why we're very pleased with the team's achievements.
On our operating performance, we increased operating earnings on a quarter over quarter basis by 71%, driven by the higher value cloud services, which are an increasing portion of our deliverables today. The subscription model also provides our business with increased visibility and will ultimately result in greater predictability of our forward looking financial performance.
Our recurring revenue was 46% of the total revenue last quarter, and we expect that to trend higher in the future. Overall, we’re pleased to report that we're on track with our business strategy as we continue to see our cloud based solutions provide customers the increased visibility, business support and expertise necessary to become part of a connected enterprise and migrate toward a fully automated supply chain.
Vince already indicated that our cash and investments at the end of the quarter were proximately $88 million. That's after distributing $3 million in shareholder dividends and investing over $9 million in the acquisition of Halo Business Intelligence.
This gives us a very strong foundation for our operating model, and sufficient room for additional strategic investments in new product and service offerings that may enhance the results our customers can achieve. So let me give you a brief update on our acquisition of Halo Business Intelligence.
The acquisition of Halo and the subsequent efforts to embed the supply chain master data management, advanced analytics and artificial intelligence based algorithms into each of our solutions, while also delivering those advanced supply chain capabilities as a standalone offering, has accelerated our ability to deliver key capabilities to differentiate our solutions and deliver on our strategic vision for the supply chain of the future. We’ve already uncovered a number of opportunities to cross sell the solutions to our existing customers.
While over the past few months, we've added several new customers onto the Halo platform. 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 gain efficiencies that will enable them to overcome the supply chain talent shortage that may otherwise hamper their profitability growth and their speed to market.
Our portfolio, which provides the ability to manage the supply chain from concept to customers, build on an artificial intelligence platform, radically changes our customers’ understanding of their supply chain performance and enhances their ability to influence demand and respond to market trends. Furthermore, by leveraging artificial intelligence and machine learning to harness unstructured and structured syndicated data, customers gain new insight from leading indicators that may impact their business performance and supply chain efficiency.
We are forging new ground with a powerful combination of the specialized talent and advanced solutions that are unparalleled in customer success. We 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.
In summary, we’re extremely pleased with the overall results from our third quarter, and are continuing to closely monitor the global economic conditions and progress to continue our growth. Our pipeline remains strong and our professional services organization is fully engaged, now having exited the traditionally slow holiday period.
So we remain optimistic about the potential ahead for the balance of fiscal year 2018. We continue to focus on our mission to exceed our customers’ expectations and leverage our investments to help them achieve a supply chain competitive advantage.
We're confident that we can continue to achieve profitable growth during our transition to a software-as-a-service engagement model that is delivering incremental benefits for our customers and resulting in a reliable business that generates sufficient cash to fund the investments needed to maintain our leadership role and providing the solution which will deliver supply chain of the future for our customers. Elise, at this time we’d like to open the call for any questions.
Operator
[Operator Instructions]. Our first question comes from Matthew Galinko with Sidoti.
Please go ahead.
Matthew Galinko
Hey, good afternoon guys. Congrats on the strong quarter.
I was wondering if you could give us an idea of whether it was a collection of deals that drove the license outperformance, or if there was sort of a single, very large deal. And maybe talk about sort of the anatomy of whether one or multiple deals kind of skewed out of process to go towards SaaS and went license instead and sort of what you learned from how the license ended up so strong this quarter.
Allan Dow
Hey Matthew, this is Allan. I'll answer that one.
We had contribution from every segment of our markets. Each of our brands were contributing and bringing them in.
we did see kind of a mix of the contracts. Some of the larger ones were software-as-a-service contracts.
A number of the more traditional sized contracts were software-as-a-service as well, but we had a couple of larger contracts that were of a perpetual license model. That was a bit of a surprise.
We’ve seen that trend heading more towards the software-as-a-service model in the last few quarters. But as we've said many times, we're most excited about procuring any new customers that want to join the family, and we're glad to have them in the customer community, whatever model makes sense for them.
So we have a good mix.
Matthew Galinko
Appreciate it. Can you - in terms of those ones that went perpetual license, anything you could share about whether industry that may have predicted that they’d go in that direction or anything along those lines?
Allan Dow
Well, something we're seeing for sure is we've been in the business for a very long time period. A lot of our customers had the traditional license model out there.
So we see - in most cases, we see that those customers would - if they're adding incremental licenses, they would go back into the format that they were on before. So if they’re a perpetual license model, they tend to go in that direction.
But we're not - that’s not even exclusive. We have a number of customers that were in a perpetual license model, that have elected to expand and go into new areas and gone with the SaaS model as well.
So we've got a bit of a mix there. But when you look at the history and you look at how we’re looking at the pipeline, if you exclude existing customers, the swing towards software-as-a-service is much stronger on new customers or new logos that are looking at our solutions.
Matthew Galinko
Got you. And since you touched on it, you kind of shared commentary the last couple of quarters around what the pipeline composition looks like between license and SaaS.
Any further color you could provide?
Allan Dow
It’s trending more and more to SaaS. I would say that at this point, if we dissected the pipeline, that we would see more SaaS in the pipeline, again particularly if you exclude existing customers that are adding to their solutions.
If you look at new ones, the trend is even more towards SaaS than it was in the last couple of quarters.
Matthew Galinko
Great. Thank you.
I'll jump back in the queue.
Operator
[Operator instructions]. We’ll go to a follow up from Matthew Galinko with Sidoti.
Please go ahead.
Matthew Galinko
Thanks. I guess I’ll keep going.
I was wondering if, in the ACV number you provided, if there's any Halo represented in there.
Allan Dow
There is.
Matthew Galinko
Okay, got you. Willingness to provide any granularity there on terms of the sequential ACV build, how much of that might have been Halo or should we just kind of work through that on our own?
Allan Dow
Boy, I don't even have the numbers at hand to give you a specific one on …
Vince Klinges
It was about $200,000.
Allan Dow
Of incremental?
Vince Klinges
Of incremental.
Allan Dow
Fair enough.
Matthew Galinko
Okay. All right.
Last question around taxes. Can you share any commentary on what we should be expecting in terms of your GAAP or cash tax rate going forward?
Vince Klinges
Yes, Matt. Yes, we had that unusual - we have a one-time adjustment discrete item for $1.1 million that's in the - that I'm packing out of the adjusted GAAP numbers.
But going forward, for the rest this year, you can kind of forecast for the fourth quarter at a blended rate of roughly around 33%. And then next year it will be down probably around 20%.
Matthew Galinko
Got it. All right, thank you.
Operator
[Operator instructions]. And gentlemen, it appears we have no additional questions at this time.
I’ll turn it back to you for any additional or closing remarks.
Allan Dow
All right, Elise. Thank you very much.
We appreciate everyone joining us today, and look forward to our call in the coming months.
Operator
Thank you. This does conclude today's conference.
We appreciate your participation. You may disconnect at any time and have a great day.