American Software (AMSWA) Q4 2018 Earnings Conference Call Transcript

American Software (AMSWA -0.19%)
Q4 2018 Earnings Conference Call
Jun. 21, 2018 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, everyone, and welcome to the American Software fourth quarter and fiscal-year 2018 preliminary earning results call. [Operator instructions] Please keep in mind, this call is being recorded. It is now my pleasure to turn today's call over to Vince Klinges, CFO of American Software. Please go ahead, sir.

Vince Klinges -- Chief Financial Officer

Thank you, Miranda. 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 in,contemplated by or underlying in 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 anduncertainty 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 comparing the fourth quarter fiscal '18 to the same period last year, our total revenues increased 12% to $29.4 million compared to $26.3 million the same quarter last year. Our license fees decreased 24% to $2.9 million compared to $3.9 million for the same period last year, which reflects our transition to the cloud SaaS services.

Services and other revenues increased 30% to $15.5 million for the current quarter, primarily due to increase of our Cloud Services and implementation products -- projects, excuse me. Our CloudServices Annual Contract Value or ACV increased by 108% to $12.7 million for the current quarter compared to $6.1 million in the same period last year. Total ACV is comprised of two components, Software-as-a-Service ACV of $9.8 million, which increased to 158%compared to approximately $3.8 million last year; and the other component is other Cloud Services and Managed Services and Hosting, which increased 26% to $2.9 million ACV compared to $2.3 million the same period last year. Our Maintenance revenues alsoincreased 4% to $10.9 million compared to $10.5 million the same period last year.

Our combined recurring revenue streams of Maintenance and Cloud Services were 46% of our total revenues for the quarter, and that compares to 44% in the same period last year.Taking a look at costs. Our overall gross margin increased to 56% for the current quarter, up from 55% in the prior-year quarter. Our license fee margin decreased to 39% for the current quarter compared to 47% the same period last year due to lower license fees. Our services margins increased to 44% compared to 36% the same period last year, and that's due to increased margin for Cloud Services.

Our Maintenance margin decreased to 78% forthe current quarter, and that compares to 79% in same period last year. Looking at operating expenses. Our total gross R&D expenses were 16% of total revenues for the current period compared to 14% in the same period last year. And that's primarily due to increased headcount from our recent Halo acquisition.

As a percentage of revenues, sales and marketing expenses were 19% of the revenues for the current and prior-year period. G&A expenses were 16% of total revenues for the current period compared to 13% for the prior-year quarter, primarily due to costs related to the recent Halo acquisition and increased variable compensation. So our operating income decreased 17% to $2.5 million for the current quarter compared to $3 million in the same quarter a year ago. Our adjusted EBITDA, which excludes stock-based compensation, decreased 7% to $4.5 million for the current quarter compared to $4.9 million the same period last year.

Our GAAP net incomedecreased 88% to $1.3 million or earnings diluted share to $0.04 compared to last year of $10.3 million or $0.34 earnings per diluted share. Our adjusted net income was $2 million or adjusted earnings diluted share of $0.06 compared to net income of $2.8 million oradjusted earnings diluted share of $0.09 the same period last year. These adjusted numbers exclude amortization of intangibles; expenses related to acquisitions; our stock-based compensation expense; a discrete tax adjustment; and the proceeds of the sale of a real estate in the fourth quarter of last year. International revenues this quarter were approximately 17% of total revenues compared to 20% in the same period last year.

Looking at the full year. Fiscal '18 revenues increased 6% to $112.7 million compared to $106.3 million the same period last year, and license fees decreased overall 2% to $15.3 million compared to $15.6 million in the same period last year. Services revenues increased 11% to $53.5 million for the full year compared to $48.3 million last year. And our overall Maintenance revenues increased 3% to $43.8 million compared to $44.2 million last year.

So for the fiscal '18, our overall gross margin increased to 56% for the fiscal '18 compared to 52% in fiscal '17 last year. License fees margins increased to 54% from 51% last year. Our services margin increased also to 37% compared to 30% the same period last year, and that's primarily due to a higher margin Cloud Services and increase in higher-margin project work related to our IT consulting business. Our Maintenance margin was 79% for fiscal '18 compared to 77% the same -- for last year, and that was also due to higher revenue and overall cost containment efforts.

Looking at operating expenses. Our gross R&D expenses were 15% of total revenues for both the current and prior year -- fiscal years. As a percentage of total revenues, sales and marketing expenses were 18% of current fiscal year compared to 19% in the prior fiscal year. Our G&A expenses were 14% of revenues for the current fiscal year compared to 13% in the prior fiscal year.

So our operating income for fiscal '18 increased 74% to $13.5 million compared to $7.8 million last -- in fiscal '17. So adjusted EBITDA for fiscal '18 increased 33% to $21 million compared to $15.8 million over the same period last year. And GAAP net income decreased 18% to $12.1 million or $0.40 per earnings diluted share compared to net income of $14.6 million or $0.49 per earnings diluted share. So adjusted net income year to date was $13.5 million or earnings diluted per share of $0.44 compared to net income of $8.5 million or earnings diluted share of $0.29 for the same period last year.

And these adjusted numbers exclude the amortization of intangible expense-related acquisitions, our stock-based compensation expense, a discrete tax benefit related to the Tax Reform Act and the proceeds from the sale of real estate in fiscal '17. International revenues for the fiscal '18 were 19% of total revenues, and that's up one percentage point from 18% in prior year -- fiscal year. Looking at our balance sheet, the company's financial position remains strong, with cash and investments of approximately $87.8 million at the end of April 30, 2018. During the quarter and fiscal year, we paid $3.3 million and $13.3 million in dividends, respectively.

Other aspects of our balance sheet. At the end of April 30, 2018, our billed accounts receivable was $18.6 million, our unbilled was $3.4 million, for a total of $22 million of accounts receivables. Our deferred revenues, current and long term, are at $33.4 million, and our shareholder equity is $112.6 million. So our current ratio on our balance sheet is 2.3 as of April 30, 2018, compared to 2.6 same period last year.

And our day sales outstanding as of April 30, 2018, was 68 days, and that is down slightly from 69 days in the same period last year. At this time, I'd like to turn thecall over to Allan Dow.

Allan Dow -- President

Well, thank you, Vince. We continued the transition to a Software-as-a-Service engagement model in the fourth quarter. As Vince indicated, our Annual Contract Value of the Software-as-a-Service revenue recognized in the quarter more than doubled over last year's Q4, driven in part by the $9.8 million of Software-as-a-Service subscription revenue, an increase of more than 158% over the previous-year period. This is our third consecutive quarter of triple-digit growth in comparison to the prior fiscal-year period.

In comparison to the fourth quarter last year, we also increased Maintenance revenues by 4% and other services by 30%. Overall, this is a very strong quarter, and we're very pleased with theteam's achievements. Our recurring revenue was 46%, as Vince mentioned, of the total revenue last quarter, and we expect that to trend higher in the future. In fact, due to the continued growth of our cloud business, in the coming quarters, we expect to report ourcloud services revenue as an independent line item on our P&L.

As we reflect back on the full fiscal year, we're pleased with the team's achievements. We're tracking very successfully toward the transition to a Software-as-a-Service engagement model, while simultaneously growing revenue by 6% and improving our operating earnings by 74%. That's a performance level not often achieved in the SaaS, Software-as-a-Service, transition.Overall, we are 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 andmigrate toward a fully automated supply chain. Vince already indicated that our cash and investments at the end of the quarter were approximately $88 million.

That's after distributing approximately $3.3 million in shareholder dividends. This gives us a strong foundation for our operating model and sufficient room for additional strategic investments in new products and service offerings. Those will enhance the results our customers canachieve as we go forward. Although the market activity has continued to be strong, we are starting to see constraints around the prospective customer IT resources, which could impact the approval of some projects.

I believe these constraints are a reflection of the tightening labor market and a shortage of skilled staff. But the good news is that we have continued to expand our team, and we are now in a position to help our customers tacklethis challenge with our Software-as-a-Service solutions, our Cloud Services, turnkey integration and a global services team. As a result, our pipeline remains strong across all of our software solutions portfolio, and we anticipate the first quarter will be consistent with historical trends. We do expect to see the trend toward a preference for Software-as-a-Service subscription contracts to continue and have aligned our operating plans to this engagement model.

Diving a little deeper into some of the specific market trends. We arestarting to see an uptick in the manufacturing planning opportunities, which can be attributed to the increased factory capacity utilization in many segments. This will also continue to spur activity for our Andromeda platform for supply chain management,strategic sourcing and Vendor Compliance. In summary, we're very pleased with the overall results from our fourth quarter, and the total year results exceeded our expectations.

We're continuing to closely monitor the global economic conditions and our team's progress to continue our growth. Our pipeline remains strong and our services organization is working near capacity. So we remain optimistic about the potential ahead for the 2019 fiscal year. We continue to focus on our core purpose, which is to make our customers more successful, and we'll leverage our investments to help them achieve a supply chain competitive advantage.

We are confident that we can continue to drive profitable growth during our transition to a SaaS engagement model and are proud to be delivering incremental benefits for our customers. The results are exciting and it continue to fuel our investments to maintain a leadership role in the supply chain and retail planning space. Miranda, at this time, let's open the call for any questions. 

Questions and Answers:

Operator

Certainly. [Operator instructions] And we can take our first question from Kevin Liu with B. Riley FBR. Please go ahead, your line is open.

Kevin Liu -- B. Riley FBR, Inc. -- Analyst

Hi, good afternoon, guys. First question here, just from a macro standpoint, Allan, I think you started to address this, but you mentioned the tight labor market and the potential impact on sales cycles. Could you just elaborate on that and discuss whether that's already had an impact on some of the deals within your pipeline? And then also, separately, I was hoping you could touch on the headlines associated with potential trade wars and whether you think that has any impact on the pace of deals moving through your sales cycle.

Allan Dow -- President

Yes, Kevin. Well, first of all, good afternoon. Thanks for joining us. We haven't really seen a slowdown in the current transactions at this point, but we're seeing a bit of an increase in some of the dialogue around those dynamics.

We are really leveraging the strength that we have in our organization around those various services to fill in the gaps and take over the responsibilities. So we're -- truly believe that, that should not result in a situation where we see significant delays. I mean, of course, every quarter, there's some carryover for projects that were expected to go, but we don't see that trend to change. In fact, it may leverage an advantage for us in our ability to help folks out.

The trade war stuff is a really interesting one. I had a team meeting going on the last couple of days and we were kicking around that idea, and I think it's -- there's an eye toward that for sure. There's still an awful lot of optimism in the marketplace. The economy is up.

The employment rates are very low. The economy seems to be booming. And if anything, some of the dialogue is around helping them understand how to do alternative sourcing strategies, which is a good thing in the supply chain space. That's what we can help our customers do successfully.

So if that angst continues to build, I think it may actually be a positive trend for us, where people want to be able to quickly evaluate their options and adjust the supply chain to overcome some of those challenges if they get put in place.

Kevin Liu -- B. Riley FBR, Inc. -- Analyst

OK. And that's really helpful context. Just in terms of how the fourth quarter came in, one of the areas that surprised me was how strong the services and other growth was in the quarter. I guess, first, was there anything one-time in nature within that line? Or is thatpurely a reflection of kind of either your SaaS business picking up or some of the implementation services? And as you look at your capacity going into fiscal '19, just curious as to your plans for hiring to ensure you can continue to sustain that level of services.

Allan Dow -- President

There were no one-time events. So they will -- we expect to see that trend to continue. The -- it is a combination of both of those. The cloud services business that had an impact on it.

But we are running at very high capacity on our organization, in our services organization, and that's across all the segments and all the various services that we have out there. We have been very successfully hiring and expanding the team. Although right now, we're running at pretty near capacity, I wouldn't say full capacity, but we don't have an abundance of resources. And we're continuing to interview.

We had folks in town in over the last couple of days, in fact, going through that process. So we're successfully attracting the kind of talent we need. We're able to bring them onboard and get them up to speed relatively quick. So we expect that, that trend should continue into the future.

Kevin Liu -- B. Riley FBR, Inc. -- Analyst

All right. And just lastly for me. You talked a little bit about the Andromeda platform toward the end of your script. I was hoping you could touch on the acquisition of Centric Software.

Do you think that opens up some more room for you guys to move upmarketthere? I mean, just any thoughts on how the new platform is being received by the market.

Allan Dow -- President

The platform is being received extremely well. We continue to have engagements out there. The pipeline is building on that platform. The customer success has been phenomenal.

And we've got a number of customers that are coming back around for a second round of -- in a couple of cases, expanding into other segments of their business, in a couple of cases, actually going a little deeper into the functionality and picking up some other functionality that they didn't do in the first phase of deployment. So that's very exciting news. Acquisitions in our space are not new. We have gone through a lot of those.

Our history has been that in almost every case, that's been a positive for us. There's a lot of distraction around those. This one is a big one. They are getting pulled into an organization that's not known to serve into the fashion products.

So it's hard to see. We'll see what time will tell, but the internal speculation is that, that will be a pretty big distraction and probably an upside for us.

Kevin Liu -- B. Riley FBR, Inc. -- Analyst

OK. Well, congrats on the continued SaaS growth and good luck over this fiscal year.

Allan Dow -- President

Thank you very much, Kevin. Appreciate that.

Operator

Thank you. [Operator instructions] And it appears there are no further questions at thistime.

Allan Dow -- President

All right, Miranda, thank you very much. We want to thank everyone for joining us this afternoon and appreciate the time. We'll speak again soon.

Operator

[Operator signoff]

Duration: 20 minutes

Call Participants:

Vince Klinges -- Chief Financial Officer

Allan Dow -- President

Kevin Liu -- B. Riley FBR, Inc. -- Analyst

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