Image source: The Motley Fool.
American Software Inc (AMSWA 0.19%)
Q2Â 2020 Earnings Call
Nov 21, 2019, 5:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day, everyone, and welcome to today's American Software Second Quarter Fiscal Year 2020 Preliminary Earnings Results Call. [Operator Instructions] Later, you will have the opportunity to ask questions, during the question-and-answer session. [Operator Instructions]
It is now my pleasure to turn today's conference over to Vincent Klinges, Chief Financial Officer of American Software.
Vincent Klinges -- Chief Financial Officer
Thank you, David, and good afternoon, everyone, and welcome to American Software's second quarter fiscal 2020 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 in, contemplated by or underlying the forward-looking statements. There are 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 second quarter of fiscal '20, the same period last year, total revenues increased 1% to $28.2 million for the current quarter, compared to $28 million in the same period last year. Subscription fees increased 64% to $5.5 million for the quarter, compared to $3.3 million for the same period last year, while our software license revenues decreased 48% to $1 million for the current quarter, compared to $2 million in the prior year period, as we continue to transition to the SaaS engagement model.
Our Cloud Services annual contract value or ACV increased by approximately 55% to $22.4 million for the current quarter, and that compares to $14.5 million for the same period last year. Our professional services and other revenues decreased 2% to $10.8 million for the current quarter, compared to $11.1 million for the same quarter last year, and that's primarily due to a decrease in our IT consulting business unit, The Proven Method, as a result of timing of project work. This was partially offset by a 16% increase in our supply chain management unit, due to stronger bookings in recent quarters and our backlog remains solid heading into Q3.
Maintenance revenues decreased 7% to $10.8 million compared to $11.6 million due to normal retention fall-off combined with lower license fees and recent quarters. Our combined recurring revenue streams of maintenance and Cloud Services were 58% of total revenues for the current quarter, and that compares to 53% from the same period last year.
Looking at costs, our overall gross margin was 54% for the current quarter, compared to 52% in the same period last year. Our license fee margin was 4% in the current quarter, compared to 13% in the same period last year. That's primarily due to lower license fee revenue compare -- with the relatively fixed costs related to non-cash amortization of cap software, and intangibles from recent acquisitions.
Our subscription fee margins decreased to 52% compared to 61% for the same period last year, and that's primarily due to increase in the allocation of amortization of cap software, which is $1.2 million or 46% of the total $2.6 million in costs, due to increase in subscription revenue, more revenue gets allocated to subscription margins. The second quarter '20 gross margin without non-cash cap software allocation would have been 73% compared to 70% in the same period last year.
Our services margin increased to 30% compared to 27% in the same period last year, and that's due to a higher portion of professional services revenue coming from our higher margin supply chain business, which had margins of 37% compared to 28% in same period last year.
Our maintenance margin increased to 83% for the current quarter, compared to 81% in the same period last year, and that's due to cost containment efforts.
Taking a look at operating expenses, our gross, R&D expenses were 17% of total revenues for the current period, compared to 16% the same period last year.
As a percentage of revenue, sales and marketing expenses were 18% of revenues for the current quarter, compared to 19% for the prior year, and that's primarily due to the timing of marketing-related costs.
G&A expenses were 17% of total revenues for the current period, compared to 16% from the prior year quarter, and that's primarily due to increased variable compensation and, to a lesser extent, insurance and legal fees. So, our operating income decreased 45% to $843,000 this quarter, compared to $1.5 million in the same quarter a year ago.
Adjusted EBITDA, which excludes stock-based compensation, decreased 9% to $3.5 million for this quarter, compared to -- excuse me -- $3.5 million, compared to $3.9 million same period last year.
GAAP net income increased 42% to $1.8 million or earnings diluted share of $0.05 for the current quarter, and that compares to net income of $1.2 million or $0.04 earnings per diluted share. Adjusted net income was $2.5 million or adjusted earnings per diluted share of $0.08 for the second quarter, and that compares to net income of $2.2 million or adjusted earnings per diluted share of $0.07 for the same period last year. And these adjusted numbers exclude, amortization of intangible expenses related to acquisitions, and stock-based compensation expense. Both GAAP and adjusted net income included discrete tax benefit of approximately $400,000 this quarter, associated with the exercise of employee stock options.
While we continue to anticipate a normal tax rate -- effective rate of approximately 13% on the balance of the year, future option exercise may continue to affect this reported tax rate.
International revenues this quarter were approximately 19% of total revenues, compared with 20% in the same period last year.
Taking a look at the year-to-date numbers for the six month ended October 31, 2019. Year-to-date, we were at $55.6 million compared to $55.4 million.
Subscription fees were $10 million year-to-date, a 53% increase compared to $6.5 million in the same period last year, while software license revenues were $2.8 million or 24% decrease compared to $3.7 million in same period last year, and again, reflecting our continued transition to the SaaS engagement model.
Services revenue decreased 5% to $21 million year-to-date compared to $22.1 million in last year, due to lower revenue at The Proven Method. This was partially offset by a 9% increase at our supply chain business unit.
Maintenance revenues decreased 6% year-to-date to $21.9 million, and that compares to $23.1 million year-to-date last year.
Taking a look at costs, our overall gross margin was 54% for the current year-to-date period, compared to 51%. License fees increased to 15%, gross margin compared to 6% year-to-date.
And -- excuse me -- subscription fee gross margin decreased to 52% year-to-date, compared to 64% in the same period last year, and that's due to increase in allocation of amortization of cap software costs. Our gross margin was 29% year-to-date, compared to 24% the same period last year, and that's due to increased service revenues coming from our higher margin supply chain management unit.
Our maintenance margins are 83% year-to-date, compared to 81% same period last year, due to cost containment efforts.
Our gross, R&D expenses were 17% of total revenues for the year-to-date, compared to 16% same period last year. As a percentage of total revenue, sales and marketing expenses were 19% for the both the current and same period last year. G&A expenses were 18% of revenues for the current year-to-date period compared to 16% same period last year.
So our operating income year-to-date decreased 23% to $1.6 million compared to operating income of $2.1 million last year. Adjusted EBITDA year-to-date increased 5% to $7 million, compared to $6.7 million in the same period last year.
Our GAAP net income increased 11% to $2.9 million or $0.09 earnings per diluted share, and that compares to $2.6 million or $0.08 the same period last year.
Our adjusted net income year-to-date was $4.5 million or earnings per diluted share of $0.14, and that compares to net income of $4.6 million or $0.15 earnings per diluted share.
International revenues year-to-date were 21% of total revenues, compared to 20% same period last year.
Taking a look at our balance sheet. The Company's financial position remains strong, with the cash and investments of $94.7 million at the end of October 31, 2019. And this increased approximately $12 million since the same period last year. During the current quarter, we paid $3.5 million in dividends, some other aspects of the balance sheet are bills -- accounts receivable was $15.4 million, unbilled $2.7 million, for a total -- little over $18 million in accounts receivable.
Our deferred revenues, current -- both current and long-term are $32.6 million, and our shareholder equity is $117.9 million.
Our current ratio was 2.7 as of October 31, 2019 and that compares to 2.8 same period last year.
Our days sales outstanding as of October 31, 2019, was 58 days, compared to 68 -- excuse me, 66 days, same period last year.
At this time, I'd like to turn the call over to Allan Dow.
H. Allan Dow -- President
Thank you, Vince. During the second quarter, we saw a strong growth in our cloud revenue, driven by the software-as-a-service engagement model, which was evidenced by the 64% year-over-year increase in subscription revenue, and the 55% growth in the annual contract value for Cloud Services over the prior year period.
The cloud model is our standard today. So going forward, we expect that the traditional perpetual licenses will be limited to smaller incremental expansions within the existing customer community.
This was a good quarter for customer acquisition. We added 10 new logos across 12 different countries, which brings us to 26 new customers year-to-date. The annual contract value for Cloud Services associated with new contracts increased from $14.5 million in Q2 of last fiscal year to $22.4 million last quarter. We're pleased to see our growth rate in the ACV exceeded the 50% level for the second consecutive quarter.
Furthermore, we are off to a good start in the third quarter, which is traditionally our strongest quarter, having gotten the summer period behind us, with the ability to leverage both the year-end funding as well as the beginning of the new calendar year spending authorizations coming available. Given our performance to date and a robust pipeline, we -- which includes several significant opportunities, we remain confident in our ability to achieve solid ACV growth in fiscal '20 and beyond.
Based on the close rate in Q1 and Q2, we are now operating our supply chain services organization at near full capacity, which is evidenced by the 16% growth in our supply chain services revenue. This quarter, we will be battling the Thanksgiving and Christmas holiday period, which is a drag on the number of billable hours that are available, but we do expect to show strong growth when compared to Q3 of last year, and continued services revenue growth as we progress through the year.
During the second quarter, our recurring revenue streams for maintenance and Cloud Services represented approximately 58% of the total revenues as compared to 53% in the same period of the prior year, due to the growth in our subscription contracts. This trend toward a higher mix of recurring revenue is on track with our prior expectations, and thus we're confident we can achieve the 60% level before the end of the fiscal year that I stated on the last call.
Obviously, the growth in recurring revenue improves the financial predictability and the profitability of our Company, but more importantly, it is a strong reflection of our customers belief that this business model drives higher value for them and open door -- opens doors for incremental expansion of our services within the existing customer community. Overall, we had a very good quarter, and we're pleased with our team's achievements.
Looking forward, we are continuing to see an uptick in the transformational projects, which leverage our digital supply chain solutions and take advantage of the optimization depth, the advanced analytics, machine-learning capabilities, and the optimized simulation capabilities of our platform.
Customers are looking for greater supply chain agility, and dramatically shorter time to market for their new products, as they strive for higher customer service levels to achieve and retain brand loyalty. Our ability to help them transform their supply chain to continuous and autonomous planning allows our customers to leverage their supply chain as a strategic market advantage.
In summary, we're encouraged by the progress we're making in our go-to-market execution on these transformational projects. We will continue to focus on making our customers more successful, as we look to expand our relationships with existing customers and continue to expand our customer community. As we achieve that mission, we will see an acceleration of our recurring revenue streams.
We're confident that we can continue to grow both revenue and profitability in the year ahead, and are proud to be delivering incremental benefits for our customers.
So David, at this time, we'd like to open the call for any questions.
Questions and Answers:
Operator
[Operator Instructions] And we'll take our first question from Matt Pfau with William Blair. Please go ahead, your line is open.
Matt Pfau -- William Blair -- Analyst
Hey guys, thanks for taking my questions, and great job on the quarter. Just hoping to dig into a little bit more detail on this ACV growth acceleration, now two quarters in a row, looks pretty good. What -- any more details on specifically what is driving that acceleration? And related to that, Mac has now been in the sales seat for in roughly three-fourth of a year or so, are some of the changes that he's made in the sales organization starting to become evident in the ACV number?
H. Allan Dow -- President
Yes. Couple of things. First of all, we don't provide guide -- any specific guidance, but as we maintain the pace of ACV bookings over the last couple of quarters, we should be able to sustain or accelerate that growth rate. And Mac is having an impact. We're seeing his influence on the timing of contracts being able to get them closed a little faster, and actually the scope of some of those contracts. As we look forward, the scope of the projects are starting to increase. So we're seeing some larger deals in the pipeline, as we look forward. So certainly, he is starting to have an influence on our P&L.
Matt Pfau -- William Blair -- Analyst
And what have you done in terms of sales capacity? I guess, how has that trended since Mac's been there?
H. Allan Dow -- President
We are up a couple of headcount. We've had some turnover in the time period that Mac's been on-board. I don't attribute that specifically to him. But we've had a little bit of turnover there. And we will see in the quarter forward, we have a number of offerings out and acceptances, so our head count will grow as we look forward. So this time next quarter, when were talking, I think we can be able to share with you even some additional headcount increases that will be coming into effect now.
Matt Pfau -- William Blair -- Analyst
Got it. And on the -- in terms of the mix of the pipeline, should we think of the pipeline now as just primarily the cloud business versus license, given the comments you made? And have you seen existing customers that are running the old on-premise product transition over to cloud? Or is it still primarily new sales that's driving the ACV number?
Vincent Klinges -- Chief Financial Officer
As we look forward, we are not seeing a just a lift and shift conversion of customers into the cloud. So that's not there. What we are seeing is that, as existing customers are expanding their footprint, which is a really exciting news that they're doing that, we have a number of those contracts that were in the process of working our way through where they will lift and shift the existing capabilities that they have or already licensed they'll move those to the cloud. So we're going to -- we anticipate that looking forward, we will see some lift and shift. There are some conversions. But they will be primarily driven by expansion projects that are bringing that lift and shift with it.
So there will be a bit of a mix in that flavoring, but not just a lift and shift. We're not seeing that. We are seeing that the pipeline, as we look forward is substantially all subscription with the exception as I said that -- the small incremental add-ons are -- if they've got an existing perpetual license that are doing a small add on, they'll probably stay in that model, they'll not converge just for that purpose. Other than that, I think, it would be something exceptional that they drive a transaction toward the license fee, but we're not even seeing that at this point.
Matt Pfau -- William Blair -- Analyst
Got it. Last one for me. One of your comments -- last comments was on, the cloud opens a door for incremental expansions within customers. With some of the early cloud customers that you've had, how have those expansions progressed? And I guess, what's typically the catalyst for a customer to expand the scope of their engagement with you?
H. Allan Dow -- President
Some of the earlier ones we're doing projects on an incremental basis, so they anticipated a larger scope and now we're moving into Phase 2 of the deployment, where they're coming back and adding the second tier or second phase of that implementation. In a few cases, there was actually new functionality that they've -- that we brought to market where they're actually expanding as well into that area. So that's -- that has been incremental for us in some areas.
One of the other influences that Mac has had on us is, to actually structure projects. Some of the more transformational projects are structured around tiered deployment. So they are actually committing upfront. So, a few of those contracts may. As they play out, it may take longer for us to move to a true Phase 2, because the phases have been built in. But that's a bit of a contrast to the way our experience was at the beginning of our subscription experience where the customer was taking the first bite, and then they'll wait for the second bite until they finished the first one, and then they step up to the second one. So we're still seeing some of that. But these transformational projects, they are looking at the whole project in its entirety, and looking how do we phase those together.
Matt Pfau -- William Blair -- Analyst
Great. That's it for me, guys. Thanks a lot.
Vincent Klinges -- Chief Financial Officer
Hey, Matt. Thanks for the questions.
Operator
[Operator Instructions] We'll take our next question from Zach Cummins with B. Riley FBR. Please go ahead, your line is open.
Zach Cummins -- B. Riley FBR -- Analyst
Hi, good afternoon, Allan and Vince. Thanks for taking my questions. I guess, it was nice to see kind of the solid rebound there in the professional services team for the supply chain management, and it sounds like you have a pretty solid backlog going into Q3. How are you feeling about the capacity you have? Or the number of headcount that you have to service that backlog, as we move forward going here?
H. Allan Dow -- President
A couple of things are in play there. We have -- because of the backlog, we have actually expanded the team, and we've been able to pull in some very solid talent to help us in a variety of areas. We've actually, also redeployed some resources in areas that are stronger than maybe in other areas. And we've also been able to leverage some third parties to help us with that backlog as well, and bringing them into the mix, which is always a nice mix as well. We build the ecosystem. We build their knowledge base. They in turn, go on and create additional demand for us out there. So that combination of resources of being able to expand our team, flex our team, and leverage third parties has been really positive influence. And right now, we're servicing the projects at the level that we need to be servicing them. So, we're running at the pace that the customer deployment model allows.
We're not constraining that model at this point. We do see it continue to build, and we will look to leverage all three strings there. Pull the resources in whatever direction we need to make sure we're servicing the customers, and capitalizing on that revenue opportunity for us in them.
Zach Cummins -- B. Riley FBR -- Analyst
Understood. That's helpful. And in terms of the sales team, and it sounds like there's a little bit of turnover, but it sounds like you do have some new people coming to the door there. I mean, how are you feeling currently about the ability to service your large pipeline of opportunities? And what really is the expected ramp-up time for some of these expected new hires?
H. Allan Dow -- President
What's exciting about it right now is, we're a known commodity in the marketplace. There's this uptick, the positive results that we're showing are really making us attractive for people that understand our industry, and know the market. So the ramp-up time for them is pretty efficient. Right now, we're seeing some good productivity out of the people that started just a few months ago. They are not closing transactions yet, but they're active, they're productive, they're working transactions, executing sales strategy. So we feel good about the headcount adds that we've made, those that are on board. We feel really good about the folks that are -- we're anticipating to join us here in the coming weeks. So I think the ramp-up time is going to be even faster with this pull the resources than we've experienced in years past.
Zach Cummins -- B. Riley FBR -- Analyst
Understood. And then just kind of final question for me. When you thinking about the current macro environment, how are you viewing customer spending trends compared to, say, this time 12 months ago?
H. Allan Dow -- President
It's settled dramatically. I think 12 months ago, we were seeing some severe influence on the macro behaviors out there. That said, still people got to watchful eye out into what's going on, but it's not a reason that we're seeing right now. I think one of the other challenges we face is that, as the deal size grows those -- just getting the overall approval on a larger transaction is a little more complicated, and sometimes can be protracted. But the pace at which we're getting through those today is much better than we were 12 months ago.
Zach Cummins -- B. Riley FBR -- Analyst
Understood. Well, thanks for taking my questions, and best of luck with the upcoming quarter.
Vincent Klinges -- Chief Financial Officer
All right, Zach. Thanks for joining us.
Operator
[Operator Instructions] And there are no further questions on the line at this time. I will the turn the program to our speakers.
Vincent Klinges -- Chief Financial Officer
David, thank you very much. And for all those who joined us this afternoon, we appreciate your time and attention, and look forward to speaking with you again in three months.
Operator
[Operator Closing Remarks]
Duration: 26 minutes
Call participants:
Vincent Klinges -- Chief Financial Officer
H. Allan Dow -- President
Matt Pfau -- William Blair -- Analyst
Zach Cummins -- B. Riley FBR -- Analyst
