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American Software Inc (NASDAQ:AMSWA)
Q3 2020 Earnings Call
Feb 20, 2020, 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 Third 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].

And it is now my pleasure to turn today's conference over to Vincent Klinges, Chief Financial Officer of American Software. Please go ahead.

Vincent Klinges -- Chief Financial Officer

Thank you, Rylin, and good afternoon, everyone, and welcome to American Software's Third 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 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 fiscal 2020, compared to the same period last year, our total revenues increased 13% to $30.6 million for the current quarter and that compares to $27 million in the same period last year. What caused the increase was subscription fees, which increased 57% to $5.8 million for the quarter, compared to $3.7 million in the same period last year, and also our software license revenues increased 115% to $3.7 million for the current quarter, and that compares to $1.7 million in the same period last year.

Our Cloud Services annual contract value, or ACV, increased by approximately 58% to $25.5 million for the current quarter, and that compares to $16.1 million in the same period last year. Our professional services and other revenues increased 1% to $10.3 million for the current quarter, compared to $10.2 million in the same quarter last year, and that is due to a 12% increase in our supply chain management unit due to stronger bookings in recent quarters, and our backlog remains solid heading into Q4. This was partially offset by a 9% decrease in our IT consulting business unit as a result of timing of project work.

So maintenance revenues decreased 5% to $10.8 million, compared to $11.4 million. Our combined recurring revenue streams of Maintenance and Cloud Services were 54% of total revenues in the current quarter, compared to 56% in the same period last year. This decrease is due to large increase in license fees this quarter. We believe the trend is to a higher percentage in the recurring revenue as we transition more to the cloud and the revenue model.

Looking at costs for the quarter. Our overall gross margin was 57% for the current quarter and that compares to 52% in the same period last year. Our license fee margin was 57% in the current quarter, compared to a negative 7% in the same period last year, and that's due to higher license fees. Our subscription fee margin increased to 66%, compared to 62% for the same period last year, and that's primarily due to the increase in subscription revenue.

Also, one thing to note, in the third quarter of '20, our gross margin without non-cash cap software allocation would be 50 -- excuse me, 74%, compared to 73% in the same period last year. Our Services margins increased to 25% compared to 24% in the same period last year, and that's due to a higher portion of our professional service revenue coming from our higher-margin supply chain business unit.

Our Maintenance margin increased to 83% for the current quarter and that compares to 82% in the same period last year due to cost containment efforts. So looking at operating expenses, our gross R&D expenses were 15% of total revenues for the current period, compared to 18% in the same period last year. As a percentage of revenue, sales and marketing expenses were 18% of the revenues, compared to 17% in the prior year, and that's primarily due to increased variable compensation from higher sales and an additional headcount compared to last year.

G&A expenses were 17% of total revenues for the current period and that compares to 16% in the prior year quarter, primarily due to increased variable compensation and to a lesser extent, higher insurance and legal fees. So our operating expenses increased 32% to $2.8 million for the current quarter and that compares to $2.1 million in the same period last year.

Our adjusted EBITDA, which excludes stock-based compensation, increased 16% to $5.3 million for the current quarter, compared to 4.6% in the same period last year. Our GAAP net income increased 43% to $3.3 million or earnings per diluted share of $0.10 for the current quarter, compared to a net income of $2.3 million or $0.07 earnings per diluted share last year.

Adjusted net income was $4 million or adjusted earnings per diluted share of $0.12 for the third quarter, and that compares to net income of $3.2 or $0.10 in the same period last year. And these adjusted numbers exclude amortization of intangible expenses related to acquisitions and stock-based compensation expense.

International revenues this quarter were approximately 19% of revenues, compared to 17% in the same period last year. Looking at the cost -- total costs -- excuse me, total revenue year-to-date, it increased 5% to $86.2 million, compared to $82.4 million in the same period last year. Subscription fees were $15.8 million year-to-date and that's a 54% increase, compared to $10.4 million in the same period last year. License fees revenues were $6.5 million, a 20% increase compared to $5.4 million in the same period last year.

Services revenues decreased 3% to $31.3 million year-to-date, compared to 32. -- excuse me, 32.2% last year due to lower revenues from TPM, and this was partially offset by a 10% increase in our supply chain business. Maintenance revenues decreased 6% to $32.7 million, compared to $34.6 million last year. Looking at costs for the nine-month period.

Overall, gross margin increased to 55% for the current period, compared to 52%. Our subscription fee gross margin decreased to 57% year-to-date, compared to 63% in the same period last year, and that's due to increase in allocation of amortization cap software costs of $2.4 million, compared to about $900,000 in the same period last year. So if you exclude those non-cash cap software amortization costs, it would be 72% gross margin for both the current year-to-date and in the same period last year.

Our license fee margin increased to 39% from 2% last year due to higher license fees. And our Services margin was 27%, up from 24% in the same period last year, and that's due to increase in services revenue from our higher-margin business. Maintenance margin was 83% year-to-date, and that compares to 81% in the same period last year.

Total R&D costs were 16% of total revenues for the nine-month period, compared to 17% in the same period last year. As a percentage of total revenue, sales and marketing expenses increased to 19% for the current period, compared to 18%, and that's primarily due to higher variable compensation and increased headcount.

G&A expenses were 17% of revenues for the current year-to-date period, and that compares to 16% in the same period last year, and up -- and that's higher due to higher variable compensation and, to a lesser extent, legal and insurance costs. So our operating income year-to-date increased 5% to $4.5 million compared to $4.3 million in the same period last year. Adjusted EBITDA year-to-date increased 9% to $12.3 million, compared to $11.2 million in the same period last year.

GAAP net income increased 26% to $6.2 million or $0.19 earnings per diluted share compared to net income of $4.9 million or $0.16 earnings per diluted share last year. Our adjusted net income year-to-date was 8.6%, or earnings per diluted share of $0.27, and that compares to net income of $7.8 million or $0.25 earnings -- EPS last year.

International revenues year-to-date were 20% of revenues and that compares to 19% in the same period last year. Taking a look at our balance sheet. The company's financial position remains strong with cash and investments of approximately $96.3 million at the end of January 31, 2020, which increased by approximately $12 million since the same period last year.

And currently, during the quarter, we paid $3.5 million in dividends. Some other aspects of our balance sheet are billed accounts receivable is 21.2%, unbilled is 2.4% for a total of $23.6 million. Our deferred revenues were 34.4%, and our shareholder equity is approximately $120 million. Our current ratio was 2.6 as at the end of January 31, 2020, and that compares to 2.7 in the same period last year. And our days sales outstanding as of January 31, 2020 was 70 days during the current period, compared to 78 days in the 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. Overall, we're -- had a very good quarter and are pleased with our team's achievements and the company's performance year-to-date in fiscal year 2020. During the third quarter, we saw a marked improvement in our close rate, with continued growth with the Software-as-a-Service engagement model, as evidenced by the 57% year-over-year increase in subscription revenue and the same 57% growth in annual contract value for Cloud Services over the prior year period.

As I stated on the November call, the quarter started strong, and after a fairly quiet holiday period, finished very strong. During the quarter, we also closed a few sizable perpetual license transactions with those customers referring a capital expense versus an operating expense. We still see these as anomalies, not a shift in the overall trend to the cloud.

During the quarter, we welcomed 11 new customers and completed subscription or license fee transactions in 11 countries. This momentum is expected to continue into the fourth quarter, with a few new contracts already signed and a solid pipeline ahead of us. We remain confident in our ability to achieve a solid ACV growth in the fourth quarter, continuing our positive progress for fiscal year 2020 and beyond.

Based on the close rate in Q3, we have a solid backlog for our supply chain services organization and are expanding the number of resources, both internally and with service partners to ensure that the specific skill sets will be available in the areas where we see demand accelerating. We anticipate higher services revenue in the fourth quarter, especially when compared to Q3 due to the seasonally higher number of billable days available as we moved away from the holiday period.

During the third quarter, our recurring revenue streams for Maintenance and Cloud Services represented approximately 54% of total revenues compared to 56% in the same period of the prior year. But as Vince said, where the slight drop is due to a higher license fee contribution in the most recent quarter. We expect the percentage of recurring revenue to continue trending higher in the future based on the strong preference for the subscription contracts with the rate approaching 60% before the end of fiscal year 2021.

The growth in recurring revenue improves the financial predictability and profitability of our company, which gives us the clarity and confidence on where to make strategic investments, and gives our shareholders greater visibility.

During the third quarter, we introduced an innovative new service model, where we are providing a customer with Planning-as-a-Service. Under this arrangement, we will provide value-added services that leverage our cloud-based solution, as well as the expert talent resources to operate and produce the optimized planning outputs for strategic and tactical business goals.

We're excited to help our customer with this new Planning-as-a-Service model, and expect this model to gain traction in the years ahead, especially as we continue to automate the decisions, outputs and operational actions by leveraging artificial intelligence and machine learning to progress toward autonomous planning.

The insights gained from this engagement will allow us to accelerate our achievements in delivering on our vision for this innovative Planning-as-a-Service model, which is focused on helping customers transform their operations to achieve even more tangible outcomes. This new paradigm will be a higher value service, driving better results for our customers and incremental revenue for us.

Looking forward, we're continuing to see an uptick in the transformational projects, which leverage our digital supply chain solutions and take advantage of the optimization depth, advanced analytics, machine learning and optimized simulation capabilities of our platform to dramatically improve the speed and quality of decision-making for our customers.

In today's dynamic economic environment, customers are looking for supply chain agility to help them navigate the global trade uncertainty, while simultaneously seeking to accelerate the introduction of new products to the market to gain higher brand awareness and mitigate risk. 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. Our objective is to help our customers improve their supply chain effectiveness by a factor of 10.

In summary, we're pleased with the progress on our go-to-market execution, as we strive for continued success to deliver exceptional value to our customers in this new digital world. We will continue to focus on making our customers more successful as we look to expand our relationships and introduce new innovative services. We are confident that we can continue to grow both revenue and profitability in the years ahead and are proud to be delivering incremental benefits for our customers.

Rylin, at this time we'd like to open the call to any questions.

Questions and Answers:

Operator

Certainly. [Operator Instructions] And we will take a question from Matt from William Blair. Please go ahead.

Matthew Pfau -- William Blair -- Analyst

Hey, guys. Great quarter, and thanks for taking my questions. I wanted to start out on the close rates. Maybe you can just provide some more detail on what drove the improvement in close rates that you saw in the quarter?

H. Allan Dow -- President

I think a couple of things were going on, Matt. Number one, I think the dynamic nature of the economy today is really putting some pressure on our customers and prospects to be much more nimble and agile, and they're funding these projects. They're moving forward a little more quickly than we had seen in the past. I think it's also being driven by executive level engagement in these projects because of the nature of the impact on their business. So it's not just an optimizing the current operations, but it's really around strategically serving customers and maintaining market share and brand awareness out there.

So the level of engagement is much higher in the organizations, and as a result, I think the number of iterations it takes to get an improvement has diminished to some degree. So I think that's been an impact on it. We still see a good willingness for people to move forward. So we were able to get lockstep with our executive team and march toward kicking projects off, which meant signing the contracts and getting going.

Matthew Pfau -- William Blair -- Analyst

Got it. And obviously, the coronavirus is having impacts on a lot of different people supply chains. Any impact there that you're seeing in terms of delaying purchasing decisions or anything like that?

H. Allan Dow -- President

Well, interestingly enough, right now, we've only seen a little bit of noise and chatter out there. It's predominantly been around companies that have been overwhelmed by increased volume. And we have -- we've one client that we were looking to do an expansion project with, and their volume of shipments is up by about 40%. They happen to be in the medical space. So it's had a positive impact. But for us, maybe a slight delay, but we anticipate that, that will be measured in weeks, not in months or longer term. And overall, the predictions at this point are that, supply chain should get back in order later this year.

So, I think the real interesting part of it, it's a tragic situation, and none of us want to see this happening. But it just highlights the fact that there are disruptions, and this happens to be one. There's going to be another one of another case, and it brings to light that this agility is really important. So we're seeing a lot of engagement around how to just manage through these disruptions that are going to become the norm as we can see forward.

Matthew Pfau -- William Blair -- Analyst

Yeah. Makes sense. And I also wanted to hit on the efforts to sort of build out the partner ecosystem. Are you seeing any more interest with partners there? Or just maybe an update on how those efforts are progressing?

H. Allan Dow -- President

Yeah. We're proceeding cautiously there. One of the important values for us is to make sure as we engage with new partners and even new individuals within the partners that we've worked with for a number of years. We have a certification program, and we want to make sure that their consultants get through that process, so that they can be successful and, obviously, our customers can be successful. And that's been going swimmingly well. We've opened up that certification process that we use internally to our partners as well. They enjoy it, they like it, they're gaining value from it, they're having a much more successful program with clients.

And the good news is, because of that program and the success we've had there, we've got some new partners that are interested engaging with us, and we're getting down the path with those. So I think we're not only expanding the depth of the relationship with those that we have, but we're expanding the number of relationships that we're engaging in, in the marketplace.

Matthew Pfau -- William Blair -- Analyst

Great. Last one from me, and I'll pass it on. On the Planning-as-a-Service product, any type of customer, either size or vertical that makes more sense for that you're targeting with that offering?

H. Allan Dow -- President

We actually have two engagement models that we're progressing right now. The one that we're engaged in is a much larger enterprise opportunity. It's an optimization strategy, using some higher-level capabilities within the platform. And so, we see that as one where maybe the client doesn't have the bandwidth or the expertise to do it well today. So we can leverage the talent we have, as well as the insights and the automated capabilities of our platform to deliver that service.

The other is an area where companies are expanding, growing and haven't had the ability to build an organization, so that's more targeted toward the small-to-medium services. And it's rather than an augmentation that we're likely to see that be a complete outsource of their planning operations. So we've engaged with a partner in that, where it will be a joint effort, our technology, some of their labor, some of our labor from an operational standpoint.

So it's kind of two segments, the lower end where they don't have the capacity knowledge or talent to do it, and the upper end, where we're advancing more sophisticated capabilities that, likewise, they just don't have the bandwidth to pull that off.

Matthew Pfau -- William Blair -- Analyst

Got it. That's all I had. Thanks a lot guys for taking my questions and congrats again.

H. Allan Dow -- President

Matt, thank you very much. Good chatting with you.

Operator

[Operator Instructions] We will take a question from Zach from B. Riley FBR. Please go ahead.

Zach Cummins -- B. Riley FBR -- Analyst

Hi. Good afternoon, Allan and Vince, congrats on the strong quarter and thanks for taking my questions. Allan, just starting with you. Can you talk about the cloud services ACV performance in the quarter? Just any context around any notable deals in the quarter? Was there anything outsized that drove the strong performance here in Q3?

H. Allan Dow -- President

No, nothing unusual. There's no one transaction that set that up or a couple of transactions. It was good volume overall. We're seeing continued growth there. As we look forward -- as we look forward we're seeing even a much stronger predominance in the pipeline toward the subscription model. So it's just good continued traction in that direction. And as I've stated in the past, it's not -- generally, the two or three that we did this past quarter that were perpetual licenses were driven by a financial model in the opposite direction. So it wasn't a mistrust around the cloud business, but they had a -- they had capital expense that was available to them. They wanted to take advantage of the opportunity.

But overall, the trend toward the cloud is much better, and people are seeing the value and the services associated with it, where we can keep them operationally at peak performance from better than they can internally.

Zach Cummins -- B. Riley FBR -- Analyst

Got it. That's helpful. And then you mentioned starting to see an uptick in transformational type of deals during your script. It sounds like you're starting to improve your relationships with the C-suite executives at these customers. But can you talk about your progress with really moving forward in these transformational types of deals? And how you're continuing to make progress to actually landing one of these in the coming quarters?

H. Allan Dow -- President

Yeah. I think it's probably a combination of our engagement at the C-suite, but certainly, that's improving as well. But our ability to engage there has been elevated by the fact that the C-suite is paying attention to the supply chain today. So not necessarily, that we can't attribute it totally to our performance. It has become a very important topic in the boardroom about how to manage the supply chain for customer loyalty and customer service. So that's elevated, and it is becoming a much stronger conversation that we're having. We are seeing that continue to play out.

So, those are the kind of transformational projects, where they are rethinking the way they run their business. It's not just an application or a tool used to tweak the edges or improve the performance and get a 5% or 10% improvement out of their operation or inventory turns. They're really looking at it as, how do they serve the customer in a much better way, how do they become more agile in their supply chain. And thus, this dialogue is going on.

We have a number of projects going on today, where the clients have become reliant on our advice or industry point of view on how they should rethink the way they operate their business, and how they should configure their systems to support a new organizational structure that is much more dynamic, collaborative and much more responsive.

So those are the kind of transformations that we're working on with clients. They're leaning on us for that insight, their inspiration behind that, and we're helping them drive that. So as we continue to proliferate that in the marketplace and gain the reputation for doing so, that will continue to accelerate the number of engagements we can have under that model.

Zach Cummins -- B. Riley FBR -- Analyst

Understood. That's helpful. And just one final question for me. I know you don't provide formal guidance, but can you just give us a sense as recurring revenue continues to build in terms of the mix of the overall revenue, what sort of revenue growth targets or adjusted EBITDA margin targets are you trying to move the business toward over the next couple of years?

H. Allan Dow -- President

Well, we don't have any fixed targets, and certainly, we don't -- as you stated, we don't put those out into the marketplace. There's just so much uncertainty today that we don't want to set a false expectation around that. But we do see just the nature of the recurring revenue model will accelerate growth, as we all know that, that recurring revenue model builds as we sustain those customers. We've got a great retention rate in that area.

And then as we layer in new projects, these new projects that are coming in, I think you can see -- now that we're through that transition, we're into the recurring revenue model, you can start to see the acceleration rates to pick up there. So I think you'll see an acceleration of our growth.

Zach Cummins -- B. Riley FBR -- Analyst

Understood. Well, thanks again for taking my questions and best of luck for the remainder of the year.

H. Allan Dow -- President

Thank you very much. Good to speak with you, Zach.

Operator

And we do not have any further questions at this time.

H. Allan Dow -- President

All right, Rylin. Well, thank you all for joining us. We appreciate your time this afternoon, and we look forward to speaking to you again in the coming quarter.

Operator

[Operator Closing Remarks]

Duration: 27 minutes

Call participants:

Vincent Klinges -- Chief Financial Officer

H. Allan Dow -- President

Matthew Pfau -- William Blair -- Analyst

Zach Cummins -- B. Riley FBR -- Analyst

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