American Software (AMSWA) Q4 2021 Earnings Call Transcript

American Software (AMSWA -0.19%)
Q4 2021 Earnings Call
Jun 08, 2021, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, everyone, and welcome to today's fourth-quarter and fiscal-year 2021 preliminary financial results. [Operator instructions] Later, you will have the opportunity to ask questions during the question-and-answer session. [Operator instructions] Please note that this call may be recorded. It is now my pleasure to turn today's program over to Vince Klinges, CFO of American Software.

Vince Klinges -- Chief Financial Officer

Thank you, Amy. Good afternoon, everyone, and welcome to American Software's fourth-quarter fiscal 2021 earnings call. On the call with me is Allan Dow, president and CEO of American Software. Allan will provide some opening remarks, and then I will review the numbers.

But first, our Safe Harbor statement. 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 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 that the forward-looking information will prove to be accurate.

At this time, I'd like to turn the call over to Allan for opening remarks.

Allan Dow -- President and Chief Executive Officer

Thank you, Vince. As the number of individuals obtaining the coronavirus vaccines continued to escalate through the spring, business leaders' confidence grew and project activity took off. As we all know, globally, we're not out of the woods yet in regards to this catastrophic impact of this virus, so we want to encourage everyone to stay strong and diligent. We can now see a path to a more normal environment and that end of this -- and the end of this tragic event is within reach.

As an organization, we've been blessed with good health, and the diversity of our team has allowed us to serve our customers well throughout the pandemic. Having achieved a phenomenal level of vaccination across our team, we've now shifted back toward in-person meetings internally, and in some cases, externally as well. We anticipate that by fall we'll have entered into the new post-pandemic work structure. The pandemic and the ensuing global crisis heightened the awareness of the overall supply chain responsibilities for brands, retailers, and producers.

I characterized these responsibilities into three categories, economically sound delivery of goods to consumers and brand producers, including an appropriate level of resiliency to the disruptions. The second, minimizing the environmental impact of the supply chain from raw material to consumer delivery. And the third leg, which in my opinion is the most important, is the ethical treatment of workers around the world. We have decades of experience in enabling economically optimized resilient supply chains.

In the past decade, we've incorporated the environmental impact into decision making and we are now at the forefront of ensuring adherence to proper labor standards in alignment with the United States Customs and Border Protection regarding their latest regulations. Through our customers, we are enabling sustainable supply chains while simultaneously addressing these economic, environmental, and social responsibility imperatives in a whole new way. Leveraging our unsurpassed expertise and our solutions, we're enabling the necessary transformations that are required to meet today's consumer expectations. In regard to our fourth-quarter results, I am pleased to announce that our team excelled.

Throughout the pandemic, our team has remained focused on serving customers, delivering on our implementation commitments, and bringing new companies into our customer community around these transformative projects. We generated a record level of net new ACV growth in the fourth quarter, more than doubling our previous high for a quarter. With the increase in new project activity and as we move beyond the pandemic-related churn and return to more traditional stability of our cloud and on-prem customers, we expect to see the rise in our recurring revenues accelerate. In the fourth quarter, we saw our cloud services' ACV grow by 45% when compared to last quarter's fourth quarter -- last year's fourth quarter, which was comparable to the pre-pandemic growth rates.

Included in this acceleration is an increasing number of cloud conversions. That's our existing on-prem customers switching to the cloud, which typically drives a significant uplift in the overall recurring revenue from each converted customer as we layer in higher value-added services. Vince will provide more detail on the impact of this in our financial model in his commentary. During the fourth quarter, we welcomed seven new customers and completed subscription or licensee transactions in nine countries, reflecting our strong global presence.

In the fourth quarter, services -- the services performance of our supply chain segment was in line with our strong growth expectations, coming in at the highest level for the fiscal year. We continue to drive more backlog for future work, which is consuming most of the resource capacity we have on hand, including a growing consumption of external capacity from our consulting partner channels. As we move forward, we plan to add additional resources internally and allocate a greater share of implementation work to our partners. With the growing backlog, expanding partner network, and continuing to leverage the more efficient virtual work environment, we expect to see the seasonally adjusted consulting services revenue and margin continue to grow in the coming quarters.

We're pleased to see the continued growth in our recurring revenue stream of cloud services and maintenance, which now represents approximately 60% of total revenues, compared to 57% in the same period last year. We expect the percentage of recurring revenue to continue trending higher in the future considering that subscription contracts represent virtually all of our new contract revenue. With a very disciplined approach and a focus on transformational-type projects, our sales activity is running at a strong pace. And as a result, we're continuing to see growth in our pipeline, both in the number of opportunities and the size of the transactions.

We're seeing customers adopt a broader footprint of our platform to improve the speed and quality of decision-making and allows them to achieve the agility and resiliency needed to thrive in this new economy. The new calendar year has shown a resurgence of customers investing in transformational projects that is helping to drive our pipeline, both in the number of opportunities, as well as average size. These projects are driven by the need to holistically manage supply chain sustainably in an economically resilient way. Based on these ofs -- these same observations, late last year, Gartner predicted spending in the supply chain planning solutions would trend toward an industry-leading growth rate, which we're starting to see that trend emerge.

In summary, we're extremely pleased with the fourth-quarter results and overall performance of our team throughout the fiscal year, working hand-in-hand with our customers as we navigated the challenges presented by the pandemic. The fourth quarter is a strong reflection of what we're capable of delivering to our customers and the financial performance of our company. Our mission of making our customers more successful year after year is paying off in customer retention and expansion as we introduce innovative capabilities for managing sustainable supply chains. 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 in a time when they need it most.

At this time, I'll turn the call over to Vince who'll provide more details on our financial results.

Vince Klinges -- Chief Financial Officer

Thanks, Allan. For the first -- fourth quarter of fiscal 2021, revenues were $28.6 million, down 2% from $29.3 million in the same period last year as we continue to transition to the SaaS model. Subscriptions fees increased 28% year over year to $8.1 million, while license fees were $1.2 million, compared to $1.1 million in the prior year. Although license fees were up slightly in the fourth quarter, which principally came from existing customers, we continue to expect declines over time given our transition to the SaaS model.

Near-term, we anticipate our license revenues on a quarterly basis are likely to be closer to trend, which are -- is about $0.5 million a quarter seen throughout the past year. Our cloud services' ACV, or annual contract value, increased 45% to $38.3 million, versus $26.4 million a year ago. We added $6.7 million in new ACV during the quarter, which was more than double our prior record and reflected the closure of two deals with ACV in excess of $1 million. Nearly half our new net ACV was from new customers and -- which was similar to last quarter.

Our SaaS churn rate remained at levels more consistent with our pre-COVID rate. And as Allan noted, our pipeline of opportunities has also increased, leaving us well-positioned to deliver strong ACV growth in fiscal '22 and beyond. Professional services and other revenues decreased 13% to $10.1 million from $11.5 million a year ago. The year-over-year decline reflects a 13% decrease in our supply chain unit and an 11% decrease in our TPM or our IT consulting business unit due to timing of project work.

We note that restrictions on travel reduced the amount of pass-through reimbursements in our supply chain services revenue to zero from $0.2 million last year. On a sequential basis, services revenues did increase 6%, and that's primarily attributed to a 13% increase in our supply chain unit. Our backlog of supply chain implementations increased significantly due to the increase in ACV bookings this quarter, so we anticipate an uptick in services in the fiscal '22. Maintenance revenues declined 12% year over year to $9.2 million, and this is reflecting a higher than normal falloff rate for this quarter.

But if you exclude the companies converting from on-prem maintenance to the cloud, the decline would have been about 8%, which is more consistent with our mid-single-digit decline we've historically seen. As of Q4, ACV bookings also included a large conversion deal. So we expect the declines in our maintenance revenues to remain elevated in the near term. However, as we typically see, a two and 2.5X uplift in maintenance revenue once the company shifts to subscription, we expect a commensurate acceleration of our subscription revenue growth.

Total recurring revenues comprised of subscription and maintenance fees together represented 60% of total revenues in Q4, and that's up from 57% in the same period last year. Our gross margin was 58% for the current period, versus 54% in the same period last year. That's primarily due to increase of our subscription fee margin to 61%, compared to 57% in the prior year. And that's primarily due to increased subscription revenues and lower amortization of cap software expense.

Excluding the noncash amortization of capitalized software expense of $686,000 in Q4, our subscription margin would have been 70%, and that compares to 72% last year where the amortization of cap software was $994,000 in the prior-year period. License fee margin was 67%, compared to 22% in the same period last year, and that's primarily due to higher license fees, and lower costs of amortization expense, and [Inaudible] agent commissions. Our services margin increased to 36% from 31% last year, and that's due to a higher mix of revenue coming from our higher margin supply chain business unit. Our maintenance margin was 79%, compared to 83% a year ago, and that's primarily due to lower revenue.

Looking at gross margins -- excuse me, gross R&D expenses were 15% of total revenues for both the current and prior-year period. Our capitalized R&D expenses totaled $16,000, and that was down from $473,000 in the same period last year, which is reflecting our transition to the cloud and adopting an agile development process. So we do not expect any material caps -- R&D caps off going forward. Sales and marketing expenses were 18% of revenues for the current period, and that compares to eight -- 20% in the same period last year.

The year-over-year decline in absolute dollars continues to reflect the reduction of travel and marketing expenses due to the COVID pandemic. G&A expenses were 19% of total revenues, compared to 16% a year ago. And that's primarily due to re -- timing of recur -- recording some variable compensation. On a GAAP basis, our operating income increased 20% to $1.9 million for this quarter, and that compares to 1.6 in the same period last year.

Our net income increased 460% to $3.1 million, or earnings per diluted share of $0.09, compared to net income of $0.5 million or $0.02 earnings per diluted share last year. On an adjusted basis, which excludes noncash amortization of intangibles related to acquisition and stock-based compensation expense, adjusted operating income increased 8% to $2.6 million, compared to 2.4 in the same period last year. Adjusted EBITDA was 3.7, or down 4%, from 3.9 in the same period last year. And adjusted net income was 3.6, or adjusted earnings per diluted share of $0.11 in the fourth quarter, and that compares to adjusted net income of 1.3 or adjusted earnings per diluted share of $0.04 in the same period last year.

International revenues this quarter were approximately 15% of total revenues, compared to 17% in the prior-year quarter. Taking a look at the full-year fiscal 2021, total revenues declined 4% year over year to $111 million -- $111.4 million to be exact, as a 31% increase of subscription fees to $28.9 million was offset by lower license fees, services, and maintenance revenues. So adjusted operating income for the year was $7.6 million, representing an operating margin of 7%, and that's down from $9.7 million or 8% operating margin last year. Adjusted EBITDA was 12.5 versus 16.1 in the same period last year.

And adjusted net income totaled $10.8 million, or $0.33 per diluted share, and that's up from 9.9 or $0.31 earnings per diluted share of the same period last year. We exited the fourth quarter with remaining performance obligations, or RPO, which we refer to as backlog, of $116 million, and that represents a year-over-year increase of 51%. The strong growth in RPO reflects our recording -- record bookings for the quarter and an increase in the duration of our cloud agreements as customers continue to make longer-term commitments on our platform. Taking a look at our balance sheet, our financial position remains strong with total cash and investments of approximately $104.7 million at the end of the quarter, an increase of approximately $10 million compared to the same period last year.

Our days' sales outstanding as of April 31, 2021, was 85 days for the current period, and that compares to 78 days in the same period last year. The increase is primarily due to the increase in bookings at the end of the quarter. During the quarter, we paid $3.6 million in dividends. And at this time, I'd like to turn the call over to questions.

Amy? 

Questions & Answers:

Operator

Certainly. [Operator instructions] And we will take our first question from Matt Pfau. Your line is open. Go ahead. 

Matt Pfau -- William Blair & Company -- Analyst

Hey, guys. Thanks for taking my question and great quarter. First, wanted to hit on the two deals that were with ACV in excess of 1 million. Maybe just some more detail around those.

Were those new or existing customers, and what drove that large deal size? And then when you look at the pipeline, are there other sort of similar-sized deals in there as well?

Allan Dow -- President and Chief Executive Officer

Hey, Matt, thank you for the question and compliments. So on the first half, both of those projects happen to be with existing customers. And in both cases, the -- well, one was a lift and shift where we converted to -- the entire platform to the new environment -- new cloud environment, and then added functionality. So it was a substantial increase in the amount of functionality and breadth of capabilities.

The other is what we've turned to be a greenfield application. So the existing applications are going to stand alone and we are looking at a complete new way of managing their supply chain and helping them not only with the platform but helping them with a new viewpoint, consulting and advising them on a new viewpoint on how to manage the supply chain in a whole new way in this marketplace. So it's a start over. And ultimately, in time, we'll replace the current applications.

But again, an uplift and an amount of functionality as well. So both of those happen to be existing customers expanding the footprint this time around. And quite frankly, I forgot the second half of your question, Matt. So if you wouldn't mind to repeat the second half of the question, I'd be happy to answer that as well.

Matt Pfau -- William Blair & Company -- Analyst

Yeah, no problem. It was just around the pipeline and, you know, are there other deals of this size in the pipeline? You did mention that deal sizes increased and so just trying to sort of understand. Are these outliers or is this sort of going to become more commonplace to have deals of this size? 

Allan Dow -- President and Chief Executive Officer

Yeah, we -- no assurance that we'll get two or more done in any given quarter. But there are certainly many -- a number more in the pipeline that the size of the transactions are starting to -- it's continuing to increase. So throughout this year -- last year, they were hard to come by just for that magnitude of imple -- of investment. In the year ahead, we anticipate that maybe not every quarter, but consistently through the year ahead, we'll have projects of this magnitude happening with us. 

Matt Pfau -- William Blair & Company -- Analyst

Great. And then just in general within your pipeline or I guess if we look at the deal that closed this quarter, were these deals that had been in the pipeline for a while, and then, you know, as economic outlook started to improve, they converted? And then sort of where do other deals in your pipeline stand from that perspective? You know, I guess, obviously, you have two large deals that, you know, really made the sequential ACV net increase large this quarter. And I'm just trying to sort of figure out as we sort of think about growth going forward, what sort of puts and takes this quarter we should think about when we're thinking about future growth.

Allan Dow -- President and Chief Executive Officer

Yeah. Good question. A real mix. One of the -- one of those two large projects had lingered for some time, and it took them a while to get there.

And the second one, actually, accelerated pretty quickly through the entire process, from a decision to go forward to make the investment to getting the contract in place. So even in the large deals, we had the two ends of the spectrum really. Overall, we're seeing a pickup in the pace. However, right now with the pandemic still in place and most people are still working remotely, it is a bit of a challenge to get everything coordinated to get the approvals done.

So we haven't seen a radical shift in the pace at which we can get from selection or even commencement of the evaluation all the way to selection and contract. Although, we're starting to see that pick-up as well. So we feel good about it. We did have a bit of carry-over into the first quarter.

We've made some good progress on the first quarter already. So we're seeing that -- you know, we didn't clean up everything in the fourth quarter. There were some lingering, and we're off and running on those projects already so that we feel good about that as well. And -- but I think as the year progresses, I'm a little bit nervous about the summer, I happened to take some time off last week and we witnessed that there's an awful lot of people out taking vacation right now, including our family.

So I'm a bit wondering about the summer period. But overall, this year is really picking up.

Matt Pfau -- William Blair & Company -- Analyst

OK, great. And just last question for me. Obviously, there's a lot of supply chain issues going on right now, and I think planning could be a key component of helping with some of those issues. But does that create any distractions within your customer base, or is it more of a net positive the issues that are going on right now with people having shortages and difficulty managing their supply chain? 

Allan Dow -- President and Chief Executive Officer

Overall, it's a net positive, Matt. Yeah, it's a good observation. You know, there's a couple of product -- pockets where people are just, you know, in such a big state of distress that they're having a hard time to focus. But that's few and far between.

I think, overall, people are seeing -- what did occur during the pandemic is people realized you can't just outrun it. You've got to out plan it. You've got to think about where the bottlenecks are. You've got to be able to model those.

And when the issues occur, you've got to be able to quickly assess what your options are and make decisions rapidly. Otherwise, you get outrun by your competition and any options that may have been available to you are no longer available because you didn't act fast enough. So that has brought an acute awareness of the need for building what we call a digital model, being able to represent the physical supply chain electronically, simulate the possibilities, make a quick decision, and act. You can't outrun the challenges, you have to out plan the challenges.

And that's really where our expertise lies. So the overall view is that the pandemic has heightened the awareness and brought to light the urgency of acting on these transformational projects and getting something in place so that they -- they know the next one's coming. We don't know what it is or what it's going to be. But they know the next disruption is going to be there because they've always been there, and they think -- the customers are starting to make those investments.

Matt Pfau -- William Blair & Company -- Analyst

Great. Thanks, guys, appreciate it.

Allan Dow -- President and Chief Executive Officer

Thank you, Matt. 

Operator

[Operator instructions] And we will take our next question from Zach Cummins. Your line is open. Go ahead.

Zach Cummins -- B. Riley Securities -- Analyst

Hi, Allan and Vince, congrats on a strong quarter, and thanks for taking my question. I guess, Allan, what really has changed in the mind of some of your existing customers? I know really that from your perspective, you haven't been forcing these customers to shift over from an on-premise model to the cloud. But to see this magnitude of conversions. I mean, what is really changing there? Are you starting to incentivize customers to move over, or -- I'm just trying to get a sense of the dynamics that you're seeing.

Allan Dow -- President and Chief Executive Officer

Great question, Zach, and thank you for joining us. We've not shifted our thinking or any incentives in a way that would encourage them to do it from a financial standpoint, that we've offered any extra spiff or anything like that. It's truly what's happening is that -- even our existing customers, as well as they're running it -- the applications today, they realize that there's more to be had, that the current releases, they're having a hard time keeping up with that we -- in many cases, as I mentioned about some of the two larger transactions, they're adding functionality and they want it all in one cohesive place so that they have a single platform, and they know we can manage it better for them. So that's a view that's really starting to drive the thinking.

And as they go to extend the footprint, they just -- they move it to the cloud because they know it's a better solution for them. We're going to take better care of them. We're going to keep them up to date more frequently. And they can get advantage on the new technology that we're making available on each new release.

So we've still not -- we don't -- we've not and we don't think we're going to have to provide any special incentives, just the benefits associated with moving to our cloud environment and our value-added services has been enough to change that. So in the past, I'm probably giving you a little more answer than you asked for. But, you know, in the past, we were seeing a fairly low conversion rate, maybe one or two per quarter where we're converting from on-premise to the cloud. And we're anticipating that this year ahead that we're looking at, you know, three or four a quarter will probably be in the conversion rate that we should expect going forward.

So, you know, it's still not a crazy number. It's not half of our installed base converting, but it's double what it was last year. I guess you could look at it from that perspective. 

Zach Cummins -- B. Riley Securities -- Analyst

I understand, that's helpful. And then in terms of your sales and marketing capacity. I mean, just given the demand that you're seeing, do you feel like you have enough capacity in place right now and kind of what is the approach for when it comes to investing in headcount and your go-to-market approach?

Allan Dow -- President and Chief Executive Officer

Yeah, I think -- well, of course, we have two channels that we've talked about in the past. We've got our direct sales model, which is for large enterprises, organizations in North America and Europe. We think we're in pretty good shape in that environment. We -- during the pandemic, we didn't pull back.

We continued to invest and we expanded the team because we wanted to be ready -- shovel ready when we came out of the pandemic. So we think we're in a good position at least for the first half. Maybe it'll carry us through the year. We're going to really focus on the productivity of the team we have and make sure that we're getting all the value.

It takes some time to get them on board and we're there. They're ready to go. They're working hard. They've got pipeline.

They're generating results. In regards to our indirect channel, which gives us local presence through a value-added reseller network, we are continuing to expand capacity there. We've got segments of the globe that are really maturing from a supply chain standpoint and they're starting to look for solutions. So we're trying to fill that in, and we've got a few pockets where we need to expand coverage and get some more resource in place.

So we'll probably -- over the next year, we'll probably add about a handful more of strategic partners that are -- those value-added resellers. And then I made mention of, of course, the expanding partner network from an implementation resource standpoint. As we look forward, we think that that channel will be able to fulfill at least half of the expanded service requirements that we have for the growing customer deployments. And that ecosystem builds on itself.

I mean, number one, they've got resources for us that can help us implement and provide good guidance and support for customers, but they also are generating activity out in the marketplace and they'll fold that back in and bring those opportunities to us as well. So that's a double benefit from the standpoint of that partner network.

Zach Cummins -- B. Riley Securities -- Analyst

Got it. That's helpful. And, Allan, can you give us an update on the overall competitive environment? I mean, with Blue Yonder in the midst of being acquired, I'm just wondering if you've seen any sort of changes in the dynamics of the environment? 

Allan Dow -- President and Chief Executive Officer

A couple of things that are probably most significant. One is really around the ERP players where we're continuing to see the likes of Oracle and SAP, and maybe even to some extent and a lesser extent, they're not quite so prominent in our space, Infor and some others, they just don't have the depth of capability and breadth that's necessary to fulfill the requirements of today's supply chain projects. So we're continuing to see defections. Those who may have been, you know, acutely biased toward SAP, for instance, are making decisions to move away, and we're picking up some business from that channel.

So that's a continuing evolving competitive landscape. We're not yet sure what will come about from the Blue Yonder being acquired -- wholly acquired by Panasonic where they've picked up the rest of the company and own it all now. There's one thing for sure though that there'll be changes. And what those changes -- they know what those changes are.

But we're seeing a little bit of chaos out there in the marketplace. Our folks are just not sure what's happening, and I think that'll take a little time for it to settle out. So we could have a window here where there's some confusion around just what that strategy means. 

Zach Cummins -- B. Riley Securities -- Analyst

Understood. And my final question is more of a financial one. I know you don't provide formal guidance. But, Vince, I was wondering if you could just give us a sense of -- I mean, your overall targets for revenue growth and adjusted EBITDA margin as we progress in the upcoming year?

Vince Klinges -- Chief Financial Officer

Was it -- Zach, yeah, as you know, we don't give guidance. But generally, we're hoping to grow to maybe the low double-digits rates on the revenue side. And with that kind of growth, we should be able to get closer to maybe somewhere between 12% to 15% adjusted EBITDA percentages. 

Zach Cummins -- B. Riley Securities -- Analyst

Helpful. Thank you. Well, thanks again, guys, for taking my questions, and then congrats again on the strong quarter.

Allan Dow -- President and Chief Executive Officer

Thank you, Zach.

Operator

It does appear that we have no other further questions on the line.

Vince Klinges -- Chief Financial Officer

All right. Well, Amy, thank you for helping us today. Thank you all for joining us this afternoon on our fourth-quarter and fiscal-year earnings call. We look forward to further meeting with you again.

If not before then, at the next earnings call in three months. Thank you.

Operator

[Operator signoff]

Duration: 45 minutes

Call participants:

Vince Klinges -- Chief Financial Officer

Allan Dow -- President and Chief Executive Officer

Matt Pfau -- William Blair & Company -- Analyst

Zach Cummins -- B. Riley Securities -- Analyst

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