American Software (AMSWA) Q1 2022 Earnings Call Transcript

American Software (AMSWA -1.33%)
Q1 2022 Earnings Call
Aug 25, 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 American Software first-quarter fiscal year 2022 financial results. [Operator instructions] Later, you will have the opportunity to ask questions during the question-and-answer session. [Operator instructions] Please note, this call may be recorded. And I will be standing by should you need any assistance.

It is now my pleasure to turn the conference over to chief financial officer of American Software, Vince Klinges. Please go ahead.

Vince Klinges -- Chief Financial Officer

Thank you, Chloe. Good afternoon, everyone, and welcome to American Software's first quarter of fiscal 2022 earnings conference 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 call -- 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'll turn the call over to Allan for our opening remarks.

Allan Dow -- President and Chief Executive Officer

Thank you, Vince. In spite of the resurgence of the coronavirus, we're starting a transition back to in-person activities, and business leaders' confidence and willingness to invest remains intact. As we all know, globally, we're not out of the woods yet in regards to the catastrophic impact of this virus. So, we want to encourage everyone to stay strong and be safe.

As an organization, we've continued to be blessed with good health, with only a few isolated coronavirus issues. The diversity of our team in skills, experience, and location has allowed us to serve our customers well throughout the pandemic. We anticipate that this fall, we'll be able to transition into the new postpandemic work structure. However, we have a keen eye on the infection rates, and we'll adjust those plans appropriately.

The pandemic and ensuing global crisis heightened the awareness of the overall supply chain responsibilities for brands, retailers, and producers. As a result, more and more of the projects we're getting involved in are transformational in nature versus the historical tactical projects around one or two particular business processes. The traits of a transformational project typically aligned to three objectives: economically sound delivery of goods to consumers with an appropriate level of resiliency to disruptions, minimizing the environmental impact of the supply chain from raw materials to consumer delivery, and the third leg of corporate responsibility, which includes 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 to decision making, and we are at the forefront of corporate compliance, which has been consuming a lot of mindshare and is now starting to consume budget. Through our customers, we're enabling sustainable supply chains while simultaneously addressing these economic, environmental, and social responsibility imperatives in a whole new way that is enabling the necessary transformations that are required to meet today's consumer expectations. Not surprisingly, these transformational projects draw a high level of scrutiny and longer approval cycles due to the perceived risk associated with changing business processes and the concern for their ability to manage such a significant change while still navigating the pandemic in the work-from-home situation. Although the approval process is making the timing of contracts of these transformational projects a little less predictable, the increasing number of those projects in our pipeline should ultimately result in more consistent cadence of one or more of these contracts signing each quarter.

In regard to our first-quarter results, I'm pleased to announce that we're off to a solid start on the fiscal year. The market has stabilized, which is evidenced by our growing pipeline, increased RPO, and lower churn while adding new contracts that continue to build our ACV and services backlog. The summer months are always a slow period, but our team continued to sign contracts and delivering customer services like they have throughout the pandemic, with a keen focus on serving existing customers, delivering on our implementation commitments, and bringing new companies into our customer community. Aside from the services, we're on plan or slightly ahead across all revenue and margin areas.

Our first-quarter services performance in our supply chain segment was impacted somewhat by the seasonally slow summer period, which resulted in a continued increase in services backlog. In particular, the large projects that we signed in Q4 got underway late in Q1, limiting their contribution to the quarter financial results, but setting the stage for a return to more positive growth in the services revenue over the remainder of the year. With the growing backlog, expanding partner network, and continuing leverage of the more efficient virtual work environment, we expect to see the seasonally adjusted consulting services margin expand modestly in the coming quarters as well. We're pleased to see the continued growth in our recurring revenue stream of cloud services and maintenance, which now represents approximately 66% of total revenues, compared to 61% in the same period last year.

That was driven by the 49% increase in cloud services ACV we saw in the first quarter when compared to last year's first quarter. With the increase in new project activity, which we -- are now virtually all subscription contracts and a return to the more traditional stability of our cloud and on-prem customer community, we expect to see the recurring revenue, as a percent of total revenue, continue to rise. The steady increase in subscription revenue was also revealing the efficiency gains we expected in cloud services, as evidenced by the gross margin exceeding 75% in the first quarter. 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 pipelines. During the first quarter, we welcomed five new customers and completed subscription or license fee transactions in eight countries, reflecting our strong global presence. We're seeing customers adopt the broader footprint of our platform to improve the speed and quality of decision making that allows them to achieve the agility and resiliency needed to thrive in this new economy. In the first half of this calendar year, we've seen a resurgence of customers investing in transformational projects that is helping to drive our pipeline to higher levels.

These projects are driven by the need to holistically manage supply chain sustainably in an economically resilient way. Based on these same observations, Gartner predicted a trend to higher spending in supply chain planning solutions, and we're starting to see that trend emerge. In summary, we're pleased with our first-quarter results and overall performance of our team as we work hand-in-hand with our customers to navigate the challenges presented by the pandemic. The first quarter is a strong reflection of what we are capable of delivering to our customers and the potential for performance improvements of our financial model.

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're 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 the details on our financial results.

Vince Klinges -- Chief Financial Officer

Thanks, Allan. For the first quarter of fiscal 2022, total revenues were 29.3 million. That's a 7% increase from 27.3 million in the same period last year, primarily driven by subscription fees, which increased 54% year over year to 9.8 million. While software license revenues were 0.5 million, compared to 0.8 million last year.

And that's all -- that's primarily due to the continued transition to the cloud services as a service. Our cloud ACV number increased 49% to 40.9 million, versus 27.5 million a year-ago period. We added 2.5 million in net new ACV during the quarter, which includes one deal in excess of 1 million. Over 70% of our net new ACV was from new customers.

And similar to last quarter, our SaaS churn rate remained at levels more consistent with our pre-COVID rate. As Allan noted, our pipeline and opportunities has also increased, leaving us well-positioned to deliver strong ACV growth in fiscal '22 and beyond. Professional services and other revenues decreased 3% to 9.5 million from 9.8 million a year ago. This year-over-year decline reflects an 11% decrease in our TPM or our IT consulting business unit due to the timing of project work, and that was partially offset by a 6% increase in our supply chain unit.

Our backlog of supply chain implementations increased significantly due to the increase in ACV bookings in the recent quarters. So, we anticipate an uptick in services during the remaining quarters of fiscal '22. Maintenance revenues declined 8% year over year to 9.5 million, reflecting a normal fall-off rate. Our total recurring revenue is comprised of subscription and maintenance fees, represented 66% of our total revenues for the first quarter, and that's up from 61% in the same period last year.

So, looking at gross margin, it was 58% for the current period, versus 52% in the same period last year. Our subscription fee margin increased to 67%, compared to 57% in the prior-year period. And that's primarily due to the increased subscription revenue and lower amortization of capitalized software expense. If you exclude the noncash amortization of cap software expense of 819,000 for the first quarter, our subscription gross margin would have been 75%, versus 72% last year since the amortization of cap software was 959,000 in the prior-year period.

Our license fee margin was 68%, compared to 14% in the same period last year, and that's primarily due to lower cost of amortization expense, amortization of cap software, and lower VAR agent commission expense. Service margin increased to 26% from 20% last year, and that's primarily due to the mix of revenue from our higher margin supply chain unit. Our maintenance margin was 79%, compared to 83% last year. And that's primarily due to lower revenue.

Our gross R&D expenses were 15% of total revenues for both the current and prior-year period. Our sales and marketing expenses were 21% of revenues versus -- in the current period, compared to 17% in the prior-year periods, and this year-over-year increase was due to increased marketing expenses, increase in variable compensation, and the reorganization of some functional personnel from a business unit G&A role to sales. Our G&A expenses were 15% of total revenues, compared to 16% a year ago, due to the reorganization of functional personnel that I just mentioned. On a GAAP basis, our operating income increased 100% to 1.8 million for the current quarter, and that compares to 0.9 million in the same period last year.

Net income increased 45% to 2.9 million or earnings per diluted share of $0.09. And that compares to net income of 2 million or $0.06 in the same period last year. As on an adjusted basis, which excludes noncash amortization of intangible expense related to acquisition and stock-based compensation expense, adjusted operating income increased 49% to 2.6 million, and that's compared to 1.7 million in the same period last year. Adjusted EBITDA increased 18% to 3.7 million, versus 3.1 million in the same period last year.

And our adjusted net income increased 28% to 3.6 million, or adjusted earnings per diluted share of $0.11 for the first quarter, and that compares to adjusted net income of 2.8 million or adjusted earnings per diluted share of $0.09 from the same period last year. International revenues this quarter were approximately 17% of revenues, compared to 15% in this prior-year period. Our remaining performance obligation, we exited the quarter with a backlog of 20 -- excuse me, 122 million, and that represents a year-over-year increase of 63%. The strong growth in RPO reflecting -- reflects record bookings in recent quarters and an increase in the duration of our cloud agreements as customers continue to make longer-term commitments to our platform.

Our financial position remains strong, with total cash and investments of approximately 108.1 million at the end of the quarter, and this is an increase of approximately 15.1 million compared to the same period last year. Our days' sales outstanding as of July 31, 2021, was 78 days for the current period, and that compares to 88 days in the same period last year. And this decrease primarily due to improved collections compared to last year. And also, during the quarter, we paid 3.6 million in dividends.

At this time, I like to turn the call over for questions. 

Questions & Answers:

Operator

[Operator instructions] And we will take our first question from Matt Pfau. Please go ahead.

Matt Pfau -- William Blair & Company -- Analyst

Hey, guys. Thanks for taking my question. Allan, I wanted to just follow up on, you know, what you're seeing in the business over the past month or so as some of the variants -- the delta variant has started to pick up in the US. Has that impacted purchasing decision or ability to close business at all? 

Allan Dow -- President and Chief Executive Officer

First of all, Matt, thanks for joining us. Yeah, great question. We have not seen that emerge as a change. I think the -- probably one of the contributing factors is people had anticipated coming back to the office about this time, you know, September, October were the announced dates.

So, they were -- while the infection rate has started to climb, I think what's really happened is people are still working from home, so really, nothing changed over the prior periods. So, the answer to the question is no, we haven't seen a change in the pattern. We can stay at this level, and we don't go into economic shutdown like we did a year ago, then and I don't anticipate that we'll see that. I think we'll -- everyone's learned how to operate virtually.

So, we're feeling good about the continued growth in the pipeline and our ability to close. And, you know, what we really saw, Matt, was the summer vacation period was a little stronger than we anticipated. People, I think they were just exhausted and worn out after the pandemic, and they went to the beach. So -- but they're back.

They're back from the beach and folks are in school and back to work. So, we're seeing momentum pick back up.

Matt Pfau -- William Blair & Company -- Analyst

Got it. Great. And then I wanted to ask two questions on the transformational deals. So, you know, first of all, in terms of the time it's taking to close them, is it as you would have expected and then your comments are just more about to get more regularity in closing those deals, you just need more in the pipeline? And then secondarily, how are, you know, some of the current supply chain issues, you know, impacting demand for transformational deals?

Allan Dow -- President and Chief Executive Officer

Yeah, I'll reverse through those questions, second one first. We're definitely seeing more and more discussions coming up and projects getting initiated that are transformational in nature, and that's exciting news. At -- the close rates -- so on the first question, Matt, the close rates are in line with what we've seen over many years around these kind of projects. You know, one of the challenges that have -- that exist today that maybe didn't exist before is just the ability to schedule people to get together where you could get a huddle in the hallway to do the -- some of the, you know -- get consensus.

But a project of this nature has always had a high level of scrutiny. And so, what we're seeing is the predictable nature of those is a little tricky. You know, they have good intentions. We have good intentions.

Everybody's worked hard to get a project kicked off on a particular time period, and then they hit a little extra due diligence process from time to time. And that just takes one more cycle and might cost us, you know, weeks or a month or something like that. But not six months, not a year. But it's, you know -- but a week or a month makes a difference if you're talking at the end of the quarter.

Matt Pfau -- William Blair & Company -- Analyst

Sure. Sure. Understood. Next one I wanted to ask about was on the traceability solution and just an update on what you're seeing there.

And, you know, I assume that would be included in some of the corporate responsibility drivers that you discussed in your prepared remarks.

Allan Dow -- President and Chief Executive Officer

Yeah, for sure. We are seeing an acceleration in that area around corporate responsibility and traceability. We're seeing at -- a handful of those opportunities are, you know, in any given time period are coming into the pipeline as stand-alone, just tackling that issue. But we're also seeing embedded with these transformational projects where that's an important criterion they want to take into consideration.

So, it's a mix of embedded in some of the more strategic opportunities and a -- what I -- I guess what I characterized before, solving a particular business process area, this traceability would be in there. Lots of discussion, lots of pipeline building, a lot of discussion on a lot of levels. What's interesting is we're driving some introductions in tackling things like a few of these opportunities are the legal department is showing up in the call to talk about their compliance and how they're going to deliver on their expectations. So, we're getting introduced to people we've never spoken before.

You know, I guess we've spoken to the legal department when it comes to the contract, but not around their business processes and things of that nature before. So, a lot of momentum building, and we're starting to see money spend -- we've seen money spent, and we're starting to see that really accelerate. Now, I think there was just a maturing of that area for people to get their arms around, you know, what kind of money they'd need to spend and how soon do they need to spend it and how do they get on top of that. We are -- we're continuing to dialogue with the US Customs, for instance, on how to address these needs across the marketplace.

There's a sincere interest there, and the regulations are going to continue. Our perspective there is that the regulations are going to continue to tighten up and be more enforced and that could be a step-change in those investments.

Matt Pfau -- William Blair & Company -- Analyst

Great. Good to hear. Thanks for taking my questions, guys. Appreciate it. 

Allan Dow -- President and Chief Executive Officer

You got it. Have a good afternoon, Matt.

Operator

And we will take our next question from Zach Cummins. Please go ahead.

Zach Cummins -- B. Riley Securities -- Analyst

Great. Hi, Allan and Vince. Thanks for taking my questions here. Allan, I know conversions are really a big theme of the last quarter.

I mean, it seems like the overall mix of ACV kind of shifted back to new customers here in this quarter. But can you give us a sense of the interest that you're still seeing from customers potentially making that lift and shift over to a subscription type of solution? 

Allan Dow -- President and Chief Executive Officer

Yeah, for sure. We had -- we're seeing it continue to build momentum. In the first quarter, we signed contracts with three existing customers to shift. They weren't some of the largest ones that we've done, but that just shows a continuing trend.

So, we're seeing more of those as we go forward. And in this particular quarter, those three were pure lift and shift. So, no new functionality added. So, that's another interesting trend where in the past quarters, we were seeing generally those projects were tied to adding some functionality, doing something new, and then moving to the cloud as part of it.

So, an interesting twist, when we look at the pipeline forward, we're seeing more and more of that coming into play. So, we'll see that to continue to accelerate, Zach.

Zach Cummins -- B. Riley Securities -- Analyst

Understood. That's helpful. And in terms of the professional services side, I mean, obviously, summer vacation period here a little lighter than anticipated. But I mean, with the strong project backlog that you have right now, I mean, do you have the necessary capacity in place to kind of handle the project load here in the coming quarters?

Allan Dow -- President and Chief Executive Officer

We do. It's -- yeah. So, first of all, the -- you know, we saw growth in the year over year from our supply chain business. So, that was positive.

We thought that we were going to get to even higher level of growth. But we did have some of those projects that we had signed in the fourth quarter, we had the -- as we all know, we hit -- we had quite a few of those coming in as we got to the end of the fourth quarter. They just didn't get going as fast as we anticipated. It was related to the summer vacation issue that I mentioned a few minutes ago.

I guess it was a blessing that people took some time off. But it had an impact on those starts. So, we're up and running on those projects now. We have added capacity.

We've hired into the team. But more importantly, we've also added capacity through our partners. We've got additional SIs that we've onboarded and done training with. And they're certified or ready to go to work and are working on some of the projects.

So, in addition to the staff that we've put on, they've been able to onboard and train some folks. So, we have ample capacity at this point to fulfill the anticipated demand. And we haven't given up yet on both hiring and onboarding additional SI capacity and continuing the certification process there.

Zach Cummins -- B. Riley Securities -- Analyst

Got it. That's helpful. And final question for me, it might be geared more toward Vince. But a really strong subscription gross margin performance in the quarter.

I mean, how should we think about this as a sustainable rate going forward? I know subscription growth appears poised to grow at a pretty strong rate this year. I mean, what sort of leverage can we see in the model in that subscription gross margin line?

Vince Klinges -- Chief Financial Officer

Yeah, Zach. We -- as we indicated last year, we did anticipate as we came into this year, we would see a pickup on it. So, coming in at roughly 75% after amortization of cap software, we do anticipate it's staying at this level, maybe for a quarter or two, and then start ticking up a little bit more. So -- but -- and start approaching 80% maybe at the back half of this year or early -- the next year.

Zach Cummins -- B. Riley Securities -- Analyst

Understood. Well, thanks again for taking my questions, and then congrats on solid first-quarter results.

Allan Dow -- President and Chief Executive Officer

Thanks, Zach. Thanks for joining us.

Operator

[Operator instructions] We'll move next to Matthew Galinko. Please go ahead.

Matthew Galinko -- Sidoti & Company -- Analyst

Hi, good afternoon, guys. Thanks for taking my question. I have one for you. Among the strategic deals you're talking about, I'm curious what you're displacing and what the supply chain planning, you know, software and infrastructure looks like that you're displacing or looking to displace?

Allan Dow -- President and Chief Executive Officer

A little bit of everything, Matthew. It's a variety. One of the -- probably one of the most prominent thing, we were talking about it just earlier today actually. SAP is continuing to falter in this space and underdeliver.

So, technically, answering the question, what we find oftentimes is we're going in there and there's a declared, you know, we're using SAP, but in reality, the users are using Excel. So, I'm not sure which one I would declare I'm replacing. Am I replacing SAP or at least the perception of SAP, but replacing Excel in many ways. But what we're finding is that in these transformational projects, in particular, we could be replacing four or five different applications, and that's one of the challenges that those companies have is that it's not one seamless platform that they can use for decision making across the organization, across their supply chain.

So, what happens is they get a lot of latency and information flow. They have disparate teams that are trying to make decisions and not working from the same perspective. And that's causing some of the challenges that are -- that persist in the supply chain today. So, we may be replacing any one of our competitors and the best of breed, in some cases, and then suddenly ERP applications and spreadsheets and everything else all in one robot.

So, it's generally not a one-for-one replacement in these kind of projects. But the ERP systems are commonly being looked at as not fulfilling the need and being shoved aside in favor of a transformational project or a best-of-breed solution. And in most cases, legacy platform applications that are out there that they're just consolidating onto a single platform now.

Matthew Galinko -- Sidoti & Company -- Analyst

Great. I appreciate the color. 

Allan Dow -- President and Chief Executive Officer

Sure. Thank you for joining us. Appreciate it.

Operator

And it does appear there are no further questions at this time. [Operator instructions] And it appears there are no questions at this time. 

Vince Klinges -- Chief Financial Officer

All right. Chloe, thank you so much for hosting our call this afternoon and helping us with that. Thank you all for your participation. And, Matt, Zach, Matthew, we appreciate the questions this afternoon, and we look forward to speaking with everyone again in three months.

Have a great afternoon.

Operator

Absolutely. [Operator signoff]

Duration: 33 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

Matthew Galinko -- Sidoti & Company -- Analyst

More AMSWA analysis

All earnings call transcripts