American Software (AMSWA) Q3 2022 Earnings Call Transcript

American Software (AMSWA -1.14%)
Q3 2022 Earnings Call
Feb 23, 2022, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, everyone, and welcome to today's third quarter fiscal year 2022 financial results. [Operator instructions] Please note, today's 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 the CFO of American Software, Vince Klinges. Please go ahead.

Vince Klinges -- Chief Financial Officer

Thank you, Chloe, and good afternoon, everyone, and welcome to American Software's third quarter fiscal 2022 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 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 could 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. I'm pleased to report that, again, we achieved double-digit revenue growth in our Supply Chain segment. And for the company as a whole, it was the second quarter of double-digit growth with Q3 accelerating well up into the teens. Our strong top line performance was accompanied by significant expansion in our adjusted EBITDA margin as we gained efficiency from the cloud growth and achieved very high utilization rates across all of our services segments including the IT consultancy business which is very project and seasonally sensitive.

We anticipate continued strong revenue growth in the fourth quarter and fiscal year '23 with the additional scale in the cloud business and a healthy backlog of project work in hand. However, EBITDA expansion will be tempered in the quarter and year ahead as we continue to invest in employee retention, expanding the team and with a higher level of in-person events and travel expected. In spite of a very competitive labor market especially in the supply chain and technical space we successfully onboarded about a dozen people so far this calendar year, filling the needs, hiring demands across sales, marketing, services, cloud operations and in R&D. We expect to repeat that pace of hiring in the next few months to fulfill the needs of expected growth in the year ahead.

And then we'll also need to keep that pace up in the first half of fiscal '23 to align to our business plan for next year. Looking back on the past quarter, the lingering impact of the pandemic and world events have extended the fragmented working environments, business uncertainty and frenzied activities our customers are engaged in to address their supply chain issues. We continue to see delays in contract approvals as the supply chain and IT organizations grapple with staffing shortages. We were able to secure the two larger projects that slipped from Q2 early in Q3.

However, in spite of some progress due to our prescriptive approach and staff augmentation efforts, we anticipate that some delays may persist for several more quarters. Overall, our pipeline continues to increase, driven by the transformational projects required to enable enterprises to holistically manage their supply chains in a sustainable and economically resilient way. Although the timing of closing these contracts is a little less predictable due to the longer approval processes, we remain confident that between a larger opportunity set and our improved execution, we're poised for a strong conclusion to the fiscal year and carry over into the first half of fiscal '23. Due to sequential improvement in our closing rate and our ongoing efforts on customer retention, I'm pleased to announce that we increased our RPO and continue to build our ACV and services backlog.

Our team is focused on serving existing customers, delivering on our implementation commitments and bringing new companies into our customer community more efficiently than ever before. We're seeing a continued increase in our services backlog and are relying more and more on our SI partners to assist in delivery. With the holiday period behind us, we anticipate continued high utilization rates across all services teams, which will deliver year-over-year growth and margin expansion in the supply chain consulting services business. We are also pleased to see the continued growth in our recurring revenue stream of cloud services and maintenance, which now represents approximately 63% of our total revenues year-to-date, compared to 62% in the same period last year.

This was driven by a 43% increase in the cloud services ACV we saw in the third quarter when compared to last year's third quarter. With the increase in new subscription contracts and the continued 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. During the third quarter, we welcomed four new customers and completed subscription or license fee transactions in 10 countries, reflecting our strong global presence. In summary, we're pleased with the third quarter results and expect to extend the performance improvements of our financial model through the remainder of this fiscal year and into next year.

While Q4 is shaping up to be the strongest quarter of net new ACV addition of this year, it is not likely to be the standout quarter like we had fourth quarter last year, which benefited from the accumulation of four slow quarters through the initial pandemic period and culminated in the closure of two large ACV contracts in excess of $1 million. We remain intently focused on executing against our growing pipeline and look forward to reporting our progress next quarter. So at this time, I'll turn the call back over to Vince, who will provide the details on our financial results.

Vince Klinges -- Chief Financial Officer

Thanks Allan. For the third quarter of fiscal '22 total revenues were $32.4 million at 17% increase from $27.7 million the same period last year. What's driving that is subscription fees which increased 45% year over year to $10.9 million, while the software license revenue also increased 87% to $1 million, compared to $0.5 million in the same period last year. Our ACV or annual contract value increased 43% to $45.3 million versus $31.6 million a year ago period.

We added $2.8 million of net new ACV during the quarter. Over 40% of our net new ACV was from new customers. Professional services and other revenues increased 21% to $11.4 million from $9.5 million a year ago. The year-over-year increase reflects a 29% increase in our IT consulting business unit, a proven method.

And that's due to timing of project work and also, we had a 13% increase of our SCM business unit also due to increase in project work. Maintenance revenues declined 10% year over year to $9.1 million, reflecting our normal falloff rate this quarter. So total revenues -- recurring revenues comprised of subscription and maintenance fees represented 62% of total revenues. That compares to 64% in the same period last year.

Our gross margin was 58% for the current period, and that's up from 55% in the same period last year. Subscription fee margin increased to 68%, compared to 59% in the same period last year. And that's primarily due to increase in subscription revenue and lower amortization of cap software expense. Excluding the noncash amortization of cap software expense of $628,000 for the third quarter, our gross -- our subscription gross margin would have been 74% versus 71% in the same period last year.

And the amortization of cap software last year was $866,000 in the prior year period. License fee margin increased to 76%, compared to 46% in the same period last year, and that's primarily due to higher revenues and lower amortization expenses. Our services margin increased to 30%, compared to 24% last year due to strong growth in our -- both our IT staffing business, the proven method, as well as a higher margin supply chain business unit. Our maintenance margin was 80% for the third quarter, and that compares to 81% in the same period last year.

Gross R&D expenses were 14% of total revenues for the current period, and that compares to 16% in the same period last year. Our sales and marketing expenses were 16% of revenues for the current quarter, compared to 18% in the same period last year. And G&A expenses were 18% of total revenues for both periods. So on a GAAP basis, our operating income increased 246% to $3.2 million this quarter, and that compares to $0.9 million in the same period last year.

So our net income increased 27% to $2.9 million or earnings per diluted share of $0.09, compared to net income of $2.3 million or $0.07 in earnings diluted share. On an adjusted basis, which excludes the noncash amortization of intangible expense-related acquisitions and stock-based compensation expense, adjusted operating income increased 153% to $4.4 million, compared to $1.7 million in the same period last year, and our adjusted EBITDA increased 85% to $5.3 million from $2.9 million in the same period last year. Adjusted net income was increased 28% to $3.8 million or adjusted earnings per diluted share of $0.11 for the third quarter, and that compares to adjusted net income of $3 million or adjusted earnings diluted share of $0.09 the same period last year. International revenues this quarter were approximately 16% of total revenues, and that compares to 15% in the same period last year.

For year-to-date, for the nine-month period ended January 31, 2022. Our total revenues increased 12% year over year to $92.9 million and that's primarily due to a 49% increase in subscription fees to $31 million, and a 30% increase in license fees and a 7% increase in services, partially offset by a 9% decline in revenues. So our adjusted operating income year-to-date was $10.8 million and representing an operating margin of 12%, compared to $5.1 million or 6% in the same period last year. Our adjusted EBITDA increased 57% to $13.8 million, compared to $8.8 million in the year ago period.

and that represents an adjusted EBITDA margin of 15%. Adjusted net income totaled $11.7 million or $0.34 per diluted share, up from $7.3 million or $0.22 per diluted share in the same period last year. We're excited this quarter with our Remaining Performance Obligation, or RPO, which is -- which we refer to as backlog of $129 million, and it's representing a year-over-year increase of 61%. The strong growth in RPO reflects record bookings over the past 12 months and an increase in the duration of our cloud agreements as customers continue to make longer-term commitments to our platform.

Taking a look at our balance sheet, our financial position remains strong with cash and investments of approximately $114.8 million at the end of the quarter, this is an increase of approximately $14 million compared to the same period last year. During the quarter we paid $3.7 million in dividends and our days sales outstanding as of January 31, 2022 was 77 days and that compares to 65 days the same period last year and this increase is primarily due to timing of billing and some delays in collections when compared to last year. At this time, I'd like to turn the call over to questions.

Questions & Answers:

Operator

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

Matt Pfau

Hey, guys, thanks for taking my question, and good quarter. I wanted to follow up on the commentary around the deal delays and perhaps it would just be helpful to get a little bit more detail on what's going on there in terms of what the drivers are and then what needs to happen to return to a more normal cadence from a deal closure perspective?

Allan Dow -- President and Chief Executive Officer

Yeah, Matt. [Inaudible] Thanks for the question. It really is getting driven by the staffing concerns that we have experienced now for a couple of quarters in a row where folks just don't have the resources to really get a project going. They've got adequate funding, they've got budget, they've got the ability to spend, they've got the desire to spend but until you can put boots on the ground, so to speak, they don't want to get committed to the contract.

So they're waiting until they get critical roles filled, people in place, free up their calendar and get those project started. Those are -- those delays are little bit unpredictable, sometimes it's involving hiring on their side and there is labor shortage market that we're in, the time frame to get people hired and onboarded is a little unpredictable. So we had a couple of -- that's what happened to us at the end of Q2 and extended some of those projects into the beginning of Q3. We didn't have nearly the order of magnitude this quarter, but there were some that we anticipated getting done that just didn't come to completion in the third quarter, but we're working hard at getting them done here in the fourth quarter, and a couple -- made progress on a couple of those already.

So it's a little unpredictable. I think people get back to their office, which we're anticipating we're going to do later in the spring. And when folks get back and they are sitting around the table and can work on some of these topics in person. I think that will help bring some stability to it.

So with a good eye to it, Matt, maybe this summer, we'll get more predictable.

Matt Pfau

Great. That's very helpful. And then wanted to ask the concerns around inflation and then potential resulting slowdown in the economy have been out there for a while now. But what are you hearing from your clients on that front? Are there any sort of economic concerns that are holding deals up and then, obviously, more recently with some geopolitical concerns, is that impacting pipeline or deal closures at all?

Allan Dow -- President and Chief Executive Officer

No, not yet. The geopolitical stuff, as we all know, is pretty fresh. But over three decades that we've been working on this stuff, the best time for supply chain projects is when we're in a state of change. And we went from one that was booming and pandemic ridden to one that maybe the pendulum swung the other way in an awfully quick fashion.

But times have change, whether it's on the downward spiral or an upward trend are good for projects like ours because people are grappling with how to deal with whatever is going on in the marketplace. So I don't think we'll see any impact on the short term. If the economy really slows down and people tighten up spending, then it may be a longer-term impact. But nothing yet, Matt, we haven't seen that come in as a topic of discussion yet.

Matt Pfau

Got it. And last one for me. In the press release, you guys talked about sustainability initiatives that you have and AI and machine learning becoming more important to companies achieving those sustainability goals. Maybe you could just expand on what you were referencing in the press release and what you're seeing in terms of sustainability initiatives driving demand for your software?

Allan Dow -- President and Chief Executive Officer

Yeah. So forever, the supply chains have really been driven by economic delivery of goods, how to get the products to the right place at the lowest possible cost and make sure you get it there on time. That's been a long-term one. Over the last five or six years it has been or maybe 10 years there has been a more focus on the environmental impact, which is one of the sustainability initiatives, what is the impact and as more and more visibility comes to that, it's been less economic driven and which is part of the environmental process, but more around just looking at the impact on the global environment.

So people are more adamant about that and then a more recent issue has really come up around the use of labor and proper labor standards around the world. So that's an important initiative. Our traceability product that we announced and have deployed several times now. We announced it earlier in the year and has really been getting -- taking hold.

People are acting on it now. The regulations are coming into play. People get -- the customers are getting a handle on what they need to be able to do, and we're helping them overcome some of those challenges so that they can look back through the supply chain and make sure that their products are being sourced responsibly and with proper labor standards. So it's really come about.

It's driving some initiatives. There are a number of stand-alone opportunities that we're working on that are on this traceability component alone, and people are really trying to address those needs and be responsible providers of products to the marketplace.

Matt Pfau

Great. Thanks, guys. Appreciate it.

Allan Dow -- President and Chief Executive Officer

Thank you, sir. Appreciate it.

Operator

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

Zach Cummins -- B. Riley Financial -- Analyst

Yeah. Hi, good afternoon. Congrats on the strong results here in Q3. Allan, I just wanted to touch a little bit more on some of the challenges you're seeing with getting deals across the finish line and through these approval processes.

It sounds like some of the ones that were delayed in Q2 have now moved into Q3, and we're able to close some of those. But I was curious what you've really seen so far in Q4 and what's really kind of given you the confidence that you can still execute in this environment and put up the strongest ACV quarter here to end the year?

Allan Dow -- President and Chief Executive Officer

Yeah. We've got several contracts already under our belt. We've got them executed. So we're not quite all the way through the first month, but we're getting there.

And then just the magnitude of pipeline and the number of transactions in the phase we're in with those folks, Zach, relative to getting contracts negotiated and the timing and the sequence of events to get projects kicked off, a lot of movement going on there. So unless we get into something really crazy, which maybe will -- that always could happen. But it's just the momentum play that's out there, the deals that are already done, the momentum play that we have around the ones that are very, very active right now and timing fairly short term to get contracts completed give us strong confidence that we'll be able to hit that level of performance.

Zach Cummins -- B. Riley Financial -- Analyst

Understood. That's helpful. And just considering some of the staffing shortages you're seeing at some of your end customers and the delay of some of the project timelines here. Is this really causing any sort of differentiated approach in how you go about trying to close some of these deals? Is that more of a focus on the existing base and trying to expand upon those relationships? I'm just curious how you guys are really trying to navigate through this challenging deal closing environment.

Allan Dow -- President and Chief Executive Officer

Yeah. We've done a couple of things. I wouldn't say we haven't changed our focus to internal more predominantly, but our existing customers more predominantly but we have some great projects underway with existing customers. They're dealing with one or the same issues that others -- traceability is a great example that most of that work is with existing customers where they're expanding their footprint, trying to make sure that they've got good labor practices in place.

But -- so a couple of things we've done relative to the staffing challenges they're facing, we're putting forward proposals that we're offering up the labor to help backfill and support steps in the project that may otherwise historically been done by the customer. We're putting forward a statement of work that is very prescriptive and trying to minimize the impact on their labor internally so that we can get those projects moving relative to the burden that's on the customers to get that done. We can't do it stand-alone. We still need time from the client in order to really effectively deploy a solution.

But we're trying to minimize the impact on their existing staff and minimizing the amount of work that they have to put in any given week. So we're taking a couple of those actions to make sure we get there. And then the other thing we've done, and we've talked about this a couple of times, is really just breaking up the project into smaller bite-sized chunks. The customers feel better about taking a smaller project, if they're looking at something that's going to be 18 months or 12 to 18 months to deploy, they're a little more hesitant and there are lot more scrutiny going into launching those projects.

So we've taken a path to say, let's break it up, what's the most important thing that we can do first that will give you the biggest return on their investment and minimize the impact and get a project going. So we're going to see that play out in a few less million-plus transactions. That was my comment earlier. We had several of those in the fourth quarter of last year.

There's a chance that we won't have any of those or maybe one of those this quarter. But we're going to have a higher flow of deals by getting them broken loose and getting the commitments. So hopefully, I covered that point for you, Zach.

Zach Cummins -- B. Riley Financial -- Analyst

Absolutely. I appreciate all the additional color on that front, so thank you for that. And final question from me, Allan, is really around the planned investments that you talked about during the script, whether that be more in-person events that you're hosting, more travel from your internal team and even just hiring additional people. I mean can you talk about, is there any particular area that you're looking to bolster your headcount and kind of what are some of the ways you're looking to attract talent in what's been a pretty tough hiring environment?

Allan Dow -- President and Chief Executive Officer

Yeah. A couple of things. There are going to be more in-person events it appears. So marketing and customer conference events, those kinds of things are coming back.

People have flipped them to be in-person. A few of our investor and analyst conferences we've gone in-person. So did get me back on the airplane as well, looking forward to it by the way. But -- so that's going to happen.

We're not going to get back and I don't anticipate through the first half of next year, we'll go back to the level that we were prior to the pandemic. But certainly, they were almost nonexistent in the last two years, a very minimal travel, mostly internal travel. But people are back on site. They're welcoming us back on site.

So we're getting more and more engagements going on there. But the bigger impact is really going to be our investment in the organization. We have -- in order to support our business plan, we need to expand in every area. As we bring more subscription business in, we need -- we're getting scale out of the cloud business, but we still need more head count in our cloud business to support them.

We've got some strong plans in R&D that we really want to expand our footprint. We think there are some elements to invest in that requires people to go develop our applications a little deeper in some of these areas. So we're going to be expanding our R&D investment as well. We're going to keep that in line with our revenue growth as a percent of investment back in R&D, but that means we got to bring more headcount in in order to do that.

We're expanding our sales team globally. We're expanding in every region. We're adding some staff here in North America. We're expanding into Asia.

We're expanding into Europe, continuing there. So we've got headcount addition, we want to pull into that area. In order to support that, we got marketing investment we needed to make. And our backlog of services business, even though we can rely on our SIs, -- even when the SIs are doing a predominance of the work, there's individuals we need from our team to support them in their implementation process.

So we're going to be staffing up in our services business. So there's not an area of our business that's untouched from that investment standpoint. The second half of your question was why are we successfully able to compete? Well, first of all, I think people love this space. The fact that supply chain is a thriving, growing business they want to be part of that.

Supply chains have an impact on the world. We feel good. The people -- our team members feel good about what we do through our customers to impact the world we live in. traceability, sustainability, environmental impact by improving the efficiency through our customers.

Those are all exciting things to do. We've got a great culture here at the company. Longevity is -- of our staff is evidence of a good working environment. So -- and then we're very competitive on our compensation structure.

So we're able to attract people. They're coming in. They want to be part of our team. And so far, we've been successful at filling the open roles we have.

Zach Cummins -- B. Riley Financial -- Analyst

Understood. It's really helpful. I appreciate you taking my questions, and best of luck here in the coming quarter.

Allan Dow -- President and Chief Executive Officer

All right, Zach. Thank you very much for joining us this afternoon.

Operator

[Operator instructions] We'll move next to Anja Soderstrom. Please go ahead.

Anja Soderstrom -- Sidoti and Company -- Analyst

Hi, thank you for taking my questions, and congratulations for a great quarter. Firstly, I'm curious, you're talking about a lot of hiring and you're successful in attracting talent. But how do you see the wage inflation playing in and how are you going to be able to offset that or absorb that?

Allan Dow -- President and Chief Executive Officer

Well, yeah, the inflation certainly is in there and well deserved. The right talent deserves to have a requisite compensation, Anja, so good question in that. We have no choice but to make sure that people are fairly compensated. So we're going to step up to the plate, make sure that happens.

That's going to have an impact. But the bottom line is that as we grow the business, we get scale through our efficiency. Our services team, for instance, is working really hard at trying to improve the efficiency of the work we do with our customers. This prescriptive methodology helps.

So even though on a dollar-for-dollar basis, we have to make sure we've got fair compensation out there. We can get a lot more work done through those efficiency factors. In our cloud business, we're getting scale just through the natural deployment. It's not a one-for-one on expanding our customer base on a cost basis.

So even though we have higher cost from inflation, on where we do spend the money, we get scale through our efficiencies in the cloud business. So we think it's a balanced budget. We can't, as I mentioned in my commentary earlier, we don't anticipate that we can grow EBITDA at the same pace that we did last year because of some of these investments we're making. But not all of that's inflation, some of that is just getting out over in advance of the business model to get -- we get salespeople on board this -- in the next couple of quarters.

They're going to have an impact in the longer term. It takes six to nine months for them to be fully productive. So we want to make the investment now. We'll put the money down and we'll get a return on that investment.

Anja Soderstrom -- Sidoti and Company -- Analyst

OK. Thank you. That's a good color. And then also curious about the partnerships you mentioned in your press release.

Can you just speak a little bit about what we can expect from those and give us more color on that?

Allan Dow -- President and Chief Executive Officer

Yeah, good follow up question. The partners we have are really getting close with us and working hard to getting customers success, we're very much aligned with them on the objectives of the project. They are seeing the world the same way we are. That efficiency and effectiveness of getting projects up and running and getting systems deployed is important.

So we have very good alignment with their objectives, our objectives and the prospect objectives. We've done some pretty good investments in getting education and onboarding process going so that consultants are getting trained and certified ready to go. So that's been exciting. They are willing to put the investment in there to get them -- to get them educated so that they can be very effective when they are on the job.

So nice synergies, they are introducing us to new opportunities as well that we weren't otherwise aware of, so that's a nice spin-off of that. But the primary effect is that we're successfully getting customers up and running and live. And that bodes well for tackling Phase 2, which is really the objective for breaking up these projects that we get Phase 1 up and running and do that efficiently and effectively. Then Phase 2 comes along much quicker and that's an exciting part of our growth model.

Anja Soderstrom -- Sidoti and Company -- Analyst

Thank you. That was all for me.

Allan Dow -- President and Chief Executive Officer

All right. Thank you, Anja. Have a good afternoon. Evening for you, by the way.

Anja Soderstrom -- Sidoti and Company -- Analyst

Yeah. Thank you, likewise.

Operator

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

Allan Dow -- President and Chief Executive Officer

All right, Chloe. Thank you so much for helping us today, and thank you for all the participants on the call, especially with the follow-up questions, some very good ones. We appreciate your time in joining us this afternoon to discuss our earnings results and look forward to speaking to you again in the next quarter.

Operator

[Operator signoff]

Duration: 37 minutes

Call participants:

Vince Klinges -- Chief Financial Officer

Allan Dow -- President and Chief Executive Officer

Matt Pfau

Zach Cummins -- B. Riley Financial -- Analyst

Anja Soderstrom -- Sidoti and Company -- Analyst

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