American Software, Inc. (NASDAQ:AMSWA) Q1 2021 Earnings Conference Call August 26, 2020 5:00 PM ET

Company Participants

Vincent Klinges - Chief Financial Officer
Allan Dow - President and CEO

Conference Call Participants

Matt Pfau - William Blair
Zach Cummins - B. Riley FBR

Operator

Good day, everyone, and welcome to today's First Quarter Fiscal Year 2021 Financial Results. At this time, all participants are in a listen-only mode. 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

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

But first I’d like to remind you that this conference call may contain forward-looking statements, including statements regarding, among other things, our business strategy and growth strategy. Any such forward-looking statements speak only as of this date. These forward-looking statements are based largely on our expectations and are subject to a number of risks and uncertainties, some of which cannot be predicted or quantified and are beyond our control. Future developments and actual results could differ materially from those set forth in, contemplated by, or underlying the forward-looking statements.

There are number of factors that could cause actual results to differ materially from those anticipated by statements made on this call. Such factors include but are not limited to, changes and uncertainty in general economic conditions, the growth rate of the market for our products and services, the timely availability and market acceptance of these products and services, the effect of competitive products and pricing and other competitive pressures and the irregular and unpredictable pattern of revenues. In light of these risks and uncertainties, there 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

Thank you, Vince. As this pandemic continues beyond our initial expectations, we know that individuals, families and companies have been adversely impacted. But we want to encourage everyone to stay strong. We will prevail. Personally, and on behalf of the company, I want to express our gratitude for all the frontline workers and first responders who continue to work tirelessly that keep us all safe and healthy in these extraordinary times.

Furthermore, as an organization, we are pushing forward in our efforts to leverage the power of diversity within our team and to ensure equal rights for all of our teammates around our ecosystem and within our communities. Our community service committee is continuing to explore ways that we can have an even bigger impact in our communities as we invest time, personal monitory contributions and matching corporate funds.

We will push forward with our community service efforts to do our part to make the world a better place for all. But we cannot condone violence of any type and hold hope that our communities, sooner rather than later will find the path to peaceful resolution of the challenges faced in today’s society.

In regards to our first quarter results, I am pleased with how our team has remained focused on serving existing customers, accelerating ongoing implementations, in bringing new companies into our customer community. We remained open and fully operational as a virtual organization throughout the pandemic to support the needs of our customers as they navigated this global crisis.

We continue to create new inspirational stories with our customers as they have managed on both ends of the spectrum from explosive growth for products at high demand to managing the staggering closing and reopening of bricks and mortar retail.

We continue to gain efficiency in every area of our business as we refine the operational activities to the new virtual world. Following a strong services performance in our prior quarter, we experienced a more pronounced seasonal slowdown in some projects as the customers and our team members took a much needed break using staycations and short trips to get away.

However, our implementation backlog remains strong and is continuing to grow. Our services work remains 100% virtual. So we are seeing a rapid rebound in project activities as schools have reopened and folks have returned to work.

Based on the seasonal nature of the services work and the backlog of project activities, we expect second quarter revenue to trend higher than Q1 and anticipate the back end of our fiscal year to be very strong after working our way through the traditionally slow calendar year and holiday period.

We are pleased to see that our focus on the cloud first strategy is paying off with a recurring revenue stream of maintenance in cloud services now represents approximately 61% of total revenues. That’s a milestone achievement. Our subscription revenue in the first quarter grew 43% year-over-year and the growth in annual contract value for cloud services over the prior year period was 36%.

We expect the percentage of our recurring revenue to continue trending higher in the future based on the strong preference for subscription contracts. We had a strong start to the first quarter, but as expected, we had less access to people and saw sales cycles lengthen as we progressed into the summer. Even so, we delivered strong ACV growth on a gross basis, which was partially offset by an uptick in churn related to several customers facing economic hardships.

Sales activity is picking back up and we are continuing to see growth in our pipelines, both in the number of opportunities and the size of the transactions leaving us confidence that we will see an upward trend in the second half of the fiscal year. We welcomed five new customers in first quarter and completed subscription or license fee transactions in five countries.

During the first quarter, we added three critical new leaders to our organization who will help drive our growth. First, we were pleased to have Kevin McInturff join our team to lead our research and development efforts. Kevin brings a fresh perspective on agile development methodologies, value-driven innovation and a continuous learning approach to research.

Second, Alex Price joined to lead our reseller channel and partner alliances for the Americas. Alex brings a wealth of experience in driving growth through our partner channel. So we are excited to have Alex on our team to help us accelerate our global sales.

And last but not least, Sean Runnels has joined us to lead our global marketing efforts. Sean brings a wealth of supply chain experience and is a career marketing professional. We have great confidence that Sean will help expand the brand awareness of our company across the globe and have a material impact on achieving our growth objectives.

Looking forward, we are continuing to see an uptick in the transformational projects as we see a transition from a CFO-driven supply chain to the CEO-driven supply chain where our customers adopt our platform to radically 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 summary, we are pleased by our progress as we strive for continued success to deliver exceptional value for our customers in this new digital world. We will continue to focus on making our customers more successful as we look to expand our relationship and introduce new and 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 to our customers in the time when they need it most.

At this time, I will turn the call over to Vince who will provide the details on our financial results. Vince?

Vincent Klinges

Thanks, Allan. Comparing the first quarter of fiscal 2021 to the same period last year, total revenues were $27.3 million as compared to $27.4 million in the same period last year. Subscription fees increased to 47% to $6.3 million for the quarter as compared to 4.5 in the same period last year, while software license revenues decreased 56% to $0.8 million, compared to $1.8 million in the prior year, again showing the transition to the cloud.

The cloud services annual contract value increased by approximately 36% to $27.6 million for the current quarter, compared to $20.2 million same period last year. As Allan mentioned, our reported ACV was negatively impacted by the loss of several customers that experienced significant financial challenges among the COVID-19 outbreak.

On a gross margin basis, excuse me, on a gross basis, our new ACV increased by more than $2 million, an encouraging sign given that we approach levels seen on average prior to the pandemic and we did so during our seasonally slowest quarter with sales activity ramping back up and churn rates moderating as we move forward.

We remain optimistic that our ACV trajectory will reflect an upward trend in the back half of our fiscal year.

Looking at Professional Services, that decreased 3% to $9.8 million compared to the prior year of $10.1 million and that was due to a 17% decrease in our supply chain management unit partially offset by a 15% increase in our IT consulting business as a result of timing of project work. We note that our backlog of supply chain management implementations remains robust, but several projects progressed more slowly than anticipated as greater number of employees and customers took vacation time.

Additionally, restrictions on travel also reduced the amount of pass through reimbursements we had recognized historically to zero. Maintenance revenues decreased 6% to $10.3 million, compared to $11 million stemming from the normal fall off rate and lower levels of new perpetual license revenues.

So our combined recurring revenue streams of maintenance and cloud services were up 61% of total revenues for the current quarter compared to 56% in the same period last year. And we believe this trend is to a higher percentage in recurring revenues as we transition the cloud revenue model

Taking a look at costs, our overall gross margin was 52% in the current period compared to 53% in the same period last year. Our license fee margin was 14% for the current quarter compared to 22% in the same period last year and that’s primarily due to lower license fee revenue.

Our subscription fee margins increased to 57% compared to 52% in the same period last year and that’s primarily due to the increase in subscription revenue and when you exclude the non-cash allocation of amortization of Cap Software of approximately $1 million in the quarter, the subscription gross margin would have been 72% and that compares to 69% in the same period last year, which included approximately $800,000 of amortization of Cap Software.

Our service margin decreased to 20% compared to 27% in the same period last year and that’s due to a higher mix of professional services revenues coming from our lower margin GPM IT staffing business unit, as well as lower utilization of our supply chain management unit due to seasonality. Our maintenance margin was 83% for the current and prior year period.

Looking at operating expenses, the total gross R&D expenses were 16% of total revenues for the period compared to 17% in the same period last year. As a percentage of revenue, sales and marketing expenses were 17% of revenues for the current period compared to 20% in the same period last year and that’s primarily due to lower travel and marketing costs, partially offset by higher salary expense from increased headcount.

Our G&A expenses were 16% of total revenues for the current period compared to 18% in the same period last year. Our operating income increased to 11% to $0.9 million this quarter compared to $0.8 million the same period last year. Adjusted EBITDA which excludes stock-based compensation decreased 11% to $3.1 million for the current quarter compared to $3.5 million in the same period last year.

Our GAAP net income increased 77% to $2 million. Our earnings per diluted share of $0.06 for the current period compared to net income of 1.2 or $0.04 earnings per diluted share. Adjusted net income was 2.8. Our adjusted earnings per diluted share of $0.09 for the current quarter and that compares to 2.1 and adjusted earnings per diluted share of $0.06 in the same period last year.

And these adjusted numbers exclude amortization of intangible expenses related to acquisitions and stock-based compensation expense. Our international revenues this quarter were approximately 15% of total revenues for this quarter, compared to 22% in the same period last year.

Looking at the balance sheet, our company’s financial position remains strong with cash and investments of approximately $93 million, which increased $5 million of the same period last year. And during the current quarter, we paid $3.5 million in dividends. Other aspects of the balance sheet, we had billed accounts receivable of $24.4 million, unbilled of $2 million, deferred revenues of $32.5 million and shareholder equity of $120 million.

Our current ratio increased to 2.8 as of July 31, 2020, compared to 2.6 the same period last year. Our days sales outstanding as of July 31, 2020 was 88 days for the current quarter and that compares to 68 days in the same period last year and that’s due to delays in some payments due to the pandemic.

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

Question-And-Answer Session

Operator

[Operator Instructions] We will take a question from Matt Pfau. Please go ahead.

Matt Pfau

Hey guys. Thanks for taking my questions. Allan, I was just sort of wondering if you could give us a little bit more detail on how the pipeline has trended. So, if I go back to last quarter, the commentary was, there was a bit of a slowdown in late March and April and then things trended back up and now it seems like maybe there is a slow period due to vacations, but then maybe things improved again.

So, maybe just give us a little bit more detail on how the pipeline is trending and then what gives you confidence going into the back half of your fiscal year?

Allan Dow

Yes. Matt, first of all, thank you for joining us and good question. We are continuing to see the pipeline grow. In fact, I looked at it with the team just a few days ago and we are trending to a high point over the last several quarters like, I think we went back maybe seven quarters to see where we were peaking up across that whole time period. So, we feel good about that.

And as I mentioned in the earlier commentary, not only do we see the total volume of the pipeline – the dollar value of the total volume that way, but the number of transactions and the size of the transactions, the average transaction value was up as well. So it bodes well for the future. We are feeling good about that.

We are also feeling good that really and just in the last couple of weeks, we’ve seen the activity pick back up and it can only be attributed to the fact that people did come back and schools are starting to reopen at least across the southern part of the United States and many of the European communities are back from their holiday periods as well.

And just the volume of activity has really picked up. So, we feel good about it. The pipeline is growing and we are actively engaged in a number of contract discussions.

Matt Pfau

Got it. And then, as I think about your customer base and exposure to retail and CPG, obviously, there is broad range of performance within that customer base in terms of how their businesses are doing and you mentioned there was a few customers that churned in the quarter that impacted the ACV growth.

As you look across your customer base and obviously still difficult to predict given the unknown macro, but I guess, what’s your sense about the, I guess, higher than normal churn that we’ve had over the past few quarters? Are we kind of at the end of this now? Or is this going to persist for a few more quarters as we figure things out here?

Allan Dow

I think Vince and personally have been very engaged in that dialogue about customers at risk and particularly those that are communicating to us – that or those who are not communicating at all and those were some of the ones that we identify that we did have trouble with. We see that as an anomaly this quarter. It was a little bigger than even last quarter.

The last quarter was up a little bit from the history. But as we look forward into this quarter, we think it’s right back on normal trend. So we don’t think this is a pattern that will persist. But we can’t predict how long the pandemic will run and just what kind of impact it will have on it.

But the strong companies, even in the industries that are hurt are – we’ve got several of them that are actually progressing new projects with us. So, given that they are engaging in that kind of activity, we feel good that they will abide by their prior commitments and pay their bills and stay strong and continue to invest.

So, we think there is a few anomalies out there, Matt, and of course, we could get another surprise or two. But we don’t see that it’s a catastrophic trend that we are worried about or anyone should worry about at this point.

Matt Pfau

Got it. Last question from me, you obviously announced a number of new hires this past quarter. Maybe just some more detail on what sort of drove that. Is it opportunistic sort of a coincidence , anything to call out there?

Allan Dow

Well, it’s certainly the three that I mentioned in my earlier commentary. We are strategic in nature. Two of those were replacements that folks that had vacated us a while ago and we took our time to find the right people that would really advance our cause and help us drive towards our longer term strategy as we look at new market conditions out there today being very, very centric around virtual in a digital world.

And new thinking about the way customers look at this – as I commented about a CEO-driven supply chain versus a CFO-driven and I crack a smile on Vince’s face as a result of bringing that up. The CFOs as we all know are very focused on cost cutting and managing cash and CEOs are about customer service and making sure that I can mitigate risk and I can operate effectively and take advantage of opportunity.

And that’s a very different perspective that we’ve seen a significant shift in over the last couple of years actually. And we believe that positions us even more positively. So, we feel good about it. The people we’ve hired will help us navigate through that and pursue this new market in a much more aggressive and effective way.

We’ll continue to make other investments that are opportunistic as we see the right people that are available for us. But those three in particular were very strategic.

Matt Pfau

Great. Thanks for taking my questions guys. I appreciate it.

Allan Dow

You got it. And nice to chat with you again, Matt. Thanks for joining us.

Operator

And we will take a question from Zach Cummins. Please go ahead. Your line is open.

Zach Cummins

Hi, good afternoon, Allan and Vince. Hope all is well as both of you and thanks for taking my questions. Allan, can you give us a sense of how deals are now progressing here in the last month? It seems like you ran into really a slow period towards the back half of Q1, but can you give us a sense of the performance so far through August?

Allan Dow

Yes. Happy to do that, Zach. Again, thank you for joining us. We hit – if we look to Q4, we were – early Q4 was tough, that was when the pandemic first hit and then we had a pretty good run in the back end and a pretty good start to this first quarter. But then it really - it was quite surprising. I guess, I should have anticipated it. I didn’t.

I thought maybe that folks working from home kind of felt like they were on vacation anyway in reality it’s not. And when you look at it it’s still working and it’s stressful and I am glad that our team members, as well as our customers did take a break and the larger transactions where we saw the difference, Zach, I think the more traditional type of engagements, that flow stayed pretty well which helped us achieve the numbers that we did get.

But all we saw is some of the larger more transformational projects. They take a higher level of approval. More people are putting their fingers on them. They are more strategic and just coordinating amongst all the people that need to be involved in that decision making and approval process became very difficult as the summer season was getting into full swing. Now they are back. We have more million dollar plus opportunities that we are pursuing right now than we’ve had in a very, very long time maybe since my engagement here at the company. So it’s just, those people are back and are working on it. And we feel good about what’s happening.

Zach Cummins

Understood. That’s helpful. And then, in terms of the uptick churn that you saw this quarter, I mean, was this related to any specific vertical or any sort of color you can provide around that to give us a sense of maybe some of the more challenging aspects as we look at the model over the next few quarters?

Allan Dow

Yes. We had a, I think a handful of customers that we unfortunately we’re unable to continue with just because of their financial condition or in a couple of cases where they have just furloughed the number of people which is related to financial as well. And if they don’t have people to use an application, there is no point in having one.

So, they were, for the most part, majority of them were in the apparel space which has been just devastated by this pandemic. People – they missed two or three seasons quite frankly. And most of them now have turned their attention to what they can salvage out of the holiday period and more importantly they are looking towards next year quite frankly.

So, the majority were there. But there were some infrastructure. There was one in particular infrastructure, electronic infrastructure company that too was also struggling in this marketplace as some of the major investments slow down.

They too were struggling. And they just didn’t have the resources to work on a more strategic application. It was one of our day-to-day operational ones, but more strategic that kind of fell apart there, but, for the most part, consumer goods and apparel-centric.

Zach Cummins

Understood. That’s helpful. And then, I guess, with everybody removing – large remote model and kind of having this more hybrid approach as they move forward. Have you seen any uptick in interest from the existing base to potentially moving over to the cloud at a faster pace?

Allan Dow

Yes. We are seeing it. Zach it’s a good observation. We are seeing that people want to mitigate their risk of operating the systems themselves and more and more push over there. We’ve – as we’ve stated before, we are not out aggressively trying to force people in that direction.

We will accommodate what makes more sense for our customer. But as they express interest in shifting that, we are embracing it. We can provide them a better level of service. We’ve got teams that are working collaboratively across that and we can pool our resources and be very effective at it. So, we are seeing an uptick in that area and I think we’ll see that trend continue.

Zach Cummins

Understood. And then, just final question for me. On the supply chain management professional services team, it sounds like many of those projects were just taking a brief pause with many people on vacation. But how are you thinking about that business? And moving towards the second half of the year, it sounds like more of these projects are back online.

And to that point, how should we think about the margin profile as we move forward with utilizing a fully remote model now. It seems like you may lose a little bit of pass through revenue that comes from traveling. But should we see a better overall margin from that group going forward?

Allan Dow

Yes. I think the pass through revenue will help that by itself will help and then the utilization rate has picked back up pretty dramatically and as we see the utilization rate pick up, the margin picks up with it. We chose – I mean, these are valuable resources that have deep knowledge about our industry, about the way that customers work and operate these systems and about our products specifically.

So, for a short blip and when people go on vacation, you don’t caught on and hang on to them but that it impacts through utilization on our margin rates. But they are back and we went through an exercise just a few weeks ago and as we looked out, we can see that the back half of the year, we don’t have enough resources today to fill out our – what we think might be the hit in the back half of the year.

So, as we progress through the fall, we’ll be looking at kind of the holiday period as a reassessment of our staffing and making sure that we’ve got adequate resources to fulfill the needs in the second half of the fiscal year. So, we think it will be much stronger and a much better utilization.

Onboarding is a little tough, when you get someone in it takes us a few months, I mean, sometimes it’s a few weeks to get them starting to be billable, but to get them fully utilized it usually takes a few months.

So, again a bit of a blip when you do that, but I think that’s why I said the third quarter is going to be real strong on both revenue and utilization and then, we get the seasonality hit and then we should be in good shape in the latter half of the fiscal year, as well.

Zach Cummins

Understood. That’s helpful. Well, thanks again for taking my questions and best of luck as we move forward from here.

Allan Dow

Zach, thanks for joining us.

Operator

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

Allan Dow

Alright. Well, thank you all for joining us and we appreciate your attention this afternoon and look forward to catching up with many of you again in the days ahead. So, have a good evening. Thank you.

Operator

This concludes today's program. Thank you for your participation. You may disconnect at any time.