American Software, Inc. (NASDAQ:AMSWA) Q4 2020 Earnings Conference Call June 18, 2020 5:00 PM ET

Company Participants

Vincent Klinges - CFO
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 American Software Fourth Quarter and Fiscal Year 2020 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]. Please note this call maybe recorded, and I will be standing by if you should need any assistance.

It is now my pleasure to turn today's conference over to CFO of American Software, Vincent Klinges. Please go ahead.

Vincent Klinges

Thank you, Chloe. Good afternoon, everyone, and welcome to American Software's fourth quarter fiscal 2020 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 I would like to remind you that this conference call may contain forward-looking statements, including statements regarding, among other things, our business strategy and growth strategy. Any such forward-looking statements speak only as of this date. These forward-looking statements are based largely on our expectations and are subject to a number of risks and uncertainties, some of which cannot be predicted or quantified and are beyond our control. Future developments and actual results could differ materially from those set forth in, contemplated by, or underlying the forward-looking statements.

There are 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 our opening remarks.

Allan Dow

Thank you, Vince. This spring has been an experience for all time. Personally and on behalf of the company, I want to express our gratitude to all the frontline workers and first responders who have worked so hard to keep us all safe and healthy in these extraordinary times. Furthermore, as an organization, we embrace and support diversity and equal rights for all of our teammates around our ecosystem and within our communities because it makes us better and it is simply the right thing to do.

As we all know, this view is not universally held across the country and around the globe. And to that end, we respect the right for civil protests, to raise the awareness of the social injustices that still exist today. As community members, we invest time, personal monetary contributions in matching corporate funds to help those who have basic living needs and to enhance the opportunities for all to excel.

In regard to our fourth quarter and fiscal year results, I am extraordinarily pleased with how our team has pivoted multiple times during the last few months. The most dramatic shift was the transformation to operating virtually, which we did in early March. Within 24 hours, we went from the old normal to 100% virtual. In anticipation of that event, our team members were prepared and I can report that we were extraordinarily successful. We remained open and fully operational, supporting the needs of our customers as they navigated the global crisis and managed their supply chains under very dynamic conditions.

Customers have shared many stories about the value they gained from using our solutions and working with our team members that span a wide array of challenges from explosive growth for protective gear, disinfectants and home-based food products, to managing the staggered closing and then reopening of the bricks-and-mortar retail. The bottom line is that in the weeks following the transition, we gained efficiency in every area of our business. Our implementation projects accelerated, our support operations engaged more with customers, and our sales team learned how to market, sell, contract, and transition a project implementation all in the virtual environment.

We're using our expertise to enable prospects and customers to work more effectively in this 100% virtual world. Especially considering all that was happening, our fourth quarter was a solid end to a very successful year on many fronts. We clearly have transitioned the business to the software-as-a-service engagement model as evidenced by the 64% year-over-year increase in subscription revenue and 53% growth in annual contract value for cloud services over the prior-year period. We're gaining momentum and building a solid recurring revenue stream of maintenance and cloud services, which now represents approximately 57% of total revenues. We expect that percentage to continue -- percentage of recurring revenue to continue trending higher in the future based on the strong preference for subscription contracts with that rate approaching 60% by the end of this fiscal year.

As I stated earlier, we accelerated our professional services activities, which is reflected in the 16% growth in professional services revenue on a year-over-year basis. We have a solid backlog for our supply chain services organization due to our strong bookings performance over the past few quarters and are expanding the number of resources in some of the areas where we see continuing demand to ensure that the specific skillsets will be available where we see demand increasing. Based on the seasonal nature of the services work and the backlog of project activities, we expect to show growth in the first quarter services revenue on a year-over-year comparison basis, We had a strong start to the fourth quarter, but the middle was a bit muddled as the realities of the pandemic took hold.

While that momentum we had entering the quarter began to re-emerge as we exited the quarter, our net new ACV growth was affected by a few delays in deal closures as well as the loss of one of our lifestyle products companies that was in financial distress. Vince will detail some of that during the update on the financial results.

We welcomed six new customers in the fourth quarter, which brings us to a total of 40 new customers for fiscal '20 and completed subscription or license fee transactions in five countries during the fourth quarter. The momentum in late April carried into the current quarter with a number of contracts completed in May and in early June, which is typically a seasonally slow period for us. We continue to see pipelines grow and are ahead of where we were this time last year. So, we remain confident in our ability to achieve ACV growth in the new fiscal year. There's still some uncertainty regarding close rates over the summer months. However, we anticipate an upward trend in the second half of the fiscal year.

What we've seen already is that managing the supply chain has risen to the executive agenda. There's an awareness that current systems and processes are insufficient for today's market where resiliency, speed, and agility go hand in hand and have become the norm. This speaks well to our comprehensive planning platform, prescriptive implementation approach, and having robust capabilities built in. These conditions bode well for our growth in fiscal '21 and beyond.

Looking forward, we're continuing to see an uptick in transformational projects, which leverage our digital Supply Chain Solutions and take advantage of the optimization depth, advanced analytics, machine learning, and optimized simulation capabilities of our platform to dramatically improve the speed and quality of decision making for our customers. In today's dynamic economic environment, customers are looking for supply chain agility to help them navigate the global trade uncertainty, while simultaneously seeking to accelerate the introduction of new products. This new approach allows them to orchestrate these processes to mitigate risks and enhance resiliency. Our ability to put our customers on a journey to transform their supply chain to continuous and autonomous planning where that journey begins with tangible results within six months gives us the competitive advantage in today's market.

In summary, we're 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 customers more successful as we look to expand our relationships and introduce new innovative services. 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 will provide the details on our financial results.

Vincent Klinges

Thanks, Allan. Taking a look at the fourth quarter of fiscal '20 to the same period last year. Total revenues increased 11% to $29.3 million and that compares to $26.3 million in the same period last year. What drove a lot of that was subscription fees, which increased 64% to $6.3 million for the quarter compared to $3.8 million in the same period last year. Software licensees decreased 37% to $1.1 million for the current quarter compared to $1.7 million.

Looking at our cloud services ACV or annual contract value, it increased by 53% to $26.4 million, and that compares to $17.3 million in the same period last year. And as Allan mentioned, our reported ACV was negatively impacted by the loss of a lifestyle product company that experienced significant financial challenges amid the COVID outbreak, and that resulted in a suspension and possible termination of the subscription contract, which reduced both the new net ACV for the current quarter and also the cumulative ACV and by approximately $600,000. We do not anticipate that this will be a trend in our customer base but rather an exception.

Looking at professional services that increased 16% to $11.5 million for the current quarter compared to $9.9 million in the same quarter last year. That's due to 20% increase in our supply chain management unit due to stronger bookings in recent quarters. And we also had 11% increase in our IT consulting business, the proven method as a result of timing of project work.

Looking at maintenance revenues, it decreased 4% to $10.4 million compared to $10.8 million, stemming from the normal falloff rate and which is lower than historical perpetual license revenues. Our combined recurring revenue streams of maintenance and cloud services were 57% of total revenues for the current quarter, and that compares to 56% in the same period last year. And we believe this trend is to a higher percentage in recurring revenue as we transitioned to cloud revenue model in the future.

Looking at other costs. Our overall gross margin was 54% for the current quarter compared with the prior, excuse me, it was 54% of the current and prior year period. Our license fee margin was 22% for the current quarter and that compares to 34% in the same period last year, that's due to lower license fees. Subscription fee margin increased to [66%] compared to 47% in the same period last year, and that's primarily due to increase in subscription revenue. And also, when you exclude the non-cash allocation of amortization of cap software of about $1 million in the fourth quarter of ‘20, the subscription gross margin would have been 72%, and that compares to 61% in the same period last year, which included about $0.5 million of amortization of cap software.

Our services margin increased to 31% compared to 30% for the same period, and that's due to a higher mix of professional service revenue coming from our higher margin supply chain management business unit. Our maintenance margin increased to 83% for the current quarter compared to 82% in the same period last year, and that's primarily due to cost containment efforts. Operating expenses, our gross R&D expenses were 15% of total revenues for the current period that compares to 19% in the same period last year. As a percentage of revenues, sales and margin expenses were 20% of revenues for the current quarter compared to 22% in the prior year period, and that's primarily due to lower travel and marketing costs, and which is partially offset by higher salary expenses from an increased headcount.

Our G&A expenses were 16% of total revenues for the current and prior year period. Our operating income increased 57% to $1.6 million for the current quarter compared to $1 million in the same quarter a year ago. Adjusted EBITDA, which excludes stock-based compensation, increased 11% to $3.9 million for the current quarter compared to $3.5 million in the same period last year.

Our GAAP net income decreased to 71% to $0.5 million or earnings per diluted share of $0.2 per share for the current quarter compared to net income of $1.9 million or $0.6 earnings per diluted share. Our adjusted net income of $1.1 million or adjusted earnings per diluted share of $0.04 for the first quarter compared to net income of $2.7 million, or adjusted earnings per diluted share of $0.09 in the same period. And these are just the numbers excluding amortization of intangible expenses related acquisitions and stock-based compensation expense. Our international revenues for the current quarter were approximately 17% of total revenues, and then that compares to 22% the prior year quarter.

Taking a look at the full year 12 months ended April 30, 2020 compared to the same period last year, total revenues increased 6% to $115.5 million compared to $108.7 million last year. Subscription fees were $22 million for the year and that's a 57% increase compared to $14 million the same period last year, while our license fees were $7.6 million or 6% increase compared to $7.1 million for the same period last year.

Our services revenue increased 1% to $42.3 million for the year compared to $42.2 million last year, and that's due to 12% increase in our supply chain management unit. This is partially offset by 10% decrease in our IT staffing business. Our maintenance revenues decreased 5% year-to-date to $43.1 million and that compares to $45.4 million. Looking at costs for the year, our overall gross margin increased to 55% for the year compared to 52% last year.

Our subscription gross margin decreased to 57% for the year compared to 59% in the same period last year, and that's due to the allocation of amortization of cap software cost of $3.4 million this year compared to $1.4 million last year. The subscription gross margin without the non-cash cap software allocation would have been 72% for the year of fiscal '20, an increase compared to 69% in the same period last year.

Licensee margin increased to 37% compared to 10% last year, and that's due to higher license fees and also due to decrease in cap software allocation to cost of license fees. Also, lower amortization of intangibles and also lower VAR commissions. Our services margin was 28% compared to 25% in the same period last year, and that's due to increase in services revenue from our higher margin supply chain management business unit. Our maintenance margin was 83% for the year compared to 82% in the same period last year.

Looking at operating expenses, our gross R&D expenses were 16% of total revenues compared to 18% for the prior year period. As a percentage of revenue, sales and marketing expenses increased to, excuse me, were from 19% for the current and prior year period. G&A expenses were 17% of revenues for fiscal '20 and that compares to 16% of the same period last year, and that's due to higher variable compensation and to a lesser extent higher legal and insurance costs.

So our operating income increased 15% to $6 million compared to $5.3 million last year. Adjusted EBITDA year-to-date increased 10% to $16.2 million compared to $14.7 million in the same period last year. And our GAAP net income decreased 1% to $6.7 million or $0.21 earnings per share compared to net income of $6.8 million or $0.22 earnings per diluted share. Adjusted net income year-to-date was $9.9 million or earnings diluted share of $0.31 compared to $10.5 million or $0.33 earnings per diluted share. International revenues for the full year were 19% of total revenues compared to 20% in the same period last year.

Looking at the balance sheet, the company's financial position remains strong with cash and investments of approximately $94.7 million at the end of April 30, 2020, which increased over $6 million compared to the same time last year. During the quarter, we also paid $3.5 million in dividends. Other aspects of the balance sheet, our accounts receivable was $22.6 million, unbilled was $2.4 million for a total of $25 million AR, deferred revenues for current and long term were $34.2 million and our stockholder, shareholder equity was $119.9 million. Our current ratio was 2.7 as of April 30, 2020 and that compares to 2.6 the same period last year. And our day sales outstanding as of April 30, 2020 was 78 days and that compares to 70 days in the same period last year.

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

Question-and-Answer Session

Operator

[Operator Instructions] We move first to Matt Pfau. Please go ahead.

Matt Pfau

Allan, just wanted to first start off with the impact that you're seeing from the pandemic and you kind of laid it out that you saw some softness at the end of the quarter, and things have picked up back then. But you know maybe we can just sort of dig into that a bit more. Is it mainly just delays or a lot of these deals still sitting in the pipeline? And then you know are there certain types of projects or deals that are getting more impacted than others? Just give us a little bit better sense in terms of what's going on there from the impact in the business.

Allan Dow

Matt, first of all, thank you for joining us and good question. It really was in the mid quarter that we saw the stall and our view on that and our experience around that was that as the pandemic happened and everyone was going virtual, it just raised the level of chaos. And you know, they were focused on just how to keep -- continue operating and moving people virtual and getting people connected and that sort of thing. So, it caused a stall. We had relatively few projects fall out. In fact, during that time period, we actually were closing some contracts and getting business started in some areas that just were quite surprising. We had won one contract that we signed at the very end of the quarter that was in the oil and gas business, for instance. And we all can look back and say, there was a period in there when they were giving oil away, if you had a swimming pool, they would have been happy to fill it up for you. And so that was a bit surprising.

And we had a contract signed in the retail space where they were actually in furloughed conditions and stores closed, and they still contracted with us. But what happened was people looked at it and said, we don't know what the outcome's going to be, we know we're going to be here for the long haul, we're a stable company, we want to invest in the future and they got going. But that happened late. It happened in late April and it carried into May and continued into the first couple of weeks of June. And so, we're seeing the pipeline is still strong. Most of the projects are still in the backlog for us. We're working on those.

Again, we're here now approaching the summer season, and to my surprise, it seems like, it feels like we've been on vacation, although we're working from our home, but this seems like a lot of people already starting to take some vacation. So that's the concern about just the ability to capture attention and get things done. But the backlog is still strong. The pipeline is still there, and we're anticipating an uplift as we go into the year with really a focus on supply chain opportunities here that people need to make an investment, and know they need to do a better job of managing it. Does that help, Matt?

Matt Pfau

Yes, it does. So, I guess it sounds like the main concern in terms of closing deals is it's typically at the time of year when it's hard to reach customers and so to convert them those deals that perhaps got pushed, it might be difficult to contact the customer and get those pushed across right now. Is that correct?

Allan Dow

Yes, I think some of them we already transacted, we had a couple of those go. So, they were -- they were just taking longer than we anticipated or normally we’d see with the delay that was in the middle, and we're still engaging. But the tough part right now is to rally people together to get final approvals and things of that nature. Normally, they’d huddle in a room and you could get that done, and now it's trying to help them navigate our virtual world and potentially people taking vacation and whatnot. So, you're absolutely right. It's a timing matter. We're not overly concerned about it. It's just a question mark right now until you get through that process you don't know what for sure is going to happen. But we certainly aren't seeing everybody saying we're done, we're stopped, we're over. It's really just, they're moving ahead, it's a strange environment for everybody.

Matt Pfau

And maybe we can focus a little bit more on the long-term potential impact. And so, I guess, one, have you seen customers or conversations with customers change at all, and I guess that meaning are more executives getting involved, has the importance of supply chain planning software been elevated? And if that's not the case, maybe you can just talk about what do you see some of the long-term impacts to your business coming out of this pandemic will be?

Allan Dow

Yes, what we're seeing is the executives taking a personal interest. I mean, they were always aware of the projects, the projects are large enough that it didn't escape their viewpoint. But now they're taking a personal interest and wanting to understand how they can move forward, what it will be different for their business, so what will be new in the new world once we get to a new place. And the other thing that's been very interesting is that there's a sense of urgency around getting systems in place that they can gain value and then be ready. So, for instance, there's some conversations going on now, let's say, how can we get started today and be ready for the fall in case the pandemic comes back? We'll be in a position where we're getting value but may have to pivot and do something slightly different than what otherwise anticipate, and that speaks volumes to the way we operate.

We implement in a very agile way and we can actually put them in a position where they're getting valuable use in real world environments by the fall if they were starting today, for instance. And then we get a chance to see it together. The benefits of an agile methodology is that you get to a point where you have viable use, and then you reassess where you go next. And if the economic conditions change or something happens in the environment, then we can pivot and we can go in a new direction or we can continue on as initially anticipated. So, that's kind of a change in discussions that we were not having six months ago, nine months ago, or a year ago.

Matt Pfau

And has there been any change in terms of the deal size? I guess, I’m thinking are customers trying to maybe buy off smaller pieces so they can get sort of a faster time to value versus some of these transformational projects. Any change there in terms of what you're seeing with your mix?

Allan Dow

No, we're still actually seeing an uplift where they're biting off on the whole project, they just want to phase the efforts that are going on, they don't necessarily want to phase the project. So, they'll take maybe a segment of the business and get it operational for a critical section. And it still takes the same amount of scope but maybe not as expansive in user community or as many of the data elements or something of that nature. So, we haven't seen a downdraft in the size of the contract, if anything, we're still seeing a trend upward.

Matt Pfau

And last one for me, just was wondering any change in plans and in terms of your sales hiring and then your sales strategy going forward, as you've maybe learned and got to experience with this remote sales that any sort of long-term changes you're anticipating in the sales strategy?

Allan Dow

No, we're not seeing any change in strategy at all. We haven't implemented anything there. We're in the middle of onboarding a number of new folks onto the team right now and that's been a continuous trend about every quarter. We've been successfully finding the right candidates and being able to bring a couple of people in. So, it's an onboarding process right now. We're still looking for that. It's getting more and more difficult to do recruiting, because people kind of lock down and they want to stay where they are. But, we're still finding some good candidates. And this week, we had a couple of folks just join us. So we're going to stay on the same track. We'll course correct if necessary as we see how the economy plays out and how the pandemic plays out. But right now, we're anticipating continuing the progress we're making over the last six months.

Operator

[Operator Instructions] We will move next to Zach Cummins. Please go ahead.

Zach Cummins

I guess just speaking to the termination of that contract with a lifestyle brand customer during the quarter. I mean, can you maybe just speak more so to what's really going on there, it sounds like more of a one-off event? And are there really any specific verticals where you're continually seeing customers to struggle that may raise some concerns for you in the upcoming quarters?

Allan Dow

There are no universal trends where you can say that, that one is tough. Of course, in the retail space this wasn’t in retail space, they are in a lifestyle product space but one that got punished. But overall, the retail segment is the only one that really went into distress that we have a number of projects in that space that are continuing, folks moved home and they continued to work on the projects. And as I said, we even contracted to start some new projects in that space. So, that would have been the one, if any of that, I would have said really would have been in the shutdown mode. Lots of distractions around that.

If you could imagine closing your retail stores and shutting down your supply chain, and then a month or two later opening it back up again and trying to restart it and figure out what that process is going to be. Lots of distractions there, but not cancellations. We only had the one. We don't have others that we're anticipating yet. We don't know for sure. We'll have to see where that plays out. But, we see people continuing to operate. They're continuing to work. They're continuing to work on their projects. So we can't put a trend on it at this point other than it looks like we had one incident and maybe we'll have on others, but we don't know where they are right yet.

Zach Cummins

And good to see the continued progress, especially in the supply chain management organization for your professional services. It sounds like the backlog there is still pretty strong and continue to see growth in that here in Q1. I remember you mentioning that you've actually moved a lot of these engagements to a virtual environment. So I was just wondering, do you see an uptick in margin from a remote model for these implementations and these projects, or any sort of major change around that?

Allan Dow

Yes, moving virtual was a surprise. It's one of those areas what we anticipated that people, people always had a view that it is necessary to be face to face we share that view. But we learned by using some virtual techniques around video cameras by managing the meeting sequence where you take short breaks, you engage people, you have to think differently, prepare differently but you hit the nail on the head, Zach. And we've taken out a whole segment that is of inefficiency around the travel and the commuting across busy cities and getting from airports into the city and out of the city and all those sorts of things. So the time we spend with customers is very efficient.

We can be more dynamic around the way we schedule, so you can put multiple customers on the same day, which we couldn't normally do before and that help facilitate very productive meetings. The decision-making process is faster. People are when they're on with us, they're focused, they're making decisions. So I think the bottom line out of that is we will see an improvement in efficiency and utilization of people, which would be dropped to the bottom line and higher margin. So we see that.

Now the challenge we have now is, again, we're heading into that summer season. So, when we look at the services revenue, if we compare it to last summer, we think we're in good shape against last summer. But this is one of those seasonal periods where we have a little more challenge getting both our resources are looking to take some vacation time and break time and our customers are doing the same thing. But on a year-over-year basis, I think we're going to be in good position.

Zach Cummins

And Allan, just given the current environment and maybe some of the struggles that you have with other competitors in the supply chain space, I mean, with all the cash on the balance sheet. Are you finding more M&A opportunities to consider here that maybe are more attractive valuations than what you would have seen maybe six to nine months ago?

Allan Dow

Well, there was a brief window in there where there's some tremendous valuations, but you have to be quick to the trigger on that event. But now you're, Zach good thoughts on that. We are considering our strategy for the future and where we fill in the gaps as we've talked before. We have, our view on acquisition is, how can we extend the reach and do more for our customers by bringing, holding in some new capabilities that are proving capabilities as well. So we are looking at that and we're hoping that we'll find the right fit, and that that because of the current market conditions that the valuation would be suitable. So we have the same mind as you that there should be some opportunities out there would be beneficial for us.

Zach Cummins

And then Vince, just one final question. Subscription gross margin, of course excluding out the cap software was right around 72% in Q4. What are your expectations for that subscription gross margin as you continue to scale those subscription revenues over the next couple of years?

Vincent Klinges

Well, I think by the next year or two that 72% assuming, excluding the non-cash amortization, it should go to, closer to 80%.

Operator

[Operator Instructions] There are no further questions at this time.

Allan Dow

Well, Chloe, thank you for helping us. For everyone that joined us today, thank you for your time. We certainly appreciate that. And look forward to speaking with you again in the near future. Have a good day.

Operator

At this time, this does conclude today's program. Thank you for your participation. You may disconnect at any time.