American Software, Inc. (NASDAQ:AMSWA) Q1 2020 Results Earnings Conference Call August 28, 2019 5:00 PM ET

Company Participants

Vince Klinges - CFO
Allan Dow - President

Conference Call Participants

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

Operator

Good day, everyone, and welcome to today's American Software First Quarter 2020 Earnings Call. [Operator Instructions] Please note that today's call is being recorded and I will be standing by should you need any assistance.

And it is now my pleasure to turn the call over to Vincent Klinges, CFO of American Software. Please go ahead.

Vince Klinges

Thank you, Denisha. Good afternoon, everyone, and welcome to American Software's First Quarter of Fiscal 2020 Earnings Conference Call. On the call with me is Allan Dow, President of American Software. I will review the numbers, and then Allan will give some remarks after that, 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 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 can be no assurance that the forward-looking information will prove to be accurate. So taking a look at the first quarter revenue numbers, they were $27.4 million for both the current and prior-year period.

Subscription fees increased 41% to $4.5 million for the quarter compared to $3.2 million in the same period last year, while software license revenues increased 4% to $1.8 million for the current quarter compared to $1.7 million for the prior-year period, as we continue to transition to a fast engagement model.

Our cloud services annual contract value or ACV, increased by approximately 54% to $20.3 million for the current quarter, and that compares to $13.2 million in the same period last year. Professional services and other revenues decreased 8% to $10.1 million for the current quarter, compared to $11 million the same quarter last year and that was primarily due to a decrease in our IT consulting business unit the proven method as a result of timing of project work. This was partially offset by an increase in our supply chain management unit due to stronger bookings of late and our backlog remains strong heading into Q2.

Maintenance revenues decreased 4% to $11 million compared to $11.5 million. Our combined recurring revenue streams of maintenance and cloud services were set 56% of total revenues for the current quarter, and that compares to 46% the same period last year.

Looking at costs, our overall gross margin was 56% for the current quarter, compared to 54% in the prior-year quarter. Our license fee margin was 22% for the current quarter compared to a negative 1% in the same period last year. And that's due to lower agent commission fees to our resellers and lower amortization of cap software that is non-cash.

Subscription fee margin decreased to 52% compared to 66% for the same period last year, and that's primarily due to increase in the allocation of amortization of cap software, which is approximately 766,000 of the $2.1 million in costs and that's due to the increase of subscription revenue mix.

In the first quarter of '20, gross margins without the non-cash cap software allocation would have been 70%. So our services margin increased 27% compared to 21% for the same period last year and that's due to a higher portion of our professional services revenue coming from our higher margin supply chain business unit. Our maintenance margin increased to 83% for the current quarter compared to 81% in the same period last year, and that's due to cost containment efforts.

Looking at operating expenses, our gross R&D expenses were 17% of total revenues for the current and prior-year period. As a percentage of revenue, sales and marketing expenses were 20% of the revenues for the current period compared to 19% in the same period last year and that's primarily due to increase in sales commissions and headcount costs.

Our G&A expenses were 18% of total revenues for the current period, compared to 15% in the prior-year period, and that increase was due to variable compensation and some legal fees. So our operating income increased 31% to $797,000 for this quarter, and that compares to $607,000 for the same quarter a year ago.

Our adjusted EBITDA, which excludes stock-based compensation, increased 24% to $3.5 million for the quarter and that compares to $2.8 million in the same period last year. Our GAAP net income decreased 17% to $1.2 million, our earnings diluted share of $0.04 for the current quarter and that compares to net income of $1.4 million or $0.04 in the earnings - $0.04 earnings per diluted share.

Adjusted net income was $2.1 million, our adjusted earnings per diluted share of $0.06 for the first quarter and that compares to net income of $2.2 or adjusted earnings per share of $0.07 in the same period last year.

And these adjusted numbers exclude the amortization of intangible expenses related to acquisitions and stock-based compensation expense. International revenues this quarter were approximately 22% of total revenues for the current quarter, and that compares to 20% in the prior-year quarter.

Looking at our balance sheet, the company's financial position remains strong, with cash and investments of approximately $88 million at the end of July 31, 2019. During the quarter, we also paid $3.4 million of dividends. Other aspects of the balance sheet, our accounts receivable build was $17.5 million, unbilled $3 million for a total of $20.5 million.

Deferred revenues current and long-term were $32.7 million and our stock shareholder equity was $114 million. Current ratio was 2.6 as of July 31, 2019 and that compares to 2.8 the same period last year. And our day sales outstanding was 68 days and that compares to 58 days in the same period last year.

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

Allan Dow

Well, thank you, Vince.

During the first quarter, we saw a marked improvement in the close rate with a strong preference for the software and service engagement model. That was evidenced by the 41% year-over-year increase in subscription revenue and the 54% growth in annual contract value that Vince mentioned earlier.

As I stated on the June call, the quarter started strong with a couple of contracts that were targeted for Q4 closing early in the first quarter, but we were able to keep that momentum up all the way to the end of the quarter.

The annual contract value for cloud services associated with new contracts increased from $13.2 million in Q1 of our last fiscal year to $20.3 million last quarter, as we added 16 new logos to our customer account.

Furthermore, we're off to a good start in the second quarter with the number of new contracts already signed. We remain confident in our ability to achieve solid ACV growth in fiscal year 2020 and beyond. Based on the closed rate in Q1, we are now operating our supply chain organization at near full capacity, which will drive higher seasonally adjusted services revenues as we progress through the year.

During the first quarter, our recurring revenue streams of maintenance and cloud services represented about 56% of the total revenues, that was compared to 54% in the same period in the prior year due to the growth in our subscription contracts.

We expect that percentage of recurring revenue to continue trending higher into the future based on the strong preference for subscription contracts, with that rate approaching 60% before the fiscal year end.

The growth in recurring revenue improves the financial predictability and profitability of our company. Overall, we had a very good quarter and we're pleased with our team's achievements. As we look forward, we're continuing to see an uptick in the transformational projects which leverage our digital supply chain solutions and take advantage of the optimization depth, the advanced analytics, machine learning capabilities and the optimized simulation capabilities of our platform.

Customers are looking for supply chain agility to help them navigate the global trade uncertainty, while simultaneously seeking a reduction in time to bring their products to the market to gain a higher brand awareness and mitigate risk. Our ability to help them transform their supply chains to continuous and autonomous planning allows our customers to leverage their supply chain as a strategic market advantage.

In summary, we're encouraged by the progress we're making in our go-to-market execution as we strive for continued success. We will continue to focus on making our customers more successful as we look to expand our relationships with customers and grow our recurring revenue streams. We are confident that we can continue to grow both revenue and profitability in the year ahead and are proud to be delivering incremental benefits to our customers.

Denisha, at this time, we'd like to open up the call for any questions.

Question-and-Answer Session

Operator

[Operator Instructions] We will go ahead and take our first question from Matt from William Blair. Please go ahead. Your line is open.

Matt Pfau

Just wanted to hit on the momentum you're seeing in the business and the ACV growth acceleration and the improvement in close rates. Maybe you could just give us some more details on what's driving that and is that partly due to - when you had a sales and maybe some changes that he's made?

Allan Dow

Hi, Vince I'll take that one. So, Matt, yes, thank you for joining us in the question. It's a combination of things, we've seen certainly with Mac coming in, we talked about that the last couple of quarters. He's had an influence on the business, we're excited about that. We're up and running under his direction now and following his leadership for the sales organization and activity, that certainly has had an impact, a positive impact, and we're excited about that.

We're also seeing that more or less seems like people have gotten comfortable with market dynamics within trade wars, tariffs and all the different things that are happening. And, new surprise, it seems to be around almost any corner these days. But people have settled into the fact that's become more of the norm and they need to be prepared for it and they're taking action to deal with some of those things that are impacting our business. So I think we had a double whammy there where both events are coming together at the same time period.

Matt Pfau

And then, the interest you're seeing in the subscription SaaS deployment model, is that primarily from the new customers you're signing or have you also seen some of your existing customers start to prefer or want to transfer over to that model as well?

Allan Dow

We're seeing this - very slight interest in transferring, so we're not seeing a lot of that happening yet, although there's some good discussions going on as existing customers are expanding the solution footprint, that's where that brings that dialogue up.

So it's not just a one-for-one kind of transfer, but we're seeing almost exclusively at this point that new projects, new customers and significant add-on projects for existing customers are going in the direction of the subscription business. It appears, though, looking forward that our license fee business will be the small incremental add-on activities with existing customers.

Matt Pfau

And on the transformational projects that you're seeing, is that being driven by you incorporating more of the acquired functionality into your products, or maybe just give us more details on what's driving the transformational projects?

Allan Dow

Certainly the DP analytics and data analysis is a key factor in these transformational projects, is the driver behind it. But also part of that, the acquisition we made around data administration, data management is a key factor in those transformational projects as well. They can't be successful without that, but it really comes down to how to realign their supply chain for this new reality in the marketplace today.

And the automated planning, artificial intelligence, machine learning capabilities are really driving efficiencies in their supply chain operations, giving them a better answer, giving them freeing up resources to actually work on more strategic initiatives, and that's really the transformational element.

So all of that's coming together with analytics, data management, machine learning and artificial intelligence to really facilitate a pretty dramatic shift in the way they operate their supply chains. So that combination is really what's making it happen these days.

Matt Pfau

Well, that's all I had for you guys. Thanks for taking my questions. Nice job on the ACV acceleration.

Allan Dow

Thanks, Matt. See you soon.

Operator

[Operator Instructions] We'll go ahead and take our next question from Zach from B. Riley FBR. Please go ahead.

Zach Cummins

Good afternoon, Alan and Vince, and congrats on the strong ACV performance in the quarter. But just talking about the 16 new customer win, can you talk about the competitive landscape that you've seen in these deals and what has really been the key differentiator for you to win these deals?

Allan Dow

The competitive landscape is still all over the map, we're seeing some traditional supply chain vendors that we've competed with for many, many years. We see - at some points that the ERP players are coming in strong.

But then at that times we see some momentum picking up around maybe some frustration with their development or the pace at which they're bringing out the new capabilities that are necessary to support today's supply chains. So that's driving some new opportunities for us as well. But there's still a bias towards the ERP players if there's been a major investment out there. So it's a mixed environment.

There are some new entrants coming in. So it's not as predictable as it was five years or 10 years ago, we had a pretty focused team and there's a lot of new players in the marketplace today, but predominance is some of the traditional folks we're up against. The real advantage we have in the marketplace today is the speed at which we can bring a solution to the marketplace, we have packaged applications, where some of the competitors are having somewhat of a toolkit and a turnkey implementation that brings risk to the project and brings a much longer time to get return on the investment.

So we have a competitive advantage there. And we are a market leader in artificial intelligence and machine learning capabilities, which has also drawn attention to us and really making a difference in the way they can operate with a more efficient supply chain.

Zach Cummins

And then I think Vince addressed this a little bit earlier in his commentary. But can you talk about a little bit more around the drivers of the year-over-year decline in the professional services group? And it sounds like the project backlog is beginning to improve. So how should we be thinking about that business over the coming quarters as you accelerate this shift towards a subscription model?

Allan Dow

Vince, why don't you take that one?

Vince Klinges

Yes, exactly. The decline in special services is primarily the proven method of IT consulting business as I mentioned. The supply chain business actually slightly increased a couple of basis points year-over-year. And now that we've closed all of this new SaaS business, we actually have filled up the backlog of work, as Alan indicated in his discussion, that we anticipate the professional services line to go higher year-over-year in the next couple of quarters.

Zach Cummins

And just one more question for you, Vince. I know you addressed this a little bit in the commentary as well, for the subscription gross margin, it seems like it was impacted by the capitalized software that's now being allocated to that. Is this - should we think of this as more of a one-time thing or is this going to be sort of something that depresses the overall reported subscription margin over the next couple of quarters?

Vince Klinges

Well, as we actually sell more SaaS business, it becomes more material inside our mix and license fees becomes less, we have to allocate more to cap software to that cost. And that's what's driving the year-over-year cost increase in cap software amortization. So it will be inside the number going forward.

The other element that happened is we actually closed a fairly large project during the quarter and we started advertising about 400,000 more than we did last year. So you have more being allocated to that area and also more cost in itself in general. So....

Zach Cummins

That's helpful. Well, thanks for taking my questions and congrats on a strong start to the year.

Vince Klinges

Sure. Thanks, Zach.

Operator

[Operator Instructions] And it doesn't look like we have any further questions on the phone line at this time.

Vince Klinges

All right. Well, thank you, Denisha, and thank you all for participating in our call this evening. We certainly thank you for your time and look forward to speaking to you again in the future.

Operator

This does conclude today's program. Thank you for your participation. You may now disconnect.