American Software, Inc. (NASDAQ:AMSWA) Q4 2019 Results Conference Call June 19, 2019 5:00 PM ET

Company Participants

Vince Klinges - Chief Financial Officer
Allan Dow - President

Conference Call Participants

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

Operator

Good day, everyone. And welcome to today’s Fourth Quarter and Fiscal Year 2019 Preliminary Earnings Results Call for American Software. At this time, all participants are in listen-only mode. Later on you will have the opportunity to ask questions during the question-and-answer session. [Operator Instructions] Please note that today's call maybe recorded. And I will be standing by if you should need any assistance.

It is now my pleasure to turn the call over to Vince Klinges, CFO of American Software. Please go ahead, sir.

Vince Klinges

Thank you, Denisha [ph]. Good afternoon, everyone. And welcome to American Software's fourth quarter earnings 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 effective competitive products and pricing and other competitive pressures, and the irregular and unpredictable pattern of revenues. In light of these risks and uncertainties, there can be no assurance that the forward-looking information will prove to be accurate.

So looking at the fourth quarter of fiscal 2019 compared to the same period last year, total revenues for the quarter decreased 11% to $26.3 million compared to $29.4 million in the same quarter last year. Subscription fees were $3.8 million for the quarter, and that was a 47% increase compared to $2.6 million for the same period last year while software and license revenues were $1.7 million, or 42% decrease compared to $2.9 million in the same period last year, and this reflects our continued transition to the SaaS engagement model.

Our cloud annual contract value, or ACV, increased approximately 36% to $17.3 million for the current quarter, and that compares to $12.7 million for the same period last year. Professional services and other revenues decreased 23% to $9.9 million for the current quarter, and that compares to $12.9 million in the same quarter last year. And that was down also due to -- we had some several large implementation projects that we're finishing in the fourth quarter of '18. Our maintenance revenues decreased 1% to $10.8 million compared to $10.9 million. Our combined recurring revenue streams of maintenance and cloud services were 56% of total revenues for the current quarter, and that's up from 46% in the same period last year.

Looking at some of our overall costs, our gross margin was 54% for the current quarter and that compares to 56% in the same period last year. The license fee margin was 34% for the current quarter and that compares to 46% in the same period last year. That's due to lower license fees and the relatively fixed expense, cost of amortization of cap software, and amortization of intangibles that is non-cash.

Our subscription fees margin decreased to 47% compared to 60% in the same period last year, and that's primarily due to a true-up allocation of a non-cash amortization of cap software, which was $1.1 million of the total $2 million of costs due to the overall increase of subscription revenue, so the gross margin without the non-cash cap software allocation would have been 77%.

Our services margin decreased to 30% compared to 39% in the same period last year, and that's due to timing of implementation projects. Our maintenance margin increased to 82% for the current quarter and that compares to 78% in the same period last year.

So, looking at operating expenses, our gross R&D expenses were 19% of total revenues for the current period compared to 16% in the same period last year, and that's due to increased development efforts. As a percentage of revenues, our sales and marketing expenses were 22% of revenues for the current quarter compared to 19% for the same period last year, and that's primarily due to expenses related to our customer conference, which was held in March for approximately $600,000 this year.

G&A expenses were 16% of total revenues for the current and prior year quarter, so our operating income decreased 59% to $1 million for the current quarter compared to $2.5 million the same quarter last year. Adjusted EBITDA, which excludes stock-based compensation, decreased 23% to $3.5 million this current quarter compared to 4.5 million in the same period last year.

So our GAAP net income increased 48% to $1.9 million or earnings per diluted share of $0.06 for the current quarter compared to net income of $1.3 million or $0.04 earnings per diluted share. Our adjusted net income was $2.7 million or adjusted earnings per diluted share of $0.09 for the fourth quarter compared to net income of $2 million or $0.06 earnings per share. And these adjusted numbers exclude the amortization of intangibles related to acquisitions and stock-based compensation expense. International revenues this quarter increased to 22% of total revenues and that compares to 17% in the prior year quarter.

So taking a look at the full year fiscal '19 compared to the same period last year, our total revenues decreased 4% to $108.7 million compared to $112.7 million over the same period last year. Subscription fees were $14 million, a 58% increase when compared to $8.9 million in the same period last year.

License revenues were $7.1 million or 54% decrease compared to $15.3 million in the same period last year. And this again reflects our continuing transition to the SaaS engagement model. Services revenues decreased 6% to $42.2 million compared to $44.7 million last year. Our maintenance revenues increased 4% to $45.4 million compared to $43.8 million last year.

Looking at our overall gross margins, for the 12-month period, was 52% for the current quarter or current year compared to 56% the prior year. License fee margin decreased to 10% from 59% in the prior year due to lower license fees, and again, related to the fixed expenses related to amortization of cap software and amortization of intangibles.

Our subscription fee gross margin increased to 59% compared to 57% in the same period, and that's primarily due to increased SaaS deployments. Our services margin was 25% compared to 31% in the same period last year, and that's again due to timing of implementation projects and also due to increase in services revenue from our lower IT consulting business unit. Our maintenance margin was 82% for the year compared to 79% in the same period last year, and that's due to higher revenue, maintenance revenue, and also cost containment efforts.

Looking at operating expenses, our total gross R&D expenses were 18% of total revenues for the 12-month period compared to 15% for the same period last year and that's due to increased headcount and increased development efforts. As a percentage of total revenues, our sales and marketing expenses were 19% for the current year compared to 18% in the prior year period.

G&A expenses were 16% of total revenues for the current year compared to 14% in the prior year, and that's up due to additional expenses related to the Halo acquisition. So, our operating income for the year decreased 61% to $5.3 million compared to operating income of $13.5 million. Our adjusted EBITDA for the year decreased 30% to $14.8 million compared to $21 million in the same period last year. And so, the GAAP net income was $6.8 million or $0.22 earnings per diluted share compared to a net income of $12.1 million or $0.40 earnings per diluted share in the prior year.

Adjusted net income was $10.5 million or earnings per diluted share of $0.33 compared to $13.5 million, or earnings per diluted share of $0.44 for the same period last year. And these adjustments exclude amortization of intangible expenses related to acquisitions, our stock-based compensation expense, and in fiscal '18, related to a discrete tax adjustment related to the Jobs Act of 2017. So, for the full year, our international revenues were 20% of revenues compared to '19.

Looking at our balance sheet, our financial position remained strong with cash and investments of approximately $88.5 million at the end of April 30, 2019. During the quarter, we paid out $3.4 million in dividends. Other aspects of our balance sheet; our bills accounts receivable was $18.8 million; our unbilled $1.5 million for a total of $20.3 million; and our deferred revenues are $33.3 million; and our shareholder equity is 114.6 million.

The current ratio is 2.6 as of April 30, 2019 and that compares to 2.3 the same period last year. And our day-sales outstanding as of April 30, 2019 was 70 days compared to 68 days for the same period last year.

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

Allan Dow

Thank you, Vince. We continued the transition to a Software-as-a-Service engagement model, which was evidenced by the 47% year-over-year increase in subscription revenue and 36% growth in annual contract value for cloud services over the prior year period. The trend towards the subscription model is driven by our expertise in delivering the value-added services for our solutions that the customers' desire and the ability to deliver a solution faster.

We're still feeling the effect of delayed or different projects, which impacted our performance in the fourth quarter. But as you've seen in the numbers, we've continued the upward trend in cloud services. The annual contract value for cloud services associated with new contracts increased from $12.7 million in Q4 of our last fiscal year to $17.3 million this year this past year.

While delays in securing several deals affected our ACV performance in the fourth quarter, we have since closed the majority of these opportunities. And have already exceeded the 600,000 in net new ACV booked in Q1 of 2019. We remain confident in our prospects for ACV growth in fiscal '20 and beyond. This was another good quarter for customer acquisition, adding 17 new logos, which brings us to 64 for the fiscal year 2019, of which 33 of those were subscription contracts.

During the fourth quarter, our recurring revenue streams of maintenance and cloud services represented approximately 56% of total revenues, which is compared to 46% of the same period of the prior year due to the growth in our subscription contracts. We expect the percentage of recurring revenue to continue trending higher in the future, which will improve the financial predictability and our profitability.

We announced on the last call that Mac McGary had joined us as Executive Vice President of Global Sales. Mac has helped us accelerate our market segmentation strategy, and is leading a transformation towards industry targeted sales and marketing efforts. We're seeing an impact on our close rates due to Mac's influence, which has bolstered our confidence that we will be able to accelerate our growth in the years ahead.

Looking forward, we are continuing to see an uptick in the transformational projects, which leverage the optimization depth, advanced analytics, machine learning and optimized solution capabilities from our suite. Transforming their supply chain enabled by continuous and autonomous planning will allow our customers to leverage their supply chain as a strategic advantage.

In summary, we're encouraged by the progress we were making with our sales and marketing transition under Mac's leadership as we strive for continued success. And we will continue to focus on our core purpose, which is to make our customers more successful by leveraging our investments to help them achieve a supply chain competitive advantage.

We are confident that we will continue to grow, both revenue and profitability during our transition to the Software-as-a-Service engagement model, and are proud to be delivering incremental benefits for our customers.

Denisha [ph], at this time, we'd like to open the call for any questions we may have from our audience.

Question-and-Answer Session

Operator

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

Matt Pfau

So first, it sounds like the deals that were delayed, those have been closed, so that issue has been rectified. What about in general on the sales cycles, have they returned to a more normal cadence or are you still seeing them a bit elongated?

Allan Dow

There's a mix, Matt. That's a good question. We are still seeing some areas where the cycle is longer than we have traditionally seen, but we're also now seeing some acceleration. We've got a number of those contracts that we actually closed this quarter that are shorter than we had seen over the last fiscal year. So, we're encouraged by that.

We think that it's a combination of some of the market conditions settling out with the reality that they need to move forward regardless of some of the macroeconomic conditions and various things that are happening across the globe, but also the impact that Mac has had and helping us position a stronger get-started-now message.

Matt Pfau

And are fears over tariffs having any impact, either positive or negative on your business?

Allan Dow

It's another interesting one. It's actually both. So some of the acceleration has come as a result of companies realizing that this dynamic environment is probably going to continue when you think about tariffs and trade wars and Brexit and all the different things that are going on rather than -- a few companies have rather than just be fearful of them back down, they're saying this is the new reality we have to act. On the other hand, we've had companies that said, this new news has given us pause and made us as nervous, so we're going to wait and see a little bit. So, we're seeing some of both actually, so it's kind of a strange environment right now.

Matt Pfau

And in terms of investments for the next fiscal year, you talked about some of the strategies Mac has implemented and have already started to show some results. Is there additional investments there needed in the segmentation strategy and also the strategy to perhaps sign larger deals, as well as bring on some partners and any other key areas you would call out as investments for the upcoming fiscal year?

Allan Dow

Well, the primary investment is under Mac’s leadership, we are expanding the sales team. So, that's an effort that will come forward for us. We believe that with the shortened sales cycle, we could actually have an impact on the back half of the year, near the end of the year from that investment. Some of the other things are really just strategically how are we positioned, how do we organize. So they don't require a financial investment, it requires an effort investment of resources and time and commitment, but we've got commitment from our leadership team, which is solid and in place and under Mac’s direction there.

And then related to the systems integrators, we have been investing with them. We've got a number of the contracts, which actually executed last year and extending into this year that we were doing joint projects with them that did have an impact on some of our services revenue, but we're fine with that, because we believe that the long-term investment with the systems integrators is a positive trend and will influence our market position. So, we're going to continue to work there.

Again, that's not a financial investment, it's really more of an effort put forward by our team to continue to foster those relationships and build on their education and whatnot that they need for delivering the implementations.

Matt Pfau

And last one I have for you guys, maybe just an update on Halo and your analytics efforts more broadly. That was a big focus at your user conference. Just interesting to hear what the feedback was from customers there? And what sort of interest you're seeing coming out of the user conference?

Allan Dow

Yes, it's been tremendous actually. So, it had an impact in a couple of ways. Some of the new developments that we announced at the user conference have actually been integral to the recent projects that were happening here in the first quarter as well as it’s continued to stimulate incremental demand for upgrades.

So keeping the customers that were particularly on the perpetual licenses doesn't have nearly as big of an impact on the subscription model, but those who had the perpetual licenses are more encouraged and moving forward with some upgrades, which will have a positive impact on our services revenue in the months ahead and quarters ahead.

Operator

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

Zach Cummins

Just starting off, it sounds like some of the deals were delayed during the quarter. Was this more related to overall macro issues or concerns or is it a lot of it more just company specific?

Allan Dow

No macro, there was really nothing going on internally that was causing the delay. So, it's really a macro environment where we had a number of projects that were queued up and going through the final stages of the approval process, and they just didn't get those done as quickly. And so, when we say macro, obviously, they didn't get delayed substantially, but I think the cautious nature of approving expenditures on software projects, in particular, are just taking a couple extra loops through, so that had the impact on the ability to get them approved and finalized in the timeframe that we thought we were going to be able to get done into the fourth quarter.

Zach Cummins

And then, can you talk about the mix of the pipeline as you're going forward. Is it really still trending majority of the opportunities towards SaaS?

Allan Dow

Yes, by a long shot. Even more so than in the past, I think we're well above the 50% range now. We're up in the 60%, 70% range where the pipeline is targeted towards subscription model. And that's trending up, and we're seeing more of the larger transformational projects come back, which will not only bolster our cloud revenue model, but also will help us improve the margins and revenue flow for the services business as well.

Zach Cummins

And you briefly mentioned that Mac has had a pretty substantial impact in just a short amount of time. So can you talk about where you are in the process of implementing his new segmentation strategy? And how all the new, how the sales reps are really embracing this new go-to-market approach?

Allan Dow

The sales team is very positive about it. Most of what we've been implementing was already in play when Mac joined us, but he emphasized that we had to move with speed. And he's been able to put a lot of time and attention and really focus on that, because that was his primary responsibility over the last few months to get those programs in place. So, his background of going through that process before helped us accelerate that. So, I think we're in a very good position now entering the new fiscal year.

Zach Cummins

And then, Vince, just one question for you. I know you briefly called it out in the script. But can you provide a little more color around what drove the dip in subscription margin here in Q4? And how we should expect that line to trend going forward over the next couple of quarters?

Vince Klinges

Yes, Zach. The capitalized software amortization is allocated between cost of license fees and cost of subscription based on the methodology of how much you're selling. So we had an estimate of how much the mix was going to be and the estimate was incorrect. It was more leaning towards. We sold more cloud. So, we had to make an adjustment in the fourth quarter and allocate some more cap software to the cloud line.

As far as where I think it's going forward, we came in at about 59% for the year. I think we'll probably end up a couple of basis points higher than that at the end of next year, probably in the maybe mid-60s somewhere around there.

Operator

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

Vince Klinges

Denisha [ph], thank you very much. And for all of those participating in the call this evening, we appreciate your time and attention. And we'll look forward to talking to you again in the near future.

Operator

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