American Software, Inc. (NASDAQ:AMSWA) Q1 2025 Earnings Conference Call August 22, 2024 5:00 PM ET

Company Participants

Vince Klinges - CFO
Allan Dow - President and CEO

Conference Call Participants

Anja Soderstrom - Sidoti & Company
Matthew Galinko - Maxim Group
Zach Cummins - B. Riley Securities

Operator

Good day, everyone, and welcome to today's First Quarter 2025 Earnings Results. [Operator Instructions] Please note, today's call will be recorded.

It is now my pleasure to turn the conference over to Vince Klinges, Chief Financial Officer for American Software. Please go ahead.

Vince Klinges

Thank you, Chloe. Good afternoon, everyone, and welcome to American Software's first quarter 2025 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 first, our safe harbor statement. This conference call may contain forward-looking statements, including statements regarding, among other things, our business strategy and growth strategy. Any such forward-looking statements speak only as of this date. These forward-looking statements are based largely on our expectations and are subject to a number of risks and uncertainties, some of which cannot be predicted or quantified and are beyond our control.

Future developments and actual results could differ materially from those set forth in, contemplated by or underlying the forward-looking statements. There are a number of factors that could cause actual results to differ materially from those anticipated by statements made on this call. Such factors include, but are not limited to, changes and uncertainty in general economic conditions, the growth rate of the market for our products and services, the timely availability and market acceptance of these products and services, the effect of competitive products and pricing and other competitive pressures, and the irregular and unpredictable pattern of revenues. In light of these risks and uncertainties, there can 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. Good afternoon, everyone, and thank you for joining us today.

Our first quarter performance was consistent with our internal expectations and provided a solid start to our fiscal 2025. Reflecting the improvement in our bookings over the past few quarters, our revenue increased slightly, both on a sequential and year-over-year basis, led by sustained growth in our cloud revenue, high retention rates, and a return to growth in our services. This, in turn, translated to the strongest gross margin performance we've seen in over a year, which, combined with the disciplined expense management, drove our adjusted EBITDA margin up to nearly 18%.

Our AI first approach to supply chain planning continues to resonate with new and existing clients. In May, we launched additional generative AI capabilities across the Logility platform as well as the new decision command center capabilities, which provide a structured and insight-rich approach to guiding users and organizations through critical decision processes.

The combination of these enhanced capabilities is accelerating and improving the quality of supply chain decisions while making those decisions more transparent and inclusive for all levels of our clients' supply chain teams.

As we continue to advance and mature the use of AI across our platform, we are making a concerted effort to elevate the existing self-managed clients who operate our software in on-prem deployments up to our current version where we manage the applications for them in our cloud-hosted realm. While still early days, we have initiated conversations with many of our clients about when and how to budget for this transition and expect to see an uptick in cloud migrations towards the end of our fiscal year once funding for the new calendar year initiatives have been secured.

As anticipated, conversion of our pipeline remained low by historical standards due to the combined impacts of seasonal softness we typically experienced during the summer months and push out some potential projects as buyers remain cautious in an uncertain economic environment. However, we are pleased to have generated higher bookings in this Q1 than we did at the start of our last fiscal year, and we are encouraged by the increased contribution from new and existing clients.

Not surprisingly, DAI+ featured prominently among our new client wins this quarter. We also saw increased traction from our network design optimization solution among both new and existing clients. This combination is providing them a unique solution to overcome the supply chain volatility they are experiencing in this market.

Looking forward, our late-stage pipeline has continued to expand due to the delays we've experienced over the past 18 to 24 months and new interest that is being stimulated by the calendar year 2025 budgeting cycle.

Although we remain cautious on forecasting any meaningful short-term improvement in the demand environment, the growth in our pipeline, coupled with some indications from our clients and prospects that they are finally ready to move forward with projects, provides us with the confidence that we can meet and perhaps exceed the guidance we put forth at the start of the fiscal year.

We plan to reassess our full year expectations once the first half is complete and our clients and prospects have had an opportunity to see through the anticipated interest rate adjustments and the election process.

In the meantime, we're reaffirming our prior fiscal 2025 guidance for a total revenue of $104 million to $108 million, recurring revenue between $87 million to $89 million, and adjusted EBITDA of $15 million to $16.4 million.

Lastly, I want to thank our shareholders for approving our proposal to eliminate the dual class structure that has been in place for many years. We believe the move enhances our corporate governance and aligns with the transformation we have undertaken to become a pure-play AI-first supply chain software company.

At this time, I'll turn the call over to Vince, who will provide the details of our financial results.

Vince Klinges

Thanks, Allan.

Before I discuss our results in more detail, I want to remind everyone that due to the divestiture of IT staff business unit, the proven method in the second quarter of fiscal year 2024, our financial statements for the comparable period last year have been recast to show with the proven method as a discontinuing operation.

Results of the sale of our transportation rating solutions were not considered material enough to recast as discontinuing operations and are still reflected in our prior year comparisons for continuing operations. Our discussion for the current and comparative periods will focus only on our continuing operations from this point on.

For the first quarter of fiscal '25, revenues came in at $26.2 million, a 1% increase from $25.9

million same period last year. This is primarily due to higher revenues from our subscription fees and professional services, which were more than offset by the declines in the maintenance. So our subscription fees increased 7% year-over-year to $14.8 million compared to $13.8 million in the same period last year.

Software license revenues were $0.2 million compared to $0.3 million in the prior year period. Professional services increased 5% to $3.9 million compared to $3.7 million same period last year, reflecting an uptick in our bookings activity over the past few quarters.

Our maintenance revenues declined 11% year-over-year to $7.3 million, and that reflects a normal falloff rate for the quarter as well as the divestiture of our transportation group, which reduced our maintenance revenues by approximately $250,000.

Total recurring revenues comprised of subscription and maintenance fees increased 1% and represent 84% of total revenues for the quarter. Gross margin was up to 67% for the current quarter compared to 65% in the prior year period. Subscription fee margin was 68% for the current period and compares to 69% for the prior year period.

If you exclude the noncash amortization of intangible expense of $667,000, our subscription gross margin was 73% for the current period, and that compares to 72% in the prior year period. Amortization of intangible expense was $340,000 in the same period last year.

Our license fee margin was 82% compared to 75% in the same period last year. Our services margin increased to 30% compared to 17% last year, and that's due to higher revenues and improved utilization. Our maintenance margin was 82% for the current quarter, and that compares to 79% in the period last year.

Our gross R&D expenses were 17% of total revenues for the current period, and that's up from 16% in the prior year period. Sales and marketing expenses were 22% of revenues for both the current and year-ago periods, and G&A expenses were 21% of total revenues for the current quarter and consistent with the same period last year.

On a GAAP basis, our operating income was $1.8 million for the quarter, and that's up from $1.4 million in the same period last year due to higher revenues and improved gross margins. Our net income was $2.1 million or earnings per diluted share of $0.06 compared to $2.6 million or $0.08 per diluted share last year.

On an adjusted basis, which excludes noncash amortization of intangible expense related to acquisitions and stock-based compensation expense, adjusted operating income was $4.3 million, and that's up from $3.2 million in the same period last year.

Adjusted EBITDA was $4.6 million compared to $3.7 million in the same quarter last year. And adjusted net income was $4.1 million or adjusted per diluted share of $0.12 for the first quarter, and that compares to adjusted net income of $4 million or earnings per diluted share of 13% in the same period last year.

International revenues this quarter were 22% of total revenues compared to 18% last year. Our remaining performance obligations, we exited this quarter $125 million, and that's a 13% increase from last year at this time.

Looking at the balance sheet. Our financial position remains strong with cash and investments of approximately $92 million at the end of the quarter. And also during the quarter, we paid $3.7 million in dividends.

Our days sales outstanding as of July 31, 2024, decreased to 61 days from the current -- in the current period, and that compares to 76 days in the same period last year. And that's due to improved collections.

Turning to our fiscal '25 outlook. As Allan mentioned, we are maintaining our guidance for the fiscal year. We anticipate revenue in the range of $104 million to $108 million, which includes recurring revenue of a range of $87 million to $89 million. And for adjusted EBITDA, we anticipate a range of $15 million to $16.4 million.

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

Question-and-Answer Session

Operator

[Operator Instructions] And we'll move first to Anja Soderstrom. Your line is open.

Anja Soderstrom

Hi, and thank you for taking my questions. So you're not a high retention rate. Can you quantify those and sort of compare them to historicals?

Allan Dow

Anja, yes, our retention rates are kind of inconsistent with what we've been experiencing in the past couple of quarters. They've been kind of in the mid-90s.

Anja Soderstrom

Okay. And also given the slower conversions, are you taking any internal actions or redirecting resources or...

Allan Dow

Anja, reference to the conversions from the on-prem to the cloud?

Anja Soderstrom

Yes.

Allan Dow

Yes, it's not far off our expectations. We didn't have to divert resources. But to accelerate, we've taken a number of steps. Number one is earlier this year, we announced that the last version that would be available to be delivered to our clients for them to manage -- self-manage came out earlier this year. So there's no more development of versions that would be available to be delivered to them.

So that's helped stimulate a lot of dialogue as well as we've done some internal investments to make it very easy for our clients to make that transition to the environment where we would be able to provide them the latest and greatest capabilities as well as manage it on their behalf.

So those combinations, along with some packaging up of projects that allowed the effort to go more seamlessly and for them to spread the cost over the term of a subscription agreement all are helping to accelerate those.

So those things combined, the reality is the sizable enough projects that they need budget. And as we just initiated those this year in anticipation of entering into this budget season we're in now, we're seeing the impact of that, that we had anticipated. Folks are engaging with us, getting the numbers, getting it in the budget, and we're hopeful that they'll stick, and we'll get through those.

So back to second -- Vince's comment about the retention rates. It's been consistent, but we were nervous about the economic condition and thought maybe that we'd see a tail off. So the good news is we've been able to hold the line on those, and we're quite excited about that.

Anja Soderstrom

Okay, that's good to hear. And then in terms of M&A opportunities, how actively are you looking? And what are you seeing in terms of valuations there?

Allan Dow

A very interesting point. We are not -- we've moved to a more opportunistic posture at this point, primarily because the valuations seem to be misrated. There's either companies that are highly distressed and eager to do something, and they've got the challenges you'd have to face in order to get those rationalized and incorporated.

Or if they're are a healthy environment, the valuation seems to be maybe back to the -- near to the pandemic ratings than what the reality of the marketplace is today or that's what their expectations are. So they're misaligned. So we're -- we've taken a more conservative posture. We are still having our eyes open. We're looking for the right tuck-in opportunity. And if it presented itself and had all the right conditions, we would act on it. So far more conservative than maybe we've been in the last couple of years.

Anja Soderstrom

Okay, thank you. That was all for me. I'll get back in the queue.

Allan Dow

Thank you, Anja. Have a good afternoon.

Anja Soderstrom

Thank you.

Operator

We'll move next to Matthew Galinko. Your line is open.

Matthew Galinko

Hi. Thanks for taking my questions. Maybe first on the professional services margin. I know you mentioned it being up from the prior year '17, but it was also, I think, the highest quarter for services and probably about a couple of years or almost two years. So just curious if this 30-plus level of the sustainable rate that we might be able to expect, just given the pipeline dynamics that you talked about? Or how comfortable are you with that level at this point moving through the year?

Vince Klinges

Hi Matthew, this is Vince. Yes, we're pretty comfortable with that rate. Actually, last year, it was 30%. So what -- not last year, excuse me, not '24, but '23, it was 31%. So we view it as getting back to kind of a normal margin rate at this point.

Matthew Galinko

Great. Thanks. And then I think you mentioned that network optimization is starting to maybe have an impact on -- I don't know if it was pipeline or kind of prospects or existing clients that you're working on. But can you talk a little bit more about how that opportunity is emerging?

Allan Dow

Yes. Thank you. You nailed all three, actually. We saw in the opportunities that we were closing in the past quarter that it was more prominent than it had been in the past. We do see it more prominent in the pipeline, and we're seeing it combined in with other capabilities like supply planning or forecasting in a way that we had anticipated when we made the acquisition.

The whole idea behind it, where the real value proposition for us was not to reenter the network design, which is really project-based activity, although we've got a robust set of capabilities to do so. The real design was to be able to couple it with the rest of our platform and allow the user community to make day in and day out decisions about how to leverage the network they have in place today.

So as demand fluctuates, as customer orders come in maybe differently than historical patterns and things -- or they take on new business, they can move and pivot and leverage the existing network more effectively. That's what's been really taking shape and getting traction with our clients. So we're very excited about that. That was the original design and strategy.

It's helping us win a broader portfolio of products -- projects where we can incorporate that in, and we have a competitive advantage as well as just an add-on to existing clients and helping them more effectively manage their supply chain. So very exciting to see the fruits of our efforts and the original strategy that we had laid out come to bear.

Matthew Galinko

Great, good to hear that that's coming around. Maybe a follow-up question would be, I guess, with the engagement on the cloud migration with existing customers and maybe combined with -- it sounds like we're waiting to see a little bit how interest rate dynamics shape up in the back half of the year and then some other macro things.

Suppose that rates stay relatively high and there's still concerns on macro in the back half of the year, do you expect that we might see customers sort of hit the brakes and not move forward on migration projects and see a sort of greater drop-off in maintenance in that scenario if kind of the features are now frozen on the premise product? Or should we see that maybe a risk or a scenario that could play out if the pipeline of conversion doesn't play out as intended or as quickly as intended?

Allan Dow

Yes. We're actually seeing the economic anxiety, I'll call it, is probably a stronger impact on new client opportunities and bigger transformative projects than we see on these transformational projects where we're moving them from self-managed to us providing the latest in the cloud for them.

So we're also seeing a combination of things, the moves that we've made. And also, we're setting more and more clients experience the challenges associated with keeping their environments protected from intrusion and from cybersecurity efforts, becoming much more dominant, much more complicated. More intrusions around their IT environment.

So there's a pent-up demand to move over, but the reality is it is still a project. It's not just something you pick up and say, let's go do that tomorrow. So it's required this budgeting cycle. So we anticipate that the cloud conversions will not be nearly as impacted by the economic conditions because of the other influencing factors and that it will become a more prominent part of our delivery model as well as our financial results as we go forward into the back half of our fiscal year and on into fiscal 2026.

So we're very excited about that move. Being very well received by our clients. Oftentimes, a good bit of a discussion. But -- and then we're seeing more and more clients these days that are just saying they've got a migration strategy already planned for a comprehensive suite of their applications, and we're part of that.

We don't anticipate an accelerated rate of terminations or cancellations of maintenance because of the nature of our applications, it would be very rare for a client to use the applications without any kind of support. So they're either going to stay with us on support, transition with us or, in some cases, maybe they'll get frustrated and move off. But when they move off, they're going to -- next application they find is going to be in the cloud, too.

So they might be frustrated that we're asking them to move, but their other move is going to be to the cloud. So there's not a lot of good options. They'd say, I want to stay in my old operating mode. So...

Matthew Galinko

Great. Thank you.

Operator

We'll move next to Zach Cummins. Your line is open.

Zach Cummins

Hi, good afternoon Allan and Vince. Thanks for taking my questions. Allan, I was curious if you could give an update on Garvis. I guess, now been rebranded as DemandAI+. If I recall from the last earnings call, I think you were in maybe the later stages of some of these pilot programs, maybe transitioning into longer-term contracts. So just curious if you can give any sort of update on the traction with those conversions and maybe driving interest from new customers.

Allan Dow

Zach, thank you for joining us. You did -- you nailed it. We -- the company was Garvis. We've branded the product, the demand forecasting product to be DAI+, DemandAI+. so that is -- when we talk about DemandAI+ being prominent with our new clients and existing clients, we actually have a combination.

It is the only forecasting capability we make available in the marketplace today. So if a client is going to get forecasting from us, that's what they're getting, what we acquired from the Garvis acquisition. So DAI+ is the only thing out there.

We have a combination, the folks that are moving from their self-managed environment over to our latest capabilities. They are migrating to DemandAI+. So that's an existing client migration. We have clients who are already in the cloud, being managed by us who are upgrading to DAI+ to get the advanced capabilities and improve forecasting accuracy associated with it. It's certainly out there.

And then related to the other part of the question was how are we doing on latching down the clients that came over from the acquisition, they were really short-term clients. Some of them still in pilots, some of them long-term implementations, but they were going month-to-month. We've begun that lockdown, getting them into a longer-term contract structure. So that's ongoing, and we're making some good progress there.

Some of those are a little bigger environments as well, and we've been working with those clients to get them in the budget so that they would have the funds available to commit to a longer-term contract in the new calendar year. So good progress all the way around. The team has fully adopted it, well embraced. The R&D efforts have got it embedded directly into our platform. So it's seamless just like all the rest of the applications.

Zach Cummins

Understood. That's helpful. And my one follow-up question is really on the competitive environment. With Manhattan releasing their own supply chain planning product this fall, just curious if you've seen any evolution in the marketplace and who you typically go up against?

Allan Dow

Well, related to that one specifically, it seems like it's a press release so far. So we've not had any awareness or no new involvement in them from a competitive landscape. Good company, so I don't want to be disrespectful of them in any way. But getting into the supply chain planning space, being prominent in the supply chain planning space is not an easy game. So we'll see how that plays out.

Other than that, our competitive landscape really hasn't changed, hasn't evolved at all. We still see the resistance, the number one competitor in our segments, which are predominantly the consumer goods companies. SAP dominates the space. They are -- to the extent that they're there, the CIO and the CFO, I want to give them as many tries as they possibly can to deliver. But in complex supply chains, long lead times, it's just not very effective. So we're quite -- we have good success there.

The second most prominent in the consumer goods space from an ERP standpoint is Microsoft, and they really don't have much to offer in this area at all. So we've got good competition from that standpoint when they're there. And then just the traditional folks. I think o9 has actually faded a bit. We aren't seeing them nearly as much.

And Kinaxis a little bit when you get closer to some of the segments where we cross over, but long lead time complicated. Supply chains, not so much. And then Blue Yonder seems to be have distracted more around their supply chain execution capabilities, but we still see them quite frequently. But that seems to be more prominent than their portfolio as far as we can tell. So a mixed environment, but really nothing changed over the last six to nine months or a year probably.

Zach Cummins

Understood. Well that's very helpful context. I appreciate you taking my questions, and best of luck with the rest of the quarter.

Allan Dow

Thank you. Thank you for joining us.

Operator

And it does appear that there are no further questions at this time.

Allan Dow

All right. Well, Chloe, thank you so much for helping us today. Thank you all of you for joining us on the conference call today. We appreciate your time and attention, and we look forward to speaking to you again in the near future. Have a good afternoon.

Operator

This does conclude today's program. Thank you for your participation. You may disconnect at any time, and have a wonderful afternoon.