American Software, Inc. (NASDAQ:AMSWA) Q1 2024 Earnings Call Transcript August 24, 2023 5:00 PM ET

Company Participants

Vince Klinges - CFO

Allan Dow - President and CEO

Conference Call Participants

Zach Cummins - B. Riley Securities

Anja Soderstrom - Sidoti

Matthew Galinko - Maxim Group

Operator

Good day, everyone, and welcome to today's First Quarter Fiscal Year 2024 Preliminary Earnings Results Call. At this time, all participants are in a listen only-mode. Later, you'll have the opportunity to ask questions during the question-and-answer session. [Operator Instructions] Please note, this call may be recorded. [Operator Instructions]

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

Vince Klinges

Thank you, Travis, and good afternoon, everyone. Welcome to American Software's First Quarter of Fiscal 2024 Earnings 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'll turn the call over to Allan for opening remarks.

Allan Dow

Thank you, Vince. Good afternoon, everyone, and thank you for joining us today. I'd like to begin by reviewing our first quarter results, providing an update on the current business environment and highlighting several initiatives we're undertaking to create value for our shareholders. Our first quarter results were mostly in line with our expectations with the exception of our professional services revenue, which was down both sequentially and a year-over-year basis due to us winding down projects coming into the summer, and experiencing our usual seasonal well before a number of projects started up after the holiday period.

We achieved solid subscription revenue growth of 14% year-over-year, which was consistent with our expectation and included the recovery of some cloud revenue from contracts that were suspended in the fourth quarter. Vince will provide some additional comments on this during his financial review.

As we've maintained a very solid retention rate on maintenance revenue, while also securing inflationary increases on renewals, our recurring revenue again exceeded the 70% threshold and now represents 75% of our total revenue. In regards to our services revenue, we will continue to manage the IT staffing business towards improving margin profile. Furthermore, in our supply chain business, the combined impacts of our simplification initiatives to reduce the overall effort from each project, incrementally outsourcing more work to our service partners, and completing a higher percentage of work remotely, likely will result in a lower overall service contribution to our revenue profile.

However, these efforts will give us margin improvements, surge capacity, a broader market reach and continued emphasis on our more reliable recurring revenue streams. Although the economic uncertainty continues to persist, we are cautiously optimistic that we will continue to see pipeline and close rates improve as we work through the upcoming holiday period for our consumer goods clients, and they build confidence in the need for new solutions in the year ahead.

The remainder of this calendar year is the hardest to predict given the headwinds from recent interest rate hikes and recession fears. But the longer-term trends all point to a strong market for supply chain planning solution for years to come. Our pipeline is strong, and we anticipate continued improvements as our clients and prospects solidify budgets for 2024 spending. Additionally, with our large installed base, most of which is still on-prem, we have ample pipeline to support the accelerated lift and shift transition objectives that we've set out for this year, which will build upon our recurring revenue streams and further enhance the strength and predictability of our financial model.

In light of the market and spending uncertainty, we will, of course, continue our cost control efforts, while with a goal of maintaining a flat to slight reduction in the overall cost this fiscal year. Overall, we're on track to achieve our financial plan for this fiscal year, and we are reaffirming our guidance. For fiscal 2024, we continue to expect recurring revenue to be between $88 million and $92 million, the adjusted EBITDA to be between $19 million and $21 million, and total revenue to be between $120 million and $126 million.

On the acquisition front, first, we continue to see positive momentum with our network design and optimization solution from the Starboard acquisition and are making progress in our efforts to find new acquisitions that will be complementary to our current platform. We believe that it is likely that we will meet our goal of ingesting one more strategic fit company in the near term, and potentially an additional one before the end of the fiscal year, utilizing our cash flow on hand for stronger investor return while maintaining the quarterly dividend.

We recognize, however, that our strong financial position enables us to do more to deliver value to our shareholders. As we look forward to the fiscal year ahead, we remain bullish on the supply chain planning market and our ability to compete effectively. Based on our ongoing performance improvement and view on the market growth, we believe our stock is undervalued. So we are initiating a share buyback that will commence after the current blackout period. We are also pursuing the sale of our headquarters and engaging with our Class B shareholder to address recent feedback on our dual class structure. We believe progress on these fronts will further benefit our shareholders.

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

Vince Klinges

Thank you, Allan. For the first quarter, revenues came in at $29.2 million, a decrease of 7% from $31.3 million in the same period last year. Our subscription fees increased 14% year-over-year to $13.8 million due to bookings in the previous quarter with about two points of that gain being catch-up revenue from some of our clients who had delayed payments that were resolved in the quarter. We do not anticipate any additional near-term recoveries of revenue that was previously suspended and we have seen our retention rates to return to more normalized levels.

Our software license revenue was $0.3 million for both the current quarter and the prior year period. Professional services and other revenues decreased 31% to $7 million from $10 million the same period last year. The year-over-year decrease reflects a 33% decrease in our supply chain management unit due to the slowdown in project activity that we've experienced over the past few quarters and the timing of new project starts and our efforts to offload more services to our SI partners.

Additionally, we saw a 28% decrease in our IT Consulting business unit, the Proven Method, which continues to be impacted by macroeconomic conditions. However, the revenue began to stabilize on a sequential basis in our IT Consulting business and we expect both areas to exhibit some improvement in Q2.

Maintenance revenues declined 8% year-over-year to $8.2 million, reflecting a normal falloff rate this quarter. Total revenues comprised of subscription and maintenance fees represented 75% of total revenues in the quarter, and that compares to 67% in the same period last year.

Our gross margin was 60% for both the current and prior year period last year. Our subscription fee margin was 69% for the current period compared to 70% in the period last year. Excluding the non-cash amortization of intangible expense of $340,000 in the first quarter, subscription gross margin would have been 72% versus 74% last year. The amortization of cap software was $508,000 in the prior year period. The decline in our subscription gross margin compared to last year is due to timing of higher short-term costs at the end of the quarter for onboarding new customers we secured in the fourth quarter and the first quarter.

Our license fee margin was 75% compared to 72% in the same period last year. Our services margin decreased to 19% from 27% last year due to lower revenues. The margin decreased primarily due to lower revenues from our supply chain business unit, resulting in lower utilization. We are closely monitoring our resources levels and have adjusted cost to make sure we maintain optimal levels of productivity throughout the remainder of the year. We believe services revenue will sequentially increase in Q2 '24 and the gross margins will improve.

Our maintenance margin was 79% for the current quarter, compared to 82% in the prior year period. Gross R&D expenses were 15% of total revenues for the current period compared to 14% in the prior year period. Sales and marketing expenses were 21% of revenues for the current quarter, and that is up from 19% in the prior year period, and G&A expenses were 19% for the total revenues for the current quarter compared to 18% last year. So our operating income decreased 39% to $1.6 million for this quarter compared to $2.6 million in the same quarter last year, primarily due to lower revenues.

Net income increased 29% to $2.7 million or earnings per diluted share of $0.08 compared to net income of $2.1 million or $0.06 per earnings per diluted share last year. On an adjusted basis, which excludes non-cash amortization of intangibles expense related to acquisitions and stock-based compensation expense, our adjusted operating income decreased 15% to $3.4 million compared to $4 million in the same period last year, and adjusted EBITDA decreased 17% to $3.9 million from $4.6 million in the first quarter of last year. Our adjusted EBITDA this quarter was impacted by a little over $400,000 in severance costs due to headcount reductions implemented to align our cost structure with the current operating environment.

Adjusted net income increased 28% to $4.2 million or adjusted earnings per diluted share of $0.12 for the first quarter, and that compares to adjusted net income of $3.3 million or adjusted earnings per diluted share of $0.10 in the same period last year. International revenues this quarter was approximately 18% of total revenues for both the current and the same period last year. Our remaining performance obligation, or RPO, was -- that we refer to as backlog, was $111 million. Our total RPO was down 11% from the prior year period due to higher burn rate and fewer deals and shorter contract duration from the recent deals when compared to last year.

Looking at the balance sheet, our financial position remains strong with cash and investments of $115.3 million at the end of the quarter. During the quarter, we paid $3.7 million in dividends. Our day sales outstanding as of July 31, 2023, was 76 days for the current period, and that compares to 68 days in the same period last year. However, we had a nice decrease of 10 days sequentially from April 30, 2023, which was 86 days. So we remain confident in our ability to collect our outstanding receivables due to the high-quality nature of our customer base. As Allan noted, our guidance remains unchanged, and at this time, I'd like to turn the call over to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from [Karen Cuttica] (ph).

Unidentified Analyst

Hi. Thanks for taking my question. My first question is, are you seeing any further elongation of sales and approval cycles? Or does that remain similar to last quarter?

Allan Dow

Thank you, [Karen] (ph) for joining us. And the question, yes, it's a super one. Right now, we've seen stabilization in the close cycles and approval cycles versus last quarter. Of course, last quarter, when we got together, we were talking about how they got longer. So at least the conditions aren't getting any worse, but they haven't really shown any signs of improvement yet. We just think that's the nature of the current market conditions. And of course, the first quarter is during the summer, which is always challenging anyway because, as you sequence through the approval cycle, you can always bump into somebody who's in a holiday on PTO with their family and whatnot. So it's always a little bit tougher in our Q1, which is the summer period. But we're hoping that will pick up. We're seeing some acceleration as we look forward. We're seeing people even though they're nervous talking about going a little bit faster and getting things started this fall. So we're anticipating maybe that will start to improve now here that we're coming off the back of the summer period.

Unidentified Analyst

Got it. That makes sense. And then one more for me. Can you provide any more detail on the strategic actions you mentioned and when we can expect to see that impact?

Allan Dow

When we see the impact is a little tricky, of course, but -- because it's all subject to lots of timing. In regards to the headquarters building, one of those strategic actions, you may see that we've actually listed the property for sale. We're exploring whether that makes sense. If we get the right kind of money, we believe that in this hybrid work environment, the facility is not as critical to our ongoing operations and the amount of space we have here.

So if we have the right opportunity to redeploy that cash and turn that asset into cash and redeploy it in a more strategic way, we'll do so. That could be a very long process. So even though that we've gone to market and we're soliciting offers here in the near term, the full cycle in that transaction could take anywhere from six to nine months, maybe even longer depending on the approval cycles that they would have to go through for property development.

In regards to the B share, we're in an investigation period right now. And we've been asked by our B shareholder, Mr. Edenfield, to explore different opportunities, look to see what the market has been like, what other companies that have been in a similar situation have done and come back with some recommendations. Once we get to a conclusion on that, we'll also have to get some third-party validation on that, independent verification of any proposed actions that we would take. So that could take us a little while. We thought that we could do something before the end of the calendar year. We were a little more conservative as you may've read in our proxy to say that in the fiscal year just because we don't know that how long that last cycle might take for us to do something there.

In regards to the share buyback, we plan to file a buyback provision as soon as we exit the blackout period that we're in right now, there'll be a few more days to make that happen and we'll start that process, but that can be a long process. We're anticipating -- we'll let that at least run through the end of the calendar year, and then we'll reassess at the end of the calendar year as we head into that holiday period.

And then the other strategic move on acquisitions. Those are a little tricky. We've got a couple of actions in play, but it takes two parties to get that sorted out and then again, some approvals in that sort of process that can be a little bit delayed. But at least that initial one, we think we're on the forefront here in the next -- we're counting it in weeks, not months at this point. So we'll see how that plays out, and nothing is done until it's done. So we're hoping that we can take at least one of those actions relatively short term.

So long rambling answer, but hopefully, that was helpful and brought a little more clarity to some of those points that I had mentioned earlier.

Unidentified Analyst

Yeah. Thank you, that was great.

Operator

Our next question comes from Zach Cummins.

Zach Cummins

Yes. Hi, good afternoon, Allan and Vince. Thanks for taking my questions. Allan, can you just talk a little bit more about the opportunities to lift and shift some of your existing customer base over to more of a subscription-based agreement? And what are some of the actions you're taking to really accelerate that process this year.

Allan Dow

Yeah, Zach, thank you so much. Thank you for joining us and another great question. So historically, as many will recall, we've been a little -- quite passive, really relative to that because we -- I was really just watchful for the clients that we're really in a position where they needed to move. They weren't taking the release updates soon. They were falling behind, maybe in some cases, even being out of compliance relative to the underlying infrastructure criteria around operating system releases, database releases, that sort of thing or if they were just -- our observation was that they were not managing the solutions as effectively as they should be. We were being proactive there.

This last year, we started initiating a more proactive move where we're going to all clients presenting the opportunities that could be available to them by moving to the cloud. We have new capabilities and features that come out that are exclusive to the cloud. So those upgrades allow them to get access to some of those features and capabilities. And then the other part of it is that we're seeing an acceleration just from our clients expressing a desire to move to the cloud where they put a strategic initiative together to do so.

So it's really about intangible benefits that could be achieved by moving to the cloud, those faster releases, the more features, the richer capabilities, the offloading of IT burden, and the flexibility and the more frequent updates that's in there. So that's the method underway. And right now, our pipeline supports the initiative of doubling the number of lift and shifts that we had done historically in this fiscal year.

Zach Cummins

Understood. That's helpful. And my follow-up question is really just around the supply chain management, professional services side. Can you talk about your approach there? It seems like you're voluntarily winding down some projects and offloading those to partners. So I'm just curious of how you're balancing outsourcing work to partners versus what sort of projects you continue to take on with your own internal teams?

Allan Dow

Yeah. I would -- I mean we're not winding down projects and handing them off, but we're continuing to educate our partners, our SI partners and value-added resellers to give them more skills and more capability and further bandwidth to take on projects right from the get-go. As we go through that process and onboard other partners, onboard more consultants that are scaling up, we're working side-by-side with them on some projects. So in the interim, you see we went from not many projects being done that way to shared resources. And now in some cases, we can really have them implement independent of us entirely. So more and more of that is starting to happen.

So it's a transition that we're going through to bring that to light. And again, we think that's probably one of the most important initiatives around this because of the flexibility we have then in resources by having a broader team that is skilled, a virtual team, not necessarily our own employees and a much broader reach and market penetration. So we're very excited about the response we've gotten from these partners. Their willingness to make some investment in education and work side-by-side with us in parallel projects.

Zach Cummins

Understood. Well, thanks for taking my questions and best of luck for the rest of the quarter.

Allan Dow

Thank you.

Operator

Our next question comes from Anja Soderstrom.

Anja Soderstrom

Hi, thank you for taking my questions. Some of them have been addressed already. But, I'm curious, you mentioned you expect improved gross margin in this year, but we didn't really see that in the first quarter. What should give us confidence that we can see that improving in the coming quarters?

Vince Klinges

Hi, Anja, this is Vince. We anticipate that because of some of the restructuring cost reductions that we've taken in the first quarter. So that should start playing out in the next couple of quarters. And then also we do see an uplift in professional services that will actually help to improve those gross margins there, too.

Anja Soderstrom

Okay, great. Thank you. That was all for me.

Vince Klinges

All right. Thank you so much.

Operator

[Operator Instructions] Our next question comes from Matthew Galinko.

Matthew Galinko

Hey, thanks for taking my questions. I guess maybe first on the catch-up payment -- catch-up subscription payments. I don't think I heard any quantification of how much that contributed to the sequential growth. So can you give us any more color on how supportive that was for fourth -- first quarter results and to the extent that, that recur moving forward, how much of a headwind is that as we move into the second quarter? Thanks.

Vince Klinges

Yeah. So the -- so Matt, thanks for the question. The pickup was roughly around $200,000, $300,000, and it was kind of a one-off catch-up from customers who had delayed payments, and they finally came back online. So we kind of view it as kind of a more normalized rate of retention going forward after that one-time pickup.

Matthew Galinko

Got it. All right. Thanks. And then my follow-up question is on the potential for the HQ sale, I guess, does that -- would that predict a more aggressive M&A disposition or capital allocation if you converted that asset to cash? Or can you sort of take it to the next step of what the plan would be on what you would do with the cash if you completed the transaction? Thanks.

Allan Dow

Yeah, Matt, this is Allan. Again, thank you for joining us. There are three options really relative to that. There could be a distribution of cash. There could be more additional share buyback, would free up resources for that. And then obviously, there's still the opportunity for acquisitions. We talked about all three of those, but it's really hard to put a definitive plan in place because of the timeline associated with this, the sale. Even if we get the right offer, we could put a purchase and sale agreement together and then it'd be anywhere from six to nine months or a year getting all the approvals because depending on what they wanted to do with the facility. So given the unpredictable nature of the timeline of that, we've made no definitive plans on how we would use the cash, but we're confident that one of those three options would return shareholder value. So we'll reevaluate those options, look at what's available to us at the time and then reassess if the cash is freed up -- if the sale goes through and the cash gets freed up, we'll have to reassess at that time. But that could be, as I said, nine months or longer from this time forward.

Matthew Galinko

Got it. Thanks, Allan.

Allan Dow

Sure.

Operator

We have no further questions in the queue. I would now like to turn the call back over to today's speakers.

Allan Dow

So, thank you very much. Travis, thank you for hosting today, and thank you all for joining us for our first quarter results. Enjoy the rest of this week and the weekend and a long holiday period here in the United States, and we look forward to speaking with you again in the near term. Have a good afternoon.

Operator

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