American Software, Inc. (AMSWA) on Q2 2022 Results - Earnings Call Transcript
Operator: Good day, everyone. And welcome to today's Second Quarter Fiscal Year 2022 Financial Results. 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. Please note this call may be recorded and I will be standing by, should you need any assistance. It is now my pleasure to turn the conference over to your Chief Financial Officer for American Software, Vincent Klinges. Please go ahead.
Vincent Klinges: Thank you, Chloe and good afternoon, everyone. And welcome to American Software second quarter of fiscal 2022 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 ours 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 and 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. At this time, I will turn the call over to Allan for our opening remarks.
Allan Dow: Thank you, Vince. With the first half of our fiscal year behind us, I'm pleased to report that we have achieved double-digit revenue growth in our supply chain management segment, each of the past two quarters. And in the second quarter, our total revenue growth also returned to the double digits. Our strong top line performance was accompanied by significant expansion in our adjusted EBITDA margin, which is now approaching the levels we last saw when we had more material contribution from license fees. Although our services revenue may cause some variation in any given quarter, we believe our recent growth and margin profile will increasingly be the norm as we continue to scale our cloud business. Looking back on this past quarter, we exited summer and with the pandemic starting to ease, the transition back to the in-person activities began to accelerate. However, with the fragmented work environments, business uncertainty and the frenzied activities, our customers are engaged in to address their supply chain issues, especially with the holiday period upon us, we experienced delays in the completion of several contracts. We have since secured one of the more significant opportunities, and we remain actively engaged in several others, which should come to conclusion soon. Overall, our pipeline continues to increase driven by the transformational projects required to enable enterprises to holistically manage their supply chains in a sustainable and economically resilient way. Although the timing of closing these contracts is a little less predictable due to longer approval processes and the relative scarcity of customer resources required to initiate projects, we remain confident that between a larger opportunity set and improved execution, we are poised for a strong second half. In regard to our second quarter results, I'm pleased to announce that we extended our post-pandemic year-over-year improvements on all measures. With increased RPO and lower churn than we were experiencing a year ago, we continue to build our ACV and services backlogs. We continue to focus on serving existing customers, delivering on our implementation commitments and bringing new companies into our customer community and we are doing it all more efficiently than ever before. With the post summer rebound in consulting services, we were on plan or slightly ahead across all revenue and margin areas. We are seeing a continued increase in our services backlog and are relying more and more on our SI partners to assist in the delivery. The third quarter is always a challenge with extended downtime for the holidays. However, we anticipate continued year-over-year growth in margin expansion in the supply chain consulting services business. We're also pleased to see the continued growth in our recurring revenue stream of cloud services and maintenance, which now represents approximately 63% of total revenues compared to 62% in the same period last year. This was driven by the 43% increase in cloud services' ACV we saw in the second quarter when compared to last year's second quarter. With the increase in new subscription contracts and a return to the more traditional stability of our cloud and on-prem customer community, we expect to see the recurring revenue as a percent of total revenue continue to rise. During the second quarter, we welcomed five new customers and completed subscription or license fee transactions in six countries, reflecting our strong global presence. In summary, we're pleased with the second quarter results and expect to extend the performance improvements of our financial model through the second half of this fiscal year. We remain intently focused on executing against our growing pipeline and look forward to reporting our progress next quarter. At this time, I'll turn the call over to Vince who will provide the details on our financial results.
Vincent Klinges: Thank you, Allan. For the second quarter of fiscal '22, total revenues were $31.2 million and that's an increase of 12% from $27.9 in the same period to last year. The big driver of that is subscription fees, which increased 49% year over year to $10.4 million while licensed revenue was $0.8 million compared to $0.5, the same period last year. Our cloud services annual contract value or ACV increased 44% to excuse me $42.5 million versus $29.6 million a year ago while we added $1.6 million in net new ACV during the quarter, we were short of our internal target as a couple of large deals were expected to close -- that were expected to close were delayed. As Allan mentioned, one of those has since closed providing a nice start to Q3. Over 40% of our net new ACV in the second quarter was from new customers. We had added five new customers in the second quarter and bringing us to a total of 10 year to date. Looking at professional services that increased 5% to $10.8 million from $10.2 million a year ago. Our year over year increase reflects a 4% increase in the proven method, our IT consulting business unit that was due to timing of project worked and a 6% increase in our supply chain business unit and our backlog of supply chain implementations increased significantly due to increase in ACV bookings in recent quarters. So we anticipate continued year over year growth in our services during the remaining quarters of fiscal '22. Our maintenance revenues declined 9% year over year to $9.3 million, which includes a combination of cancellations and cloud conversions, reflecting a normal fall off rate this quarter. Our total recurring revenues comprised of subscription and maintenance fees represented 63% of our total revenues in the second quarter and that's up from 62%, the same period last year. Our gross margin was 59% for the current period versus 53% in the same period last year. Our subscription fee margin increased to 67% compared to 58% in the prior year period. And that's primarily due to increase in subscription revenue and lower amortization of cap software expense. Excluding the non-cash amortization of cap software expense of $690,000 in the second quarter, our subscription gross margin would've been 74% versus 71% the same period last year. And the amortization of cap software was $921,000 in the prior year period. Our license fee margin was 75% compared to a negative 23% in the same period last year and that's due to lower costs, such as amortization expense of $258,000 and amortization cap software expense of $174,000 and lower agent commissions of $61,000. Services margin increased to 31% from 26% last year and that's primarily due to a mix of revenue from higher margin supply chain business unit and better utilization of the supply chain staff. Maintenance margin was 81% for both the current period and prior year period. Gross R&D expenses were 14% of total revenues for the current year period compared to 16% in the same period last year. We are in a transition period with our R&D in preparation for increasing the gross R&D spend in future periods to sustain spend as a percentage of supply chain revenue in this range. Sales and marketing expenses were 19%, excuse me, for both the current and prior year period. G&A expenses were 18% of total revenues compared to 16% last year, primarily due to higher variable compensation expense, given our strong revenue and adjusted EBITDA performance throughout the first half of the year. So on a GAAP basis, our operating income increased 326% to $2.7 million for this quarter compared to $0.6 million in the same period a year ago. Net income increased to 379% to $3.3 million or earnings per diluted share of $0.10 compared to net income of $0.7 million or $0.02 per earnings diluted share last year. On an adjusted basis, which excludes non-cash amortization of tangible expense-related acquisitions and stock-base come optimization expense, adjusted operating income increased 137% to $3.8 million compared to $1.6 million in the same period last year. Adjusted EBITDA increased 70% to $4.8 million from $2.8 million in the same period last year and adjusted net income increased 173% to $4.2 million or adjusted earnings per diluted share of $0.12 for the second quarter and that compares to adjusted net income of $1.5 million or adjusted earnings diluted share of $0.05 in the same period last year. International revenues this quarter were approximately 15% of total revenues for the current and prior year periods. Taking a look at the numbers year to date, total revenues increased 10% year-over-year to $60.5 million and that's primarily due to a 51% increase in subscription fees to $20.1 million a 5% increase in license fees and a 1% increase in services partially offset by a 9% decline in maintenance revenues. Adjusted operating income year to date was $6.4 million representing an operating margin of 11% compared to $3.3 million or 6% margin for the same period last year. Adjusted EBITDA was $8.4 million versus $5.9 million a year ago period and adjusted net income, totalled $7.8 million or $0.23 per diluted share up from $4.3 million or 13% diluted share in the same period last year. Our remaining performance obligation, which we refer to as backlog was $123 million representing a year-over-year increase of 58%. The strong growth in RPO reflects record bookings in recent quarters and an increase in the duration of the cloud agreements as customers continue to make long term commitments to our platform. Looking at our balance sheet, our overall financial position remains strong with cash and investments of approximately $111.4 million at the end of the quarter. This is an increase from approximately $16.7 million compared to the same time last year. Our day sales outstanding as of October 31, 2021 was 65 days for the current period. And that compares to 69 days in the same period last year. And this decrease was primarily due to improved collections compared to last year and also during the quarter, we paid $3.7 million in dividends. At this time, I'd like to turn the call over to questions
Operator: Our first question from Matt Pfau. Please go ahead.
Matt Pfau: Hey guys, thanks for taking my questions. First one, to start off with the deals that got pushed in the quarter. It'd be helpful if you could just provide a little bit more detail on what exactly went on there. And then I know you closed one, but the ones that haven’t signed yet, what's your competence level in getting those deals across in either your third or fourth quarter.
Allan Dow: Matt, this is Allan. I'll take that one. Thank you for joining us this evening. It was a situation that I would describe as frustrating, but not necessarily disappointing. Personally got involved in many of those contracts and the evaluation. The team really did a phenomenal job of getting things ready and the contracts got negotiated and they were sitting ready for final approvals on more than the couple that we mentioned prior. So a handful actually. And we just couldn't get the final approvals done that one of those have come through already and other one probably yet this evening or the next couple of days and a few more next week, hopefully before Thanksgiving even kicks in. So we're hard at work at those. Again, I would describe it as frustrating, not so much disappointing only because of the hard work that went into it and on both sides, the customer side, and with our team as well. So high degree of confidence. We feel good about those. We still got them in the works. Not a work to do on many of them because we're really waiting on the customer side. And, just a couple of things that seemed to really play out for us were around the work conditions where people are not in the office. So it's not as easy to walk down the hallway and wrangle the group together and get the approvals necessary. And then in a couple of cases, they're just really with the resource requirements, but we figured out ways to get that behind us as well. So, feel really good about getting those contracts wrapped up.
Matt Pfau: Got it. That's, that's helpful. And then just maybe be helpful if you could give us a little bit, in terms of the magnitude. You said they were large deals. If you had closed those, at least the ones that you had planned on closing, would you have been sort of closer to somewhere around a $3 million sequential ACV increase?
Allan Dow: Plus a little bit higher?
Matt Pfau: Got it, got it. Good to hear. Okay. And then, on the press release, you commented Allan on sustainability becoming a bigger factor in terms of customer what they're demanding out there or where they're investing. Maybe just some more detail on that would be helpful as well as what you're seeing and in your traceability solution.
Allan Dow: Yeah, for sure. It's really become, from a dialogue standpoint, a frenzied one. There's a lot of challenges around capturing the appropriate data. We've got one of our team members, Mark Burstein is well known in the circles around this area really set the standards in working with the customs organization and others. It's still hard at work on some of those standards. Probably the biggest challenge is data validation and making sure that the information gathered and the processes put in place are verifiable, and that they'll be capable of still getting their products into both the US and the European Union. So a lot of collaborative work going on there which has really been amazing to me to see how well competitive companies have come together to really work on this issue. So it is a hot topic. It's the front of everyone's mind. For all the right reasons, people are working hard at it. And we see that that's going to be a strong topic in the months and quarters and years to come as people really get their arms around it, get it tackled. And, as that starts to play out, I think the regulations are going to get tighter and tighter and consumer expectations are going to get even more demanding. So I believe Matt, we're just at the beginning stages of that really playing out.
Matt Pfau: Great. Thanks a lot guys for taking my questions. I'll pass the line.
Operator: And we'll move next to Zach Cummins. Please go ahead.
Zach Cummins: Yeah. Hi, good afternoon, Vince and Allan. Thanks for taking my questions and congrats on the strong performance across now in the quarter. Just digging a little further, Allan, in terms of what's in the pipeline for you, how do you guys think about the opportunity for conversions with existing customers versus new customers coming into the fold in terms of ACV perspective?
Allan Dow: Yeah, great question. Historically, for many, many years, and it still exists today where, if you look at a trend over time, roughly 50% of our contract business comes from both, from the new customers and from the existing customers. The newer projects tend to be -- in general, tend to be a little larger because you're starting from scratch and you're adding handful of components into the mix there. Whereas in general, the existing customer community may be adding a couple of things or one thing or expanding on a division or something like that. But with that said that, some of those larger transactions can be existing customers as well. In fact, one that we've closed this quarter already is from an existing customer. That was a holdover from last, from last period. So it's a mix, but in general, you can say that the new customer projects are a little bigger but overall revenue or revenue that's driven by those contracts is about split on the long term. Does that answer the question, Zach?
Zach Cummins: Yeah. Yeah. That's extremely helpful. And in regards to the press release you had out this morning in terms of consolidating resources across agility, demand management and NGC. can you just talk about the decision and why you feel like now is the right time to do that and kind of what you're hoping to achieve by making this move?
Allan Dow: Well, good friend of mine always says Zach, that it's every once in a while, you want to be lucky and sometimes you got to smart and you got to be lucky. And when those two hit together, you really hit the mark. And I believe that we were smart and lucky on this one. We started this transition three and a half, four years ago. We started by talking about what do we need to do with the collective capabilities we have in our software platform? And we began in parallel with the transition to the cloud, a number of years ago to say, when we do that, let's make this platform all one, because we had complimentary capabilities across all of the business units. We had four at that time, with NGC, demand management, agility, and the halo operation that we had acquired just prior to that. So our team went hard to work at it. The pandemic of the last 18 months has really demonstrated why that was a brilliant decision. It wasn't mine. So I'm not saying I'm brilliant. But, as an organization, we've got some great people here that we're thinking hard about the future of supply chain and what we need to do to help our customers be more successful. We didn't have any idea that the pandemic was coming, but the reality of the pandemic set in motion, the things that we knew were on the horizon as the pace of supply chains continued to accelerate the length of products in the marketplace, time in markets is getting shorter and shorter. Thus the turnover and the number of new product introductions going faster and faster, the global enterprises, and what it really meant was in order to be successful, our customers had to start breaking down the silos. So we were structured around the silos of the past and the way our customers operated their supply chains. And we served those markets very well. In today's marketplace that's unacceptable. You got to break those barriers down. We have, our customers are rethinking the way they operate their supply chain. They're synchronizing their teams around product lines or customer experience or divisions. They no longer have forecasting teams and sourcing teams and procurement teams that operate in silos and independent of each other. So our business today is aligned with the necessary needs of it. And we were fortunate to not have to be tackling that today, where we already got it behind us. The last leg of that journey was to align our organization in such a way that we could really capitalize on that as well. And our demand management team is acutely focused on emerging markets in small to medium enterprises. And our agility team is acutely focused on the needs of large enterprises and that's how we set our business structure up to align with our product capabilities. So probably a heck of a longer answer than you wanted Zach is when you ask that question, but that's the story and hopefully that was helpful.
Zach Cummins: Extremely helpful. I always appreciate the additional insight on that front. And just final question for me geared towards Vince. In terms of the subscription margin, it's remained pretty steady here in kind of the mid 70s. How are you, I guess, how should we be thinking about that going forward as a subscription piece of the business continues to scale?
Vincent Klinges: Yeah, Zach, we're thinking it'll trend slightly up towards the end of this back half of the year. It's roughly around 74 bouncing around 74, 75. It should pick up a couple basis points maybe towards like 76 and 77 towards the end of the year, but we're really targeting next year to get it to 80. So that's kind of the way we're modeling it right now.
Zach Cummins: Understood. That's helpful. Well, thanks again for taking my questions and best of luck going forward.
Operator: We'll move next to Matthew Galinko. Please go ahead.
Matthew Galinko: Hey good afternoon. Thanks for taking my questions. Maybe firstly, on the transformational type deals, can you, take a stab at whether in the velocity picking up on getting those, across the finish line or given where we are in the pandemic and where we are in the global macro environment, what are the kind of puts and takes there?
Allan Dow: Yeah, Matt first of all, thank you again for joining us. Good question. The nature of supply chain today is really driving these transformational projects. It's much like we were chatting a few minutes ago when Zach asked the question about realignment of our business, where those are the needs of the customers, they need to think differently. They need a platform for managing the supply chain, where they can do the scenario analysis and span across the whole end to end supply chain operations that they have. So, what that brings about is not only a software application and implementation but it's a change management practice as well. So that's one of the headlines that we've been hitting into. And we've really worked hard at helping our customers figure out how to do that to the tune of several projects we have up and running today, where we have some of our consultants sitting on the customer side, really operating on their behalf, helping them operate the day to day operations so that they can free up some of the key resources to help on the project. So we're thinking outside the box. We're doing some non-traditional work. It's starting to break those projects loose. We're serving that idea up to more of the prospects as we go forward. So that combined with the results we're getting I believe we're going to see that break loose. Now the next couple of months are really tricky as we get into the holidays with Thanksgiving here in the United States and Christmas around the world. But that said we're in a period that is traditionally strong for us because we have got three milestone moments. We have the end of the calendar year where money needs to get spent because that's the end of many of our customers fiscal year. The start of a New Year, people come outta the blocks with a fresh, rest from Christmas and New Year and a desire to get back to work and new fiscal budget that can free up some cash. And then of course, 30 days later we have the end of our quarter and we've done a marvelous job over 40 years of training our customers at the end of the quarter is a good time to do work with us. So we have those three milestone events that should be another breakthrough quarter for us where we stand out in the third quarter.
Matthew Galinko: Got it. Thanks. That's very helpful. Maybe just one more on the competitive front, what you're seeing given, some of the consolidation that's played out in the space.
Allan Dow: Yeah. It's been an interesting time in this space. I think there's a couple of consolidations that have just taken some folks out of the play. Not all companies have been successfully gobbling up some of the things that they spend money on and really put into effective use. So we've actually seen a few competitors just disappear from the horizon or solutions they would be, disappear from the horizon. Overall, the more prominent players that we peer up against, Blue Yonder, who just went through a change in ownership structure with Panasonic taking them private under their umbrella. We've yet to see really that star it to come about. Although we've seen few more resumes hit the street. So we'll see what that means as time plays out. We see, we continue to see the ERP players. They get some business where they lock up the CFO and the CIO and they want to have a single solution, but they're continuing to falter and we're seeing more breakaway client to historically had been loyal to those brands, stepping away and reassessing what they need to manage their supply chain. And that's become more prominent than a brand loyalty. So that's starting to break loose some projects for us. So there's a handful of our, the best breed providers out there that stand side by side with us. We're all getting our fair share today, and I think the collective of the top three or four will probably take you more business from some of the others who aren't as strong and can't help the customers as well as they have the desire and need to transform their business. So it's a healthy environment. We like the position we're in and we can compete very effectively.
Matthew Galinko: Thanks and congrats on the strong quarter.
Allan Dow: Thank you, sir. Appreciate you joining us this evening.
Operator: And it does appear, there are no further questions at this time.
Allan Dow: So Chloe, thank you so much for helping us with the call this evening. I want again, thank everyone who joined us this evening for the call. We appreciate your attention and interest in American Software and look forward to giving you an update again in three months ahead on our progress in the third quarter. Thank you all. Bye bye.
Operator: Absolutely. This does conclude today's program. Thank you for your participation. You may disconnect at any time and have a wonderful evening.
