American Software, Inc. (AMSWA) on Q4 2024 Results - Earnings Call Transcript
Operator: Good day, everyone, and welcome to today's Fourth Quarter and Fiscal Year 2024 Earnings Results Call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. [Operator Instructions] Please note, this call is being recorded, and I will be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Vince Klinges. Please go ahead, sir.
Vince Klinges: Thank you, Travis. Good afternoon, everyone, and welcome to American Software's fourth quarter 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, 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 opening remarks.
Allan Dow: Thank you, Vince. Good afternoon, everyone, and thank you for joining us today. Although challenging from an economic standpoint, fiscal 2024 was a pivotal year for American Software. Strategically, we transformed our company through the divestitures of the proven method in Transportation Rating Solutions, leaving us with a singular focus on our core supply chain software business moving forward. This transformation will become more evident later this year as we plan to rename the company Logility, and trade under the ticker symbol LGTY. Most important is that our Logility brand is already known to our existing client community and prospects. And Logility was recognized by Gartner as a leader in the latest Magic Quadrant for supply chain planning solutions. So, this change will align the company with our brand. To further distance ourselves from the competition, we accelerated our AI roadmap significantly in fiscal 2024 with the acquisition of Garvis. As we shared last quarter, the Garvis products have been rebranded with -- as DemandAI+, and early indications suggest that the new capabilities will benefit us on three fronts: the addition of new logos to our client community, an accelerated pace of existing client lift and shifts to the cloud, and upgrades of existing cloud clients to this next generation of demand forecasting. Given that DemandAI+ represents our next-generation demand intelligence platform and is only available in the cloud, we recently informed our clients that new innovation will no longer be available on-premise. We believe this will further catalyze the conversion of our maintenance revenue to subscription fees over the next several years. Even as we bolstered our platform through M&A, we continue to return capital to our shareholders via our usual quarterly dividend. And for the first time in many years, we repurchased stock in the open market, fully utilizing the remaining amounts of our prior authorization. Finally, we reached a definitive agreement with our founder and Class B shareholder, Jim Edenfield, which subject to shareholder approval, will eliminate our dual-class structure. In aggregate, we believe the actions we have taken over the past year will create significant shareholder value in the years to come. Turning to the fourth quarter, our results were largely as expected and we were pleased to meet the revised guidance for the full year that we provided midway through fiscal 2024. Similar to our experience over the past year, our clients and prospects remain engaged on transformational supply chain initiatives, but have delayed approvals or start dates, and in some cases, staged the commitments over multiple phases amid persistent macroeconomic headwinds. Our pipeline, again, grew from the improved levels we saw in the third quarter, reflecting both strong interest in our new AI capabilities as well as an increase in late-stage deals that remain in the closed process. Although pipeline conversions remains below historic norms, we continue to see improvement relative to the start of the fiscal year, resulting in a sequential uptick in our backlog that was partially driven by contracts signed late in the fiscal quarter. Contributing to the backlog growth in the fourth quarter was greater desire among our clients to move from on-prem to our enhanced capabilities in the cloud, interest from our cloud clients and upgrading to the AI forecasting approach with DAI+, the acceleration of generative AI capabilities, a number of Garvis pilot clients expanding the footprint more broadly across their enterprise, and the traction with our continuous network optimization capabilities that provide insights into navigating around the bottlenecks in supply chains. We're also on the forefront of releasing new AI-based capabilities that expand value for our clients by enhancing their decision-making such as InventoryAI+, which we announced in the spring and most recently, the Decision Command Center. We have other groundbreaking solutions on the horizon for the year ahead. As we look forward to the current fiscal year, we're encouraged by the level of pipeline growth experienced throughout the latter half of fiscal 2024. We are poised to invest ahead of the growth as soon as we see the economic pressures and uncertainties subside and pipeline conversion starts to accelerate. At the same time, the timing of deal closures, particularly large transactions remains difficult to predict and can meaningfully impact the revenue we recognize in any given period. Thus, while we believe our cloud bookings should grow at a higher rate and translate into accelerating subscription fee growth exiting the year, our initial outlook for fiscal 2025 reflects conservative assumptions around the timing of client spending decisions and the delayed revenue impact from late year bookings. Taking all this into consideration, our initial guidance for fiscal 2025 includes total revenue of $104 million to $108 million, recurring revenue between $87 million and $89 million, and adjusted EBITDA of $15 million to $16.4 million. At this time, I will turn the call over to Vince, who will provide the details of our financial results.
Vince Klinges: Thanks, Allan. Before I discuss the results for the quarter, I'd like to remind everyone that due to the divestiture in the second quarter of our non-core IT staffing business unit, The Proven Method, our financial statements have been recast to show The Proven Method as a discontinuing operation. Results from the Transportation Ratings Solutions were not considered material enough to recast as discontinued operations and are still reflected on our prior-year comparisons for continuing operations. Our discussion of the current and comparable periods will focus only on the continuing operations from this point on. So, for the fourth quarter, our total revenues were $25.4 million, decreased 5% from $26.8 million in the same period last year, and that's primarily due to lower revenues from our license fees and professional services and maintenance. Our subscription fees increased 8% year-over-year to $14.1 million compared to $13 million the same period last year. Our software license revenues were $0.2 million, and that compares to $0.7 million in the same period last year. Professional services and other revenues decreased 23% to $3.7 million from $4.8 million a year-ago period, and that's primarily due to lower bookings earlier in the year and also our efforts to direct more services to our SI partners. Our maintenance revenues declined 9% year-over-year to $7.4 million, reflecting a normal falloff rate this quarter, as well as the divestiture of our Transportation group, which reduced our maintenance revenues by approximately $250,000 for the quarter. So, our total recurring revenues, comprised of subscription and maintenance fees, represented 85% of the total revenue for the fourth quarter, and that compares -- that's up from 79% in the same period last year. Our gross margin was 66% for the current period, up from 65% in the same period last year. Our subscription fee margin was 68% for the current quarter and prior-year period. Excluding the non-cash amortization of intangibles of $232,000, our subscription gross margin was 70% in the current period, and that's compared to 71% in the same period last year. The amortization of intangible expense was $398,000 in the same period last year. The decline in non-cash amortization expense from the prior-year period compared to the most recent period reflects the change in the Garvis acquisition technology amortization life from three to five years. Our license fee margin was 68% compared to 77% in the same period last year. Our gross margin for services were -- decreased to 26% compared to 30% last year. And our maintenance margin was 81% for the current period, and that's up from 80% in the same period last year. Our gross R&D expenses were 18% of total revenues for the current period, and that compares to 17% in the prior-year period, but were virtually unchanged in absolute dollars. Sales and marketing expenses were 21% of revenues for the current quarter, and that compares to 18% in the prior-year period, primarily due to increased marketing activities and costs related to the Garvis acquisition. Our G&A expenses were 23% of total revenues for the current quarter, and that compares to 22% last year. The increase was due to inclusion of approximately $550,000 of one-time expenses related to the planned elimination of our dual-class structure. So, operating income was $0.7 million this quarter compared to $2.2 million in the same period last year, primarily due to lower revenues and also costs related to Garvis acquisition and the non-recurring expenses related to our B Class structure. Net income was $2.2 million or earnings per diluted share of $0.07 compared to net income of $2.9 million or $0.09 per diluted share last year. On an adjusted basis, which excludes non-cash amortization of intangible expense-related acquisitions and stock-based compensation expense, our adjusted operating income was 2.7%, and that compares to $3.7 million in the same period last year, adjusted EBITDA was $3.1 million compared to $4.3 million in the fourth quarter of last year, and our adjusted net income was $4 million or adjusted earnings per diluted share of about $0.12 for the fourth quarter, and that compares to adjusted net income of $4.2 million and adjusted earnings per diluted share of $0.12 in the same period last year. International revenues this quarter were approximately 20% of total revenues compared to 19% last year. We exited the quarter with remaining performance obligations, or RPO, which we refer to as backlog, of $128 million, which is an 8% increase sequentially and a 3% year-over-year increase. Looking at our balance sheet. Our financial position remains strong with cash investments of $83.8 million at the end of the quarter. And during the quarter, we paid $3.7 million in dividends. Our days sales outstanding as of January 31 -- excuse me, April 30 of '24 was 101 days for the current period compared to 78 days in the same period last year. And that's due to timing of increased billings at the end of the quarter, which majority were subsequently collected and our current DSO at the end of May was 77 days. As Allan mentioned, related to our guidance, consistent with our usual seasonality, our guidance for fiscal '25 assumes our bookings will be weighted more heavily towards the latter half of the year relative to the fiscal year '24. We expect to see an increase in the existing client conversions to the cloud, which, combined with the sale of TRS will result in greater decline in maintenance than we have seen in past years. As a reminder, we typically see an uplift of 2x to 3x revenue when our clients lift and shift to the cloud. So, we anticipate our subscription fee growth will accelerate exiting this year. So, the guidance we're providing for fiscal '25, we anticipate revenue in the range of $104 million to $108 million, including recurring revenue of $87 million to $89 million, and 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.
Operator: [Operator Instructions] Our first question comes from Zach Cummins.
Zach Cummins: Hi, good afternoon, Allan and Vince. Thanks for taking my questions. Allan, I just wanted to ask you around the current buying environment. It sounds like you're seeing some hesitation from some of your customers at this point. Just trying to grapple how they move forward with project start time. So, just curious of how those conversations have evolved versus maybe what you were seeing three or six months ago.
Allan Dow: Well, first of all, Zach, good afternoon, and thanks for joining us. Great question. Yeah, the economic environment, although earlier in the year when we last met, got together, we were anticipating an interest rate drop, I think, everyone was, and encouraged by the long-term prospects of the economy improving. And since then, that really hasn't occurred as we all know and see. That has translated into a continued stall in the marketplace relative to projects. We were obviously able to break some projects loose. A few of the projects we signed actually have deferred start dates. So, we're not doing any activity even though we were able to execute the contract. So, that is a direct reflection in the increased RPO, but an impact on the revenue that we were not able to capture in the fourth quarter nor will we, in one case, even in this first quarter. And people are breaking up the projects. They're going for much smaller bites, just trying to be conservative, get something done, keep some powder dry guess, so to speak, to -- they want to proceed with Phase II, but they want to make that decision as they see how things unwind here as the year continues -- the calendar year continues. So, a very conservative approach, probably less conservative than we were experiencing earlier on. What's very interesting, Zach, related to this conversation or question you posed, is that the evaluation period itself is running about the same pace that we'd seen historically the amount of time and energy that's being invested, which really much slower is the approval time period. Once you get selected, you give evidence of selection and you start working on contracts and then getting through that approval cycle and going from budget to funding has really gotten much longer. So that's the part of the sales cycle that we see gotten much more difficult. So, probably a longer answer than you were anticipating, Zach, but I think hopefully that will provide a little clarity on what we're seeing in the marketplace right now.
Zach Cummins: Absolutely. I always appreciate the incremental color. And Allan, the follow-up question I had was around the conversion activity within your on-premise customer base. A little bit of a shift to what we've seen in the past where it seems like you could have drawn a line in the sand, to use the phrase, to really accelerate some of that conversion activity moving forward. So, just curious if you had any feedback from customers since kind of giving that notice. And kind of what's your expectation in terms of really starting to move people over to the cloud side of the business?
Allan Dow: Yeah. It's been mixed feedback. The rationale behind it was really multi-fold. First and foremost, it's just become far more difficult for us to deliver on-prem, given that all of our development and the depth of development is really hinged around being in the cloud. So, we've decided that, that didn't make sense. We've also seen, as we've all experienced in the world today, the cyber risks have gotten higher. So, many of our clients have been very receptive to it. In some cases, they were pleased that we actually delivered the message, because it gave them one more incentive behind the momentum to move to the cloud. They're anxious about being able to protect their data and their systems and make them available on their own environment. They're much more comfortable that we and our partners are able to do that in a more effective way. So that's been encouraging. And then, those who, on the other side of the spectrum, were frustrated by it, we've continued to dialogue with them and share with them that we're not abandoning them. We're just not going to be able to deliver any new functionality. And we're going to help them through that process. So, after the initial shock and maybe a bit of an overreaction, the reality of -- we have ample time to get them to the cloud in a comfortable way and facilitate getting budgets in place and adequate time to actually do the transformation project and move it over without putting risk on their supply chain, they've gotten more comfortable with the circumstances. So, it takes a little more conversation with those who initially react negatively, but we haven't had anybody that ran away yelling and screaming. And I think that's been probably also a strong reference to that. That's just the reality in the market today. So...
Zach Cummins: Understood. And maybe one final question maybe geared towards Vince, but can you give us a sense of the baseline assumptions that you're making for your initial recurring revenue guidance for this year? I know it's maybe a little trickier from a revenue recognition standpoint, just given you're accelerating some of the conversions of on-prem customers, but any sort of incremental color around that would be greatly appreciated. Thanks.
Vince Klinges: Yeah, Zach, you might be thinking that it's a little lower on the lower side. We were trying to be a little conservative, because until we start seeing the close of the deals happening in the first half of the year, we want to be -- we wanted to take a cautious approach to adding incremental bookings to the SaaS. So that's why we've kind of modeled it, so like more of the bookings would be in the second half of the year related to the SaaS area.
Zach Cummins: Got it. Thanks for taking -- yeah.
Allan Dow: Yeah, I was just going to say the revenue was tied to the bookings and the contract start date. So, as you move the bookings out to the back end of the year, we just have less time to capture the revenue and really having a reflection in the revenue number associated with the financial results.
Zach Cummins: Understood. Makes sense. Well, thanks for taking my questions, and best luck with the rest of the quarter.
Allan Dow: Thanks, Zach.
Vince Klinges: Thanks, Zach.
Operator: Our next question comes from Matthew Galinko.
Matthew Galinko: Hi. Thanks for taking my questions. I was hoping maybe you could give us a little bit more color around the -- maybe the tone or what do you see as the cause of the headwinds that are kind of prolonging the approval cycle? Is it the fact that the customers were expecting interest rates to come down and didn't, but they'll sort of reset expectations and could kind of operate in a higher rate environment and move forward? Or is it something where we need to expect rates to come down before real forward progress happens?
Allan Dow: Yeah. First of all, Matthew, thank you for joining us, and thanks for the question. It's a good one to explore a bit here. Our client community is primarily in the consumer goods space. Much of those -- many of those clients are in an environment where their products are not staple goods. So, they're subjective. The consumer doesn't necessarily have to spend money on those things. We're seeing -- although we also have a very good community of clients in the staple goods, and that's where we're seeing the energy that's going forward. Staple goods are still strong. We all still have to eat. We all still have to have some level of clothing. There are some of those things that are just strong in the marketplace, and those are the clients that are investing. Discretionary spending is at will, obviously, and those are the clients that are really suffering the most. I don't anticipate really -- we're not seeing that the interest rates are a direct impact on our clients' business, but more a reflection of the impact on what's going on in their sales and their revenue impact that they're having. They're seeing bloated inventories in the channel. So, the flow of inventory has been kind of backlogged as they as they brought the inventory in -- back into the channel based on coming off the back end of the pandemic. And then, all of a sudden, sales started to slow. So, they're anxious. They're anxious about what the interest rates will do to the consumer and what that will have an impact on consumer spending. And as you look under the covers at much of the economic news, we can actually see the same things that they're experiencing. As a result of that, they're also cutting staff on their side. So, when you're cutting staff, they're a little anxious about making investments and kicking-off projects when they have limited staffing levels. They're kind of just staying the course right now to see what happens. So that's really what we're hearing from them. However, they know that they need to invest. They know that the pace of the market is moving their ability to operate a supply chain in the old traditional ways. They're excited about the new capabilities that we can help them with to help them accelerate the decision making, help them take down the barriers to making decisions more quickly and more effectively. But the CFOs got a big desk and short arms, just won't reach out there and sign the capital expenditure document and release the funds to let them get going. So, that's -- Matthew, that's kind of what we're seeing in the marketplace. That's why we also think because they've done the evaluations, they've readied the project, they know what they need to do, we think if we can get a break in this macroeconomic condition that we might see a rather rapid acceleration in projects.
Matthew Galinko: Thank you. That's great color. And I guess my follow-up, I guess relatively related, but as kind of -- I think you outlined three pockets of demand, but primarily the cloud conversions and kind of new logos. Within the cloud conversion group of potential deals, are those also under the same intense scrutiny as sort of new logos or new functionality, or are they a little bit more amenable to shifting if they're already under maintenance contracts? Help me understand a little bit if there's relative differences between those groups of prospective and existing customers?
Allan Dow: Yeah, great perspective on that one. They are easier to get moving. However, as Vince pointed out, there is an investment that needs to be made. There is typically an offset of investment, so what also makes it easier. But from our perspective, we see, as Vince said, somewhere between 2x to 3x and oftentimes even greater uplift over the current spend they're making with us. When they can offset that spend internally, it becomes quite easy, because now they get security, new functionality, enhanced capabilities, they can stay current and they get a safer environment from a cyber risk standpoint and have offsetting expenses. Now, with that said, they still have to get a -- it is still a project that requires cash flow and that sort of thing. So, there's some work to be done there. It's not easy, but it's a whole lot easier than saying we're just going to scrap everything we're doing today and start over, because that's an easy one to offset a bit and say, "Can't we just stay with what we got? Do we have to really spend the money today? Can we wait for a couple of months?" Whereas these lifting shifts are a little easier to get through. Overall, expenditure is a little bit lower as well. I mean they're not as big as a larger transformation project and those -- the larger the project, the more eyes and hands that get touched on it to get it approved. So, we're counting on that, continuing to accelerate for us in the new fiscal year, and will make up a pretty material portion of our anticipated bookings.
Matthew Galinko: Great. Thank you.
Allan Dow: Thank you, sir.
Operator: Our next question comes from Anja Soderstrom.
Anja Soderstrom: Thank you for taking my questions. Just a follow-up on the -- you were expecting the bookings to be back-end loaded in the second half. So, then that should be pretty impactful for fiscal 2026 then in terms of the return on revenue?
Allan Dow: Yeah, absolutely, Anja. Again, thank you for joining us. Yes, in fact, that is exactly the point. As we see, the end of the calendar year is typically good for us, that could stimulate a little bit of demand. But often even then, someone that signs at the beginning of -- end of November or beginning of December, usually the first thing they say is, "And we'll get started after the holidays." So that usually causes a month or two delay. So, even at that level, we get -- we pick up maybe two, three months' worth of revenue on those bookings. But anything you signed in January, February, March and April, April is basically you get nothing, it's always fiscal '26. March, you might get a month or so. So, it's just the beginnings of it. But yes, it cascades immediately then into fiscal '26. So, we're anticipating a bigger uplift into the back end.
Anja Soderstrom: Okay. Thank you. And then, in terms of the pipeline, the conversion has been below the historical levels, but it's been improving. Do you have any sort of numbers around that to what magnitude it's been below historical levels and how it's been improving?
Allan Dow: Yeah. We're seeing -- we're continuing to see double-digit growth in our overall pipeline. The conversion rates is the troubled part of that, but it's pent-up demand. So again, if we can see a breakthrough in the economic conditions, we think that -- we're hoping to see that we can burn through the growth in our pipeline and convert it to revenue and have to work really hard to continue to build pipeline, which we do every day anyway. But yeah, the pipeline growth is really exciting. We need to break through in the conversions.
Anja Soderstrom: Okay. Thank you. And I'm also curious about the rebranding, what's been driving that and your thoughts around that?
Allan Dow: Yeah. We've had that in mind for some time, and we're looking for the right trigger point. Earlier in the year in fiscal '24, we made the commitment to divest the non-strategic assets. So, it became -- which carries with it a lot of work. And now with the recapitalization under the share structure, it made sense. And it's going to be time. We've reserved the new ticker symbol. We've got the registration ready, and we're good to go. We're waiting for that final approval. We'll get a few of this paper work behind us. But primarily, the motivation behind it is the fact that from an investment community, we're known as American Software. From a business community, from the solutions we do, the brand we put out there, we're known as Logility, and the clients ask, "Who's American Software?" And the investment community says, "What's Logility?" So, we figured it's time to just dispense with that and be one. And the most logical approach is to align the company with the brand as opposed to try to rebrand and align to the parent company, the registered company. So, that's the motivation. We're well known in the industry as a -- Logility brand is very well known in the industry. So, there's a whole lot less work if we follow the path we're on, and we're quite excited about that, just bringing that clarity to the table.
Anja Soderstrom: Okay. Thank you. And in terms of the elimination of dual-class stock, how is that perceived by the investors? Do you think that's going to be sort of big hurdle for them currently? And are you going to see a lot more interest now, or...
Allan Dow: Yeah. Well, a lot of them are with us on the call this afternoon. So, we'll see what they have to say. But generally, we've been chatting about this for a while and when the day would be right. So, the expectation is it is right. It's the right thing to do. It gives even representation across the entire investment community, which is always a positive thing. It also opens up the window. Maybe it's well known, maybe not completely well known. There's a lot of investors who just -- their charter doesn't -- forbids them for making investments in growth companies that have a dual-class structure. So, we think it will open up the company to an even broader investment community, which is always good for the current investors as well. So, we're quite excited about that transition. The work is all done. What we're really into now, we'll be making some filings in preparation for the shareholder meeting, which happens in August, and we'll be asking for all the shareholders to either support us on that through their vote or express their desires elsewise, but we are firmly believing that it will be a positive reception and that we'll wrap this up in the month of August.
Anja Soderstrom: Okay, great. Thank you. That's all from me.
Allan Dow: Excellent. Thank you, Anja. Thanks for joining us.
Operator: We have no further questions at this time.
Allan Dow: Well, Travis, thank you so much for helping us with the call today. Thank you all for participating once again. We certainly appreciate your attention and late in the day, and we look forward to speaking to all of you at the next quarter end, if not sooner. Have a good afternoon.
Operator: This does conclude today's program. Thank you for your participation. You may disconnect at any time.
