Q3 2020 Earnings Call

Ladies and gentlemen, thanks for standing by and welcome to acuity fiscal 2023rd quarter financial results call. At this time all lines are no listen only mode and later, we will conduct a question answer session. If he would like to ask a question on today's conference you Press Star then one on your Touchtone phone and as a reminder, today's call is being recall.

Did I would now like to turn the call over to our host Chief Accounting Officer, Karl Bailey or Bellamy I'm sorry. Please go ahead.

Hello, everyone and welcome to today's call before we begin I'd like to ensure that everybody understands that our discussion may contain forward looking statements that are based on certain expectation and analyses.

Such forward looking statements are subject to risks and uncertainties that could cause actual results could differ materially from those anticipated.

Q 80 undertakes no obligation to revise or update these forward looking statement.

To reflect events or circumstances after the date of this call.

For a complete description of these risks and uncertainties. Please refer to kuwaitis 10-K, and 10-Q filings with the Securities and Exchange Commission.

Please also note that during this call we will be discussing non-GAAP pre tax income.

Which is a non-GAAP financial measure as defined by 50 regulation G.

A reconciliation of the non-GAAP financial measure to the most directly comparable GAAP measure is included in today's press release, just posted on the company's website now.

Now I'll turn the call over to our CEO Anton children.

Thank you Carlos good afternoon, and thank you for joining todays call could discuss key ladies school 23rd quarter results.

Joining me on todays call up Hemlock, Oh, President and Daniel lender Chief Financial Officer.

Total revenue was in line with guidance for the quarter with an expected decline over the same period last year, largely due to reductions in professional services and license style.

We closed a record number of cloud deals and the momentum in competitive new cloud customer wins continues to be strong.

Material improvements in both professional services and cloud margins have contributed to a stronger than coal GAAP net income.

I'll now turn it over to Daniel can discuss financial results.

Thank you I'll stop.

Third quarter total revenue and subscription revenue were generally in line with our guidance well before tax profit, both GAAP and non-GAAP exceed our projection, resulting from higher subscription and professional services margins.

For the fiscal 23rd quarter currency had a 1.2 million negative impact compared with last year, and a 700000 negative impact compared with fiscal 22nd quarter.

Our profit was negatively impacted by 242000 compared with prior year on 100000 compared with the second quarter.

Please note that my discussion today about growth rates are giving on a constant currency basis, unless otherwise stated.

Third quarter revenue was 77.8 million compared with 79.6 million last year, primarily resulting from anticipated declines you don't professional services business and in license sales.

As previously discussed last year's professional services revenue included a multi site global project low lower license revenue was due mainly to our transition to the cloud.

Subscription revenue grew 16% and accounted for 35% over business for the fiscal 2023rd quarter, when you're rolling 12 month basis, our subscription billings grew by 18% with a three year Cagar Oh, 28%.

Subscription margins for the third quarter grew to 65% versus 64% a year ago.

For the fourth quarter, we expect subscription margins to remain at similar levels.

Maintenance another revenues totaled 29.7 million compared with 30.4 million last year.

<unk> underperformance basis maintenance and other revenue was down about 220000, we did decline relating mainly to cloud conversions.

Conversions are expected to continue impacting our maintenance revenue line, but but as a reminder, that conversion opportunity is generally three times maintenance, which gives us additional growth potential in a higher dollar margin on an ongoing basis.

Professional services revenue was 17, and a half million compared with 20.7 million for last years third quarter.

Last years results included the multi site go a project for personnel augmentation services, which has since been completed services margins improved to 6% up from 1% for last years third quarter and negative 4% for the fiscal 22nd quarter.

The result of ongoing cost saving initiatives.

We continue to expect breakeven services margins for the full year.

License revenue for the fiscal 23rd quarter. It was 3.3 million compared with 4.6 million last year.

In fiscal 20 period, there were two license deals greater than 300000, the same thing last years third quarter.

Total revenue by vertical for the third quarter was automotive, 36%, Hi, Tech and industrial 34% consumer product, the food and beverage, 15% and life Sciences another 15%.

By geography total revenue was North America, 49% Emmy, a 29% Asia Pacific 15 in Latin America, 7%.

Gross margin for the third quarter improved to 57% from 53% last year.

Other marketing expense was 19.8 million or 25% of total revenue versus 18.4 million or 23% of total revenue for last years third quarter increase related primarily to higher headcount.

R&D expense amounted to 13.6 million for fiscal 2003rd quarter, compared with 13.2 million a year ago.

As a percentage of total revenue R&D expense was 18% this year and 17% last year.

General and administrative expense it was 9.2 million or 12% of total revenue versus 8.1 million or 10% of total revenue last year. The increase mainly resulted from the movement of certain personnel into DNA from other areas.

Stock compensation expense totaled 2.9 million for the fiscal 23rd quarter and 2.1 million last year.

This brings us GAAP pre tax income to one and a half million compared with 3.6 million for last years third quarter non-GAAP pretax income was 4.6 million versus 5.7 million last year.

We finished the quarter with approximately 134 million in cash and equivalents compared with approximately 139 million at the end of fiscal 19.

Cash flow from operations for the first nine month of fiscal <unk> of the year, what 7.7 million compared with 15.1 million for the same period last year.

Accounts receivable was 39.7 million October 31 versus 46.4 million a year ago, mainly due to lower services maintenance billings.

Day sales outstanding you send to combat method was 45 days for the fiscal 23rd quarter compared with 48 days for the same period last year.

Our short term deferred revenue balance product over 31 was 81.9 million versus 80.5 million a year ago.

Including 32.8 million of deferred subscription versus 27.8 million.

47.1 million of the for maintenance versus 50.7 million 1.7 million of the for professional fees versus 1.8 million and 200000 of the for license another versus 200000.

As a reminder, as a reminder, our maintenance contracts are billed annually well subscription contracts can be built either annually or quarterly.

I will finish up my remarks, with full year fiscal 2020 guidance, reflecting lower professional services into second half of the year lower licenses in Q4 and currency effect.

Revenue of approximately 311 million, including subscription revenue of approximately 108 million GAAP pre tax loss of approximately 4 million and non-GAAP pretax income of approximately 8 million with that I'll turn back to you at all.

Thank you Daniel.

No I discussed earlier was very pleasing to see the volume of cloud deals up to a record number and in particular continued momentum in winning new customers, assuming all competitive strengths any LP cloud the global manufacturers.

We closed 25 cloud deals with 14 coming from those new customers and 11 from conversions.

As I mentioned on the last call on newly launched adaptive ERP, a low code no code enterprise platform provides significant opportunity to keep that competitive momentum going.

That's a multi skilling deal numbers this quarter tended towards new customers on the yesterday basis, we still see a 50 50 feel value mix between conversions and new customers and I'll sales pipeline reflects a mix.

We continue its experienced less short term demand biological special sensors projects is the majority of converting customers a lot to move and enjoy the benefits of the Lady cloud in advance of completing upgrade project.

But heavy emphasis on managing costs and professional services and placing a stronger focus on expanding partner utilization on a global basis has allowed us to material include margins in that sector of the business.

I'll continuous efforts to drive efficiency through automation and process improvements in all cloud business. That's in cloud margins also include over the period.

Looking at the quarter geographically North America continues to perform well following the ended the quarter. We're also very pleased to welcome Michael Brown <unk>, who is joined US as our new senior Vice President North America.

Michael comes to Q I'd with many years of enterprise software sales experience in companies such as Lou and also technologies, social where HP software open text and then yet.

We expect Mike will build on success at booklet senior Vice President Global sales achieved in North America prior to its global appointment.

Yeah, Hey, how to solid quarter and continue to build the pipeline for the remainder of this year.

We continue to complete our sales team in the region with only a few slots remaining open.

And while discussing EMEA.

You're speaking to you from office in Barcelona.

In the last few weeks here in Europe attending a number of customer and partner focus it up.

Customers have responded exceptionally welchol positioning of Q idea adopted healthy as an enabler rapid change and also to the application or industrial Internet of things back from where we connect manufacturing operations on the shop floor to the ERP and we'll call it.

Asia Pacific and Latin America show that bit of weakness, mainly around our China business, where the trade wars seem to be having some impact on their economy.

So we have all verticals electronics industrial consumer packaging food and beverage and life Sciences performed quite well in terms of cloud bookings in the quarter automotive was a bit lower after having an absolute second quarter and remain strongly yesterday basis.

Our employee count came down a bit to north of 19 under full time employees, mainly due to the adjustments we made lot professional services organization.

I will total direct salespeople stands now about 90.

So looking to hire a few more in specific areas and the pleased with the caliber talent, we've been able to attract.

On the solution side of the business. We recently held a hakan thalmann, Poland hosting teams for would come out of the 25 of our EMEA I apologize to develop new business applications in a low code Nokone enterprise platform.

Just 24 hour development time, we saw some outstanding results with some functionally rich apps developed ingest that short times that.

In the queue I'd labs, we continue to invest R&D will see resources in digital transformation and indeed, our latest version of demand supply chain planning now shifts with embedded artificial intelligence and machine learning, helping customers further increase demand forecast accuracy.

I'll now hand, the call I was a path or color on those cloud deals.

Thanks, Tom.

As I've sat in Q3, we had 25 new book.

There were 11 our.

And for payment Matthew.

We saw orders from all regions and all vertical well North America, having an exceptional cloud corner and our CP food and beverage protocol.

Away.

And AD revenue booking revenue.

Order, we had a food and beverage when again.

Okay and or call. The company was using an older version of JD, which of course is now long biological and they were in the midst of considering a very expensive multiyear mo take either S&P or.

Toward the end of their evaluation the company purchase Thanks, Robert company, using too lazy and decided to take a lot at the end of the review they determine QHC at meet their needs and a much shorter time on the platform technology, what eliminate most if not all there.

Customization.

Corner, we received an order for the first potentially many more sites from this company.

Last quarter, I mentioned Europe had a large competitive lanagan sesay PT large automotive supplier I'm happy to say that this customer has already live and referenceable.

<unk> contract to life and less than three months really exciting in a very pleased customer.

Again this quarter, we had several small life science when I love looking at the technology coming out of the startup and I'd like to probably now appeal of the amazing capabilities.

So if you look at those costs at these customer basis here are the corridor, we will have solutions were.

I will soon be able to get there you're too and doctors offices without surgery.

For people have all ages there'll be a way to repair and actually regrow disease and here are the fact of tissues and organs.

Okay, So fun dialysis.

There will be able to have dialysis treatment and then how far does their own home.

For chronically ill patients. The next generation of metal medical devices will have smart sensors and artificial intelligence applied to clinical data from her diagnostics strategic intervention entry prevention and better all overall patient care really.

Citing capability on those areas.

While these accounts from a longer list of competitor.

But mainly net suite S&P and for our customers told us. They selected Hugh 82 are due to our life science experience support for regulatory compliance in the cloud and easy to use solution.

Our ability to deliver adaptive ERP cloud solutions for our global manufacturing customer, enabling agile business processes, an unprecedented level of speed and providing exciting capabilities to both existing and new customers. Thanks Anton back to you.

Thank you Pam.

So looking forward our investments in sales and marketing continue to drive lead flow volumes, which remain ahead of our internal targets and all cloud pipeline continues to grow and current lease up over 25% from the same period last year.

As reinforced by feedback from our customer conferences any I mean, this month manufacturers need for rapid response to change continues to increase.

A few I'd adopted applications give all customers and prospects cloud solutions, providing them the ability to adapt in real time.

Our total addressable.

Market for cloud solutions continues to grow and a market position is improving.

Short term risk do still remain affect the including uncertainty facing manufacturers around the tower negotiations and global geopolitics.

Yeah, Hi globally of continue to slow decline may play, a part and future deal cycles.

As stated in prior calls so far we haven't seen a material effect on our pipeline and we don't expect it to affect a longer term goal.

In summary, we continue to win business from competitors and we are aggressively driving all cloud business, it's substantial market opportunity in front of as.

We remain exceptionally well positioned to meet along some objectives.

Operator, we're ready to take questions from analysts.

Alright, Thank you again, ladies and gentlemen, if you would like to ask a question. Please press Star then one on your Touchtone phone.

And we have a question from avant Surrey from William Blair. Please go ahead.

Hey, everybody. Thanks for taking my questions and congrats and continued success there I wanted to touch on the.

The continued trends of cloud customers sort of on the existing base <unk>. There's a long runway there for conversions of existing base, you sort of mentioned it bounced back and forth tree, new but but but I guess the big question. I have is have you seen any change have you seen an increase maybe in the interest around cloud adoption in the base, it's still pretty steady Eddie at some point I think you know, obviously, we see that sort of inflection happening.

People understand the value the copper sourcing what you're seeing from trends in terms of the conversation the adoption of the acceptance the interest would love to get little color there.

Sure. Thanks, Bill I'm absolutely so.

As we said, we expect that the deal mix to stay at that kind of 50 50 by value.

That said, obviously, we continue to grow the business.

And so I would say you know as part of that there is oh, a growing <unk> groundswell. If you like good momentum in the existing base on that shift towards cloud and that helps us maintain that 50 50 economists. So we're seeing both an increase in new business as well as an increase in interest from customers on the conversion side.

And when you put those two things together that's.

Helping us grow up business overall.

Yeah, Yeah, you said in the pipeline and the billings number right.

Yes.

Yes, you mentioned, China, as an impact, but love to understand I'm about to customer adoption bundled build up with Ali Baba.

Too early yet.

And if it is when do you expected to be sort of a meaningful contributor to this offset some of the tariff issues or those two things are tied you Gotta love to get some color on the relationship and I was progressing and then obviously offset the charts issue.

Yeah look relationship with very very happy with Oh, we have also as custom alive in the cloud data on and that's been very very successful we're right at the final stages with another existing customer that's looking to move shapes of that China sites. There are large enterprise customer global but they're not looking to move Essex Chinese 95.

Your operations into the Alibaba cloud in the near term.

I would say just the general sentiment in China, right now and you know there has been an impact on the economy. So things are moving a little bit slower than we would've liked and anticipated originally but we still a very confident but you know in the medium to them. This is a great relationship for us and it's going to drive increased cloud momentum and not.

China business, but a little bit slower than we had originally anticipated.

We do see if I can add to that we can have a cloud partnerships in Asia Pacific not in China, and we didn't see we've done we've systems by the Chinese companies as well as sites in China to move to a data center that was actually in Singapore, So by having this relationship with Alibaba.

Yes, Hi, Ana I think that may help neutralize out or at least that's what the customers are saying to us that they want to make sure that their data is actually in China.

The Alibaba that's a good one.

Yeah.

All right. Thank you and now to line of Brad Reback. Please go ahead from Stifel. Please go ahead.

Great. Thanks very much.

And on any update on how we should think about that subscription growth rate for next year I think last quarter, you talked about exiting at a 30% growth rate. It did see between Capex and maybe some of the macro that might be off the table, but any color would be helpful. Thanks.

Yeah, absolutely. So you know Daniels put the guide and stuff together, so I'll, maybe ask him to just give you a bit more of that to the detail.

Yes. So yes, we have initial guidance for next year, Brad, but so far we believe we're actually in track to return to 30% given the bookings that traction that we've gotten this year.

And what we're expecting a Q4 or so we do expect to be.

Be coming back towards the 30% level next year.

Great, Thanks, and and Daniel on on the cloud gross margin.

You guys have clearly done an excellent job driving that higher how should we think about additional gains from the mid sixtys here.

Yes. So you know, we're still aiming to improve it by email 1% to 2% on a on a yearly basis Brad.

You know we're still it don't we're still in early stages, a with regards to our channel Islands.

So we're still working through some of the.

Technology requirements that are needed to run all of the additional capability the channel Islands brings.

So, but we do expect that.

What do we issued guidance next year, we'll issue some more firm.

Longer term goals with regards to our overall margins there.

Great. Thanks, very much sure.

Thank you and now to line of the Zach Cummins from B. Riley. Please go ahead.

Yeah, Hi, Thanks for taking my question just a few incremental for me I mean in terms of the guidance. That's implied Q4 can you talk about the drivers for a little bitty acceleration, we're expecting to see for some surplus subscription growth in Q4 this year.

It was down you'll do you want to go up into the guidance numbers, though yeah. I think I think if I understand your question. If you understand question correctly or that you're talking more about it are you talking more about the business drivers behind the this subscription growth.

Yeah that in terms of it it seems like it's going to at least on a reported basis, it's gonna be getting to closer to 20% plus growth versus kind of Latin mid teens level that we had here in Q3.

Yes, so I mean from a you know weve as I mentioned, what I was when I was answering brad's question relating to next year. You know we've done I think a very good job this year and improving our overall bookings from over last year, So where we show.

A significant improvement.

And that's you know throughout the year, it's been translating into into that additional subscription revenue.

And you know the we do have quite a quite a strong quite a strong pipeline.

For for Q4, Q4 tends to be I a stronger.

Quarter from a seasonality standpoint for us and we're so that that will you know clearly have an impact in both in terms of the the revenue for Q4 as well as our.

Revenues next year.

Got it that's helpful and Anton can you talk about your approach to professional services going forward I know youve rationalized, a little bit of that organization and started to offload some more to third party partners, but how should we think about the professional services line and your approach to that as we continue to move forward here.

Yeah, absolutely as I talked about on the last call. Yeah, we've had about time longer term plans to.

You grow professional services at a much slower right when we grow the rest of the but the business, particularly around cloud and start to integrate more with or expand all partner network around that.

And using them in a much more integrated fashion.

And and we've accelerated that plan now so you know we've done some of the right sizing to get the costs under control drive those margins back up as we've done within core the good level now that gives us a good foundation on which to.

Then increase I'll use upon those.

Still have critical mass within security services organization that allows us to bring all of the good stuff around program management capability.

And then other said over the medium term it'll grow that business, but other much lower right than the rest of the business, particularly the cloud broke.

Got it that's helpful. Well, thanks again for taking my questions and best of luck with the end of the.

Thank you.

Thank you and now to line of Kevin Lu from Cailloux Company. Please go ahead.

Hi, Good afternoon, maybe just kind of falling on the services question, Oh, certainly you're bringing in more partners to help out.

Station side, you talked to let exciting.

Leads or additions to the funnel coming in from partners.

So yeah, we we've been focused primarily on right now in terms of.

Expanding services a partner network, we will be bringing in the somebody that's going to be helping is expand let's say the sales channels crude partners and so our intention there it's too.

Particularly with the launch of adapt to the LP and the enterprise platform, we think there's going to be an attraction that pool well, it's all existing partners to extend their businesses and also for new partners to come in.

So I'd say that that's the primary focus right now has been on pause to supplement all services capability and capacity moving forward will be we'll be adding to that incremental focus on getting more and more channel partners down increasing that part of the business too.

Got it and then just looking at kind of the.

For the fourth quarter here, you know certainly subscriptions continue decline, but that also imply what might actually come down sequentially, but what's your what's typically being a strong quarter tenant for overall book and license growth maybe talk about another driver or is it suddenly just seeing what option of the cloud.

Within your pipeline or.

Sort of not though.

On the deal cycles.

So as Daniel looks like the you know a pipeline is looking good for Q4 and you know so a win win not seeing the effect of macro at this point of course, those things can change, but right now we are feeling confident about.

The size of the pipeline, we've got compared to the targets that we have and looking forward to.

Strong performance they have come a a cloud perspective for sure.

Yeah with regards to licenses, Kevin our Salesforce is being zeroed in on bringing in cloud deals.

And this this year really were not seeing you know there the funnel is no really heavily weighted towards cloud.

Theres very very few license deals slipped out there so we're not expecting.

A seasonally higher license number that we've seen other years and you know that we had you know when we started a year we were kind of planning on Oh on that potential. So it's really not I mean, if there is some effect on licenses from the overall manufacturing.

Yeah, no lack of growth in manufacturing because any licenses that we get is additional users by the fact that of the Salesforce is entirely focused on cloud, where we're not seeing anything else out there that wouldn't that would make that number go higher.

Okay. That's helpful. And then lastly, you know obviously the students and the like in terms of hiring on the sell side can you talk about how you're feeling about the productivity ramp that you've added over the course of this year and how you're feeling about yourself capacity going into next year.

Yeah, I think you know we were on track in terms of what we have plans a higher as I said, you know on and on the call very pleased with the caliber of the people that we bought into the organization.

We do typically plan for somebody to take you know around six to nine months to come up to speed to let's say gold sales productivity.

But pleasingly actually we're seeing some of the people that we got in early this year already contributing to yeah. Those cloud bookings performance. So I'm happy with that we've got a few slots left to build but not many and we think that puts us in a a really good and strong position heading into next year to continue that momentum.

All right that's great to hear congrats and thanks for taking my question.

Great. Thanks.

Thank you and now to line of Ishfaque Faruk from Sidoti and company. Please go ahead Sir.

Hi, good afternoon guys.

A question regarding guidance.

The guidance for Q4 sort of implies a slight decline from a you know the guidance you guys laid off for Q2.

Daniel You mentioned briefly that you know some of that has to do with licenses.

The rest of the downtime.

Primarily to do with professional services were made and that's how should we think about yes. So our our professional services revenue is lower in general It was it was a bit lower than we were expecting even in Q3 and were expecting about same run rate. In Q4, you are having said that you know we've we've really manage.

The profitability of that business had adjusted to to the odd to the revenue line. So when a bottom line basis is actually there's there's no effect there and then there's the currency effect that I talked about earlier with you know this out this quarter. We know there was about to wonder Kay.

On subscription overall, it's about it with about 700 Kaye from from last quarter.

So given where where currencies are today, that's that's having an impact to the overall year as well.

And on the go out you guys are very strong cloud bookings in margins are going up significantly as well and.

Daniel the.

Doug loud outlook that you mentioned that did you expect subscription do you know go back up to 30% our growth a you know for this coming year or so.

Most people dedicated on on the recent cloud bookings did you guys huh.

Yeah, I mean to our our our expectation if some of it has to do with the cloud bookings that we've done. We did you know we've done through the first three quarters over the year.

And then the remainder is based on our expectations for for Q4, you know and the first couple of quarters of of next year. That's really does those are really going to be the the key drivers for our growth next year.

Okay and my last question.

I'm not on the Ali Baba relationship that you guys mentioned that you guys have Oh, my God grind up and running.

I use what are you guys seeing in terms of your initial conversations with some of that Jain lobbyist opportunities moving forward et cetera, now that there. They seem you know more secure with.

China These data centers.

Yes.

Back to the point palm, we'd like nearly a we had a very positive reaction.

I think that comes in two areas right. So one is.

Having the capability locally in China, and so they feel much more secure about having.

The data in China.

And then secondly of course, the power the Alibaba brand, it's very well known anybody well respected over there and so when you put those two things together together with the Q AG cloud ERP I think it's a very compelling message.

So I think that stimulating a lot of interest.

Interestingly the Chinese government is also compelling or at least encouraging organizations to start to use more and more cloud services and so I think that will help us drive that momentum pool to answer the into the medium sour.

Wonderful. Thank you guys were taking my questions [laughter]. Thank you I'd now like turn the call back over to our host and 10 children for closing remarks. Please go ahead Sir.

Okay, well if there is no more questions. We thank you and we look forward to announcing I'll quote a full results in a few months time. Thank you very much thanks everybody.

Thank you and ladies and gentlemen, this call will be available for replay after four PM Pacific time today through December 3rd Twond 2019 at Midnight you May access 18, T. replay system at anytime by dialing one 804, 7567, or one and entering the access code or 473.

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Yeah.