Q3 2020 Earnings Call

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The call today, Please press the star and see Ralph.

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Good day, everyone and welcome to todays American Softwares third quarter fiscal year 2020 preliminary earnings results call.

This time all participants are in listen only mode. Later, you will have the opportunity to ask questions. During the question and answer session.

Registered to ask a question not anytime by pressing the star and one on your Touchtone phone I will be standing by if you should need audio assistance and then as now my pleasure to turn todays conference over to Vince Klinges CFO of American software. Please go ahead.

Thank you Roland and good afternoon, everyone and welcome to American Software's third quarter fiscal 2000, 2020 earnings conference call on the call with me is Allendale President American software I will review the numbers and then Alan will give some remarks after that but I would like to remind you that this conference call may contain forward looking statements, including statements regarding among other things.

So our business strategy in growth strategy any such forward looking.

Statements speak only as of this date. These forward looking statements are based largely on expectations that are subject to a number of risks and uncertainties some of which cannot be predicted for quantified and our 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 number.

Factors that could cause actual results could differ materially from those anticipated by statements made on this call such factors include but are not limited to.

Changes in and uncertainty in general economic conditions, the growth rate of the market for our products and services the timely availability in market acceptance of these products and services be 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 could be no assurance that the forward looking information will prove to be accurate.

So taking look at the third quarter fiscal 20 compared to the same period last year. Our total revenues increased 13% to 30.6 million for the current quarter and that compares to 20 to 27 million same period last year.

What caused the increase was subscription fees, which increased 57% of 5.8 million for the quarter compared to 3.7. The same period last year and also our software license revenues increased 115% to 3.7 million for the current quarter and that compares to 1.7, the same period last year.

Our cloud services annual contract value or HCV increased by approximately 58% to 25.5 million for the current quarter and that compares to 16.1 million the same period last year.

Our professional services and other revenues increased 1% to 10.3 million for the current quarter.

Compared to 10.2 million the same quarter last year and that is due to at 12% increase in our supply chain management unit due to stronger bookings in recent quarters in our backlog remained solid heading into Q4.

This was partially offset by 9% decrease in our I T consulting business unit as it rolls resolve of timing of project work.

So maintenance revenues decreased 5% to 10.8 million compared to 11.4 million.

Our combined recurring revenue streams of maintenance and cloud services were 54% total rather the news in the current quarter compared to 56% in the same period last year.

This decrease is due to large increase in license fees. This quarter. We believe the trend is to a higher percentage in the recurring revenue as we transition more to the cloud in the revenue model.

Looking at cost for the quarter or overall gross margin was 57% for the current quarter and that compares to 52% in the same period last year. Our license fee margin was 57% in the current quarter compared to a negative 7% in the same period last year and that's due to higher licensees are subscription fee margin increased to 66% compared to 62%.

For the same period last year, and that's primarily due the increase in soup subscription revenue.

Also a one thing to note in the third quarter of 20, our gross margin without a noncash cap software allocation would be 50, excuse me, 74% compared to 73% in the same period last year.

Our services margins increased to 25% compared to 24% the same period last year and that's due to a higher for portion of our professional service revenue coming from our higher margin supply chain business unit.

Our maintenance margin increased to 83% for the current quarter and that compares to 82% in the same period last last year due to cost containment efforts.

Looking at operating expenses, our gross R&D expenses were 15% of total revenues for the current period compared to 18% in the same period last year as a percentage of revenue sales and marketing expenses were 18% of the revenues compared to 70, 17% in the prior year and that's primarily due to increased variable compensation from higher sales and an additional eight.

Headcount compared to last year, Gina expenses were 17% of total revenues for the current period and that compares to 16% in the prior year quarter, primarily due to increased variable compensation and to a lesser extent higher insurance and legal fees.

So our operating expenses increased 32% to 2.89 for the <unk> current quarter that compares to 2.1, the same period last year, our adjusted EBITDA, which excludes stock based compensation increased 16% to 5.3 million for the current quarter compared to 4.6, the same period last year.

Our GAAP net income increased 43% to 3.3 million or earnings per diluted share of 10 cents for the current quarter compared to net income of 2.3 or seven cents earnings per diluted share last year.

Adjusted net income was 4 million or adjusted earnings per diluted share of 12 cents for the third quarter and that compares to net income of 3.2 or 10 cents. The same period last year and these adjusted numbers exclude amortization of intangible expenses related acquisitions and stock based compensation expense.

International revenues this quarter were approximately 19% of revenues compared to 17% in the and the same period last year.

Looking at the costs total costs or excuse me total revenue year to date, it increased 5% <unk> 86.2 million compared to 82.4 million same period last year subscription fees were 15.8.

Year to date, and that's a 54% increase compared to 10.4 million same period last year.

License fees revenues were 6.5 million, a 20% increase compared to 5.4 million in the same period last year.

Services revenues decreased 3%, the 31.3 million year today compared to 32.0.

Excuse me 32.2 last year due to lower revenues from TPN and this was partially offset by 10% increase in our supply chain business.

[noise] maintenance revenues decreased 6% to 32.7 million compared to 34.6 million last year.

Looking at cost for the nine month period overall gross margin increased to 55% for the current period compared 52, our subscription fee a gross margin decreased to 57% your day compared to 63 in the same period last year and that's due to increase in allocation of amortization cap software costs of 2.4 mill.

Okay, and compared about 900000 same period last year. So if you exclude those non cash cap software amortization costs. It would be 72% gross margin for both the current year to date and the same period last year.

Our license fee margin increased to 39% from 2% last year due to the higher license fees and our services margin was 27% up from 24% in the same period last year and that's due to increase it service revenue from our higher margin business.

Maintenance margin was 83% year to date and that compares to 81% on say period last year.

Total R&D costs were 16% of total revenues for the nine month period compared to 17% same period last year as a percentage of total revenue sales and marketing expenses increased to 19% for the current period compared to 18% and that's primarily due to higher.

Variable compensation and increased head count.

<unk> expenses were 17% of revenues for the current year to date period and that compares to 16% in the same period last year.

And up and that's higher due to a higher variable compensation and to a lesser extent legal and insurance costs. So our operating income year to date increased 5% to four point.

5 million compared to 4.3 in the same period last year adjusted EBITDA year to date increased 9% 12.3 million compared to 11.2 main the same period last year GAAP net income increased 26% to 6.2 million or 19 cents earnings per diluted share compared to net income of 4.9 or 16 cents or.

Earnings per diluted share last year, our adjusted net income.

Year to date was 8.6 or earnings per diluted share of 27 cents and that compares to net income of 7.8 or 25.

<unk> earnings.

Yes last year.

International revenues year to date were 20% of revenues and that compares to 19% in the same period last year, taking a look at the our balance sheet. The Companys financial position remained strong with cash and investments of approximately 96.3 million at the end of January 30, Onest 2020, which increased by approximately 12 million since the same period last.

At year.

And currently doing a core we paid 3.5 million and dividends. Some other aspects of our balance sheet. Our build accounts receivables 21.2, Unbilled is 2.4 for a total of 23.6.

Our deferred revenues were 34.4, and our shareholder equity is approximately 120 million.

Our current ratio was 2.6 as is the end of January 30, Onest 2020, and that compares to 2.7, the same period last year and our days sales outstanding as of January 31st 2020 was 70 days.

It's going to during the current period compared to 78 days in the same period last year at this time I like to turn the call over to round out.

Thank you Vince.

Overall, we're had a very good quarter and are pleased with our teams achievements in the company's performance year to date in fiscal year 2020.

During the third quarter, we saw a marked improvement in our close rate with continued growth with the software as a service engagement model as evidenced by the 57% year over year increase in subscription revenue.

And the same 57% growth in annual contract value for cloud services over the prior year period.

As I stated on the room November call the quarter started strong and after a fairly quiet holiday period finished very strong.

During the quarter. We also closed a few sizable perpetual license transactions with those customers, referring a capital expense versus an operating expense, we still see these as anomalies not a shift in the overall trend to the cloud.

During the quarter, we welcomed 11, new customers in completed subscription a license fee transactions in 11 countries.

This momentum is expected to continue into the fourth quarter with a few new contracts already signed in a solid pipeline ahead of US we remain confident in our ability to achieve a solid HCV growth in the fourth quarter, continuing our positive progress for fiscal year 2020 and beyond.

Based on the close rate in Q3, we have a solid back backlog for supply chain services organization and our expanding the number of resources, both internally and with service partners to ensure that the specific skill sets will be available in the areas, where we see demand accelerating.

We anticipate higher services revenue in the fourth quarter, especially when compared to Q3 due to the seasonally higher number of billable days available as we moved away from the holiday period.

During the third quarter, our recurring revenue streams for maintenance and cloud services represented approximately 54% of total revenues compared to 57, 56% in the same period of the prior year, but it's been said.

We are the slight drop is due to a higher license fee contribution in the most recent quarter.

We expect the percentage of recurring revenue to continue trending higher in the future based on the strong preference for the subscription contracts with the rate approaching 60% before the end of fiscal year 2021.

The growth in recurring revenue improves the financial predictability in profitability of our company, which gives us the clarity and confidence on where to make strategic investments and gives our shareholders greater visibility.

During the third quarter, we introduced innovative new service model, where we are providing a customer with planning as a service under this arrangement, we will provide value added services that leverage our cloud based solution as well as the expert talent resources to operate in produce the optimal.

He's planning outputs for strategic and tactical business goals.

We're excited to help our customer with this new planning as a service model and expect this model to gain traction in the years ahead, especially as we continue to automate the decisions.

Outputs in operational actions by leveraging artificial intelligence and machine learning to progress towards autonomous planning.

The insights gained from this engagement will allow us to accelerate our achievements in delivering on our vision for this innovative planning as a service model.

Which is focused on helping customers transform their operations to achieve even more tangible outcomes.

New paradigm will be a higher value service driving better results for our customers an incremental revenue for us.

Looking forward, we're continuing to see an uptick in the transformational projects, which leverage our digital supply chain solutions and take advantage of the optimization Dep advanced analytics machine learning and optimize simulation capabilities of our platform to dramatically improve the speed and quality of the.

Essentially making for our customers.

In today's dynamic economic environment environment.

Customers are looking for supply chain agility to help them navigate the global trade uncertainty, while simultaneously seeking to accelerate the introduction of new products.

The market to gain higher brand awareness in mitigate risk.

Our ability to help them transform their supply chain to continuous and autonomous planning allows our customers to leverage their supply chain as a strategic market advantage.

Our objective is to help our customers improve their supply chain effectiveness by a factor of Tim.

In summary, we were pleased with the progress on our go to market execution as we strive for continued success to deliver exceptional value to our customers in this new digital world.

We will continue to focus on making our customers more successful as we look to expand our relationships and introduce new innovative services.

We are confident that we can continue to grow both revenue and profitability in years ahead in our planet proud to be delivering incremental benefits for our customers.

Well I look at this time, we like to open the call for any questions.

Secondly, if he would like to ask a question. Please press the star and one on your Touchtone phone.

Your name is taking your question at any time by pressing the pad Keith.

Good to ask a question. Please press star one pods, just a moment two last questions to Q.

And we will take a question from Matt from William Blair. Please go ahead.

Hey, guys, great quarter, and thanks for taking my questions wanted to start out on the the close rates. Maybe you can just provide some more detail on on what drove the improvement in close rates that you saw in the quarter.

HM Inc. a couple of things were going on that.

None of the number one I think the dynamic nature of the economy today is really putting some pressure on our customers and prospects to be much more nimble and agile in.

There are funding these projects, they're moving forward a little more quickly than we had seen in the past.

It's also being driven by executive level.

Engagement in this in the in these projects because the nature of the impact on their business. So it's it's not just in optimizing the current operations, but it's really around strategically serving customers and and.

Maintaining market share and and brand awareness out there so that the level of engagement as much higher in the organizations and as a result, I think the the number of iterations. It takes to get an improvement has has diminished to some degree so I think thats been a an impact on it we still see a good willingness for people to move forward. So.

We were able to get lockstep with or executive team and in March towards kicking projects off which meant signing the contracts and getting going.

Got it and obviously the Corona viruses, having impacts on the on a lot of.

Different people supply chains, any any impact there that that you're seeing in terms of delaying purchasing decisions or anything like that.

Well interestingly enough right now, we've only seen a little bit of UBS noise in a in chatter out there is predominantly been around companies that have been overwhelmed by increased volume and we have we have one client that we were looking to do an expansion project with the nerve.

Their volume of of shipments is up by about 40% they happen to be in the in the medical space. So it's had a positive impact but for us maybe a slight delay, but we anticipate that that will be.

Measured in weeks not in months or longer term and an overall the predictions at this point of that supply chain should get back in order later this year. So.

Thanks to the real interesting part of it it's a it's a tragic and situation and none of us want to see this happening but.

It just highlights the fact that that there are disruptions and no. This happens to be one there's going to be another one of another case and it brings to brings to light that this agility is really important. So we're seeing a lot of engagement around how to I'm. Just managed through these these disruptions that are going to become the norm as we can see forward.

Yep.

Makes sense and.

So I wanted to hit on yeah, the efforts to sort of build out the partner ecosystem are you seeing any more interest with partners. There just maybe an update on how those efforts are progressing.

Yeah. We're a we're proceeding cautiously there are one of the one of the important values for us is to make sure as we engage with new partners and even new individuals within the partners that we've worked with for a number years.

We have a certification program and want to make sure that they're they're consultants get through that process.

So that they can be successful and obviously our customers can be successful and that's been going swimmingly well, we've opened up that certification process that we use internally to our partners as well.

They enjoy it they like it they're gaining value from that they're having a much more successful program with a with clients.

And the good news is because of that program in the success. We've had there we've got some new partners that are interested engaging with us and we're getting down the path with those so I think we're not only expanding the depth of the relationship with those that we have but we're expanding the number of relationships that were engaging into the marketplace.

Great last one from me and I'll pass it on on the planning as a service product any type of customer either you know size or or or vertical that that makes more sense for that you're targeting what that offering.

We actually have to two engagement models that were we're progressing right now the one that we're engaged in his is a much larger enterprise opportunity, it's an optimization strategy.

Using some higher level capabilities within the platform.

It in so we see that is one where where maybe the client doesn't have the bandwidth or the expertise to do it well today. So we can leverage the talent, we have as well as the insights in a in the automated capabilities of our platform to deliver that service. The other is the area where companies are expanding.

Growing and having had the ability to build an organization.

So that's more targeted towards the small to medium services in its rather than an augmentation that we're likely to see that the AG a complete outsource of their planning operations.

So we've engaged with a partner in that were it'll be a joint effort our technology some of their labor some of our labor from a phone operational standpoint, so it's kinda to two segments kind of the lower end, where they don't have the capacity knowledge or talent to do it and the upper end, where we're advancing more.

More sophisticated capabilities that that likewise, they just don't have the bandwidth to pull that off.

Got it.

That's all I had things like guys for taking my questions and congrats again.

Matt. Thank you very much good chatting with you.

Just a reminder, if he would like to ask a question. Please press the star and one.

Take a question from Zacks from B. Riley SBR. Please go ahead.

Oh, Hi, good afternoon Allen events, congrats on the strong quarter and thanks for taking my questions.

And just just starting with you and can you talk about the cloud services HCV you perform and some corridor.

I guess any context around any notable deals in the quarter was there anything outside of that drove the strong performance here in Q3.

No nothing nothing unusual there is no one transaction that set that up or a couple of transactions. It was good volume overall, we're seeing continued growth there as we look forward.

As we look forward, we're seeing even even a much stronger predominance in them and the pipeline towards the subscription model. So it's just good good continued traction in that direction and as I've stated in the past a it it's not generally the to the too.

Two or three that we did this past quarter that were perpetual licenses were driven by a financial model in the opposite direction. So it wasn't a mistrust around the cloud business, but they had a.

They had capital expense that was available to them. They wanted to take advantage of the opportunity, but overall the trend towards the cloud as much better and and people are seeing the value in the services associated with it where we can keep them operationally at peak performance.

Better than they can internally.

Got it that's helpful. And then you mentioned are starting to see an uptick in transformational type of deals during your script.

It sounds like you're starting to improve your relationships with the C suite executives at these customers, but can you talk about your progress with really moving forward and these transformational types of deals in and how you're continuing to make progress to actually landing one of these andy coming quarters.

Yeah I think.

It's probably a combination of our our engagement at the C suite, but certainly that's improving as well, but our ability to engage there has been elevated by the fact that the C suite is paying attention to the supply chain today, so not necessarily that that that we can't attributed totally to our our performance. It has become a very.

Important topic in the boardroom about how to manage the supply chain for customer loyalty and customer service.

So that's that's elevated has become a a much stronger conversation that we're having a we are seeing that continue to play out. So those are the kind of transformational projects, where they are rethinking the way they run their business. It's not just an application or a tool used to tweak the edges or improve the performance and get a fiber.

10% improvement out of their or their operation or inventory turns they're really looking at it is how do they serve the customer in a much better way how did they come more agile and their supply chain and thus this this dialogue is going on we have a number of projects going on today, where the where the clients have become relying on our advice.

Okay, sorry industry point of view on how they should.

Should we think the way they operate their business and how they should configure their systems to support a new organizational structure that is much more dynamic collaborative and much more responsive. So those are the kind of transformations that we're working on with clients. There. They are leaning on us for that insight there inspiration behind that and we're here.

Moving them drive that so as we continue to proliferate that in the marketplace and and gain the reputation for doing so that'll that'll continue it accelerate the number of engagements we can have under that model.

I understand it's that's helpful and just one final question for me I know you don't provide formal guidance, but can you just give us a sense as recurring revenue continues to build a in terms of the mix of the overall revenue.

What sort of revenue growth targets, our adjusted EBITDA margin targets are you trying to move the business towards over the next couple of years.

Well I, we don't have any fix targets and certainly we don't we as you stated we don't put those out into the marketplace. There's just so much uncertainty today that we don't want to set a false expectation around that but we do see just the nature of the recurring revenue model a will accelerate growth as we all know.

So that that a that recurring revenue model builds as we as we sustain those customers. We've got a great retention rate in that area and then as we layer in new projects. These new projects that are coming in you can see.

Now that we're through that transition we're into the recurring revenue model you can start to see the acceleration rates to pick up there. So I think you'll you'll see an acceleration of our our growth.

I understand well, thanks, again for taking my questions and especially like with the remainder of the yeah.

Thank you very much good to speak with you that.

And we do not have any further questions at this time.

All right Ryan will thank you all for joining US. We appreciate your time. This afternoon, we look forward to speaking to you again in the coming quarter.

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

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