Q4 2020 American Software Inc Earnings Call
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Good day, everyone and welcome to today's American software fourth quarter in fiscal year 2020 financial results.
At this time all participants are in always you know me mode. Later, you off the opportunity to ask questions. During the question and answer session.
My registered ask a question at any time by pressing the star and one on your Touchtone phone.
Please note this call may be recorded and I will be standing by if you should need any assistance. It is now my pleasure to turn the conference over to CFO of American software than say clean Yes. Please go ahead.
Thank you glowing good afternoon, everyone and welcome to American Software's fourth quarter fiscal 2020 earnings conference call on the call with me as Allan Dow President and CEO of American software Alan will provide some opening remarks, and then I will review the numbers, but first I'd like to remind you that this conference call may contain forward looking statements, including.
Turning 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 that are subject to a number of risks and uncertainties some of which cannot be predicted or 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 of factors that could cause.
Could differ materially from those anticipated by statements made on this call such factors include but are not limited to changes and uncertainty in general economic conditions the growth rate of the market for our products and services the timely availability and market acceptance of these products and services the effective competitive products in pricing and other.
Competitive pressures and their irregular and unpredictable pattern of revenues in light of these risks and uncertainties that could 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 Alan for opening remarks.
Thank you Vince.
This spring has done an experience for all time.
Personally and on behalf of the company I want to express our gratitude to all the frontline workers in first responders, who have worked so hard to keep us all safe and healthy in these extraordinary times.
[noise]. Furthermore, as an organization, we've embraced in support diversity and equal rights for all of our teammates around our ecosystem and within our communities because it makes us better and is simply the right thing to do.
As we all know this view is not universally held across the country and around the globe in to that end, we respect the right for civil protest to raise the awareness of the social injustices that it's still exists today.
As community members, we invest time personal monetary contributions and matching corporate funds to help those who have basic living needs and to enhance the opportunities role to excel.
In regards to our fourth quarter in fiscal year results I'm extraordinarily pleased with how our team has pivoted multiple times during the last few months. The most dramatic shift was the transformation to operating virtually which we did in early March.
Within 24 hours, we went from the old normal to 100% virtual.
In anticipation of that event our team members were prepared.
I can report that we were extraordinarily successful.
We remain to open and fully operational supporting the needs of our customers as they navigated the global crisis and manage their supply chains under very dynamic conditions.
Customers have shared many stories about the value they gained from using our solutions and working with our team members that span a wide array of challenges from explosive growth to pour protective gear disinfectants and home based food products.
The managing the staggered closing and then reopening of the bricks and mortar retail.
The bottom line isn't.
But in the weeks following the transition we gained deficiency in every area of our business.
Our implementation projects accelerated our support operations engaged more with customers and our sales team learn how to market sell contract and transitional project implementation all in the virtual environment.
We're using our expertise to enable prospects and customers to work more effectively this 100% virtual world.
Especially considering all that was happening our fourth quarter was a solid end to a very successful year on many fronts. We clearly have transitioned the business to the software as a as a service engagement model as evidenced by the 64% year over year increase in subscription revenue and 53%.
Growth in annual contract value for cloud services over the prior year period.
We are gaining momentum and building a solid recurring revenue stream of maintenance in cloud services, which now represents approximately 57% of total revenues.
We expect that percentage to continue.
The percentage of recurring revenue to continue trending higher in the future based on the strong preference for subscription contracts with that rate approaching 60% by the end of this fiscal year.
As I stated earlier, we accelerated our professional services activities, which is reflected in the 16% growth and professional services revenue on a year over year basis.
We have a solid backlog for our supply chain services organization due to our strong bookings performance over the past few quarters and our expanding the number of resources in some of the areas, where we see continuing demand to ensure that the specific skill sets will be available where we see demand increasing.
Based on the seasonal nature of the services work in the backlog of project activities, we expect to show growth in the first quarter services revenue on a year over year comparison basis.
We had a strong start to the fourth quarter, but the middle was a bit modeled as the reality is of the pandemic took hold.
Well that momentum.
We had entering the quarter began to reemerged as we exited the quarter our net new Eightd. Both was affected by a few delays in deal closures as well as the loss of one of our lifestyle products companies that was in financial distress.
Vince will detail.
The some of that during the update on the financial results.
We welcome six new customers in the fourth quarter, which brings us to a total of 40, new customers for fiscal 2008, and completed subscription or license fee transactions in five countries during the fourth quarter.
No momentum in late April carried into the current quarter with a number of contracts completed in May and in general early June.
Which is typically a seasonally slow period for us.
We continue to see pipelines grow and are ahead of where we were at this time last year. So we remain confident in our ability to achieve HCV grow in the new fiscal year.
Theres still some uncertainty regarding close rates over the summer months. However, we anticipate.
An upward trend in the second half of the fiscal year.
Well, we've seen already is that managing the supply chain has risen to the executive agenda.
Theres an awareness the current systems and processes are insufficient for today's market, where resiliency speed and agility go hand in hand and have become the norm.
This speaks well to our comprehensive planning platform prescriptive implementation approach and having robust capabilities built in.
These conditions bode well for our growth in fiscal 21 and beyond.
Looking forward, we're continuing to see an uptick in from transformational projects, which leverage our digital supply chain solutions and take advantage of the optimization depth advanced analytics machine learning and optimize simulation capabilities of our platform to dramatically improve the speed and quality of decision making.
For our customers.
In today's dynamic economic environment customers are looking for supply chain agility to help them navigate the global trade uncertainty.
Simultaneously seeking to accelerate the introduction of new products.
This new approach allows them to orchestrate these processes to mitigate risk and enhance resiliency.
Our ability to put our customers on a journey to transform their supply chain to continuous and autonomous planning where that journey begins with tangible results within six months gives us the competitive advantage in today's market.
In summary, we are pleased by our progress as we strive for continued success to deliver exceptional value for our customers in this new digital world.
We will continue to focus on making customers more successful as we look to expand our relationships and introduce new innovative services.
We're confident that we can continue to grow both revenue and profitability in the years ahead and are proud to be delivering incremental benefits for our customers in a time when they need at most.
At this time I'll turn the call over to Vince who will provide details on our financial results. Thanks, Alan taking a look at the fourth quarter fiscal 20 to the same period last year total revenues increased 11% to 29.3 million.
That compares to 26.3 million in the same period last year.
Drove a lot of that was subscription fees, which increased 64% to 6.3 million for the quarter compared to 3.8 million at the same period last year.
Software licensees decreased 37% to 1.1 million for the current quarter compared to 1.7.
Looking at our cloud services HCV or annual contract value. It increased by 53% to 26.4 million and that compares to 17.3 million. The same period last year and as Alan mentioned, our reported HCV was negatively impacted by the loss of a lifestyle product company that experienced significant financial challenges.
As amid the cobot outbreak.
And that resulted in a suspension and possible termination of the subscription contract, which reduced both the new net HCV for the current quarter and also the cumulative HCV and by approximately 600000.
We do not anticipate that this will be a trend in our customer base, but rather an exception.
Looking at professional services increased 16% to 11.5 million for the current quarter compared to 9.9 million in the same quarter last year, that's due to a 20% increase in our supply chain management unit due to stronger bookings in recent quarters and we also had an 11% increase in our it consulting business. The proven method as a result and timing of.
Project work.
Looking at maintenance revenues decreased 4% to 10.4 main compared to 10.8 million stemming from the normal fall off rate.
And which is lower than historical perpetual license revenues.
Our combined recurring revenue streams of maintenance and cloud services were 57% for the total of total revenues for the current quarter and that compares to 56% in the same period last year.
And we believe this trend is to a higher percentage in the recurring revenue as we transition to cloud revenue model in the future.
Looking at other costs, our overall gross margin was 54% for the current quarter.
Compared to the prior excuse me for that was 54% for the current and prior year period, our licensee margin was 22% for the current quarter and that compares to 34% in the same period last year, that's due to lower licensees.
Subscription fee margin increased to 56%.
Yes, 56% compared to 47% in the same period last year, and that's primarily due to increase in subscription revenue and also when you exclude the noncash allocation of amortization of cap software of about a million dollars in the in the fourth quarter of 20, the subscription gross margin would have been 72% and that compares to sit.
51% in the same period last year, which included about a half million of amortization of cap software.
Our services margin increased to 31% compared to 30% for the same period and that Stuart due to a higher mix of professional service revenue coming from our higher margin supply chain management business unit, our maintenance margin increased to 83% for the current quarter compared to 82% in the same period.
Last year, and that's primarily due to cost containment efforts.
Operating expenses, our gross R&D expenses were 15% of total revenues for the current period that compares to 19% in the same period last year as a percentage of revenues sales and marketing expenses were 20% of revenues for the current quarter from compared to 22%.
In the prior year period, and that's primarily due to lower travel and marketing costs.
At which was partially offset by higher salary expenses from increased head count.
Our gx DNA expenses were 16% of total revenues for the current and prior year period, our operating income increased 57% to 1.6 million for the core current quarter compared to 1 million the same quarter year, a year ago, adjusted EBITDA, which excludes stock based compensation increased 11% to 3.9 million.
And for the current quarter compared to 3.5 of the same period last year.
Our GAAP net income decreased to 71% to half million dollars our earnings per diluted share two cents per share for the current quarter compared to net income of 1.9 or six cents earnings per diluted share. Our adjusted net income of 1.1 million or adjusted earning per diluted share four cents for.
The fourth quarter compared to net income of 2.7.
Our adjusted earnings really diluted share of nine cents in the same period and these adjusted numbers exclude amortization of intangible expenses related acquisitions and stock based compensation expense.
Our international revenues for the current quarter were approximately 17% of total revenues for that.
And then that compares to 22% is.
The prior year quarter.
Taking a look at the full year 12 months ended April Thirtyth 2020, compared to the same period last year total revenues increased 6% to 115.5 million compared to 108.7 million last year subscription fees were 22 million.
For the year and Thats, a 56, 7% increase compared to $14 million. The same period last year wire license fees were 7.6 million or 6% increase compared to 7.1 million for the same period last year.
Our services revenue increased 1% to 42.3 million for the year compared to $42.2 million last year.
And that's due to a 12% increase in our supply chain management unit. This was partially offset by a 10% decrease in our ITD staffing business.
Our maintenance revenues decreased 5% year to date to 43.1 million that compares to 45.4 million.
Looking at costs for the year, our overall gross margin increased to 55% for the year compared to 52% last year.
Subscription gross margin decreased to 57% for the year compared to 59% in the same period last year and Thats due to the allocation of amortization of cap software cost of 3.4 million this year compared to 1.4 million last year.
Subscription gross margin without the noncash cap software allocation would've been 72% for the year of fiscal 2000, an increase compared to 69% in the same period last year.
Licensee margin increased to 37% compared to 10% last year, that's due to a higher licensees and also due to a decrease in cap software allocation to cost of license fees.
Also lower amortization of intangibles and also lower var commissions.
Our services margin was 28% compared to 25% in the same period last year and Thats due to increase in services revenue from our higher margin supply chain management business unit.
Our maintenance margin was 83% for the year compared to 82% same period last year looking at operating expenses, our gross R&D expenses were 16% of total revenues.
Compared to 18% for the prior year period, as a percentage of revenue sales and marketing expenses increased to 19.
Excuse me were from 19% for the current and prior year period.
DNA expenses were 17% of revenues for fiscal 2000 and that compares to 16% in the same period last year and that's due to higher by variable compensation and to a lesser extent higher legal and insurance costs.
So our operating income increased 15% to 6 million compared to three 5.3 million last year adjusted EBITDA year to date increased 10% to 16.2 million compared to 14.7 million same period last year, and our GAAP net income decreased 1% to 6.7 million or.
81 cents earnings per share.
Fair to net income of 6.8 or 22 cents earnings.
Diluted share.
Adjusted net income year to date was 9.9 million or earnings per diluted share or 31 cents compared to 10.5 million.
Or 33 cents earnings per diluted share international revenues for the full year were 19% of total revenues compared to 20% in the same period last year.
Looking at the balance sheet deal that accompanies financial position remains strong with cash and investments of approximately 94.7 million at the end of April Thirtyth, 2020, which increased over 6 million compared to the same time last year.
During during the quarter quarter, we also paid $3.5 million dividends other aspects of the balance sheet. Our accounts receivable was 22.6 million Unbilled was 2.4 for a total of 25 million of a our deferred revenues for current and long term were 34.2 million and ours stockholder shareholder equity was a 190.
I mean point 9 million.
Our current ratio was 2.7 as of April Thirtyth 2020, and that compares to 2.6, the same period last year and our days sales outstanding as of April Thirtyth 2020 was 78 days and that compares to 70 days in the same period last year.
At this time I'd like to turn the call over to questions.
At this time, if he would like to ask your question. Please press star.
Why don't you touched tones.
You may with try your question at any time.
Key.
And once again for your questions today that is star and why.
First to Max style. Please go ahead.
Hey, guys. Thanks for taking my questions and a good performance in a difficult environment.
Right.
Alan just wanted to first start off with the impact that you're seeing from the pandemic and you kind of laid it out that you saw some softness at the end of the quarter and things have picked up back then, but maybe we can just sort of dig into that a bit more you know are is it mainly just delays.
There are a lot of these deals still sitting and the pipeline and then are there certain types of projects are deals that are getting more impacted then others just give us a little bit better sense in terms of what's what's going on there from from the impact to end the business.
Yes.
Thank you first of all thank you for joining us and good question.
It really was a mid mid quarter that we saw the the stall and our view on that and our experience around that was that as the pandemic happened in everyone was going virtual it just raised the level okay awesome.
They were focused on just kind of keep continue operating and moving people virtual and getting people connected and that sort of things that caused a stall we had relatively few fought projects fallout.
In fact during that time period, we actually over closing some contracts in getting business started in some areas just were quite surprising we had one one contract that we we signed the very ended the quarter that was in the oil and gas business for instance, and we all can look back and say there was a period and there was when they were giving oil.
If you had a swimming pool that we've been happy to fill it up for you and.
So that was a bit surprising, but you know company and we had a contract signed in the retail space, where they were actually in furloughed conditions in stores closed and they still contracted with us, but what happened lose people looked at in said when we don't know what the outcome is going to be we know we're going to be here for the long haul work.
Stable company, we want to invest in the future and they got going but that happened late.
In late April and it carried into May and continued into the first couple of weeks of June them. So we're seeing the pipeline is still strong most of the projects or are still in the backlog for us we're working on those.
Again, we're here now approaching the summer season into my surprise it seems like.
It feels like we've been on vacation, although we're working from home, but this seems like a lot of people on already starting to take some vacations. So that's the that's the concern about just the ability to capture attention and get things done, but the backlog is still strong the pipeline is still there and we're anticipating.
An uplift as we go into the year with the with really a focus on supply chain opportunities here that people need to make an investment and know that needs to do a better job managing.
Help Matt.
Yes, it does.
So.
I guess it sounds like the main concern in terms of.
Closing deals as its typically at a time of year, when it's hard to reach customers and soda to convert some of those deals that perhaps got pushed it might be difficult the to contact the customer and get those first across right now is that correct.
Yes, I think some of them we already we already transacted, we had a couple of those go. So they were they were just taking longer than we anticipated are normally would see with the delay that was in the middle and we're still engaging.
But the tough tough part right now is to rally people together to get final approvals and things of that nature normally they handle in a room and you could get that Don and now it's it's trying to help them navigate a virtual world and potentially people take it vacation and whatnot, so you're absolutely right, it's a timing matter.
We're not overly concerned about it it's just a question Mark right now until you get through that process.
Don't know what for sure is going to happen.
So we are we certainly aren't seeing everybody, saying, we're done were software over its really just they're moving ahead. They just it's a strange environment for everybody.
Yeah got it and maybe we can focus a little bit more on the long term.
Potential impact and so I guess one have you.
You know seen customers or conversations with customers change at all on I guess that meaning you know are more executives are getting involved has the importance of supply chain planning software and now elevated and you now that's not the case you add maybe just talk about what you would you see some of the long term impact so you're busy.
Thats coming out of this this pandemic will be.
Yeah, what we're seeing is the executives taken a personal interest them and they were always aware of the projects. The projects are large enough that it didnt excuse me there viewpoint, but now they're taking a personal interest and wanting to understand.
How how they can move forward what it will be different for their business. So what will be new new in the new world. Once we get to a new place and the other thing Thats been very interesting is that there's a sense of urgency around getting.
Getting systems in place that that they can gain value and then be ready. So for instance, there is some conversations going on now let's say how can we get started today and be ready for the fall in case. The pandemic comes back will be in a position, where we're getting value, but may have to pivot and do something slightly different than others more otherwise.
We anticipate and that speaks volumes to the way we operate we implement in a very agile way and we can actually put them in a position where theyre getting.
We will use in real world indoor environments by the fall if they were starting today for instance, and then and then we get a chance to see together and the benefits of an agile methodology is that you you get to a point where you have.
I will use and then you reassess where you go next and if the economic conditions change or something happens the environment than we can pivot and we can go it in a new direction or we could continue along as initially anticipated. So thats kind of a change in in discussions that we were not having six months ago nine months ago or a year ago.
Got it in and has there been any change in terms of the.
You know deal size, I guess, I'm thinking or our customers trying to maybe bite off smaller pieces. So they can get sort of a faster.
Time to value versus some of these transformational projects any any change there in terms of what you're seeing with your mix.
No, we're still actually seeing an uplift where where their biting off on the on the whole project. They just want to phase. The efforts that are going on they don't necessarily want to phase. The project. So they'll take they'll take off maybe a segment of the business and get it operational or a critical section of it still takes the same loss scope, but maybe not.
Expansive in the user community or as many of the data elements or something of that nature. So we haven't seen a downdraft in the size of the contract if anything we're still seeing that trend upward.
Okay, that's great and last one for me just.
Was wondering any change in plans in terms of your sales hiring and then your sales strategy going forward as you've maybe.
Learned and got to experience with this remote sales that any any sort of long term changes you are anticipating in sales strategy.
No we're not seeing any change in strategy at all we haven't implemented anything there we.
We're in the middle of Onboarding, a number of new folks on to the team right now.
And thats been that's been a continuous trend about every quarter. We were successfully finding the right candidates and being able to bring a couple of people in so it's an onboarding process right now we're still looking for that it's getting more and more difficult to do recruiting because people kind of locked down and they want to stay where they are but.
We're still finding some good candidates and just this week, we had a couple of folks just drilling out so we're going to stay on the same track.
Well of course, correct if necessary as we see how the.
The economy plays out and how the pandemic plays out but.
Right now, we're we're anticipating continuing the product progress, we're making over the last last six months.
All right. That's it from me guys. Thanks, a lot for taking my questions.
Super Matt good to chat with you.
Just a reminder for your questions today that is star and flying.
Next to SEC comments. Please go ahead.
Hi, Good afternoon Allen events, Thanks for taking my questions.
Yes, just speaking to the termination of that contract with a lifestyle brand petsmart during the quarter in can you just speak more so I've got what what's really going on there it sounds like more of a one off event and are there really any specific verticals, where what are your continually say customers to struggle that that may raise some concerns for you in the upcoming quarter.
Yeah.
On.
There are no universal trends, where you can say that that one is top of course.
In the retail space. This one wasn't in retail sales base, there in a lifestyle product space, but.
One of the got punished and but overall the retail segment is the only one that really.
Really went into distress, but we have a number of projects in that space that are continuing.
Folks move tome and they continued to work on the projects and as I said, we even even contracted to start some new projects in that space. So that would have been the one if any of that I would have said really what it would have been into shutdown mode.
Lots of distractions around that if you can imagine closing your retail stores in shutting down your supply chain and then a month or two later opening it back up again trying to restart it and figure out what that process is going to be lots of distractions, there, but not not cancellations. We did we only had to one.
We don't have others that we're anticipating yet we don't know for sure will shift to see without plays out but.
We see people continuing to operate they're continuing to work they're continuing to work on their projects. So we can't put a trend on it at this point other than it looks like we had one we had one incident and maybe we will have on others, but we don't know where they arent yet.
Understood that that's helpful and good to see the continued progress, especially in the supply chain management organization for professional services that it sounds like the backlog there it's still pretty strong opinion continue to see growth in that here in Q1.
I remember you mentioning that you've actually moved a lot of these engagements to virtual environments. I was just wondering do you see an uptick in margin from a remote model for these implementations on these these projects or any sort of major change around that.
Yes, we are moving virtual was a surprise it it's one of those areas. What we anticipated that people people always had a view that it is necessary to be face to face we share that view.
What we learned.
Using some virtual techniques around video cameras by.
Managing the meeting sequence, where you take short breaks you engage people you have to think differently prepare differently, but you hit the nail on ahead Zack.
We've taken out a whole segment that is of inefficiency around the travel in the commuting across busy cities in getting from airports into the city and out of the city and all those sorts of things. So the time, we spend with customers is very efficient we can be.
We can be more dynamic around the way we schedule. So you can put multiple customers on the same day, which we couldn't normally do before and that helps facilitate very productive meetings.
The decision making process is faster.
People are when they're on with US they are focused they're making decisions. So I think the bottom line other that as we will see we will see an improvement in efficiency and utilization of people, which would be dropped to the bottom line and a higher margin.
So we see that no. The challenge we have now again, we're heading into that summer season. So when we look at the services revenue if we compare to last summer. We think we're in good shape against last summer.
But this is one of those seasonal periods, where we have a little more challenging getting both our resources are looking to take some vacation time and break time and our customers are doing the same thing, but on a year over year basis, I think we're going to be in good position.
Understood that's helpful and Alan just given the current environment and maybe some of the struggles that you have worked with other competitors in.
In the supply chain space.
I mean with all the cash on the balance sheet are you finding more M&A opportunities to consider here that that maybe are more attractive valuations and what you would've seen maybe six to nine months ago.
Boy there was a brief window into where there was some tremendous valuations but.
And to be quick to the trigger on that event that.
But no your eurs that good good thoughts on that we are.
We are we are considering our strategy for the future and where we filling the gaps as we've talked before we have.
Our view on an acquisition is how can we extend the reach and do more for our customers by bringing in folding in some new capabilities that are proven capabilities as well.
So we are we are looking at that we're hoping that we'll find the right fit in that that because of the current market conditions that devaluation would be suitable so.
We're we have the same mind as you that there should be some opportunities out there would be beneficial for us.
Understood and then that's just one final question subscription gross margin of course, excluding out the cap software was right around 72% in Q4, what are your expectations for that subscription gross margin as you continue to scale those subscription revenues over the next couple of years.
Well I think by the next year to it at 72% sitting at excluding the.
Noncash amortization it should go to closer to 80%.
All right. That's helpful. Okay, well, thanks again for taking my questions and best of luck income quarter.
Thank you that thanks for joining us.
Once more.
She's today that star.
It will allow further questions to Q.
Hi, there are no further questions at this time.
Well Chloe thank you for helping us for everyone. The joined US today. Thank you for your time, we certainly appreciate that and look forward to speaking with you again in the near future has a good day.
Lee.
Hi. This does conclude today's program. Thank you for your participation you may disconnect at any time.
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