Q2 2021 American Software Inc Earnings Call
Canadian business case.
Operating income.
Operating income.
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Good afternoon, everyone and welcome to todays second quarter.
For school year Twentytwenty why on preliminary financial results call. At this time all participants on a listen only mode. Later, you will have an opportunity to ask questions. During the question and answer session. You may registered to ask a question.
Net anytime by pressing the star and one on your Touchtone phone. Please note. This call may be recorded I will be standing by should you need assistance. It is now my pleasure to turn todays program over to Vince Klinges CFO of American software. Please go ahead.
Thank you Jamie.
Good afternoon, everyone and welcome to American software second quarter of fiscal 2021 earnings call on the call with me is Allan Dow President and CEO of American software Alan will provide some opening remarks, and then I will review the numbers.
But first I would like to remind you that 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 day. These forward looking statements are based largely on on on 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 these anticipated 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 and pricing and other competitive pressures, Andy irregular and unpredictable pattern of revenues in light of these risks and uncertainties that 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 Alan for opening remarks.
Thank you Vince as.
As we all continue to grapple with the level of uncertainty regarding the pandemic on a contentious political arena.
We know that many individuals families in companies have been adversely impacted moving one to encourage everyone to stay strong.
Personally and on behalf of the company on to express our gratitude to all the frontline workers and first responders, who continue to work tirelessly to keep us all safe and healthy as we battled through the resurging health crisis, and the emotional and financial roller coaster, we've experienced this year.
As an organization, we've been blessed with good health and the diversity of our team has allowed us to make balance decisions about how we serve our customers well, while maintaining a safe and productive work environment.
In regard to our second quarter results I am pleased with how our team has remained focused on serving existing customers accelerating ongoing implementations and bringing new companies into our customer community.
We generated solid net new HCV growth and as expected our churn rate return to the normal levels, we have seen historically.
We held our first ever virtual customer conference named disruption Rx in October where it was amazing to hear so many inspirational stories about how our customers have leveraged our team members insights to unleash the power of our solution platform.
Our customers have dealt with both ends of the spectrum for managing explosive growth for products on high demand to mitigating the staggered impact. This pandemic has had on the bricks and mortar retail.
We had a global record turnout for this event.
Which has stimulated a tremendous amount of collaboration across the customer community.
This in turn is driving more success as well as creating incremental interest in new projects with existing customers and new prospects.
We will regain momentum on our services performance and continuing to drive more backlog for future future work.
While we typically experience a seasonal holiday slowdown here in the third quarter, we expect it to be less pronounced than in prior years due to the virtual work conditions, which is providing a much more flexible project calendars.
With our strong implementation backlog in near 100% virtual work strategy, we expect from the third quarter services revenue to remain relatively flat as compared to the second quarter.
We are pleased to see that our focus on a cloud first strategy is paying off we are the recurring revenue streams for cloud services and maintenance now represents a pox approximately 62% of total revenues in milestone achievement on.
Our subscription revenue in the second quarter grew 27% year over year and the growth in annual contract value for cloud services over the prior year period was 33%.
We expect the percentage of recurring revenue to continue trending higher in the future based on the strong preference for subscription contracts.
Sales activity is running at a strong pace and as a result, we're continuing to see growth in our pipelines both in the number of opportunities and the size of the transactions.
We are confident that we will see an upward trend in the second half for the fiscal year regarding the number of new projects that we will be initiating.
We welcome six new customers in the second quarter and completed subscription or license fee transactions in nine countries, reflecting our strong global presence.
Transformational projects are continuing to drive pipeline as well as services backlog as we see customers adopt our platform to radically improve the speed and quality of decision, making that allows them to achieve the agility and resiliency needed to thrive in this new economy.
In summary, we're pleased by our progress as we strive for continued success to deliver exceptional values for our customers.
Our mission of making our customers more successful year after year is paying off in customer retention and expansion as we introduce new innovative services.
We are confident that we can continue to grow both revenue and profitability in the years ahead and are proud to be delivering incremental benefits to our customers in a time when they need it most.
At this time I will turn the call over to Vince who will provide the details on our financial results.
Thanks, Allan comparing the second quarter of fiscal 21 to the same period last year total revenues were 29, our skin between 7.9 for the current quarter and that compares to 28 point to the same period last year as Alan mentioned, our subscription fees increased 27% to $7 million for the quarter and that compares to 5.5, the same period last year.
While our software license decreased 57% to our half demand for the current quarter compared to remain on the prior year period.
Our cloud services annual contract value for HCV increased by approximately 32% to $29.6 million for the current quarter compared to 22.4 million on the same period last year as Alan mentioned, our churn rate improved from the elevated rates as seen earlier in the pandemic and was consistent with the pre covenant levels on.
Our professional services and other revenues decreased 5% to 10.2 million for the current quarter compared to 10.8 million on the same quarter last year due.
Due to a 23% decrease in our supply chain unit, partially offset by a 21% increase in our consulting business unit. The proven method as a result on timing of project for we note that our backlog in our supply chain unit implementations remained robust, but several projects progress more slowly than anticipated as a number of custom.
For his took vacation time in August. Additionally, the restrictions on travel also reduced the amount of pass through reimbursements, we recognize to zero compared to half million dollars in the prior year period.
Maintenance revenues decreased 6% for $10.2 million compared to $10.8 million stemming from the normal fall off rate and lower levels of new perpetual license revenues.
So our combined recurring revenue streams of maintenance and cloud services were 62% of total revenues in the current quarter compared to 58% in the same period last year.
We believe this trend is to a higher percentage and the recurring revenues as we transition to the cloud subscription revenue model.
Costs for the quarter overall gross margin was 53% for the current period compared to 54% in the same period last year. Our gross license fee margin was negative 23% for the current quarter compared to 4% in the same period last year due to lower license fee revenue on a relatively fixed costs such as amortization expenses.
Subscription fee margins increased to 58% compared to 52% in the same period last year and Thats, primarily due to the increase in subscription revenue.
When you exclude the non cash allocation of amortization of cap software of about a little over 900000.
True to subscription gross margin.
It has been 71% compared to 73% in the same period last year, which included 1.2 million of amortization of cash software.
Our services margin decreased to 20.
27% in the current current period compared to 30% in the same period last year and Thats, primarily due to higher mix of professional service revenue coming from our large lower margin on.
The proven method business unit as well as lower utilization of our supply chain unit due to seasonality.
Maintenance margin was 81% for the current period compared to 83% for the same period last year looking at our operating expenses. Our gross R&D expenses were 16% of total revenues for the current period compared to 17% in the prior year period as a percentage of revenue sales and marketing expenses were 19%.
Revenues for the current period compared to 18% in the prior year period, and Thats, primarily due to costs related to our customer conference this quarter and higher expenses from increased headcount.
DNA expenses were 16% of total revenues for the current period compared to 17% in the same period last year operating income decreased 25% to point $6 million. This.
This quarter compared to 0.8 in the same period last year, adjusted EBITDA, which excludes stock based compensation decreased 21% to $2.8 million this quarter compared to 3.5 for the same period last year, our GAAP net income decreased 61% to point $7 million or any to diluted share of two cents.
And that compares to net income of 1.8 or five cents earnings per diluted share last year adjusted.
Adjusted net income of $1.5 million.
On with has adjusted earnings per diluted share of five cents.
And that compares to 2.6 million and other adjusted earnings or eight cents for the same period last year and these adjusted numbers exclude amortization of intangible expense related to acquisitions and stock based compensation expense. So our international revenues. This quarter were approximately 15% of total revenues that compares to 19% in the same period last.
Year.
Looking at the six month period are basically year to date ended October 30, Onest 2020.
Total revenues year to date were $55.2 million compared to 55.6 million same period last year subscription fees increased 34% to $13.3 million.
Compared to 10 million for the same period last year, while software license revenues were $1.2 million or 56% decrease compared to 2.8 same period last year again, this is reflecting our transition to the SaaS engagement model.
Our services revenues decreased 4% to $20.1 million compared to $21 million last year, our maintenance revenues decreased 6% to $20.5 million compared to $21.9 million last year.
Looking at costs overall gross margin was 53% for the current year to date period compared to 54% last year, our license fee margin decreased 1%.
Two 1% from 15% last year on that Stuart due to lower license fees, while our system friction.
The gross margin increased to 57% compared to 52% in the same period last year, our services margin was 23% compared to 29% in the same period last year net due to increases in service revenue from our lower margin TPM business unit.
Our maintenance margin was 82% year to date compared to 83% in the same period last year.
Looking at operating expenses, our gross R&D expenses were 16% of total net revenues for year to date compared to 17% in the same period last year as a percentage of revenue sales and marketing expenses were 18% and that compares to 19% in the same period last year and DNA expenses were 16% of revenues.
For the current year period compared to 18% in the same period last year. So our operating income year to date decreased 8% to $1.5 million compared to operating income of $1.6 million last year adjusted EBITDA year to date decreased 16% to $5.9 million compared to 7 million in the same period last year GAAP net income decreased.
11% to $2.7 million or eight cents per diluted share compared to net income of 2.9 or nine cents per diluted share last year.
Adjusted net income year to date was 4.3 or earnings per diluted share 13 cents compared to net income of 4.5 or for 14 cents operative diluted share.
Last year.
International revenues year to date were 15% of total revenues compared to 21% in the same period last year take.
Taking a look at the balance sheet, the company's financial position remains strong with cash and investments and approximately 94.6 million at the end of October 30, Onest 2020.
During the quarter on quarter, we paid 3.6 million in dividends.
Some other aspects for the balance sheet. Our accounts receivable was 18.5 are built on bills was two point fives for a total of $20.9 million on accounts receivables, our deferred revenues 31 point.
Two and our shareholder equity was $119.1 million.
Our current ratio increased to three three as of the ended the quarter compared to 2.7 in the same period last year. Our day sales outstanding as of October 30, Onest 2020 was 69 days.
For the current period compared to 58 days in the same period last year.
So Jamie at this time, we'd like to open the call for questions.
At this time, if you would like to ask a question. Please press star one on your Touchtone phone.
We will pause for one moment two questions for Q.
Our first question comes from Zacks your.
Your line is open.
Yes, hi, good afternoon, Alan and then thanks for taking my questions and nice to see the bounce back here and the number in the quarter.
Alan I was just curious first off just get some of your feedback from your virtual customer conference that disruption Rx I mean can you talk about any on the follow through you've seen in terms of potential new customer leads and even expansion of business with your existing customer base.
Sure thing yet it was a tremendous event as I said, we had a record turnout.
About three times, what we had seen in the past in the physical events and of course until we'll easy to participate with virtual that an eight debt to get on an airplane and travel even in the best of times, but we were excited about that and it. It allows US also do engage have a much more global community. We traditionally have held the event in.
In North America, because of the predominant from customers being here in North America.
But this was a much more balanced event.
We also had a record turnout for prospective customers people, who aren't currently using the applications, but participated and.
The the theme for the event was around managing managing around the disruption and disruptions in general not just the current ones that we've been experiencing so it was a great draw we had a heavy heavy level of customer presentations going on to newer speaking directly about the kind of impact they've had on that subsequently.
He has drawn interest from it.
Existing customers that have that we've been able to put some activity on to the pipeline already that resulted from that conversation with existing customers and accelerated the conversations with some perspective customers. They were predominantly folks that we would have engaged with at some level.
But what we've seen is an acceleration of of their excitement and enthusiasm to get going on the project and be able to read some of the benefits that those.
Those customers who are speaking we're talking about.
So I think.
Overall debt first of all thank you for joining us and thank you for the question, but I think the impact we've seen so far is really better an acceleration with some new interest from existing customers out there.
Understood. That's helpful and then to that point I was going to be curious as to what you've seen in terms of sales cycles I know some other players on the supply chain planning space have highlighted some longer sales cycles in some instances due to the pandemic.
Just curious what you've seen in terms of sales cycles here in recent months.
Good day.
Yeah, Great question Zack its enters two prongs to it first of all particularly on larger transactions we are seeing.
Probably traditional maybe even accelerated cycles getting to a decision in getting to the point, where we start engaging or under contract in the final approvals each day contracting process and final approvals that were seeing are running a little bit longer than that history, and I truly attribute that to just the ability to get people to.
Attention the focus team that's working on the project that's going on and work on the project is living with the challenges that they face on their supply chain without having the capabilities. We offer they're really excited they're engaged there around on the making decisions quickly is.
Is that higher level is when you get to the legal.
Legal and financial processes getting approvals, it's been a bit challenging the flip side of it is for a couple of quarters in a row now we've had opportunities that bubbled up and actually got all the way to contracting kick off in a very short cycle like three to four months and we have not historically seen that and that was those projects.
I mean, there is only a few in each case in each quarter, but.
Thats been an interesting model, where people have really on seeing the need to do something quickly and they've acted quickly and they moved all the way through engagement review decision contracting and getting an implementation going so it's been kind of amazing to see how quick people can can work when they are really motivated.
Understood that's helpful.
And then in terms of professional services, I mean, especially on the supply chain management side.
I know its still a few struggles there was with people being on vacation here, but can you speak to some of the utilization rates and I believe for Q.
Three tends to be seasonally slower, but it sounds like that could likely not be the case. This year just given your fully virtual model.
Yes, we truly believe that we are seeing that.
Not that far from the holidays is is how does that is to believe.
But we're seeing the project plans that are laying out where people are pushing a little harder and continuing to work dig.
Big to just the nature of not having to travel people are willing to take that extra day or partial we can actually do some productive work. So we do anticipate we'll see how it plays out but we do anticipate that it won't be as dramatic as it was in the past where when are going on.
Our consultants, we're getting on an airplane flying out on the clients have to come to the office or in many cases travel as well when you hit the holiday week. They just didn't want to do that and they basically put the for the project on suspension. So we think there is a.
Good day will be some degree of seasonality to it but not as dramatic as in the past.
We came out of the summer was was it on the last call we talked about that I think.
Is that you may have been the one asked the question but.
We saw a slowdown in the summer that we had not anticipated just because people went on break it kind of felt like we were on break but the reality is people are under a lot of pressure.
Given what we've been through and they did take a break that slowed down we got back and get back in pretty good speed.
We had some churn in projects, where we were ending projects and restarting some new ones that income in.
We had a little turnover in teams getting on to the new projects. So we didn't come back quite as strong as we had hoped here in the second quarter with the lingering holidays and starting up some new projects, but we think it will be strong into the holiday. So I do as I said earlier I do think it will be relatively flat to Q2 based on what we can deliver.
Understood. That's helpful context, and then just one other question for me I was just curious on your plans for sales and marketing spend in the coming quarters. I know you brought in some pretty key new talent in August but how are you feeling in terms of sales capacity in place just given all the demand that you're seeing right now.
Yes, I think we still have room for for growth. We're looking for some key individuals when we find debt will bring them in.
I don't think we are not on a position, where we need to to double down on or do something any dramatic like that but.
Pipelines are for the sales team members are busy.
So were looking specifically for a few key roles to get filled as soon as we can find the right resources for a little challenging to get people on board and up to speed in this environment because you can't.
Difficult to sit across the table and get people ramped up but growth is still on our plans and we'll we'll do it logically as we can and work our way through the for holiday period here looking forward.
Great Thats helpful. Thanks, again, Allen for and for taking my questions and best of luck on coming quarter, and hopefully you have an enjoyable holiday season.
Yes, likewise that thank you for joining us again, thank you.
Our next question comes from that flow your line is open.
Hey, guys. Thanks for taking my questions.
Wanted to start off with churn and good do I hear that debt returned to pre chauvet levels and as you look out across the customer base add do you see any other customers that are in potential financial distress debt that could make this metric kick back up over there.
Next several quarters or do you think we're kind of in a net state now where some of the more financially distressed customers had been flushed out in your expectation is Canada be around this this pre tobin level going forward.
As Matt Alan hair, James Thanks, again, thank thank you for joining us and great question.
Yes.
We don't have a crystal ball, but as we as we look at the customers that are that are out there today.
Our active mobile users there, they're busy they're engaging with us they're working on it. So we we we can't make a.
Prediction about their financial condition.
Although as you for reporting we can see that but we think were solid we don't see a dramatic level of churn in the next quarter or so as we look on that's about as much visibility as we can get is a couple of quarters I'll probably at best.
So we think this we think we've got it behind us it.
It looks promising.
Theres a lot of activity and acceleration out there. So we think we're in a pretty good position now relative to.
That churn rate settling.
Great.
And one of the things you mentioned.
Sales of getting deals across aligned or one of the challenges is getting people's attention and as we move into the holiday season. Here is it's obviously a higher level on predictability than normal and that could potentially be a distraction. How are you thinking about that in terms of its impact on on.
On your guys ability to close deals here in the current quarter that year end and then I guess, the offset to that too is your software obviously helps with some.
On predictability in creating plans on adjusting them. So how do those two sort of dynamics.
Impact you guys.
So on the first one.
I think I think we're what we're seeing is well the third quarter. Historically has been a positive one for us for for a couple reasons three reasons actually that effect.
I always quote number one is that you have ended the year money and.
To the extent that Thats been budgeted unallocated and then on most companies it to use it or lose it scenario. So companies if they've got a commitment and they've progressed the project Bella they will use that to leverage to get people's attention to move the ball forward. So we think that the December season for instance is quite a good organic.
Is that that year on money.
User Louis loses situation. So, we'll we'll leverage that as best we can to move those those opportunities through the through the final stages.
On the other nice piece you have is the beginning of the year with new money coming available and those who have progressed projects made the decisions on a little legal work on it.
As soon as they can get their hands on the budget in that in the new fiscal year. They have the ability then to put pen to paper sign it and put it on the books. So oftentimes we'll see early in January we get to a bit of bump there where people are are all on all.
Trued up ready to go and ready to act on it and then of course, we have the end of the fiscal calendar for US which is always a closing event for every software company. So we've got three trials on it. We think we think this year will look like the traditional model, where it will be strong for us from a deal closing standpoint, and we feel pretty good about that.
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Yes, and I'm with you on that the.
The need for applications is strong we've got a lot of pipeline around.
The Finalization of next fiscal year or next calendar year slashed fiscal year budgeting on number of companies number of projects are keyed up for that they look good so on.
On Im feeling good about the the supply chain market in general on our ability to execute on that market and people actually putting dollars to their needs in the year ahead. So I think as we've said several times in the second half for US the second half for the fiscal year for us still looks quite good.
Got it Okay and then.
Looking at the license fees in the quarter. It was a a decent step down sequentially and I guess my understanding from our prior conversations is that the majority of those license fees our sales too.
Existing customers that were already using these a license products. So thats stepped down as it is it just timing or are you seeing more existing customers move over to the to the cloud product.
Yes, we're not at this point, we're not seeing a dramatic.
From what we would call lift and shift where they may move from an on premise model over but we are seeing.
All of the license fee transactions, we did were with existing customers no new customers in the past quarter.
We are seeing an acceleration were existing customers extending their footprint actually put the new capabilities in the cloud.
With an eye on potentially in the future of bringing everything together under the cloud.
And then we still have maybe a small minor uptick is relatively.
Relatively small uptick in people that are doing a shift. So overall I think we're we're seeing the solidification of the cloud for strategy in.
On the minds of our even our existing customers where anything new they do work is it's a new set of capabilities they'll put it into the cloud first perspective.
Great Thats, all I had guys. Thanks, a lot for taking my questions.
Thank you so much thanks have a good evening and again, thank you for joining us.
Once again, if you would like to ask a question. Please press Star then one on your Touchtone phone.
It appears we have no further questions at this time I will now turn the program back over to Jeff Kleanthis for closing remarks.
Thank you all this is Alan actually but thank you all again for joining US. We appreciate your participation on our earnings call and we look forward to speaking with you all again in the near future Jamie. Thank you for hosting.
This does conclude our call. Thank you for your participation you may disconnect at any time.
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