Q2 2022 American Software Inc Earnings Call
Certainty and 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 and the effect of competitive products and pricing and other competitive pressures and the irregular and unpredictable pattern of revenues in light of these risks and uncertainties.
<unk> no assurance that the forward looking information will prove to be accurate.
At this time I will turn the call over to Alan for our opening remarks.
Thank you Vince.
With the first half of our fiscal year behind Us I'm pleased to report that we have achieved double digit revenue growth in our supply chain management segment each of the past two quarters and in the second quarter. Our total revenue growth also return to the double digits.
Our strong topline performance was accompanied by significant expansion in our adjusted EBIT margin, which is now approaching the levels. We last saw when we had more material contribution from license fees.
Although our services revenue may cause some variation in any given quarter. We believe our recent growth and margin profile will increasingly be the norm as we continued to scale our cloud business.
Looking back on this past quarter, we exited summer.
And with the pandemic starting to ease the transition back to the in person activities began to accelerate.
However, with the fragmented work environments business uncertainty and the frenzied activity as our customers are engaged in to address their supply chain issues, especially with the holiday period. Upon us we experienced delays in the completion of several contracts.
We have since secured one of the more significant opportunities and we remain actively engaged in several others, which should come to conclusion soon.
Overall, our pipeline continues to increase driven by the transformational projects required to enable enterprises to holistically manage their supply chains, and a sustainable sustainable and economically resilient way.
Although the timing of closing these contracts is a little less predictable due to longer approval processes and the relative scarcity of customer resources required to initiate projects. We remain confident that between a larger opportunity set and improved execution. We are poised for a strong second.
Half.
In regard to our second quarter results I'm pleased to announce that we extended our post pandemic year over year improvements on all measures.
With increased <unk> and lower churn than we were experiencing a year ago, we continue to build our ACB and services backlogs.
We continue to focus on serving existing customers delivering on our implementation commitments and bringing new companies into our customer community and we are doing it all more efficiently than ever before.
With the post summer rebound and consulting services, we were on plan or slightly ahead across all revenue and margin areas. We're seeing a continued increase in our services backlog and are relying more and more on our Si partners to insist but to assist in the delivery.
The third quarter is always a challenge with extended downtime for the holidays. However, we anticipate continued year over year growth and margin expansion in the supply chain consultant consulting services business.
We're also pleased to see the continued growth in our recurring revenue stream of cloud services and maintenance, which now represents approximately 63% of total revenues compared to 62% in the same period last year.
This was driven by the 43% increase in cloud services ACB, we saw in the second quarter when compared to last year's second quarter.
With the increase in new subscription contracts and a return to the more traditional stability of our cloud and on Prem customer community. We expect to see the recurring revenue as a percent of total revenue continue to rise.
During the second quarter, we welcomed five new customers and completed subscription or license fee transactions in six countries, reflecting our strong global presence.
In summary, we're pleased with the second quarter results and expect to extend the performance improvements of our financial model through the second half of this fiscal year.
We remain.
Totally focused on executing against our growing pipeline and look forward to reporting our progress next quarter.
At this time I'll turn the call over to Vince who will provide the details on our financial results. Thank you Alan for the second quarter of fiscal 'twenty. Two total revenues were $31 2 million and that's an increase of 12% from $27 nine in the same period last year.
The big driver of that is subscription fees, which increased 49% year over year to $10 4 million, while license revenue was <unk> 8 million compared to <unk>, 5% the same period last year.
Our cloud services annual contract value or <unk> increased 44% to 20 excuse me $42 five.
$5 million versus $29 6 million a year ago.
While we added $1 6 million in net new <unk> during the quarter, we were short of our internal target as a couple of large deals that were expected to close that were expected to close were delayed as Alan mentioned one of those has since closed providing a nice nice start to Q3.
Over 40% of our net new ACB in the second quarter was from new customers. We added five new customers in the second quarter, bringing us to a total of 10 year to date.
Looking at professional services that increased 5% to 10.8 million from $10 2 million a year ago, our year over year increase reflects a 4% increase in the proven method our it.
Consulting business unit and that was due to timing of project work and a 6% increase in our supply chain business unit and our backlog of supply chain.
Implementations increased significantly due to the increase in ACB bookings in recent quarters. So we anticipate continued year over year growth in our services during the remaining quarters of fiscal 'twenty two.
Our maintenance revenues declined 9% year over year to $9 $3 million, which includes a combination of cancellations and cloud conversions, reflecting a normal falloff rate this quarter. Our total recurring revenues comprised of subscription and maintenance fees represented 63% of our total revenues.
In the second quarter and Thats up from 62% in the same period last year.
Our gross margin was 59% for the current period versus 53% in the same period last year, our subscription fee margin increased to 67% compared to 58% in the prior year period and.
And that's primarily due to increase in subscription revenue and lower amortization of cap software expense.
Excluding the noncash amortization of cap software expense of 690000 in the second quarter, our subscription gross margin would have been.
74% versus 71% the same period last year.
And the amortization of cap software was 921000 in the prior year period.
Our license fee margin was 75% compared to a negative 23% in the same period of last year and that's due to lower costs, such as amortization expense of 258000 in amortization of cap software expense of 174000.
And our.
Our agent commissions of 61000.
Services margin increased to 31% from 26% last year and Thats due to primarily due to the mix of revenue from higher margin supply chain business unit and better utilization of the supply chain staff.
Maintenance margin was 81% for both the current period and prior year period.
Gross R&D expenses were 14% of total revenues for the current year period compared to 16% in the same period last year, we are doing in a transition period with our R&D and preparation for increasing the gross R&D spend in future periods to sustained spend as a percentage of supply chain revenue in this range.
<unk>.
Sales and marketing expenses were 19% excuse me for both the current and prior year period, G&A G&A expenses were 18% of total revenues compared to 16%.
Last year, primarily due to higher variable compensation expense, given our strong revenue and adjusted EBITDA performance throughout the first half of the year.
So on a GAAP basis, our operating income increased 326% to $2 7 million for this quarter.
Compared to <unk> 6 million in the same period a year ago net.
Net income increased 379% to $3 3 million or earnings per diluted share of <unk> 10, compared to net income of <unk> dollars 7 million or <unk> <unk> per earnings per diluted share last year.
On an adjusted basis, which excludes noncash amortization of intangible expense related to acquisitions and stock based compensation expense adjusted operating income increased 137% to $3 8 million compared to $1 6 million in the same periods last year, adjusted EBITDA increased 70% to $4 8 million from $2 eight.
In the same period last year and adjusted net income increased to 173% to $4 2 million or adjusted earnings per diluted share of <unk> 12 for the second quarter and that compares to adjusted net income of $1 5 million or adjusted earnings per diluted share of <unk> in the same period last year International.
This quarter were approximately 15% of total revenues for the current and prior year periods.
Taking a look at the numbers year to date total revenues increased 10% year over year to $65 million.
Primarily due to a 51% increase.
And subscription fees to $20 1 million, a 5% increase in license fees and a 1% increase in services parts, partially offset by a 9% decline in maintenance revenues.
Adjusted operating income year to date was $6 4 million, representing an operating margin of 11% compared to $3 $3 million or 6% margin for the same period last year. Adjusted EBITDA was $8 4 million versus $5 9 million a year ago period, and adjusted net income totaled seven five.
8 million or <unk> 23 per diluted share up from $4, three or 13% diluted share in the same period last year.
Our remaining performance obligation.
Which we refer to as backlog was $123 million, representing a year over year increase of 58% with strong growth in <unk>.
Reflects record bookings in recent quarters and an increase in the duration of the cloud agreements as customers continue to make long term commitments to our platform.
Looking at our balance sheet, our overall financial position remains strong with cash and investments of approximately $111 4 million at the end of the quarter. This is an increase of approximately $16 7 million compared to the same time last year.
Our days sales outstanding as of October 31, 2021 was 65 days for the current period.
And that compares to 69 days in the same period last year.
And this decrease was primarily due to improved collections compared to last year and also during the quarter, we paid $3 7 million in dividends.
At this time I would like to turn the call over to questions.
Okay.
At this time, if you would think task a question please press star and one.
One on your Touchtone phone.
You may withdraw your question at any time by pressing the pound key.
And once again for your question that is star one.
And we'll take our first question from Matt Pfau. Please go ahead.
Hey, guys. Thanks for taking my questions.
First wanted to start off with the deals that got pushed in the quarter.
It'd be helpful. If you could just provide a little bit more detail on what exactly went on there and then I know you're close to one but the ones that have been signed yet.
Your confidence level in getting those deals across end.
Either your third or fourth quarter.
Matt Hi, Matt This is Alan I'll take that one thank you for joining us this evening.
Yeah.
It was a situation that I would describe it is frustrating, but but not necessarily disappointing.
Personally got involved in many of those contracts and the evaluation of the team really did a phenomenal job of getting things ready and contracts got negotiated and they were sitting ready for final approvals on.
More than more than the couple that we've mentioned prior so a handful actually.
And we just couldnt get the final approvals done one of those have come through already and another one probably yet this evening or the next couple of days and a few more next week hopefully before Thanksgiving, giving even kicks in so we're hard at work at those.
Again, I would describe it is frustrating not so much disappointing only only because of the hard work that went into it on both sides of the customer side and with our team as well so a high degree of confidence.
We feel good about those we still got them in the works not a lot of work to do on many of them because we're really waiting on the customer side.
Just a couple of things that seem to really play out for us were around the work conditions, where people are not in the office. So it's not as easy to walk down the hallway and and wrangle the group together and get the approvals necessary and then a couple of cases. They are just really struggling with the the resource requirements, but we figured out ways to get that behind us as.
Well, so so feel really good really good about.
Getting those contracts wrapped up.
Got it that's helpful and then just.
Maybe it'd be helpful. If you could give us a little bit in terms of the magnitude you said they were large deals. If you were to close those at least the ones that you had planned on closing would you have been sort of closer to somewhere around a $3 million sequential <unk> increase.
Plus a little bit higher.
Got it got it good to hear.
Okay and then.
On the press release, you comment commented Alan on.
Sustainability, becoming a bigger factor in terms of customer.
What they're demanding out there or where they're investing maybe just some more detail on that would be helpful. As well as what youre seeing in your traceability solution.
Yes for sure it's really become a.
From a dialogue standpoint, a frenzied one there's a lot of challenges.
Around.
Capturing the appropriate data we've got.
One of our team members Mark Burstein is well known in the circles around this area really set the standards and working with the customers organization and others.
Hard at work on some of those standards, probably the biggest challenge is data validation and making sure that the information gathered in the processes put in place are verifiable.
They will be capable of still getting their products into both the U S and the European Union. So a lot of collaborative work going on there.
Which has really been amazing to me to see how well competitive companies have come together to really work on this issue. So it is it is a hot topic.
The front of everyone's mind.
For all the right reasons people are working hard at it and we see that thats going to be.
Strong topic.
Months and quarters and years to come as people really get their arms around it get it tackled in.
As that starts to play out I think the regulations are going to get tighter and tighter and consumer expectations are going to get even more demanding so.
I believe that we're just at the beginning stages of of that really playing out.
Great. Thanks, a lot guys for taking my questions ill pass the line.
For sure Thanks for joining us again.
And we'll move next to Amit.
Go ahead.
Yes, hi, good afternoon, Vincent Alan Thanks for taking my questions and congrats on the strong performance across the P&L in the quarter.
Just digging a little further Alan in terms of.
What's in the pipeline for you how do you guys think about the opportunity for conversions with existing customers versus new.
New customers coming into the fold in terms of the ACB perspective.
Yes.
Great question.
Historically for many many years and it still exists today, where.
If you look at a trend over time, roughly 50% of our contract business comes from both from the new customers and from the existing customers.
The newer projects tend to be in general tend to be a little larger because you're starting from scratch and youre, adding a handful of components into the mix there whereas in general.
The existing customer community may be adding a couple of things are one thing or expanding a division or something like that but with that said.
Some of those larger transactions can be existing customers as well.
In fact in fact, the one that we've closed this quarter already is from our existing customer that was a holdover from last from last period.
So it's a mix, but in general you can say that the new customer projects are a little bigger.
But overall revenue is.
<unk> revenue.
Revenue, that's driven by those contracts is about split on the.
One trend is that does that answer the questions.
Yeah, Yeah, that's extremely helpful.
And.
In regards to the press release, you had out this morning in terms of consolidated resources across Logility demand management, and NGC and Jesus.
Can you just talk about the decision and why you feel like now is the right time to do that.
What are you hoping to achieve by making this move.
Well.
Good friend of mine always says exact that it's every once in a while you want to be lucky.
<unk>.
Sometimes you got to be smart and you got to be Lucky and when those two hit together you really hit the Mark and I believe that we were smart and Lucky on this one.
We started this transition.
354 years ago.
We started by talking about what do we need to do with the collective capabilities. We have in our software platform and we began in parallel with the transition to the cloud the number of years ago to say when we do that let's make this platform or one because we had <unk>.
Complementary capabilities across all of the business units we had.
Four at that time with the NGC demand management, Logility and the Halo operation that we had acquired just prior to that.
So our team worked hard to work at it.
The pandemic over the last 18 months has really demonstrated why that was a brilliant decision wasn't mind, so im not saying umbrella.
But as an organization we've got some great people here that we're thinking hard about the future supply chain and what we needed to do to help our customers be more successful. We didn't have any idea that the pandemic was coming but the reality of the pandemic set in motion the things that we knew were on the horizon is the pace of supply chain continued to accelerate.
Great.
Length of products in the marketplace time in markets.
Is getting shorter and shorter thats the turnover in the number of new product introductions going faster and faster the global enterprises and what it really meant was in order to be successful our customers had to start breaking down the silos.
So we were structured around the silos of the past and the way our customers operated their supply chains and we serve those markets very well in today's marketplace. That's unacceptable you've got to break those barriers down we have our customers are rethinking the way they operate their supply chain. They are synchronizing their teams around product lines or customer experience or <unk>.
<unk> they no longer have.
Forecasting teams and sourcing teams and procurement teams that operate in silos and independent of each other so our business today is aligned with the necessary needs of it and we were fortunate to not have to be tackling that today, where we already got it behind us.
The last leg of that that journey was to align our organization in such a way that we can really capitalize on that as well in our demand management team is acutely focused on emerging markets and small to medium enterprises and our Logility team is acutely focused on the needs of large enterprises and that's how we set.
Our business structure to align with our product capability, so probably a heck of a longer answer than you wanted Zach is when you ask that question, but that's the story and hopefully that was helpful.
Extremely helpful. I'll always appreciate the additional insight on that front and just final question for me are geared towards that.
In terms of the subscription margin, it's remained pretty steady here and kind of the mid seventies.
How are you I guess, how should we be thinking about that going forward.
Subscription piece of the business continues to scale.
We are thinking.
It will trend slightly up towards the end of this back half of the year.
It's roughly around 74 bouncing around 70 475, it should tick up a couple basis points.
Maybe towards like 70, 677 towards the end of the year, but.
We're really targeting next year to get it to 80.
So that's kind of the way we're modeling it right now.
Understood. That's helpful. Thanks, again for taking my questions and best of luck going forward.
Thank you. Thank you thanks for joining us.
And once again for your questions that is star.
One.
Next to Matthew <unk>. Please go ahead.
Hey, good luck.
Thanks for taking my questions, maybe firstly on the transformational type deals can you.
Take a stab at weather and the velocity picking up on getting those across the finish line.
Sure.
Given where we are in the pandemic and where we are in sort of the global macro environment. What are the kind of puts and takes there.
Yes, Matt first of all thank you again for joining us good question.
The nature of supply chain today is really driving these transformational projects. It's much like we were chatting a few minutes ago when Zach asked the question about.
Our realignment of our business, but those are the needs of the customers they need to think differently. They need a platform for managing the supply chain, where they can do the scenario analysis and spanned across the whole the whole.
And supply chain operations that they have.
So.
What that brings about is not only a software application that implementation, but it is a change management practices as well so that's one of the.
The headlines that we've been hitting into and we've really worked hard at helping our customers figure out how to do that to the tune of several projects, we have up and running today, where we have some of our consultants sitting on the customer side really operating on their behalf, helping them operate the day to day operations. So that they can free up some of them.
Key resources to help on the projects so were thinking outside the box we're doing some non traditional work.
Starting to break those projects loose.
We're serving that idea up to more of the prospects as we go forward.
So that combined with the results we're getting.
I believe we believe we're going to see that break loose now.
The next couple of months are really tricky as we get into the holidays with Thanksgiving here in the United States and Christmas around the World.
But that said we're in a period that is traditionally strong for us.
Because we have three milestone moments, we have the the end of the calendar year, where money needs to get spent.
Because thats the end of many of our customers fiscal year. The start of a new year people come out of the blocks with a fresh rest from Christmas and new year's and a desire to get back to work.
And new fiscal budgets that can free up some cash and then of course 30 days later, we are at the end of our quarter and we've done a marvelous job over 40 years of training our customers at the end of the quarter is a good time to do work with us so.
We have those three milestone events that.
Should be another breakthrough quarter for us, where we stand out in the third quarter.
Got it thanks.
Very helpful.
Maybe just one more on the competitive front, what youre seeing given some of the consolidation that's played out in the space.
Yes, it's been an interesting time in this space.
I think theres a couple of <unk>.
<unk> that have just taken some some folks out of the out of the play.
Not all companies have been.
Successfully gobbling up some of the things that.
They spend money on and really put them to effective use so we've actually seen a few a few competitors disc.
Disappear from the horizon, our solutions they would be disappear from the horizon.
Overall, the the more prominent players that we are up against.
Blue Yonder, who just went through.
Change in ownership structure.
With Panasonic taken them private under their umbrella, we've yet to see really that start to come about although we've seen fewer resumes hitting the street. So we will see what that means as time plays out.
We see we continue to see the ERP players they get some business, where they they lock up the CFO in the seat.
And they want to have a single solution, but they are continuing to falter, and we're seeing more breakaway clients, who historically had been.
Loyal to those brands stepping away and reassessing, what they need to manage their supply chain and thats become more prominent than a brand.
Brand loyalty, so thats starting to break loose some projects for us.
So there is a handful of our best of breed providers out there.
That stands side by side with US, we're all getting our fair share today and I think the collective of the top three or four will probably take a more business from some of the others who aren't as strong.
Can't help the customers as well as they have.
The desire and need to transform their business. So it's a healthy environment, we like the position we're in and we can compete very effectively.
Thanks, and congrats on the strong quarter.
Thank you Sir I appreciate you joining us this evening.
And once more for your question that is star one.
A moment to allow any questions to queue.
Okay.
And it does appear there are no further questions at this time.
So chloe thank you so much for helping us with the call. This evening I want again, thank everyone, who joined US. This evening for the call. We appreciate your attention and interest in American software and look forward to giving you an update again.
Three months ahead on our progress in the third quarter. Thank you all about.
So currently this does conclude today's program. Thank you for your participation you may disconnect at any time and have a wonderful evening.
Yeah.
Okay.
Yes.
Okay.