Q3 2022 American Software Inc Earnings Call
With Q3, accelerating well up into the teens.
Our strong topline performance was accompanied by significant expansion in our adjusted EBITDA margin as we gained efficiency from the cloud growth and achieved very high utilization rates across all of our services segments, including the consultancy business, which is very project and seasonally sensitive.
We anticipate continued strong revenue growth in the fourth quarter and fiscal year 'twenty three with the additional scale in the cloud business and a healthy backlog of project work in hand, However, EBITDA expansion will be tempered in the quarter and year ahead, as we continue to invest in employee retention.
Spanning the team and with a higher level of in person events and travel expected.
In spite of a very competitive labor market, especially in the supply chain of technical space. We successfully on boarded about a dozen people. So far this calendar year filling the needs hiring demands across sales marketing services cloud operations and in R&D.
We expect to repeat that pace of hiring in the next few months to fulfill the needs of the expected growth in the year ahead.
And then we will also need to keep that pace up in the first half of fiscal 'twenty three to align to our business plan for next year.
Looking back on the past quarter, the lingering impact of the pandemic and world events have extended the fragmented working environments business uncertainty and frenzied activity as our customers are engaged in to address their supply chain issues.
We continue to see delays in contract approvals as the supply chain and it organizations grapple with staffing shortages.
We were able to secure the two larger projects that slipped from Q2 early in Q3.
However, in spite of some progress due to our prescriptive approach and staff augmentation efforts, we anticipate that some delays may persist for several more quarters.
Overall, our pipeline continues to increase driven by the transformational projects required to enable enterprises to holistically manage their supply chains, and a sustainable and economically resilient way.
Although the timing of closing these contracts is a little less predictable due to the longer approval processes, we remain confident that between a larger opportunity set and our improved execution. We're poised for a strong conclusion to the fiscal year and carryover into the first half of fiscal 'twenty.
Three.
Due to sequential improvement in our closing rate in our ongoing efforts on customer retention I'm pleased to announce that we increased our RPM and continued to build our HCV in services backlog.
Our team is focused on serving existing customers delivering on our implementation commitments and bringing new companies into our customer community more efficiently than ever before.
We're seeing a continued increase in our services backlog and are relying more and more on our Si partners to assist in delivery.
With the holiday period behind US, we anticipate continued high utilization rates across all services teams, which will deliver year over year growth and margin expansion in the supply chain 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 our total revenues year to date compared to 62% in the same period last year.
This was driven by a 43% increase in the cloud services HCV, we saw in the third quarter when compared to last year's third quarter.
With the increase in new subscription contracts and the continued stability of our cloud and on Prem customer community. We expect to see the recurring revenue as a percent of total revenue continued to rise.
During the third quarter, we welcomed four new customers and completed subscription or license fee transactions in 10 countries, reflecting our strong global presence.
In summary, we're pleased with the third quarter results and expect to extend the performance improvements of our financial model through the remainder of this fiscal year and into next year.
While Q4 is shaping up to be the strongest quarter of net new ACB edition of this year. It is not likely to be the standout quarter like we had fourth quarter last year, which benefited from the accumulation of four slow quarters through the initial pandemic period and culminated in the closure of two large.
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<unk> contracts in excess of $1 million.
We remain intently focused on executing against our growing pipeline and look forward to reporting our progress next quarter.
At this time I'll turn the call back over to Vince who will provide the details on our financial results.
Thanks, Alan So the third quarter of fiscal 'twenty. Two total revenues were $32 4 million at 17% increased to 27, 7% the same period last year.
What's driving that is subscription fees, which increased 45% year over year to 10, 9%.
While the software license revenue also increased to 87% to $1 million compared to $1 5 million. The same period last year, our HCV, our annual contract value increased 43% to $45 3 million versus $31 6 million a year ago period, we added $2 8 million of net new ACB during the <unk>.
Order over 40% of our net new HCV was from new customers.
Professional services and other revenues increased 21% to $11 4 million from $9 5 million a year ago. The year over year increase reflects a 29% increase in our it consulting business unit. The proven method and that's due to timing of project work and also we had a 13% increase of our <unk>.
Business unit also due to increase in project works.
Maintenance revenues declined 10% year over year to $9 $1 million, reflecting our normal falloff rate. This quarter. So total revenues recurring revenues comprised of subscription and maintenance fees represented 62% of total revenues Thats compares to 64% same period last year, our gross margin was 58% for the car.
Current period, and Thats up from 55% in the same period last year subscription fee margin increased to 68% compared to 59% in the same period last year.
Primarily due to increased subscription subscription revenue and lower amortization of cap software expense, excluding the noncash amortization of cap software expense of 628000 for the third quarter. Our gross our subscription gross margin would have been 74% versus 70.
71% in the same period last year and the amortization of cap software last year was 866000 in the prior year period.
License fee margin increased to 76% compared to 46% in the same period last year, and that's primarily due to higher revenues and lower amortization expenses.
Our services margin increased to 30 compared to 24% last year due to strong growth in our both our it staffing business the proven method as well as a higher margin supply chain business unit.
Our maintenance margin was 80% for the third quarter and that compares to 81% in the same period last year.
Gross R&D expenses were 14% of total revenues for the current period and that compares to 16% in the same period last year, our sales and marketing expenses were 16% of revenues for the current quarter compared to 18% in the same period last year and G&A expenses were 18% of total revenues for both periods.
So on a GAAP basis, our operating income increased 246% to $3 $2 million this quarter and that compares to <unk> 9 million in the same period last year. So our net income increased 27% to $2 9 million or earnings per diluted share of <unk> <unk> compared to net income of $2 three or <unk> <unk> earnings diluted share.
Share on an adjusted basis, which excludes the noncash amortization of intangible expense related acquisitions and stock based compensation expense adjusted operating income increased to 153% to $4 4 million compared to $1 seven in the same period last year and our adjusted EBITDA increased 85% to <unk>.
Five three.
From two nine in the same period last year.
Adjusted net income was increased 28% to $3 8 million or adjusted earnings diluted share of <unk> 11 for the third quarter and that compares to adjusted net income of $3 million or adjusted earnings per diluted share of <unk> <unk>. The same period last year International revenues. This quarter were approximately 16% of total revenues.
And that compares to 15% in the same period last year.
Year to date for the nine months period ended January 31 2022.
Our total revenues increased 12% year over year to 92.9.
$9 million compared.
And thats, primarily due to a 49% increases subscription fees to.
To 31 million, a 30 and a 30% increase in license fees and a 7% increase in services, partially offset by a 9% decline in revenues. So our adjusted operating income year to date was $10.8 million and Thats.
Representing an operating margin of 12%.
Compared to $5 1 million or 6% in the same period last year or.
Adjusted EBITDA increased 57% to $13 8 million compared to $8 8 million a year ago period and that represents an adjusted EBITDA margin of 15%.
Adjusted net income totaled $11 7 million or 34 cents per diluted share up from 7.3 or 'twenty two.
For diluted share the same period last year.
We're excited this quarter with the remaining performance obligation or RVO.
Which is which we referred to as backlog of $129 million, representing a year over year increase of 61%.
The strong growth in our <unk> reflects record bookings.
Over the past 12 months and an increase in the duration of our cloud agreements as customers continue to make longer term commitments to our platform.
When you look at our balance sheet, our financial position remains strong with cash and investments of approximately $114 8 million at the end of the quarter. This is an increase of approximately $14 million compared to the same period last year.
During the quarter, we paid $3 7 million in dividends and our days sales outstanding as of January 31, 2022 was 77 days and that compares to 65 days. The same period same period last year and this increase is primarily due to timing of billing and some delays in collections when compared to last year.
At this time I'd like to turn the call over to questions.
At this time, if you would like to ask a question. Please press the star and one on your touch Tom.
You may withdraw your question at any time by pressing the pound key.
And once again part of your question that is star one.
One.
And we'll take our first question from Matt Pfau. Please go ahead.
Hey, guys. Thanks for taking my question.
Good quarter.
I wanted to follow up on the commentary around the deal delays and perhaps it would just be helpful to get a little bit more detail on what's going on there in terms of what the drivers are and then what needs to happen to return to a more normal cadence from a deal closure perspective.
Yes, Matt.
Alan Thanks for the question.
It really is getting driven by the staffing concerns that we have experienced now for a couple of quarters in a row.
Our folks just don't have the resources to really get a project Goin' they've got adequate funding they've got budget, they've got the ability to spend they've got the desire to spend.
But until you can put boots on the ground so to speak.
They don't they don't they don't want to get committed to the contracts so they're waiting until they get critical roles filled.
People in place free up their calendar and get those projects started those are those delays are a little bit unpredictable, sometimes it's involving hiring on their side.
Yes.
Labor shortage market that we're in that timeframe to get people hired and on boarded there is a little unpredictable. So we got a couple of thoughts.
What happened to us at the end of Q2 and extended some of those projects into the beginning of Q3.
We didn't have nearly the order of magnitude this quarter, but there were some that we anticipated getting done that just didn't.
Didn't come to completion.
In the third quarter, but we're working hard at getting them done here in the fourth quarter and coupled made progress on a couple of those already.
So it's a little unpredictable I think.
People get back to their office, which we're anticipating we're going to do later in the spring and when folks get back in the air.
Sitting around the table and can work on some of these topics in person I think that will help bring some stability to it so.
Good good I too, Matt maybe maybe this summer we'll get more predictable.
Great that's very helpful and then.
I wanted to ask.
The concerns around inflation, and then potential resulting slowdown in the economy have been out there for for a while now but what are you hearing from your clients on that front is there any sort of economic concerns that are holding deals up and then obviously more recently with some.
Geopolitical concerns is that impacting pipeline or deal closures at all.
No not yet.
Geopolitical stuff as we all know is pretty fresh.
But.
Over three decades.
That we've been working on this stuff.
The best time for supply chain projects is when we're in a state of change.
Yes, we went from one that was booming and pandemic ridden to one that that may be the pendulum swung the other way.
An awfully quick fashion, but.
Times of change, whether it's on the downside downward spiral or an upward trend.
Good for our projects like ours, because people are grappling with how to deal with whatever is going on in the marketplace. So.
I don't think I don't think well see any impact on the short term.
If the economy really slows down and people tighten up spending then it may be a longer term impact, but nothing yet Matt that we haven't seen that that come in as a topic of discussion yet.
Got it and last one for me.
Sustainability initiatives that you have in AI and machine learning, becoming more important to companies achieving those.
Stain ability goes maybe you could just expand on what you were referencing in the press release and what Youre seeing in terms of sustainability initiatives driving demand for your software.
Yeah. So.
Forever the supply chains are really been driven by.
Economic delivery of goods, how to get the products to the right place at the lowest possible cost and make sure you get it there on time, that's been a long term one over the last five or six years has been maybe 10 years has been a more focus on the on the environmental impact which is one of these sustainability initiatives what is the impact.
<unk> and as more and more visibility comes to that.
Been less economic driven which is which is part of the environmental process, but more more around just <unk>.
Looking at the impact on the on the global environment.
So people are more adamant about that and then a more more recent issue has really come up around the use of labor and proper labor standards around the world. So that's an important initiative, our traceability product that we announced and deployed several times now we announced it earlier.
The year.
And it's really been Ben.
Getting taking hold people are acting on it now the regulations are coming into to play people get the customers are getting a handle on what they need to be able to do and we're helping them overcome some of those challenges. So that they can look back through the supply chain and make sure that their products are are being sourced responsibly.
With proper labor standards. So it's really come about its driving some initiatives. There are a number of standalone opportunities that we're working on that are on this traceability component alone and people are really trying to address those needs.
Responsible providers of products to the marketplace.
Great. Thanks, guys I appreciate it thank you Sir appreciate it.
Okay.
And we'll take our next question from Zack comment. Please go ahead.
Yes, hi, good afternoon, congrats on the strong results here in Q3.
Alan I, just wanted to touch a little bit more.
Some of the challenges you're seeing with with getting deals across the finish line and through these approval processes.
It sounds like some of the ones that were delayed in Q2 have now moved into Q3 and were able to close some of those but I was curious what you've really seen so far in Q4.
And what's really kind of giving you the confidence that you can still execute in this environment and put up the strongest ACP quarter here to end the year, yes.
Yes, we've got several contracts already under under our belt, we've got them executed so.
Not quite all the way through the first month, but we're getting there and then just just the magnitude of pipeline and the number of transactions in the phase we're in with those folks.
<unk> to getting contracts negotiated in the timing and the sequence of events too to get projects kicked off a lot of movement going on there so unless we get into something really crazy, which maybe will.
That always could happen, but it.
Just a momentum play that's out there the deals that are already done at the moment momentum play that we have around the ones that are that are very very active right now.
And timing fairly short term to get contracts completed.
Give us strong confidence that that will be able to hit that that level of performance.
Understood that's helpful.
Just considering some of the staffing shortages youre seeing at some of your end customers.
The delay to some of the project timelines here.
Is this really causing any sort of differentiated approach in how you go about trying to close some of these deals is there more of a focus on the existing base and trying to expand upon those relationships I am just curious how you guys are really trying to navigate through this challenging deal closing environment.
Yes, we've done a couple of things.
I wouldn't say, we've we haven't.
Changed our focus to internal.
More predominantly but existing customers more predominantly but we have some great projects underway with existing customers there they're dealing with one of the same issues that others traceability is a great example that most of that work is with existing customers, where they are expanding their footprint.
I'm trying to make sure that they've got good labor practices in place.
But.
So a couple of things we've done relative to the staffing challenges, they're facing we're putting forward proposals that we're offering up the labor to help backfill and.
And support.
Steps in the projects that may otherwise historically been done by the customer.
We are putting forward a statement of work that is very prescriptive and trying to minimize the impact on their labor internally. So that we can get those projects moving relative to the.
The burden that's on the customers to get that done we cant do it standalone, we still need time from from the client in order to really effectively deployed a solution, but we're trying to minimize the impact on their existing staff and minimizing the amount of work that they have to put in any given week.
So we're taking a couple of those actions to make sure we get there and then the other thing we've done.
And we've talked about this a couple of times is really just.
Breaking up the project into smaller bite sized chunks.
The customers feel better about taking a smaller project if they if they are looking at something thats going to be 18 months or 12 months to 18 months to deploy they're a little more hesitant than there are a lot more scrutiny going into launching those projects. So we've taken a path to say lets break it up what's the most important thing that we can.
First I will give you the biggest return on their investment and minimize the impact and get a project go and so we're.
We're going to see that play out in a few less.
Plus transactions that was my comment earlier, we had several of those in the fourth quarter of last year.
There is a chance that we won't have any of those or maybe one of those this quarter.
But we're going to have a higher flow of deals by getting them broken loose and then getting the commitments. So hopefully I cover that point for <unk>.
No absolutely I appreciate all the additional color on that Brian . So thank you for that and final question for me Alan is really around the planned investments that you talked about during the script whether that be more in person events that youre hosting more travel from from your internal team and even just hiring additional people.
And then can you talk about is there any particular area that youre looking to bolster your head count and kind of what are some of the ways you're looking to attract talent in what's been a pretty tough hiring environment.
Yes.
Couple of things there are going to be more in person events. It appears.
So marketing and customer conference events, those kinds of things are coming back people of flip them to be in person.
A few of our investor and analyst conferences, we've gone in person. So you get me back on the airplane as well looking forward to it by the way.
But so that's going to happen, we're not going to get back and I don't anticipate through the first half of next year. We'll go back to the level that we were prior to the pandemic, but certainly they were almost nonexistent in the last two years very minimal travel mostly internal travel.
But people are back on site, they're welcoming us back onsite, so we're getting more and more engagements going on there. There is the bigger impact is really going to be our investment in the in the organization we have.
In order to support our business plan, we need to expand in every area.
As we bring more subscription business and we need.
We're getting scale out of the cloud business, but we still need more head count in our cloud business to support them.
We've got some strong plans in R&D that we really want to expand our footprint. We think there are some some elements to invest in that that requires people to go develop our applications all deeper in some of these.
Areas. So we want to we're going to be expanding our R&D investment as well, we're going to keep that in line with our revenue growth as a percent of investment back in R&D, but that means we got to bring more head count in in order to do that.
We're expanding our sales team globally, we're expanding in every region, we're adding some staff here in North America, we're expanding into Asia, we're expanding into Europe .
Continuing there so we've got head Count addition, we want to pull into that area.
Are there to support that we got marketing investment we need to make in our in our backlog of services business, even though we can rely on our size.
Even when the size or doing a predominance of the work there is theres individuals we need from our team to support them in their implementation process. So we're going to be staffing up in our services business. So there is not an area of our business that's untouched from that investment standpoint.
The second half of your question was why are we successfully able to compete well first of all I think.
People Love this space, the fact that supply chain as is.
As a thriving growing business they want to be part of that supply chain to have an impact on the world.
We feel good that people our team members feel good about what we do through our customers to impact the world We live in <unk>.
Traceability sustainability environmental impact by improving the efficiency through our customers those are all exciting things to do.
We've got a great culture here at the company.
<unk> is.
Our staff is evidence of that.
It's a good working environment. So and then we're very competitive on our compensation structure. So we're able to attract people they're coming in they want to be part of our team and so far we've been successful at filling the open roles we have.
Understood. That's really helpful. I appreciate you taking my questions and best of luck here in the coming quarter Alright.
Alright, thanks, very much for joining us this afternoon.
And once again for your questions.
And one will move next to on your soda strong. Please go ahead.
Alright, Thank you for taking my questions and congratulations on a great quarter.
You're talking about a lot of hiring.
Yes.
Okay. Thank palin.
How do you see that playing in.
And how you're going to be able to offset that or upfront.
Well, yes inflation certainly is in there and well deserved the right talent deserves to have.
Requisite compensation on yes. So good question in that we have no choice, but to make sure that people are fairly compensated. So we're going to step up to the plate and make sure that happens.
That's going to have an impact but the.
The bottom line as we grow the business, we get scale through our efficiency.
Our services team for instance is working really hard at trying to improve the efficiency of.
Of the work, we do with our customers. This prescriptive methodology helps so even though on a dollar for dollar basis.
We have to make sure we've got fair compensation out there we can get a lot more work done.
Through those efficiency factors and our cloud business, we're getting scale.
Through the natural deployment.
It's not a one for one.
Expanding our customer base on a cost basis, so even though we have higher costs from inflation on the on where we do spend the money we get scale through our efficiencies that the cloud business. So we think it's a balanced budget, we can't as I mentioned in my commentary earlier, we don't.
Anticipating that we can grow EBIT at the same pace that we did last year because of some of these investments, we're making but not.
Not all of that is inflation some of Thats, just getting out over in advance of the of the business model.
We've got salespeople on board. This in the next couple of quarters, they're going to have an impact on the longer term. It takes six to nine months for them to be fully productive. So we want to make the investment now we'll put the money down and we'll get a return on that investment.
Okay. Thank you and then.
I'm also curious about the partnerships you mentioned in your press release.
Can you speak about what we can expect from them.
Ma'am.
Yes. Good question good follow up question.
The partners, we have are really really getting close with us and working hard to gain customer.
<unk> success, we're very much aligned with them on the objectives of the project. They are seeing the world. The same way, we are that efficiency and effectiveness of getting projects up and running and getting systems deployed.
Is important.
So we have very good alignment with with with their.
<unk>, our objectives and the prospects objectives, we've done some some some pretty good investments in and getting the education and on boarding process going so theyre consultants are getting trained and certified ready to go.
So thats been exciting they are willing to put the investment in there to get them to get them educated so that they can be very effective when they're on the job. So nice synergies they are introducing us to new opportunities as well that we weren't otherwise aware of so that's a nice spinoff of that but.
The primary effect is that we're successfully getting customers up and running and live in that.
That bodes well for for tackling phase, two which which is really the objective for breaking up these projects that we get phase one up and running.
And do that efficiently and effectively than phase II comes along much quicker and that's an exciting part of our growth model.
Thank you that will help for me.
Alright, Thank you and you have good afternoon evening for you by the way.
Thank you Brian .
And once more for your question that is star one pause a moment to allow further questions to queue.
Yes.
And it does appear there are no further questions at this time.
Alright, Chloe. Thank you so much for helping us today and thank you for all the participants on the call, especially with the follow up question. Some very good ones. We appreciate your time in joining US. This afternoon to discuss our earnings results and look forward to speaking to you again in the next quarter.
This does conclude today's program. Thank you for your participation you may disconnect at any time and have a wonderful afternoon.