Q2 2023 American Software Inc Earnings Call
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You may withdraw yourself from the queue by pressing star two. Please note. This call may be recorded I'll be standing by should you need any assistance. It is now my pleasure to turn the conference over to Vincent <unk> CFO American software. Please go ahead.
Good afternoon, everyone and welcome to American software second quarter fiscal 2023.
Our results.
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 our safe Harbor statement. This conference call may contain forward looking statements, including statements regarding among other things our business strategy and growth strategy any such forward looking.
<unk> speak only as of this date. These forward looking statements are based largely on our 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.
Number of factors that could cause actual results to 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 effect of competitive products and pricing and other competitive pressures and the irregular and unpredictable predictable pattern of revenues in light of these risks and uncertainties. There can be no assurance that the forward looking information will prove.
To be accurate. So at this time I would like to turn the call over to Alan for our opening remarks.
Thank you Vince I'm pleased to report that we delivered strong adjusted EBIT in our second quarter results on revenue that was mostly in line with expectations with the exception of our professional services revenue, which I'll cover in more detail later in the discussion.
We achieved a 19% year over year revenue growth in our subscription revenue and have maintained a very solid maintenance retention rate, thus delivering recurring revenue that represents 67% of our total revenue.
Total revenue in our supply chain management segment was up 5% year over year, our solid topline performance was accompanied by continued expansion in our adjusted EBITDA margin, both sequentially and year over year.
In regard to the decline in professional services, we principally saw the pullback in our it consulting business, which is more sensitive to macroeconomic conditions and started the decline coming into the fall.
In addition, we have experienced some delays and slowdown of projects in the supply chain segment, which we anticipate will continue into the new calendar year.
Once our clients returned from the holiday period, we expect to have a number of deferred projects starting up.
Furthermore, we are fortunate that we've been delivering more projects through our partners, which in turn gives us the flexibility to shift resources with market demands more easily.
During the first quarter, we announced our most recent acquisition the team that came over from starboard has been fantastic to work with the client community has embraced our strategy and we're seeing a growing pipeline for network design optimization, both as standalone opportunities as well as a strategic part of the integrated planning suite.
We see this acquisition to be everything we expected if not more in regard to a productive expansion of our footprint.
The rapid success on this one clearly leaves us with the capacity to pursue other acquisitions with an objective to find at least one more with a strategic fit for our portfolio before the end of our fiscal year.
As you're all aware the continuation of major geopolitical events inflationary pressures and the signs of the recession continued to stir some business uncertainty in our consumer goods and retail markets.
We are starting to see some moderation in the pipeline expansion and are seeing delayed start dates on a number of projects.
These delays have not only slowed services revenue, but also slow the capture of subscription revenue in the current fiscal year.
Given the current market conditions, we believe it's prudent to adjust our guidance for fiscal 'twenty three.
Due primarily to a reduction in our expectations for professional services, we are resetting our fiscal year revenue guidance to fall between $125, five and $127 5 million.
Given the delayed startup projects in our backlog, which impacts the timing of when we recognize subscription revenues, we expect to see recurring revenue approach. The low end of our original guidance and land between 80, and 85, five and 87 $5 million.
Finally, reflecting a more measured pace of investment as we await more clarity in the recessionary pressure on our clients. We are increasing our adjusted EBITDA expectations to a range of $18 million to $20 million.
Overall, we remain confident in the need for new.
New supply chain solutions in our target markets and we're competing effectively so we expect our growth to reaccelerate in the new year and.
In summary, we're pleased with the second half quarter results in the supply chain segment and expect to extend the performance improvements of our financial model during the remainder of this fiscal year.
Our pipeline is steady our competitive position is strong and we see long term need for transformative supply chain solutions, we remain as bullish as ever in our market opportunity.
At this time I'll turn the call over to Vince who will provide the details on our financial results. Thanks, Alan for the second quarter of fiscal year 'twenty three total revenues were.
31, 4 million and that was at a 1% increase from $31 2 million in the same period last year, primarily driven by subscription fees, which increased 19% year over year to $12 3 million, while software license fees were $1 7 million compared to <unk> 8 million in the same period last year, our professional services decrease.
11% to $9 6 million from $10 8 million on the same period a year ago. This year over year decrease reflects a 1% decrease in our supply chain unit and a 20% decrease in our it consulting business unit. The proven method, which was impacted by timing of project work.
Our maintenance revenues declined 5% year over year to $8 8 million, reflecting a normal fall off rate this quarter and total recurring revenues comprised of subscription and maintenance fees represented 67% of total revenues for the second quarter and that compares to 63% in the same period last year.
Our gross margin increased to 60% for the current period versus 59% in the same period last year, our subscription fee fee margin was 67% for both the current and prior year period, and excluding noncash amortization of intangible expense of 464000 in the second quarter our subscription gross.
Margin would have been 71% versus 74% last year and amortization of cap software was 690000 in the prior year period our.
Our license fee margin was 86% compared to 75% in the same period last year and our service margins decreased to 29% from 31% last year, primarily due to lower revenues.
Our maintenance margin increased to 82% for the current quarter compared to 81% in the prior year period.
Gross R&D expenses were 14% of total revenues for the current and prior year period, our sales and marketing expenses were 19% of revenues for the current quarter compared to 18% in the prior year period, and our G&A expenses were 19% of total revenues compared to 18% last year.
This was due to higher stock option incentive expense insurance computer it infrastructure and some recruiting costs.
On a GAAP basis, our operating income increased 3% to $8 million this quarter compared to $2 seven in the same periods a year ago net income decreased 37% to $2 1 million or earnings per diluted share of <unk> <unk> compared to net income of $3 three or <unk>.
<unk> per diluted share last year.
On an adjusted basis basis, which excludes noncash amortization of intangible expense.
A related acquisitions and stock based compensation expense adjusted operating income increased 16% to $4 4 million compared to $3 8 million. The same period last year adjusted EBITDA increased 4% to $4 9 million from $4 eight last year adjusted net income decreased 21% to $3 3 million.
Our adjusted earnings per diluted share of <unk> 10.
For the second quarter and that compares to adjusted net income of $4 2 million or adjusted earnings per diluted share of <unk> 12 in the same period last year.
International revenues this quarter were approximately 19% of total revenues and that compares to 16%. The same period last year, taking a look at the numbers year to date.
Total revenues increased 4% to $62 $7 million.
Due to a 21% increase in our subscription fees.
To $24 4 million license fees were $1 million professional services declined by 3% to $19 6 million and we had a 5% decline in our maintenance revenues to $17 $7 million adjusted.
Operating income for year to date increased 31% to $8 3 million and that represents an operating margin of 13% compared to $6 4 million or 11% margin in the same period last year, adjusted EBITDA increased 13% to $9 6 million compared to $8 4 million in the same period year.
Our ago, representing adjusted EBITDA margin of 15%.
Adjusted net income totaled $6 $6 million or <unk> 19 per diluted share compared to $7 8 million or 23 per diluted share in the same period last year.
We exited the quarter with our remaining performance obligations or RPE O, which is referenced to backlog of $123 million. Our total <unk> was relatively flat from the prior year due to shorter contract duration from recent deals.
Which as noted on our short term RPI actually increased 5% from the same period last year and it was up sequentially as well.
Looking at the balance sheet, our financial position remains strong with cash and investments of approximately $106 8 million at the end of the quarter.
During the quarter, we paid $3 7 million in dividends our days sales outstanding as of the end of the quarter was 78 days and that compares to 65 days. The same period last year and this increase is primarily due to timing of billings and delays in some collections compared to last year.
As Alan indicated were looking at our guidance we are raising.
Our adjusted EBITDA guidance, despite a reduction of revenue guidance, we provided at the beginning of the fiscal year. We now anticipate revenue in the range of $125 5 million to $127 5 million, including recurring revenue of $85 5 million to $86 5 million.
And then and as Alan indicated the decline of our revenue guidance was primarily due to $6 million.
Reduction in our expected expectations for professional services, which are the majority is attributable to our lower margin it consulting business.
For adjusted EBITDA, we are raising our guidance to 18 point.
18 million to $20 million, and that's up from $16 million to $18 million range.
Higher year, a couple of last quarter.
This reflects a more gradual pace of head count expansion across the company than we anticipated coming into the year.
At this time I would like to turn the call over to questions.
Okay.
At this time, if you'd like to ask a question. Please press star one on your Touchtone phone you may remove yourself from the queue at any time by pressing star Q.
Once again that is star and wanted to ask a question.
And we'll take our first question from Matthew Glinka.
I guess.
The commentary to be it sounds like you expect.
Some confidence to come back in and.
End of the calendar year, so did I understand that correctly and I guess, what gives you confidence that deals are going to start moving forward again.
As we move through the balance of this calendar year.
Hey, Matthew it's Alan Yeah. Good good catch that's exactly what we wanted to convey.
The reason for confidence is that in the dialogue with <unk>.
Prospective clients people that we're negotiating contracts with <unk>.
We had anticipated starting projects this time or a little sooner than now actually in a few cases.
And they've come back and said, we just got to take a pause we want to get through the holiday season, we're going to pick it back up in January .
Let's get ready and then we'll revisit it come the first of the year.
So.
That's what's given us that confidence.
We haven't seen wholesale cancellations are.
Understood.
<unk> described.
Delays.
<unk> been fairly specific and the conversations about the timing of when they want to.
Rally the troops and get going does that help.
Terrific. Thank you and then.
Follow up I know you touched on the Star Board.
So I guess, the beginning of the pipeline build for starboard, but can you go into a little bit more detail how was the reception with your existing customers.
At what point do you expect that to start.
Making it into sales or.
Having.
Standalone sales through that thank you.
Yeah, a little bit of both actually so we fairly early in our first quarter results, we talked about a few transactions that we completed.
We doubled down on that in the second quarter and.
We've done a number of new contracts already underway.
There were a couple of them that we're early in the <unk>.
In the quarter that we've already got up and running.
Limitation.
The timeline for those projects is rather rapid due to the product design and availability of in house data that we can provide so we've got them up and running.
Done a couple of more transactions, where there was integrated into the suite already and we've I would.
Since the last time, we spoke we probably tripled the pipeline out there. So overall I would say the reception is very strong and we are renegotiating a number of campaigns right now to to do outreach to our installed base and try to mine that that community for even more projects add ons.
And then leveraging it rather effectively and new campaigns, where we're trying to bring a new logo on board and using it as a competitive weapon and those those discussions as well so.
We're really excited about that the team is great. Our team that was here at Logility prior to the acquisition is.
As really adopted the suite. The R&D team has done a marvelous job of getting his prepared for integrating it into the platform and.
As I've mentioned in my earlier comments. We're just we're ahead of the game on that on that acquisition. So excited about that one.
Thank you.
The next question comes from well well Miller.
Hi, Thanks for taking my question. This is will on for Matt.
So following up your comments about clients pausing projects due to the holidays.
Previously you had mentioned.
Staffing challenges are contributing to sales cycle elongation or you still stainless or again is this primarily due to projects being delayed due to the holidays now.
No question well. Thank you welcome to the call. Thank you so much for joining us.
We still see some staffing challenges in there I think we're all we're all in the motive.
We anticipate coming into the new year that people are going to settle into their roles.
Number of people walking out the door will probably diminish the number of available resources on the market will probably.
Become a little more plentiful so we anticipate that our clients will be able to fill some of those positions and.
And they're doing a good job.
The reference to <unk>.
Delays that we experienced now are more related to just timing of projects.
Our clients, we focus on consumer goods, we focus on retail direct to consumer business as well through brand owners and this is the most important time of the year for them you come into the holiday season.
Watch TV you know whats.
<unk> begun for the consumers to come out so.
It's a all hands on deck kind of view, let's let's focus on finishing the year strong getting through the holiday season is from our client perspective.
And then we'll pick back up in the new year. So thats the kind of feedback we're getting right now so it's probably more related to economics and their desire to do the best they can in this holiday season.
Without any distractions on new projects sort of things. So does that does that help willow that gives some clarity my comments alright. Thank you that's definitely helpful and just one more question so sure.
The sequential increase to EBITDA margin expansion. So you mentioned moderating head count almost that intention.
Given the softer macro environment are you looking to pull back on any yes.
Well we are.
As you've come to know us youll get to know were conservative.
Conservative on all expenses. So we've been we've been scrubbing the ranks across the board on on anything we can look at to see where we are.
Successfully like everyone. We've moved to a hybrid model. So we need less real estate. So we've been able to reduce some of our lease our overhead costs and those kind of areas.
But head count as principal cost for us as a software organization. It's by far the number one cost. So we made a conscious decision to not accelerate as quickly as we had originally anticipated.
And it's just a cautionary move at this point, we've still got a couple of dozen open roles that were trying to recruit four youll see that happening you will be announcing new folks joining us as we go forward into the new year. So we haven't shut it down, but we're just being a little more conservative.
If if the recession hits and hits hard.
We'd rather be in a conservative posture, then be in a cutback mode.
Folks that we're bringing onto the team we think are very valuable and good contributors and will lend.
Lend credibility to our organization. So we want to make sure we hang on to the folks we hire so it's just a conservative posture, while we wait out the next couple of months and see what happens with the.
The retail market.
Yes.
Hey, great. Thank you.
And once again, if you'd like to ask a question Thats Star one and our next question comes from Zach Cummins.
Yes, hi, good afternoon, Allan and Vince Thanks for taking my questions.
Alan can you just talk about more of the overall pipeline on the subscription side of the business it sounds like.
Maybe there's been some moving parts going on there just curious I know much of the guidance reduction for this year is related to your professional services, but can you give us any insight into kind of the deal cycles and the pipeline on the subscription side of the business.
Sure Yes.
Made a quick comment in there. Thanks for clarifying question, its probably deserves a little more dialogue.
We are.
We're right now we're seeing our pipeline has got a balanced off it's kind of holding the line were not retracting at all.
So we've got a healthy pipeline still lying ahead of us.
Both for the coming quarter as well as for the year ahead. So we feel good about that we're still actively recruiting we got new stuff coming in we do have some things that are falling out both through closing and from cancellations. So.
<unk>.
Yes.
We're imbalance right now so we're not growing and expanding the pipeline, but we're we're keeping we're keeping the pipeline steady now with that I think is worthy of noting that.
This is the time of the year win win our perspective clients are working on their budgets and we usually see an uptick in activity. After the holidays, we start the new calendar year, which is the fiscal year for most companies.
They've got the approvals on the budgets they got out projects authorized and all of a sudden the.
Dust off from the holidays come back and get to work and we usually see a pickup in the in the pipeline. So I would say that probably.
Probably in spite of what we're seeing right now the most important time period is going to begin to the January February time period, and that will be a much stronger indication of the calendar year ahead for us, but we're confident there is still a lot of good dialogue.
Still a number of folks that are saying give me a few more weeks or give me another month, and we'll know where we stand on budget.
So we feel we feel good which is why we commented earlier on about the strength of this market is still are still there.
Demand will be strong.
It's a timing factor.
Understood that's helpful.
I know, it's a non core part of the business but.
Can you dig a little bit deeper into kind of the decline that we've seen and the proven method business is it a matter of just lower volume coming from some of your larger customers or what are some of the dynamics that are impacting that business.
Yes turnover of projects was the primary thing and not a not a replenishment of those.
We've actually been very active with the team trying to expand or are the number of clients that we have so that we have less density and less reliance on any given few so we've got an expanded footprint of clients that are out there. We've also had a real push on improving the margins in that business.
We don't think it needs to be a supply chain relative margin, but we want.
Healthy margin for our consulting business and the team has done that effectively.
Vince and I were on a call with them earlier today had some good dialogue about prospective opportunities that are expanding and folks similar to what I was saying a few minutes ago quite frankly, starting to pick up the pace and then anticipating bringing.
Some new resources online in the new year. So we don't think we will see a significant continued decline in that business, but it was a bit of a level set coming into the fall as as people kind of turned over projects that they had been working on.
Understood. That's helpful and final question for me is is geared towards events in terms of the subscription gross margin. We saw in this quarter kind of a downtick in both sequentially and year over year was there any onetime impacts here in this quarter or what are some of the puts and takes for subscription gross margin.
Yes, Zach yes, sometimes.
There is some investments on the hosting business that we have to make.
With as you are to kind of step up the environment.
Sometimes that does the timing of that doesn't correlate to when we start taking revenue on those customers. So theres a little us short term kind of.
Adjustment that goes on there. So we anticipate that the margins will start to pick up in the subsequent quarters.
Got it that's helpful. Thanks, again for taking my questions and best of luck here with the rest of the year.
Thanks, <unk>, thanks for joining us this morning.
And our last question comes from Ias that Sean.
Alright, Thank you for taking my questions.
And then have been addressed already but I'm just curious you're talking about delaying projects, but do you also see him on duration and the size of the projects or is it just the matter of a delay at this point.
Thank you for joining us no material change in the size of the projects or the scope the relative rate of pay in that.
We actually have.
<unk> in the backlog that are that are.
Under contract and slated to start in January so that was part of the impact that we had on the subscription revenue.
So those will those will formally kick off and get running coming into the new year. So it's really it's a timing topic not so much a size or scale.
Okay. Thank you and then in terms of Capex, it ticked up a bit.
In the first half.
Well have you been investing in and how should we think about that for the remainder of the year.
Yes.
This is Vince we had two things, we're actually building out our sixth floor to.
To get ready to move our R&D folks out there to give them a better working environment. So that is one of the things we're investing in and the other thing is we're working with Microsoft to.
Restructure some of the relationship as far as how we pay pay for some of the services. They do where we actually did a capex spend and bought some licenses as opposed to.
Having the cost in the cloud.
So that's why we did that is we did that in the first quarter. So that's those are those two events are pretty much one offs, so going forward I would.
I would anticipate the capex spending to go down significantly.
Okay.
Okay, great that was helpful.
Thank you.
Yes.
And it appears we have no further questions at this time I will now turn the program back over to our speakers for any additional or closing remarks.
Well. Thank you everyone for joining us we appreciate the time this afternoon and we look forward to speaking with you again in a few months have a good evening.
Thank you ladies and gentlemen. This concludes today's conference you may now disconnect.
Okay.
Okay.
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