Q2 2020 Earnings Call

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Reminder, this conference is being recorded I would now like to turn the conference over to our host Ms. Kara Bellamy. Please go ahead ma'am.

Before we begin I'd like to ensure that everybody understands.

Differ materially from those anticipated.

Thank you Kirk good afternoon, and thank you for joining todays call to discuss Acuities fiscal 22nd quarter results.

Joining me on the call on Pam Lopker, our president and Daniel lender Chief Financial Officer.

Our second quarter stores hit guidance for subscription and overall revenues, but our results are down over the same period last year, largely due to lower services numbers.

The quarter also delivered strong growth in cloud bookings.

Ill now turn it over to Daniel to discuss the financial results.

Oh.

Nearly $26 million a new club business closed in Q2 was on track with our targets, but did not sufficiently exceed them to make up for the Q1 shortfall.

For the second quarter currency negatively impacted total revenue by $1.4 million compared with last year and by 400000 for the fiscal 21st quarter.

Our bottom line was negatively impacted by 325000 compared with the prior year and negligible compared with the first quarter.

My discussion today about growth rates are given on a constant currency basis, unless otherwise noted.

Second quarter revenue totaled $76.4 million compared with 84.5 million last year, primarily resulting from declines in our professional services business and license sales.

While we expected services revenue to decline the decline was higher than anticipated as existing customers are opting to convert into the cloud without entering into significant upgrade projects at the time of the conversion.

As we've discussed previously our license revenue is generated from existing customers, adding users or modules.

This quarter as expected license revenue declined due to continued conversion to the cloud.

But it was further impacted by the slowdown in manufacturing.

Subscription revenue grew 17% and accounted for 34% of our business for the fiscal 2020 second quarter.

Over the last 12 months, our subscription billings grew by 23% with a three year CAGR of 32%.

Subscription margins for the quarter were fairly consistent at 62% versus 63% a year ago.

For the remainder of this fiscal year, we expect subscription margins to remain at current levels or to improve slightly.

As we continue to make investments in support of our acceleration in cloud growth and the related infrastructure.

During the quarter, we signed an agreement to partner with Alibaba to service, our China market the year that public cloud solution.

Our medium term targets remain to increase subscription margin by one to two percentage points per year.

Maintenance and other revenues were $29.6 million compared with $30.6 million.

On a performance basis revenue was down 400000 with a decline relating to conversions.

Five conversions are expected to continue impacting our maintenance revenue line, but as a reminder, the conversion opportunity is generally three times maintenance, providing acuity with additional growth potential and a higher dollar margin on an ongoing basis.

Professional services revenue was $17.4 million compared with $26 million for last years second quarter.

Prior year revenue included a large multi site global instrumentation project services margins were Nick negative, 4% for the second quarter, which was a slight improvement over the first quarter.

Despite our lower services revenue in the quarter and lower forecast for the remainder of the year, we have implemented a number of cost saving initiatives and continue to expect breakeven services margins for the full year.

License revenue for the fiscal 22nd quarter was three and a half million compared with 5.6 million last year in fiscal 20 period. There was one deal greater than 200000 compared with seven last year.

Total revenue by vertical for the second quarter was automotive 35%.

Hi Tech and industrial 35%.

Consumer products, and food and beverage, 16% on life Sciences, 14%.

By geography total revenue was North America, 48%, EMEA at 29% Asia Pacific, 15% and Latin America eight.

Our EMEA region is recovering nicely, we saw strong sales execution from them in the quarter and the future pipeline continues to improve we have some additional terrifying remaining whether by were pleased to see some very positive momentum.

Gross margin for the second quarter and improved to 53% from 52% last year.

Sales and marketing expense was $20.2 million or 26% of total revenue versus $19.5 million or 23% of total revenue for last years second quarter.

Our marketing activities remain on track and we're still planning on adding some headcount throughout the remaining of the fiscal year.

R&D expense was 13.9 million for fiscal 2020 second quarter, compared with 13, and a half million a year ago.

The increase related to our ongoing investments in advanced technologies.

As a percentage of total revenue R&D expense was 18% this year and 16% last year.

General and administrative expense was $10.4 million or 14% of total revenue compared with $9.4 million or 11% of total revenue last year.

The increase is mainly a result of moving our order processing employees from sales and marketing to DNA.

Stock compensation expense totaled $3.2 million for the fiscal 22nd quarter and $3.4 million last year.

This brings our GAAP pretax loss to $3.4 million compared with GAAP pretax income of $2.6 million for last years second quarter.

non-GAAP pre tax income was about breakeven versus $5.9 million last year.

Income tax expense amounted to $9.9 million for the second quarter of fiscal 2020 compared with one and a half million last year.

The fiscal 2020 period included a onetime noncash accounting adjustment of 10 million attributed to the placement of our valuation allowance.

Mainly relating to the Companys, Ireland deferred tax assets.

Recent losses generated in connection with the company's continued transition to an investment in a cloud model require that a valuation allowance be placed in certain tax assets for accounting purposes. If you recall, we place a similar valuation allowance on our us deferred tax assets in the fourth quarter fiscal 17.

As far as revenue continues to grow we believe profitability will increase over the long term and that our deferred tax assets will ultimately be realized.

Due in large parts to the valuation allowance we placed this quarter on our deferred tax assets. Our GAAP net loss was $13.3 million or 69 cents per class a share and 57 cents per class B share.

Last year GAAP net income was $1.1 million or five cents per diluted class a shares and diluted class b share.

We ended July with approximately $142 million in cash and equivalents compared with approximately $139 million at the end of fiscal 19.

Our cash flow from operations was $14.2 million for the first half of fiscal 20, compared with $9.1 million last year.

Accounts receivable was 41 and a half million at July 31, compared with 54.3 million a year ago, mainly due to lower services billings.

Days sales outstanding using the Countback method was 49 days for fiscal 22nd quarter versus 53 days for the same period last year.

Our short term deferred revenue balance at July 31 was 94.4 million.

Versus $91.2 million, a year ago, including $32.8 million of deferred subscription versus $27.8 million.

$59.6 million of deferred maintenance versus $61.7 million $1.8 million of deferred professional fees versus $1.6 million and 200000 of deferred license and other versus 100000.

As a reminder, our maintenance contracts are billed annually.

While subscription contracts can be built either annually or quarterly.

I'll conclude my remarks, with a third quarter guidance.

With our customers priority of converting to the brought to the cloud prior to upgrading their systems.

We expect professional services revenue to be flat for the second half of the year compared with the first half.

Additionally, the effect of the manufacturing economy slowdown on our license business.

Which is predominantly generated from existing customers, adding additional capacity as they grow.

He is reducing license revenue expectations for the remainder of the year, while subscription bookings are at record levels, both in number and value. The timing of the deals has had an impact to full year subscription revenue expectations.

Therefore, we are updating our guidance to reflect these changes.

For the 2023rd quarter, we're anticipating revenue between 78 and $79 million.

Including subscription revenue of 27, and a half to $28 million.

GAAP pre tax income of about breakeven to a million loss, a non-GAAP pre tax income of $2.2 million to $3.4 million.

Our full year guidance now calls for revenue between 313% to $118 million, including subscription revenue of $108 million to $109 million.

GAAP pretax loss of $4 million to $5 million and non-GAAP pretax income of $6.7 million to $8.7 million.

With that I'd like to turn the call back to you on pump.

Okay. Thanks Daniel.

As discussed earlier, we have seen our strongest ever first half cloud bookings performance and while our second quarter bookings exceeded our internal targets didnt fully close the revenue gap from Q1.

However, all cloud funnel remains strong and continues to grow and is up 37% from the same time last year.

We had 24 cloud deals in Q2 with 13 coming from new customers balancing out the Q1 swing that we saw towards conversions.

And as we've stated in the past we do continue to see about a 50 50 deal mix between conversions and new customers on an annual basis.

On our last call we discussed the increased emphasis we're placing on winning new customers and taking market share.

This paid off in some substantial deal wins against most of our major competitors this quarter.

With our newly launched adaptive VLP and low code No code enterprise platform, we see significant opportunity to keep that competitive mentioned going.

With an accelerated to take up a fast track migration to the cloud we are seeing less short term demand for large professional services projects. As a result, we have advanced our strategy of growing our partner community on a global basis, passing more of the services business into our ecosystem.

Ill direct services business will continue to grow over the long term, but with a greater emphasis on the use of partners. We believe this strategy combines the benefits of QST Global project management, while giving our customers greater choice and flexibility.

Looking at the quarter end from a geographic perspective, it was very pleasing to see EMEA performed strongly bringing in our largest cloud deal for the quarter and a good win against our largest global competitor.

We turn the corner in the region now from a sales performance perspective, and our cloud funnel there is growing well.

North America also had a good good quarter from a cloud bookings perspective, and subscription revenues were up by license and services revenue was down over the same period last year.

Latin America saw a slight increase in subscription revenue similar to North America licenses and services were down also.

Cloud bookings in Asia Pacific was strong with total revenues in the region flat year over year.

Looking at our verticals our largest steel during the quarter was in the automotive sector and we also had good performance in life Sciences, the balance of the business was spread over industrial and food and beverage.

Our quality management division performed particularly well with its strongest booking performance ever combining some strong competitive wins with the existing customer expansions.

On the solution side of the business the pipeline as customers working with QST adaptive VLP, formerly known as channel Islands continues to build.

During the quarter, we hosted a launch global customer who brought 40 people here to Santa Barbara for weak weather pen testing out our enterprise platform capabilities as a low code no code alternative to customizations.

The results were very successful with great comments and feedback from our customer who is now working on a medium term plans for replacing customizations with the platform.

During the quarter, we also announced an agreement with Alibaba in China.

To run Q 80 in the Alley cloud, we believe the strategic partnership forms the foundation on which we can drive significant crowd cloud growth in China.

This also represents the first step in our strategy to become a platform agnostic provida, giving flexibility to customers who are on QST across the selection of a public cloud providers offerings.

In acuity labs, we continue to invest R&D resources in digital transformation and the application of advanced technologies to support efficient and effective manufacturing processes.

Of particular interest in this quarter, we started work on a project integrating Q 80 with warehouse automation and robotics.

We also worked on a number of use cases related to the application of artificial intelligence and machine learning.

I'll now hand, the call over to Pam.

Thanks, Sam Tom.

And then Tom mentioned Q2 was an excellent quarter for acuity and cloud bookings.

Like 24, new cloud deal and the highest Q2 bookings ever.

I was especially pleased to see the Rx region Roaring back this quarter lift on largest cloud bookings of the quarter.

Most of our new customer cloud wins this quarter were against S&P. However, we did see a Max next year on the different competitors and I will point to al Sam as I highlight our fans.

Europe had the large competitive win against S&P at a large automotive supplier.

The customer data functional benchmark lucky not just that capability, but also speed to implement credibility in the industry and intimacy with the customers turn engagements.

Our industry knowledge significantly lower risk factor and customer intimacy, where the deciding factors on this deal.

Another large win against key competitors less for our supply chain and quality management solutions for you asked headquartered early entrants into the electric truck manufacturing space, a combination of our superior functionality and agility health plan.

Three years ago, we sold to a startup med device company earlier. This year. They were purchased by you had cornered large floodwall life Science company lets a different ERP strategy.

Our proven success at this first expand the fast expanding startup convince them to go against their legacy strategy and expand the Lady foot print engine new sites.

This quarter. We also received the first called order from a large multinational UK headquartered honor.

Part supplier with a history of acquisition they had several ERP systems and selected.

Cloud as their corporate standard.

Our primary competitor during this deal with M and we won due to our superior functionality and dedication to the automotive parts industry.

We also had several smaller life science linzess corner, taking share from a long list of competitors, including Apple core TSYS, Prowl, Nestle, FCTA and and for our customers told us. They selected Q 82, due to our life science experience support for regulatory compliance in the Clal and easy to use solutions.

Our ability to deliver adapters.

Cloud solution for our global manufacturing customers, enabling their agile business processes and unprecedented passive entry level lipski is creating a paradigm shift and manufacturing ERP.

And I'm delighted to say that Q AG is leading the way. Thank you back to you on time.

Thank you Pam so looking forward our investments in sales and marketing are paying off in terms of lead generation and new business acquisition in the cloud.

Our lead flow volumes remain ahead of the targets, we set for a marketing lead generation teams, our cloud bookings performances at record levels and our pipeline continues to grow.

Manufacturers need for rapid response to change continues to increase.

Q 80, adaptive applications give all customers and prospects cloud solutions, providing them the ability to adapt in real time.

Our total addressable market for cloud solutions continues to grow and our market position is improving.

Short term risk remain a factor, including uncertainty facing manufacturers around towers negotiations in global geopolitics.

This has led to slower growth in contraction in some markets may play a part in future deal cycles. So far though we haven't seen a material effect on our pipeline, we don't expected to affect our longer term goals.

In summary, our sales and marketing efforts are paying dividends, we're winning business from competitors and we're aggressively driving our cloud business with substantial market opportunity in front of us were exceptionally well positioned to meet our long term objectives.

Greg we're ready to take questions from analysts. Thank you very much Sir ladies and gentlemen, if youd like to ask a question. Please press Star then one on your telephone keypad, you'll hear a tone, indicating you have been placed in Q and you may remove yourself from Q at any time by pressing the pound key if you are using a speakerphone. Please pick up the handset before pressing the numbers. Once again if you have a question. Please press Star then one at this time.

And our first question comes from the line of advanced surgery with William Blair. Please go ahead. Your line is open.

Hey, guys. This is dillon on for Bill on.

I guess I just kind of wanted to start off I know you mentioned from macro geopolitical perspective, you're not seeing any effect in the pipeline.

But I was wondering if there's anything you're seeing or hearing like on a vertical specific or region specific area.

You guys are kind of continually hearing and then how does this affect your approach into the second half.

And then further.

All right. Thanks Dillon, so yes, as you say at the macro level, we're not really seeing any affect them.

We're really pleased with the way that the pipeline and funnel is developing actually.

And that really translates down to verticals and Geo.

There's a mixed picture so we hear about global slowdown in automotive, but subsectors of automotive are actually increasing production. So electric vehicles for example.

And that seems to be reflective of what's happening for us is that you know.

That pipeline continues to grow deals continue to be that.

That said we are watching very closely is the events unfold.

But so far we continue to make the investments in sales and marketing they continue to pay off and we're not expecting any short term effect based on what we see today.

Great. Thank you that's yes, that's really helpful. And then I know you kind of touched on the M&A side as well sounds like things are really picking up.

There, but I guess outside of the new sales hires and focusing on that pipeline what kind of types of processes are you guys implementing here.

To address some of the challenges that you've seen in that it sounds like there are leading to to kind of starting to pay dividends I know it's early in the cycle.

But how does this kind of trending versus your expectations.

Yes, so it's a.

On the last call we talked about my take a few quarters for us to get back we wanted to be.

That's that's happening a little bit quicker than we expected, which is really great to see on the funnels growing significantly there.

I think I asked you to putting in strong management processes, particularly around consistent application of our global sales process. That's something we're doing across the board right now, but thats been a real emphasis for us in EMEA.

We've made some changes in our marketing organization, there as well and enhance that and so you put all those things together and that starts to come good.

That said as Daniel said, we've still got a little bit more hiring to do and we expect to continue that through this year.

And look forward to that pipeline continues to grow there.

Great. Okay, and then last one from me.

Just in reference to that pipeline any additional color.

Around how subscription heavy is the pipeline looking and then are you guys also.

Currently seeing or expecting to see any kind of change around the deal size or duration of the deals anything like that thank you.

Sure.

So the the quotes I gave on our pipeline and the growth of 37% of the same period last year Thats pure subscription funnel.

And so that's a very strong subscription cloud business pipeline that we have.

What's also pleasing is that were seeing an increasing number of very large deals within that and those are both sourced from.

New customers as well as conversions and so we really like the way that that shaping out right now it's nicely balanced and we've got a good mix of some very large deals with some.

More modest sized deals in there as well so that gives us a little bit more coverage.

So yeah, we really like the way that's going.

Great. Thank you for taking my questions.

Thank you Bill.

And next return to line of Zach Cummins with B. Riley FBR. Please go ahead.

Hi, good afternoon. Thanks for taking my question. So I know thats been touched on a few times in terms of expected headcount investments in the back half of the year for sales and marketing can you provide a little more color around where exactly that headcount investments going is it more so on quota carrying reps or is it more so on the lead generation side.

Sure. Yes. So we've added about 60 heads so far through this year.

In the plan right now we're looking to add about 20 to 30 more.

Some of that's in direct sales executives some of that's in moral support role so kind of business consulting Presales engineers and some marketing roles there.

And we think that'll continue through this year and we think that will set us up well for our growth plans as we head into 521. It doesn't mean, we'll stop hiring but the rate at which we do that is likely to slow down as we head towards the back end of this year.

Understood Thats helpful. And then in terms of the professional services group. It sounds like many of your customers are now electing to.

Convert over to the cloud before taking on any sort of large professional services engagement.

Over the longer term should we expect a bigger portion of professional services revenue will continue to shift over to partners or how should we think about the longer term professional services business.

Absolutely. So we've been thinking for a while and had a strategy of moving and growing our ecosystem and moving more of that business to partners.

The rate at which customers are electing to move into this cloud first and then do the upgrades is caused us to accelerate that strategy or advances.

So yes, you should expect to see the services business come down as a proportion of the overall revenue acuity, but it will continue to grow as we grow of course, but you will see more of our partners contributing to that over time.

Understood and then in terms of the really strong cloud bookings in the first half of the year and it sounds like there is still plenty of opportunity out there at this point in the funnel can you talk about your confidence level in re accelerating that subscription revenue towards your longer term, 30% target.

Absolutely we are very confident that right now.

We just look at the way that the the funnel unfolded in particularly in the second quarter and the record performance. We've had as I said earlier when we look at the balance of deals that we have in the funnel of prospects Thats, a really healthy mix of new customers, taking market share from competitors and conversion of existing customers and further expansion in those customers too.

So we really feel good all things being equal that we're well placed to hit those long term targets as we get towards the end of this year.

Understood and just one question for Daniel in terms of the subscription margin for the quarter was down on a sequential basis can you talk about the driver for that lower subscription margin in this quarter.

Yes, so there's no with with the accelerating some of the acceleration in deals that were seeing there is some investments that we need to do from an infrastructure standpoint that sometimes from a timing from a timing perspective get ahead off of that revenue component.

So that has.

A bit of an effect there.

We don't expect.

The Alibaba.

Cloud to have a very material.

Effect in the short term, but that does put just a little bit of pressure there as well as its a brand new.

Central for us.

Understood Thats helpful. Thanks, again for taking my questions and best of luck in the second half of this year.

Great. Thanks.

And again, ladies and gentlemen, if youd like to ask a question over the phone lines. Please press Star then one.

And our next question comes from the line of his truck, who fruit with Sidoti and company. Please go ahead.

Hi, guys. Good afternoon, Thanks for taking my question.

Daniel you briefly touched on this in the last caller.

On the Alibaba deal side can you just can you explain what the long term.

Consequences of off using Ali cloud for your acuity Jain of services.

Hey, it's Michael saw with you all I'll jump in and answer that.

So there's a couple of straight answer that first from a China perspective.

We really expect that to be a significant boost to our capability to grow our cloud business that particularly with.

Chinese headquarter the local companies there.

It was a low sensitivity of hosting date or outside of China, and so having a trusted name like Alibaba Chinese company like Alibaba there.

Well the data will be stored there I think is a significant opportunity for us and of course, they are very well known very well trusted in that market too so thats great.

The other kind of strategic strand to that for us on a global basis is that this is really.

Our first step as we look to become as I said earlier platform agnostic, we're driving to a point, where you have the acuity application would be available.

Cross selected providers cloud platforms.

And that could those choice customer is going to make a choice based on economics or maybe some of the technologies and add ons that some of those cloud providers have so this is really the first step in that journey of proving that out.

Okay.

I'm sorry go ahead.

I'll just add to that we use that tool to kind of extract.

For instance, lets me different cloud provider environment. So that were doing everything the same regardless of what cloud environment.

Yes, sorry, non certainly we don't believe we'll have increased cost and time.

Service to your bottom.

And then secondly, do you think the ability to do that is really important to our customers, particularly on.

Regions like China.

Okay and in terms of your cloud funnel.

You guys mentioned that it was one of them a record for the first half of the year in terms of cloud funnel and bookings.

Could you give me a sense for like where do you see that growing and the long term because considering you guys you know.

Jim Joe guidance for the rest of the year slightly.

Yeah sure. So the the trimming an adjustment as really based on a timing effect of so whilst we had record bookings in the first half.

I was more skewed towards Q2, we had we were little bit lower against our internal focus on Q1.

So really that timing effect is what's causing the adjustment for this year.

Yeah as I said earlier, we think for the long term and our goal is still to push that.

30% year on year growth in subscription.

You see that will be kind of at a run rate of that by the end of this year and then that will flow through in the next year.

All right. Thank you so much.

Welcome. Thank you Chuck.

Next return to line of Adam for work with Stifel. Please go ahead.

Great and thanks for taking the question is really nice to hear about the list of competitive wins and it was just maybe you could dig a little deeper into what are the key product or even marketing messages that are helping on so much more competitive against the broad let you mentioned thanks.

Yes, it does.

Really our move to our adaptive ERP platform.

Hence really helped Darwin's customers love the new user interface the ability to have allowed no culloden buyer men.

Extreme simplification.

Currently now for their companies and for ICICI resources. So it's been just a very very exciting time or.

Customers are thrilled about it and similarly.

Absolutely.

Great. Thanks, so much.

Thanks.

Thanks, Adam.

I will now turn the call back to and turn for closing remarks.

All right. Thank you Greg so thank you everyone for joining todays call. We look forward to updating you in November on our third quarter results. Thank you very much.

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