American Software, Inc.

Good day, everyone, and welcome to today's American Software Third Quarter Fiscal Year 2020 Preliminary Earnings Results Call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question and answer session. You may register to ask a question at any time by pressing the star and 1 on your touchtone phone. I will be standing by if you should need audio assistance, and it is now my pleasure to turn today's conference over to Vince Klingas, CFO of American Software. Please go ahead.

Thank you, Rylan. And good afternoon, everyone, and welcome to American Software's third quarter fiscal 2020 earnings conference call. On the call with me is Alan Dowell, president of American Software. I will review the numbers, and then Alan will give some remarks after that. But I would like to remind you that this conference call may contain forward-looking statements, including statements regarding, among other things, our business strategy and growth strategy. Any such forward-looking statements speak only as of this 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. There are a 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 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 taking a look at the third quarter of fiscal 20 compared to the same period last year, our total revenues increased 13% to $30.6 million. for the current quarter, and that compares to $27 million the same period last year. What caused the increase was subscription fees, which increased 57% to $5.8 million for the quarter compared to $3.7 million the same period last year. And also our software license revenues increased 115% to $3.7 million for the current quarter, and that compares to $1.7 million the same period last year. Our cloud services annual contract value, or ACV, increased by approximately 58% to $25.5 million for the current quarter, and that compares to $16.1 million the same period last year. Our professional services and other revenues increased 1% to $10.3 million for the current quarter, compared to $10.2 million the same quarter last year, and that is due to a 12% increase in our supply chain management unit due to stronger bookings in recent quarters and our backlog remained solid heading into Q4. This was partially offset by a 9% decrease in our IT consulting business unit as a result of timing of project work. So maintenance revenues decreased 5% to $10.8 million compared to $11.4 million. Our combined recurring revenue streams of maintenance and cloud services were 54% of total revenues in the current quarter compared to 56% in the same period last year. This decrease is due to a large increase in license fees this quarter. We believe the trend is to a higher percentage in the recurring revenue as we transition more to the cloud and the revenue model. Looking at costs for the quarter, our overall gross margin was 57% for the current quarter, and that compares to 52% in the same period last year. Our license fee margin was 57% in the current quarter compared to a negative 7% in the same period last year, and that's due to higher license fees. Our subscription fee margin increased to 66% compared to 62% for the same period last year, and that's primarily due to the increase in subscription revenue. Also, one thing to note, in the third quarter of 20, our gross margin without non-cash cap software allocation would be 74% compared to 73% in the same period last year. Our services margins increased to 25% compared to 24% in the same period last year, and that's due to a higher portion of our professional service revenue coming from our higher margin supply chain business unit. Our maintenance margin increased to 83% for the current quarter, and that compares to 82% in the same period last year due to cost containment efforts. So looking at operating expenses, our gross R&D expenses were 15% of total revenues for the current period compared to 18% in the same period last year. As a percentage of revenue, sales and marketing expenses were 18% of the revenues compared to 17% in the prior year, and that's primarily due to increased variable compensation from higher sales and an additional headcount compared to last year. G&A expenses were 17% of total revenues for the current period, and that compares to 16% in the prior year quarter, primarily due to increased variable compensation and, to a lesser extent, higher insurance and legal fees. So our operating expenses increased 32% to 2.8 million for the current quarter. That compares to 2.1, the same period last year. Our adjusted EBITDA, which excludes stock-based compensation, increased 16% to 5.3 million for the current quarter, compared to 4.6, the same period last year. Our GAAP net income increased 43% to 3.3 million, or earnings-polluted share of 10 cents for the current quarter, compared to a net income of 2.3, or 7 cents, earnings-polluted share last year. Adjusted net income was $4 million or adjusted earnings diluted share of $0.12 for the third quarter, and that compares to net income of $0.032 or $0.10 the same period last year. And these adjusted numbers exclude amortization of intangible expenses related to acquisitions and stock-based compensation expense. International revenues this quarter were approximately 19% of revenues compared to 17% in the same period last year. Looking at the total revenue year-to-date, it increased 5% to $86.2 million compared to $82.4 million the same period last year. Subscription fees were $15.8 million year-to-date, and that's a 54% increase compared to $10.4 million the same period last year. License fees revenues were $6.5 million, a 20% increase compared to $5.4 million the same period last year. Services revenues decreased 3% to $31.3 million year-to-date compared to $32.2 last year due to lower revenues from TPM, and this was partially offset by a 10% increase in our supply chain business. Maintenance revenues decreased 6% to $32.7 million compared to $34.6 million last year. Looking at costs for the nine-month period, overall gross margin increased to 55 percent for the current period compared to 52. Our subscription fee gross margin decreased to 57 percent year-to-date compared to 63 in the same period last year. And that's due to increase in allocation of amortization cap software costs of 2.4 million compared to about 900,000 in the same period last year. So if you exclude those non-cash cap software amortization costs, it would be 72% gross margin for both the current year to date and the same period last year. Our license fee margin increased to 39% from 2% last year due to the higher license fees, and our services margin was 27%, up from 24% in the same period last year, and that's due to increase in service revenue from our higher margin business. Maintenance margin was 83% year to date, and that compares to 81% percent of the same period last year. Total R&D costs were 16 percent of total revenues for the nine-month period compared to 17 percent the same period last year as a percentage of total revenue sales and marketing expenses increased to 19 percent for the current period compared to 18 percent and that's primarily due to higher variable compensation and increased headcount. G&A expenses were 17 percent of revenues for the current year-to-date period and that compares to 16 percent the same period last year and up, and that's higher due to higher variable compensation and, to a lesser extent, legal and insurance costs. So our operating income year-to-date increased 5% to $4.5 million compared to $4.3 in the same period last year. Adjusted EBITDA year-to-date increased 9% to $12.3 million compared to $11.2 million in the same period last year. GAAP net income increased 26% to $6.2 million or 19 cents earnings polluted share compared to net income of 4.9 or 16 cents earnings polluted share last year. Adjusted net income year to date was 8.6 or earnings polluted share of 27 cents and that compares to net income of 7.8 or 25 cents earnings ETFs last year. International revenues year to date were 20% of revenues and that compares to 19% in the same period last year. Taking a look at our balance sheet, the company's financial position remains strong with cash and investments of approximately $96.3 million at the end of January 31, 2020, which increased by approximately $12 million since the same period last year. And currently during the quarter, we paid $3.5 million in dividends. Some other aspects of our balance sheet are billed accounts receivables 21.2, unbilled is 2.4 for a total of 23.6. Our deferred revenues were $34.4, and our shareholder equity is approximately $120 million. Our current ratio was 2.6 as of the end of January 31st, 2020, and that compares to 2.7 in the same period last year. And our day sales outstanding as of January 31st, 2020 was 70 days during the current period compared to 78 days in the same period last year. At this time, I'd like to turn the call over to Allen Dowell. Thank you, Vince.

Overall, we had a very good quarter and are pleased with our team's achievements and the company's performance year-to-date in fiscal year 2020. During the third quarter, we saw a marked improvement in our close rate with continued growth with the software-as-a-service engagement model, as evidenced by the 57% year-over-year increase in subscription revenue and the same 57% growth in annual contract value for cloud services over the prior year period. As I stated on the November call, the quarter started strong and after a fairly quiet holiday period, finished very strong. During the quarter, we also closed a few sizable perpetual license transactions with those customers preferring a capital expense versus an operating expense. We still see these as anomalies, not a shift in the overall trend to the cloud. During the quarter, we welcomed 11 new customers and completed subscription or license fee transactions in 11 countries. This momentum is expected to continue into the fourth quarter with a few new contracts already signed and a solid pipeline ahead of us. We remain confident in our ability to achieve a solid ACV growth in the fourth quarter, continuing our positive progress for fiscal year 2020 and beyond. Based on the close rate in Q3, we have a solid backlog for our supply chain services organization and are expanding the number of resources both internally and with service partners to ensure that the specific skill sets will be available in the areas where we see demand accelerating. We anticipate higher services revenue in the fourth quarter, especially when compared to Q3 due to the seasonally higher number of billable days available as we moved away from the holiday period. During the third quarter, our recurring revenue streams for maintenance and cloud services represented approximately 54% of total revenues compared to 56% in the same period of the prior year. But as Vince said, where the slight drop is due to a higher license fee contribution in the most recent quarter. We expect the percentage of recurring revenue to continue trending higher in the future based on the strong preference for the subscription contracts. with the rate approaching 60% before the end of fiscal year 2021. The growth in recurring revenue improves the financial predictability and profitability of our company, which gives us the clarity and confidence on where to make strategic investments and gives our shareholders greater visibility. During the third quarter, we introduced an innovative new service model where we are providing a customer with planning as a service. Under this arrangement, we will provide value added services that leverage our cloud-based solution as well as the expert talent resources to operate and produce the optimized planning outputs for strategic and tactical business goals. We're excited to help our customer with this new planning as a service model and expect this model to gain traction in the years ahead, especially as we continue to automate the decisions, outputs, in operational actions by leveraging artificial intelligence and machine learning to progress towards autonomous planning. The insights gained from this engagement will allow us to accelerate our achievements in delivering on our vision for this innovative planning as a service model, which is focused on helping customers transform their operations to achieve even more tangible outcomes. This new paradigm will be a higher value service driving better results for our customers and incremental revenue for us. Looking forward, we're continuing to see an uptick in the transformational projects which leverage our digital supply chain solutions and take advantage of the optimization depth, advanced analytics, machine learning, and optimized simulation capabilities of our platform to dramatically improve the speed and quality of decision-making for our customers. In today's dynamic economic environment, customers are looking for supply chain agility to help them navigate the global trade uncertainty while simultaneously seeking to accelerate the introduction of new products to the market to gain higher brand awareness and mitigate risk. Our ability to help them transform their supply chain to continuous and autonomous planning allows our customers to leverage their supply chain as a strategic market advantage. Our objective is to help our customers improve their supply chain effectiveness by a factor of 10. In summary, we're pleased with the progress in our go-to-market execution as we strive for continued success to deliver exceptional value to our customers in this new digital world. We will continue to focus on making our customers more successful as we look to expand our relationships and introduce new innovative services. We are confident that we can continue to grow both revenue and profitability in the years ahead and are proud to be delivering incremental benefits for our customers. Rylan, at this time, we'd like to open the call for any questions.