American Software, Inc. (NASDAQ:AMSWA) Q2 2023 Earnings Call Transcript

American Software, Inc. (NASDAQ:AMSWA) Q2 2023 Earnings Call Transcript November 17, 2022

American Software, Inc. beats earnings expectations. Reported EPS is $0.1, expectations were $0.08.

Operator: Good day, everyone, and welcome to today’s Second Quarter FY ’23 Preliminary Financial Results. Please note, this call may be recorded. assistance. It is now my pleasure to turn the conference over to Vince Klinges, CFO, American Software. Please go ahead.

Vince Klinges : Good afternoon, everyone, and welcome to American Software’s Second Quarter of Fiscal 2023 Results. On the call with me is Allan Dow, President and CEO of American Software. Allan 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 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.

Photo by Fotis Fotopoulos on Unsplash

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 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’d like to turn the call over to Allan for our opening remarks.

See also 10 Jim Cramer Stock Picks This Week and 15 Biggest Dry Bulk Shipping Companies in 2022.

Allan Dow : Thank you, Vince. I’m pleased to report that we delivered strong adjusted EBITDA 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 top line 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’ve 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 return 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 stand-alone 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 a recession continue to stir some business uncertainty in our consumer goods and retail markets. We’ve started 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 slowed 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 ’23. Due primarily to a reduction in our expectations for professional services, we’re resetting our fiscal year revenue guidance to fall between $125.5 million and $127.5 million. Given the delayed start of 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 $85.5 million 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 supply chain solutions in our target markets, and we’re competing effectively, so we expect our growth to reaccelerate in the new year.

In summary, we’re pleased with the second half quarter results and 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.

Vince Klinges : Thanks, Allan. For the second quarter of fiscal year ’23, total revenues were $31.4 million, that was 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 $0.7 million compared to $0.8 million in the same period last year. Our Professional Services decreased 11% to $9.6 million from $10.8 million in 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 falloff rate this quarter.

And total recurring revenues, comprised of subscription and maintenance fees, represented 67% of total revenues for the second quarter, 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 margin was 67% for both the current and prior year period. And excluding noncash amortization of intangible expense of $464,000 in the second quarter, our subscription gross margin would have been 71% versus 74% last year. And amortization of cap software was $690,000 in the prior year period. 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 $2.8 million this quarter compared to $2.7 million in the same period a year ago. Net income decreased 37% to $2.1 million, or earnings per diluted share of $0.06, compared to net income of $3.3 million or $0.10 per diluted share last year.

On an adjusted basis, which excludes noncash amortization of intangible expense-related acquisitions and stock-based compensation expense, adjusted operating income increased 16% to $4.4 million compared to $3.8 million in the same period last year. Adjusted EBITDA increased 4% to $4.9 million from $4.8 million last year. Adjusted net income decreased 21% to $3.3 million, or adjusted earnings per diluted share of $0.10 for the second quarter, and that compares to adjusted net income of $4.2 million or adjusted earnings per diluted share of $0.12 in the same period last year. International revenues this quarter were approximately 19% of total revenues, and that compares to 16% in the same period last year. Taking a look at the numbers year-to-date.

Our total revenues increased 4% to $62.7 million due to a 21% increase in our subscription fees of — 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 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 a year ago, representing an adjusted EBITDA margin of 15%. Adjusted net income totaled $6.6 million or $0.19 per diluted share compared to $7.8 million or $0.23 per diluted share in the same period last year.

We exited the quarter with the remaining performance obligations, or RPO, which is a reference to backlog, of $123 million. Our total RPO was relatively flat from the prior year due to shorter contract duration from recent deals, which is noted on our short-term RPO 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 Allan indicated, we’re 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 as Allan indicated, the decline of our revenue guidance was primarily due to a $6 million reduction in our expected expectations for professional services, which the majority is attributable to our lower-margin IT consulting business. For adjusted EBITDA, we are raising our guidance to $18 million to $20 million, and that’s up from $16 million to $18 million range prior year — a couple — last quarter. This reflects a more gradual pace of headcount expansion across the company than we anticipated coming into the year.

At this time, I’d like to turn the call over to questions.

Q&A Session

Operator: And we’ll take our first question from Matthew Galinko.

Matthew Galinko: I guess it sounds that the commentary, to me, sounds like you expect some confidence to come back in, in the 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?

Allan Dow: Matthew, it’s Allan. Yes, good catch. That’s exactly what we wanted to convey. The reason for confidence is that in the dialogue with prospective clients, people that we’re negotiating contracts with, they had anticipated starting projects at 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 or undescribed delays. It’s been fairly specific in the conversations about the timing of when they want to rally the troops and get going. Does that help?

Matthew Galinko: Terrific. And then as a follow-up, I know you touched on the Starboard, I guess, the beginning of the pipeline build for Starboard. But can you go into a little bit more detail, how is the reception with your existing customers? And at what point do you expect that to start making it into sales or having stand-alone sales through that?

Allan Dow: Yes, 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. In fact, there were a couple of them that were early in the quarter that we’ve already got up and running. The implementation time line for those projects is rather rapid due to the product design and the availability of in-house data that we can provide. So we’ve got them up and running. We’ve done a couple more transactions where that was integrated in the suite already. And we’ve — I would say, we’ve — 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 reinitiating a number of campaigns right now to do outreach to our installed base and try to mine that community for even more projects add-ons, and then leveraging it rather effectively in new campaigns where we’re trying to bring a new logo on board and using it as a competitive weapon in those discussions as well. So really excited about that. The team is great. Our team that was here at Logility prior to the acquisition has really adopted the suite. The R&D team has done a marvelous job of getting us prepared for integrating it into the platform. And as I mentioned in my earlier comments, we’re just — we’re ahead of the game on that acquisition. So excited about that one.

Operator: Our next question comes from Will Miller.

Will Miller: This is Willow on for Matt Pfau. So following up your comments about clients pausing projects due to the holidays. Previously, you mentioned client staffing challenges were contributing to sales cycle elongation. Are you still seeing this? Or again, is this primarily due to projects being delayed due to the holidays now?