American Software, Inc. (NASDAQ:AMSWA) Q2 2024 Earnings Call Transcript

American Software, Inc. (NASDAQ:AMSWA) Q2 2024 Earnings Call Transcript November 16, 2023

American Software, Inc. misses on earnings expectations. Reported EPS is $0.08 EPS, expectations were $0.09.

Operator: Good day, everyone, and welcome to today’s Second Quarter Fiscal Year 2024 Preliminary Earnings Results Call. At this time all participants are in a listen-only mode. Later you will have an opportunity to ask questions during the question-and-answer session. [Operator Instructions] Please note that this call is being recorded and that I will be standing by should you need any assistance. It is now my pleasure to turn today’s program over to Vincent Klinges, CFO of American Software.

Vincent Klinges: Thank you, Chelsea, and good afternoon, everyone, and welcome to American Software’s Second Quarter of Fiscal 2024 Earnings Call. On the call with me is Allan Dow, President and CEO of American Software. Allan will provide some opening remarks, and then I’ll overview 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. 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.

At this time, I will turn the call over to Allan for opening remarks.

Allan Dow: Thank you, Vince. Good afternoon, everyone, and thank you for joining us today. Our second quarter was transformative in many respects and we believe we’ve laid the foundation for sustained growth and margin expansion over the long-term. First and foremost, we completed the acquisition of Garvis a disruptive SaaS start-up that developed an AI-native demand forecasting system, leveraging generative AI to enrich the user experience. We have rebranded the Garvis product as DemandAI+, which has replaced the current Demand components within the Logility platform. As many of you know, Logility invented supply chain statistical forecasting five decades ago and we believe that DemandAI+ is the next-generation Demand intelligence platform that will launch a new paradigm of supply chain planning.

The technology has already been validated with over 70 implementations, including deployments at some of the largest consumer goods package companies in the world. With the inclusion of DemandAI+, we expect to increase our acquisition of new customers, particularly at the large strategic account level and to accelerate the pace of cloud conversions within our existing client community. Since we completed the acquisition, we’ve signed contracts for a dozen new deployments of DAI+, including one of our existing cloud clients who is now upgrading to DAI+. While we have focused intently on identifying opportunities to extend the breadth and depth of our supply chain planning capabilities for the past several quarters, we’ve also evaluated our existing assets to ensure we can benefit fully from the investments we are making.

In the second quarter, we were pleased to find a strategic fit for our IT staffing and consulting services business and we completed the sale of The Proven Method in mid-September. Subsequent to quarter-end, we also sold our transportation business. These divestitures align our focus on being a pure-play supply chain software leader and will reduce the volatility in our results, while enhancing our growth and margin profile. As we believe the actions we’ve taken will create significant shareholder value, we also implemented a share repurchase program, and we’re active in buying back shares during Q2 with substantial success. Vince will provide some further details on this in his commentary. Next, I’d like to review our second quarter results and provide an update on our current outlook for the year.

Our second quarter results reflected slower activity as we experienced over the past year. However, we’re encouraged to see several previously delayed opportunities finally across the finish line, resulting in bookings performance more akin to our strength we saw in the fourth quarter of the prior fiscal year. As many of our deals closed late in the quarter, the improvement is not readily apparent in our reported results for Q2, but is reflected in the sequential uptick in our backlog. We remain cautiously optimistic that our clients and prospects are adapting to the economic headwinds that have delayed their investments in technology over the past year and we look forward to building upon our progress this quarter during our seasonally stronger second half.

Our pipeline remains solid and has expanded as we continue to increase market awareness of our new DemandAI+ solution. As we look back on our first half performance, we had a slow start to the year due to the ongoing economic uncertainty in our usual seasonality. Our sales cadence improved as expected in Q2, but the timing of the deal closures limited the revenue we expected to recognize. Our revised guidance outlook for fiscal 2024, therefore, reflects the combined impact of our two business divestitures, the acquisition of Garvis and the real run rate based on the first half actual results. For fiscal 2024, we now expect recurring revenue to be between $85 million and $88 million. Our adjusted EBITDA to be between $14.5 million and $16 million and total revenue to be between $100 million and $104 million.

Finally, I wanted to provide a brief update on our other initiatives we discussed during last quarter’s call. Although buyer interest in our headquarters was high, the increase in interest rates has dampened the commercial real estate market and we are no longer pursuing a sale of the property. We’ll revisit that topic once the market conditions stabilize. Finally, regarding our dual-class structure, we remain engaged with our Class B shareholder to consider various options with the goal of completing this process by the end of our fiscal year as previously stated. At this time, I’ll turn the call over to Vince, who will provide details on our financial results.

Vincent Klinges: Thanks, Allan. Before I discuss our results in more detail, I want to note that due to the divestiture of our IT consulting business unit, The Proven Method, our financial statements have been recast to show The Proven Method as discontinued operations. In the second quarter of fiscal year ’24, The Proven Method generated $1.7 million in revenue and $78,000 in adjusted EBITDA prior to the closing of the sale in September. And for the first half of the year of ’24, it generated $4.9 million in revenue and $0.3 million in adjusted EBITDA. Our discussion of the current and comparable periods will focus only on our continuing operations from this point. So total revenues of $25.7 million decreased 6% to $27.3 million in the same period compared to the same period last year.

Our subscription fees increased 8% year-over-year to $13.4 million but declined slightly from the prior quarter. Recall that in Q1, we benefited from approximately $0.3 million in catch-up revenue that did not reoccur in Q2. That, along with our normal quarterly churn, contributed to a sequential decrease in subscription fees. As Allan mentioned, our bookings performance in Q2 was much improved from the prior quarter with many of the deals closing late in the quarter. However, we were unable to recognize much of the revenue associated with it. We expect to see sequential growth in our subscription fees this quarter. Our license fee revenue came in at $0.2 million compared to $0.7 million in the prior year period. Our professional services and other revenues decreased 26% to $4 million from $5.4 million in the year ago period, and that’s reflecting longer sales cycles as we experienced over the past year and a conscious decision to offload more services to our SI partners.

Our maintenance revenue declined 8% year-over-year to $8.1 million, reflecting a normal falloff rate this quarter. Our total recurring revenues comprised of subscription and maintenance fees represented 84% of total revenues in the second quarter, and that compares to 78% in the same period last year. Looking at gross margin, it was 64% for the current period compared to 66% in the prior year period. Our subscription fee margin was 66% in the current period compared to 67% in the prior year period. But if you include the noncash amortization intangibles of $767,000 in the current quarter, the gross margin was 71% for both the current period and the prior year period. We had amortization of cap software of $464,000 in the same period last year.

License fee margin was 59% compared to 86% in the same period last year. Services margin decreased to 29% from 36% in the last period and again due to lower revenues. Our maintenance margin was 79% for the current quarter, and that compares to 82% in the prior year period. Gross R&D spend was 17% of total revenues for the current period, and that compares to 16% in the prior year period. Sales and marketing expenses were 21% of revenues for the current quarter, and that compares to 19% in the prior year period. G&A expenses were 21% of total revenues for the current quarter and that is down from 22% in the last year period. So on a GAAP basis, our operating income was $1.2 million this quarter compared to $2.6 million in the same quarter a year ago, and that’s primarily due to lower revenues and the costs related to Garvis acquisition, of which $0.3 million were onetime charges and $0.5 million of intangible amortization costs.

Net income was $0.6 million or earnings per diluted share of $0.02 compared to net income of $1.9 million or $0.06 in earnings compared to last year. On an adjusted basis, which excludes noncash amortization of intangible expenses related to acquisitions and stock-based compensation expense. Adjusted operating income decreased 13% to $3.6 million compared to $4.2 million in the same period last year. Adjusted EBITDA decreased 13% to 4.1% from 4.7% in the same quarter last year. We note that the acquisition of Garvis reduced our adjusted operating income and adjusted EBITDA in the second quarter of this year by approximately $700,000 of which, as I mentioned, $300 million relates to nonrecurring transaction costs. So adjusted net income decreased 9% to $2.9 million or adjusted earnings diluted share of $0.08 for the second quarter and that compares to adjusted net income of $3.2 million or adjusted earnings per diluted share of $0.09 in the same period last year.

International revenues for this quarter was approximately 21% of total revenues compared to 19% last year. We exited this quarter with remaining performance obligation or RPO which we refer to as backlog of $113 million, while our total RPO was down 8% from the prior year period, due to the slowdown in bookings activity over the past year. We are pleased to see a return to sequential backlog growth this quarter. Also, during the quarter, as Allan mentioned, we repurchased our stock approximately 431,000 shares under the stock buyback authorization for a total of $4.8 million of cash. Subsequent to the end of the quarter, we purchased another 241,000 shares for $2.7 million. So we have approximately 274,000 shares remaining on the stock buyback program.

Looking at our balance sheet. Our financial position remains strong with cash and investments of approximately $83.9 million at the end of the quarter. During the quarter, we acquired Garvis for $25 million in cash and paid $3.8 million in dividends and repurchased approximately 430,000 shares for a total cost of $4.8 million. Our days sales outstanding was approximately 72 days for the current period, and that compares to 78 days in the same period last year. Turning to the fiscal ’24 outlook. Our guidance now reflects only our continuing operations. We note that the original outlook for the year included $15 million in revenue and assumed mid-single-digit EBITDA margin for our discontinuing operations. So for fiscal year ’24, we anticipate revenue in the range of $100 million to $104 million, including recurring revenue of $85 million to $88 million.

And for adjusted EBITDA, we anticipate a range of $14.5 million or $16 million. Our revised outlook assumes the recent sale of our transportation solutions largely offsets the revenue contribution from the acquisition of Garvis. And we anticipate Garvis’ impact on our adjusted EBITDA to remain similar to Q2 level for the remainder of the year. We continue to expect Garvis to be accretive in the next 12 months. At this time, I’d like to turn the call over to any questions.

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Q&A Session

Operator: [Operator Instructions] And our first question will come from Matt Pfau.

Kiran Kuttickat: Hi. It’s Kiran Kuttickat on for Matt. Thanks for taking our questions. First, can you add some color on the change to guidance and the impact from divestitures versus any macro expectations that may have changed?

Allan Dow: The majority of the adjustment is related to the divestitures, particularly on the revenue and the earnings hit is a big, a fairly good piece of that. The macro, there was an impact from the first half of the year, early first quarter, that had a slight impact on the adjustment, but not as material as obviously the divestitures. So we wanted to make sure we got that reflected in the forward look.

Kiran Kuttickat: Got it. And then how are customers thinking about budgets for 2024? And did you see any worsening in sales cycles?

Allan Dow: It’s mixed results, Kiran. Thank you. Great question. We feel really good about the budgets coming together. Of course, budgets don’t mean spend. There’s two layers to that process. One is to get a budget in place first that anticipated spend and then to get the actual release for funds as they approach and start to kick off the project. But we’re encouraged by the amount of budgeting activity that’s out there, the number of projects that are coming in. Pipeline is looking more robust for next year. I think there still is a lot of sentiment in many of the industries around the consumer goods space. Let’s see how the year ends kind of sentiment. We’re in that season now. Of course, the sales have kicked off. Black Friday will be next week.

Within the next three or four weeks, companies will start to see what’s happening and get a real sense of that. But we’re encouraged in the anticipated spend for next year. So feel good about that. We’ve not seen a material change in the sales cycles, the time frame. We actually have seen some projects get accelerated, which was a bit of a surprise in some areas, where they know they’re just going to need to make those investments, and this is the season to get started, get prepared. They get projects organized and then they kick into full swing after the holidays. The supply chain part of it is kind of wrapping up after you get past into December. The supply chain work is almost done. If it’s not in the store by then, it’s going to make it into the store.

So supply chain teams can refocus their energy then. So mixed environment, but positive outlook for the future, Kiran. Great question.

Kiran Kuttickat: Okay. Thanks for taking my questions.

Allan Dow: You’re welcome.

Operator: Thank you. [Operator Instructions] And our next question will come from Zach Cummins.

Zachary Cummins: Hi. Good afternoon, Allan and Vince. Thanks for taking my questions. Can you provide a little more insight into the updated recurring revenue guidance that you gave for the year? Is that more so just the timing of deal closings that’s impacting the revenue contribution we’re going to see? Or any other assumptions that you’re baking into there would be helpful.

Allan Dow: Yes. It is a little bit from early in the year, but mostly the second quarter was really back-end loaded. We were very, very busy right up to the finish line, the last few days of the quarter, actually, that we’re bringing those projects in. We’ve now kicked those projects off. They were anxious even though the legal process and the procurement process delayed them a bit. They were anxious. We were prepared and our teams hit the ground. In fact, first of November, we were out on the street making those projects happen. So the revenue is up and flowing now. We’re going to see a real positive impact on that in our third quarter results. You’ll see the full impact of those deals coming together for us. So we’ll see. We’re anticipating a real strong uplift in third quarter.

Zachary Cummins: Understood. That’s helpful. And could you go a little deeper into some of the feedback you’ve gotten since you’ve acquired Garvis and started rolling it out to some of the existing customers in your base. It seems like pretty great product to really accelerate the transition from some of your on-premise customers to the cloud. So just curious of the feedback so far and how you’re thinking about using that as a tool for migrations within the existing base?

Allan Dow: It’s been phenomenal, really. It’s — on a couple of fronts. Number one, the client reception has been exceptionally strong. It’s been a bit of a relief, actually, for some of our clients with all the buzz around AI and native AI and generative AI. And we’ve got CEOs and CFOs that are telling our supply chain teams, you got to go out and find us some of that, whatever it is. They don’t know what it is, but they got to go find it. And so our supporters and the client base are saying, thank you for helping it make it easy for me because now it’s inside the platform that I have today. And with an upgrade and expansion and maybe a lift and shift to the cloud, we can get at what our leadership team is asking for, and we can bring it to the marketplace.