American Software, Inc. (NASDAQ:AMSWA) Q3 2024 Earnings Call Transcript

American Software, Inc. (NASDAQ:AMSWA) Q3 2024 Earnings Call Transcript February 22, 2024

American Software, Inc. beats earnings expectations. Reported EPS is $0.19, expectations were $0.06. AMSWA isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: [Operator instructions] Hello and welcome to the Third Quarter Fiscal Year 2024 Earnings Results Conference. At this time all participants are in a listen-only mode. Later you will have an opportunity to ask questions. [Operator Instructions] Please note that this call is being recorded should you need anything. I’d now like to turn the conference over to Vince Klinges, CFO of American Software. Please begin.

Vincent Klinges: Thank you and good afternoon, everyone, and welcome to American Software’s third quarter of fiscal 2024 earnings call. with me, on the call with me is Allan Dow, President and CEO of American Software. Allan will provide some opening remarks, and then I’ll 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. 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’d like to turn the call over to Alan for opening remarks.

Allan Dow: Thank you, Vince. Good afternoon, everyone, and thank you for joining us today. Our third quarter was one of the busiest periods we’ve seen in the last year and a half, particularly as we entered into the new calendar year. Our clients and prospects are reengaging on transformational supply chain initiatives that have been in the works for some time, and while we continue to experience some delays in the larger deals, the demand environment appears to be improving. Against this backdrop, our third quarter results were in line with our expectations, and we remain on track to deliver the fiscal year 2024 guidance we provided last quarter. Before I review the third quarter results in more detail, I’d like to provide an update on the integration of Garvis, which we’ve rebranded as DemandAI+ and represents the next generation demand intelligence platform.

Our teams have been fully integrated, and we’re actively collaborating on both sales opportunities and our product roadmap. From a go-to-market perspective, we’ve continued to leverage pilots to gain access to new strategic accounts. However, the primary emphasis with both new prospects and our existing client community is to drive towards rapid deployment of DemandAI+ into full production use as quickly as possible. We expect to close several longer-term engagements in the fourth quarter, which resulted from winding down the previous pilot engagements and converting them to long-term contracts with broader production deployments. In addition, our pipeline of lift and shifts has increased dramatically as we continue to drive awareness of our AI native demand forecasting capabilities and the first production-worthy use of generative AI capabilities to streamline decision-making for supply chain planning across our client community.

In fact, we’ve already seen some existing agility accounts adopt DemandAI+. One is a rapid-growing U.S.-based coffee brand with a highly promoted product line. The DAI+ solution will help them better manage the spikes in demand they often experience and determine the most cost-effective promotions to profitably grow their company. We are encouraged by this early success and believe that DemandAI+ will play a critical role in the migration of our existing clients to the cloud in the coming years. Turning back to our third-quarter results, we’re pleased to see another sequential uptick in our backlog as our clients and prospects began to reengage on previously stock hold initiatives. Our revenues largely tracked our internal expectations, but we note that the declines in our maintenance and service revenues, respectively, were exacerbated by the divestiture of our transportation group and the lower utilization during the holiday periods.

From a profit standpoint, our adjusted EBITDA margin held steady on a sequential basis, despite the inclusion of Garvis’ expenses for the full quarter and some additions to our product development team. Overall, we continue to see signs of improvement in the demand environment. We have a robust pipeline for entering Q4, leaving us poised for a strong finish to our fiscal year. Our guidance for fiscal 2024 remains unchanged, and we continue to expect to see recurring revenue between $85 million and $88 million, adjusted EBITDA between $14.5 million and $16 million, and total revenue between $100 million to $104 million. Given our performance to date, though, we anticipate reaching at least the midpoint on these respective guidance ranges. Finally, I want to provide an update on other initiatives that have been discussed previously.

We bought back over $5 million in stock during the third quarter and have now repurchased all of the shares remaining under our prior authorization. Yesterday, we announced that our Co-founder, Executive Chairman, and Treasurer, Jim Edenfield, retired from the Board as well as his role as the company’s treasurer. After over 50 years of leadership for the company, Jim was not only a steadfast leader of our company, which we’ll be forever grateful, but he was also a visionary for our industry as a whole. We appreciate Jim’s willingness to continue as an advisor to our Board and to me. Jim Miller, who has been our Board member since 2002, accepted the role as Chairman and along with other Board members, will guide us through the strategic initiatives we had previously laid out.

Furthermore, in regards to our dual class structure, we remain engaged with our Class B shareholder to consider various options. Jim’s retirement has no impact on the previously announced timeframe for that work. At this time, I’ll turn the call over to Vince who will provide details of our financial results.

Vincent Klinges: Thanks, thanks Alan. Before I discuss our results in more detail, I want to remind everyone that due to the divestiture in the second quarter of our IT staffing business unit, the proven method, our financial statements have been re-cast to show the proven method as discontinuing operations. So our discussion of the current and comparable periods will focus only on the continuing operations from this point on. The total revenues for the third quarter came in at $25.5 million, a decrease of 7% from $27.4 million, same period last year, and it’s primarily due to lower revenues from professional services and maintenance. Our subscription fees increased 9% year-over-year to $14.1 million from $13 million in the same period last year.

Our software license revenue was $0.3 and that compares to $1 million in the prior year period. Our professional services and other revenues decreased 28% to $3.4 million from $4.8 million the same period a year ago, and that’s reflecting lower utilization during our holiday period and our decision to offload more services to our SI partners. Our maintenance revenues declined 11% year-over-year to $7.7 million, reflecting the normal fall-off rate for the quarter, as well as divestiture of our transportation group, which reduced our maintenance revenues by approximately $250,000 for the quarter. Our total recurring revenues comprised of both subscription and maintenance fees represented 86% of our total revenues for the third quarter, and that’s up from 79% in the same period last year.

Our gross margin was 64% for the current period compared to 66% in the same period last year. Our subscription fee margin was 65% in the current period compared to 69% in the same period last year, but if you exclude the non-cash amortization of a tangible expense of $1.1 million, our subscription gross margin was 72% in both the current and prior year period. The amortization of a tangible expense was $425,000 in the same period last year. License fee margin was 80% compared to 65% in the same period last year. Our gross margins for services decreased to 21% from 26% last year due to lower revenues, primarily from a dramatically quieter holiday period this year. Our maintenance margin was 81% for both the current and prior year period. Our gross R&D expenses were 18% of total revenues for the current period, and that compares to 16% in the same period last year, as we filled open rolls during the quarter and had a full quarter of expenses from our acquisition of Garvis.

Our sales and marketing expenses were 20% of revenues for the current period, and that compares to 18% in the same period last year. Our G&A expenses were 23% of total revenues for the current quarter, and that compares to 21% last year. On a GAAP basis, our operating income was $0.8 million for this quarter, compared to $2.7 million in the same period last year, primarily due to lower revenues and also the costs related to the Garvis acquisition. Our net income was $4.1 million, our earnings diluted share of $0.12, compared to net income of $3.2 million or $0.09 per diluted share, including a net income gain of $1.4 million related to the sale of our transportation group. On an adjusted basis, which excludes non-cash amortization of intangible expenses related to acquisitions and stock-based compensation expense, our adjusted operating expenses was $3.6 million, and that compares to $4.3 million same period last year.

Our adjusted EBITDA was $4 million, and that compares to $4.8 million same period last year and adjusted net income of $6.4 million, or adjusted earnings diluted share of $0.19 for the third quarter, and that compares to adjusted net income of $4.4 million or $0.13 in the same period last year. Looking at international revenues, this quarter was approximately 22% of revenues, that’s up from 20% last year. Our remaining performance obligation, we exited the quarter with RPO, or what we call is backlog of $119 million. Looking at our balance sheet, our financial position remained strong with total and cash investments of $78.2 million at the end of the quarter. During the quarter we paid $3.8 million in dividends and repurchased over $0.5 million shares at a total cost of $5.4 million.

Our day sales outstanding at the end of January 31, 2024 was 86 days, and that is down from 101 days, same period last year. Turning to the 2024 outlook, our guidance remains, as Alan said, our guidance remains unchanged and reflects only our continuing operation and we believe we will achieve the midpoint of these ranges is the most likely scenario given our year-to-date performance. So we anticipate revenues in the range of $100 million to $104 million, including recurring revenue $85 million to $88 million, and adjusted EBITDA we anticipate in the range of $14.5 million to $16 million. 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 comes from Willow Miller [ph].

Unidentified Analyst: Hi, I’m Willow Miller. I’m on for Matt. Thanks for taking our question. So starting off, how are sales cycles here today? It sounds like they’re improving similar to last quarter and are there any changes on how customers are thinking about budgets for 2024?

Allan Dow: Willow, thank you for joining us and thank you for the questions. The sales cycles are still extended beyond where they were in years past. It’s really the scrutiny on budgets and whatnot, but we are seeing them start to break loose now. So I think as we move forward, the time has already passed on many of those projects and we’re trying to get them up and running now, but as we’re anticipating with the energy in the market right now that as we get into the later in the spring and into the summer, that we’ll have seen those sales cycles start to close up now because people are moving a little bit more quickly. In regards to budget, very encouraging; much more activity going on this time period than we were coming into the holiday season, say six months ago. Things have really picked up and we’re quite excited about the growth in our pipeline that we’re seeing now as a result of that. So really positive trend for the future.

Unidentified Analyst: That’s helpful. Just one last question; so earlier this month, you released a press release about adding Gen I capabilities to legality. So just wanted to know what the goal is here. Is it to stay competitive and keep up to date with technology? Or is it to monetize it longer term if there’s enough value added to customers?

Allan Dow: It’s tremendous value add actually and it’s a leapfrog. We were first to market with production ready capabilities around generative AI. That generative AI, many of us are familiar when we talk to our phone or maybe talk to our car, get directions and that sort of thing. It’s a similar technology. We’re applying it specifically to the supply chain planning. At its beginning stages, at its lowest level, what generative AI brings is more insights, more quickly to a broader community. So the ability to make decisions faster come as a result of it. Some of the same information you could get by pounding on the keyboard, you can get through the same method, but it’s much more intuitive, much easier and it opens up the insights that are capable through our system to a much broader audience.

So it’s more inclusive around the decision making, strategic decisions that need to be made around the applications. We look at generative AI in four phases. The first phase is insights, and that’s kind of the phase we’re in now, where people are really starting to get their arms around it. Phase two will be directed activity. We’re starting to introduce that into the platform today. Directed activity helps now where a user can issue a command or request an action. After that, we move to more autonomous capabilities. We have autonomous capabilities today, but directed through the generative AI capabilities and ultimately really starting to automate many more things through user interaction and so that would be stage four. Stage one is available today.

Stage two is coming to the marketplace, really starting to come into play and stage three and four are a little horizon oriented. So it will be breakthrough technology that will radically change the way people use supply chain planning applications.

Operator: Our next question comes from Matthew Galinko.

Matthew Galinko: Hey. Congrats on the quarter, and thanks for taking my questions. I think you touched on transformational deals beginning to move again. So can you add a little bit more color on just how quickly they’re moving along and whether you expect those to, and you to get across the finish line in the next four quarters? And what do you think specifically contributed to them starting to move again?

Allan Dow: Yeah, I think confidence. Matthew, thank you for the question, first of all. Confidence in the economy stabilizing. Every day you wake up, it swings one way or the other. Interest rates are going to go down, then they’re going to stabilize, and they’re going up, but overall, what we’re seeing, what we’re hearing people talk about, our clients, our prospects talk about, is a stabilization around their business and continued improvement going forward. So their willingness to commit to a bigger investment, willing to put more resources at the table to accomplish more, is really what’s stimulating. The need for a transformational project hasn’t changed, but their nervousness about the kind of investment it takes to really tackle something like that, they were very anxious about that, so the pace had slowed.

So yes, we’re seeing an uptick. We see more of those projects coming into the pipeline and over the next four quarters, certainly we anticipate that they’ll come to fruition and we’ll get started on those projects, start implementing them, and get more and more of that activity going. So nice add-ons, nice lift and shift capability, nice several capabilities, projects going on, but then these transformational ones kicking in will help us in the long term as well.

Matthew Galinko: Thank you. And as a follow-up, you just mentioned lift and shift, and I think you said that it accelerated. Again, is that partially just confidence in your customers coming back in, or is there some element of your new AI approach and sort of cloud-native assets, opening more opportunities to shift legacy to kind of premise to cloud? Just maybe talk a little bit about that.

Allan Dow: Yeah, there’s really three things that are driving it right now. The predominance of it is the new capabilities we brought to the market, including DAI+, DemandAI+, bringing new capabilities that are only available in the cloud. So that’s been an incentive for more and more clients to look at that and say it’s time. So that’s probably representing half of that growth, just the new capabilities that are available, the in-generative AI capabilities only available in the cloud. Out of the remaining 50%, another 25% is the budget that we just talked about. People now have the — they wanted to move. They wanted to get an update. They wanted to get some new technology, but now have access to funds. So that’s probably helped to stimulate another quarter of the overall pipeline growth.