Logility Supply Chain Solutions Inc (LGTY) 2005 Q2 法說會逐字稿

Good day. All sites are on the conference line in the lecture-only mode. At this time, I would like to turn the program over to your host, American Software's Chief Financial Officer, Vince Klinges.

Good morning and welcome to American Software's second-quarter fiscal '05 conference call. To begin, I'd 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 underlining the forward-looking statements. There are a number 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 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 product and pricing and the irregular 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 would like to turn the call over to Jim Edenfield, CEO of American Software.

Good morning, ladies and gentlemen. We're pleased to report the results of our second fiscal quarter which ended on October 31st. For the second consecutive quarter, revenues increased over those obtained in the previous year. However, an unexpected shortfall in license fees hampered our earnings comparison. The shortfall occurred in our Logility subsidiary and we believe that this is a temporary phenomenon. We're pleased that we recorded our 15th consecutive quarter of profitability under GAAP.

While many exciting things occurred during the quarter, the most prominent by far was the strategic acquisition of Demand Management. This St. Louis-based company is a perfect fit with Logility, and we expect many synergies. Due to the significance of this acquisition, Mike Edenfield, the President of Logility, is going to summarize the benefits going forward. But first, I'd like to comment on the activities of another one of our subsidiaries, New Generation Computing.

We continue to sell our new products to new and to existing customers. One of the big wins with a new customer was with Westpoint Stevens, who selected NGC's Web-based sourcing and production system, ESPS, along with the EPDM product data management module to streamline their global sourcing and production. Other significant wins were with Rocca (ph) Apparel and Go (indiscernible) brands.

Services revenues continued to grow in our consulting and staffing business, reflecting to some extent an improving economy. Hopefully, the next step in the slowly improving economy will include increased expenditures to license small and large ticket software systems. At this time, Mike will review the benefits associated with the acquisition of DMI.

Good morning. I'd like to give a quick overview of Demand Management, or DMI, in case there are some on the call that are not familiar with them. DMI was a privately-held company based in St. Louis, Missouri, specializing in supply chain planning software solutions. They were about a $10 million a year company with approximately 30 people, plus they had a significant indirect channel of 23 organizations with approximately 67 people who sell, install and implement their solutions worldwide. Their products, which are marketed under the DS1 brand, are being used by several thousand users in 70 countries around the world. They have over 800 customers paying maintenance on an annual recurring basis.

As we previously announced, Logility acquired DMI on September 29th of this year. We have owned them now for about two months and we're very pleased with the acquisition.

I want to summarize what we see as the benefits to the acquisition. The first two benefits relate to expanding our market coverage. The first is, we now can address a broader market segment. Traditionally, Logility has been focused on the upper, mid-tier and higher end of the market, in terms of this size of the enterprise we sell to. DMI has been focused more on the mid-tier and smaller end of the market. Combined, we now have the ability to service from a $25 million enterprise to a Fortune 100 company. We believe this gives us more market coverage than any supply chain planning vendor from a size of enterprise perspective and opens up greatly the number of companies we can now sell one or more of our solutions to.

The second benefit to our market coverage is the addition of the DMI indirect sales channel. As I mentioned earlier, they have 23 rep organizations around the world that sell, implement and support the DS1 product. So combined we have more than doubled our market coverage with the addition of this indirect channel. It also provides us better coverage in international markets that we do not have a presence in, such as Australia, New Zealand, South Africa, and more than doubles our European presence.

The third key benefit is it increases our market share substantially in the supply chain planning space. We had a large and satisfied installed base of over 800 maintenance-paying customers. We believe this makes us number one in implemented supply chain planning systems in the world with over 1100 combined maintenance-paying customers. It also substantially increases our maintenance revenue, which is recurring.

The final two benefits I would like to discuss are cost and revenue synergies. From a cost synergy perspective, we've already started to realize most of the seven-figure savings we expected from the transaction. We will be getting the full benefit of these by spring 2005. The biggest savings area has been from the consolidation of three product development groups down to two.

Perhaps the most exciting opportunity is the revenue synergy potential. Both channels will continue to go after their respective target markets independently. However, we believe by cooperating where appropriate, one plus one can be greater than two. For example, the DMI sales organization has already provided some qualified leads to the Logility sales organization of opportunities both in and out of the DMI customer base that Logility was not aware of. We have put in place the proper incentive programs to ensure that happens when appropriate.

Secondly, Logility's marketing efforts routinely identify accounts that are not necessarily good prospects for the Logility sales organization because they are smaller enterprises where the cost of sale would be too high for a direct sales channel to go after. However, they are good prospects for DMI. This one marketing campaign alone produced a few hundred leads for the DMI sales channel at no additional expense to either organization.

So a key objective will be maximizing those two areas we've talked about, as well as identify other areas where we can leverage the two sales and marketing organizations to find and sell more opportunities than the two companies did separately.

We'll also continue to look for acquisitions that meet our criteria (technical difficulty) criteria we look at in our acquisition are, first of all, something that is synergistic with our core competency -- something we understand and know how to manage. Secondly, something that would open us up to new market segments, such as new industries, or in the DMI case, a broader segment in terms of the size of the organization we can sell to. Third, we wanted to have a productive sales channel. Fourth, we would like it to increase our international presence. Fifth, it must be an accretive transaction. At this time, I'd like to turn it back over to Vince for a detailed review of the Q2 financials.

Thanks, Mike. Taking a look at the second quarter fiscal '05 compared to the same period last year, total revenues increased 10 percent to 14.9 million, compared to 13.5 million for the same quarter last year. License fees were 2.6 million, compared to 2.9; services and other revenues were 7.6 million, compared to 6.1 million, and that increase was primarily due to our IT staffing business. Maintenance revenues increased 5 percent to 4.7 million, compared to 4.5 million and that was primarily due to increases in Logility from the Demand Management acquisition.

Looking at the costs for the quarter, the gross margin was 49 percent for the quarter, compared to 55 percent for the same quarter last year. License fee margin was 65 percent compared to 61 percent, and that was an increase due to lower capitalized software amortization costs this quarter when compared to last year. That was offset somewhat by lower license fees.

Our services margins were 30 percent this quarter, compared to 37 percent due to more revenue coming from the lower margin IT staffing business. Maintenance margin this quarter was 71 percent, compared to 74 percent for the same quarter last year. Taking a look at operating expenses, our gross R&D expenses were 12 percent of total revenues, and that compares to 14 percent for the same quarter of last year. As a percentage of revenues, sales and marketing expenses were 19 percent of revenues, or 2.9 million for the quarter, compared to 19 percent for the same quarter last year. G&A expenses were 2.4 million, or 16 percent of total revenue, pretty much the same as last year. Our operating income was 810,000 for this quarter, compared to 1.6 million for the same quarter a year ago. EBITDA was 2 million, compared to 3 million in the same period last year. Net income was 1.5 million, or earnings per diluted share of 6 cents for the second quarter, and that compares to a net income of 2.3 million, or earnings per share of 9 cents for the same period last year. International revenues for this quarter were approximately 6 percent of total revenues, compared to 7 percent in the same period last year.

Looking at the year-to-date six months ended October 31, 2004 compared to the same period last year, total revenues were 28.6 million and that compares to 26.6 million last year. License fees were 5.1 million, compared to 5.6 million in the same period last year. Services revenues were 14.4 million year-to-date, compared to 12 million in the same period last year. Maintenance revenues were 9.1 million for both the current and last year's six-month period.

Taking a look at the cost, the overall gross margin was 50 percent year-to-date, compared to 53 percent same period last year. License fees margins increased 65 percent, compared to 61 percent last year due to lower software amortization costs primarily. And services margins were 30 percent, compared to 34 percent in the same period last year. Our maintenance margin was 72 percent when compared to 74 percent during the same period last year.

Looking at operating expenses, our gross R&D expenses were 13 percent of total revenues for the six-month period, compared to 15 percent for the same period last year. As a percentage of total revenue, sales and marketing expenses were 20 percent, compared to 21 percent in the same period last year. G&A expenses were 17 percent of revenues for both periods. Our operating income year-to-date was 1.4 million, compared to an operating income of 2 million last year and our net income year-to-date of 2.6 million, or 10 cents of earnings-per-share, compares to a net income of 3.4 million, or 14 cents earnings per share last year.

Taking a look at the balance sheet, our company's financial position remains strong with cash and short-term and long-term investments of approximately 55 million at the end of the second quarter and no debt. During the quarter, we paid a quarterly dividend of 7 cents per share for a total of approximately 1.7 million. Our 87 percent owned subsidiary, Logility, purchased certain assets and liabilities of Demand Management for approximately 9.5 million, less of working capital adjustment. Logility also purchased approximately 124,000 Logility shares for a total cost of over 600,000 under the authorized stock buyback program. And under that program, we have 541,000 shares remaining to purchase under that program.

Other elements of the balance sheet are billed accounts receivable was 8.9 million, our unbilled is 2.7. Working capital was 49.4 million and our deferred revenues were 10.3 million and our stockholder equity is 76.2 million. The current ratio is 3.7 million and our days sales outstanding is approximately 75 days, compared to 59 days last year at this time. This increase was due primarily to the DMI acquisition that added approximately 1.8 million to our accounts receivable balance as of the end of October and we anticipate the DSO to improve next quarter when we have a full quarter of DMI sales in the DSO calculation. At this time, I would like to turn the call over to questions. Eric?

(Operator Instructions). Patrick Flavin, Flavin, Blake & Co.

Good morning, gents. Jim, can you give us -- well, to begin with, it's nice to see the topline growth. Can you give us some help, though, with the increase in expenses, both on the services and maintenance line at a faster rate than revenue growth?

On the services line, we grew quite rapidly. Low-margin services, which is a function of two things -- the nature of the service itself doesn't have as high a margin as when you are providing support services for software implementation and training. And then secondly, it's hard to believe that there’s a more competitive market than software, but if there is, it's probably consulting and staffing. So we were adding -- we added quite a bit of services at a lower margin rate and we've actually had a small decrease in services at the higher margin rate. Of course, one would ask, well, why would you want to do that? Well, the facts are that we want to increase just as fast as we can services with any profitable margin, and that's what we're trying to do.

So looking to the future, we don't see the lower-margin services growing quite as fast as they recently have, although we do expect them to continue to grow. And as we pick up license fee sales, then we're going to see the services with the higher margins grow; not drop off, but actually grow.

Now in the quarter that we're in right now, we have the holiday period. And so we always end up with less billable hours than we do, say, in the quarter that we've just completed. So we may not actually see the absolute services billed go up for this quarter. In fact, they could come down a little bit or go up slightly. But, nevertheless, we do expect that, following the holiday season that the growth would resume. As it relates to maintenance, probably -- and Vince, I will let him address this -- but I am sure that some of the way that the maintenance was brought in from the DMI acquisition impacted that somewhat.

Yes, Jim, I'll take that. This quarter, we had one month's worth of the DMI acquisition, October, in our numbers. And as required when you acquire any kind of company, you have to fair-value the assets and liabilities of the Company. And we were required to fair-value the deferred support revenue that we had on the balance sheet. And that significantly reduced the ability for us to take maintenance for that month of October. So the margins actually were -- the gross margins for the DMI element for October were actually negative. So we had all of the full cost, but we did not have all of the revenue. And that is a temporary situation when you have to fair-value a newly acquired company. And we anticipate that to dissipate once we go through an annual billing cycle of these DMI maintenance customers and we get the bill and book contracted revenue.

Okay. And then, Jim, can you give us a status report on the pipeline?

I think I commented on the pipeline as it related to services already. And let me just summarize that once again, that we expect that the consulting and staffing services pipeline looks good. We expect that to continue to grow, although as a percentage, not quite as rapidly as we have been growing. And then the other services are pretty much tied to the growth and license fees, which is a good segue into what we do see in license fees. Our pipelines at New Generation Computer are probably a little better than they were this time last quarter. The pipelines in the American Software core ERP business are probably not quite as good, and the pipelines in Logility are about the same.

And the key to getting them up is going to be the closure rates. There was great reluctance during the last quarter on the part of businesses to make commitments. And so we are hoping, we're expecting, we believe that that's going to get better. What would be the basis for that belief? Well, one thing would be, think back, it seems to me like it was a long time since we had the election, but actually, it was just earlier this month on November 2nd. So the elections were on November 2nd. The quarter ended -- our quarter ended on October 31st. So throughout our quarter, all of us were continuously bombarded with how bad things are. Things are just terrible. The economy's getting worse, the foreign policy situation is worse, oil is $50 a barrel, is going to $100 a barrel. Everywhere we looked and read everything was just absolutely terrible.

So I think a lot of people just kind of sat back and said, well, I'm going to wait and see what happens. Well, the election is over now, so maybe we can begin to have a little more balanced view of the way things really are, and hopefully, that will translate into people being -- willing to make serious long-term business commitments. I believe that to be the case, and we'll just have to wait and see if it actually is.

Okay, thank you.

(Operator Instructions). Sam Rebotsky, SER Asset Management.

(technical difficulty) thinking relative to -- you made the acquisition of DMI into Logility, as far as what you're seeing in both Logility's space at American Software, and as far as the evaluations of different acquisitions and what your expectations are as far as making acquisition in the next six months to a year, whether in software or Logility?

What was your question, Sam?

Basically, I'm (indiscernible) looking -- what kind of valuations you're seeing. You decided to make the acquisition into Logility of DMI because evidently it fit there, and you felt the valuation was appropriate. Going forward, what are you seeing as far as American Software or Logility, as far as utilizing your cash to make an acquisition? What would your expectations in the next six months to a year -- do you expect to make an acquisition? Are you seeing decent valuations as far as fitting into both companies? And would you make an acquisition first in American Software or Logility going forward?

The last part of your question is probably the easiest to answer. We would make it where it seemed to fit the best. For example, DMI was a direct competitor of Logility's, although we're focused on the lower end of the market. So it made total sense that DMI should be part of Logility. If it had been a better fit for American Software, we would have made it with American Software.

But as far as what you're seeing in both spaces, are the valuations going up, going down, are you seeing things that would fit into your pipeline as good as they were, say, six months or a year ago? What is it looking like as far as what you're seeing, as far as utilizing your cash for an acquisition?

We have very stringent acquisition criteria. Mike mentioned them. One of the items he mentioned was that it had to be accretive. What we do see is that there seems to be a tremendous amount of private equity capital out there now, and that is driving up valuations. I know that we've had a couple of companies that we looked at, and we said, gee, this looks like a good company, why don't we pursue it? And we kind of determined what we thought would be a fair starting offer for it, and we weren't even in the game. It was a very high valuation that was placed on it by a private equity group. So I think that huge amount of capital that's out there is probably driving up valuations right now. And so -- and it may become more difficult to find companies like DMI that you can buy at a fair price to the buyer and the seller.

So it appears that, right now, your developments would be more internal if they made sense, as far as spending your cash?

Well, we are continually looking for acquisitions. Our history is that we don't make them very often. And the reason for that is the stringent criteria that we have. We are aware of the statistics that the majority of acquisitions don't really work out. So we want to beat the statistics. (multiple speakers) We're constantly looking, and at the same time, we're trying to determine how better to deploy the capital internally to grow the businesses that we already own.

In essence, the DMI, we're familiar with that company. And I guess -- so you had a -- at least you knew them, and that is what made that particular acquisition easier for you, I presume?

One of the things that made it easy was that we were able to agree with the owners on a price. That was probably the easiest part of the transaction. But this distribution network that came with them is, in my view, almost priceless to complement our Logility operations. What you’ve got there, you’ve got these many -- I believe it was 30 some-odd small businesses that consist of from one to 10 or 12 people. And all they do is sell the DMI products within an assigned territory. And they have over 800 customers that are paying these maintenance fees.

And then back at the headquarters of DMI, you had a significant expenditure, relative to the overall scheme of things, going into a new product that these customers could upgrade to. Well, these customers can upgrade to Logility's product. And so we were able to close down that R&D operation to obtain a considerable portion of our six-figure savings target -- excuse me -- seven-figure savings target that we had for the acquisition.

So now, the DMI customers, if they are happy, they can continue to pay maintenance; we like that. If they want to move up to something that's more modern and fancier and more state-of-the-art and the system of the future, then they can upgrade to the Logility product. We like that. And then there's an intermediate step that's also something that we like very much. And that is that we can take a portion of the Logility products, the collaboration portion, and we can sell that to the DMI customers. Actually, we're allowing the DMI distributors to do that. They sell that to their customers. And so they obtain maybe 80 percent of the benefits of going to a larger system, or a more modern system and keep the basic engine that they already have.

So this way we can keep the maintenance base hopefully in place for many, many years -- years to come. So I don't know that we will ever find another acquisition that complements the Company as much as that one seemed to do, but we are looking.

It sounds exciting. Good luck.

(Operator Instructions).

Thank you very much, ladies and gentlemen. If there are no more questions, we appreciate your joining us this morning and we're going to work very hard this quarter and the quarters thereafter and we look forward to talking to you again in three months.