Logility Supply Chain Solutions Inc (LGTY) 2005 Q3 法說會逐字稿

Good day. All sites are now on the conference line in a listen-only mode. If anyone should require any assistance during the call today, please press star, and 0 and an operator will be standing by to help you. At this time, I would like to introduce Vincent Klinges, CFO of American Software. Please go ahead.

Good afternoon. Welcome to the third quarter fiscal 2005 American Software 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 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. Further developments and actual results could differ materially from those set forth and contemplated by, underlying in 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 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 effective competitive products and pricing, and the regular pattern of revenue. 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 Jim Edenfield, CEO of American Software.

Good afternoon, ladies and gentlemen. I hope by now that each of you have received the press release of our earnings announcements for the third quarter, which ended January 31st. We have had to issue a subsequent, modifying announcement press release that you, I don't believe, would have received yet. You may receive it during the course of this conference. I think it's important that I read this press release to you before we get into the details of the conference. This is what the press release that you will see in a few moments says. The management of the Companies have been notified by their auditors that $290,000 of revenue included in the financial results for the period ending January 31, 2005 were subject to further review prior to finalization of each Company's 10-Q filing. If the revenue is recognized in a later quarter, then the earnings per share as stated in the announcement for American Software would be reduced by approximately $0.01 per share and the earnings per share as stated in the Logility announcement would be reduced by approximately $0.02 per share.

I'm now going to proceed, and we're going to proceed with the conference that we had originally planned to conduct based upon the press release that you should have in hand at this time, not the one that I have just read. This was the third consecutive quarter that total revenues increased over those attained in the previous year. For the quarter they were up 21 percent, and for the year-to-date, 12 percent. We like the trend. We're also pleased that we were able increase every revenue category during the third quarter -- license fees, services, and maintenance. New Generation Computing, our subsidiary focused on the apparel and retail industries, continued to make good progress during the quarter. A major highlight was the licensing of our global sourcing product, to VF Corporation, the largest apparel manufacturer in the world for use in all of their divisions world-wide. As manufacturing continues to leave the United States, our product will enable VF to enhance its competitive position as it sources production from hundreds of manufacturers in Asia and Latin America.

Service revenues continue to rapidly increase in our consulting and staffing business. We believe that this is partly due to an improving economy. Many analysts believe that this phenomenon is a precursor to growth in technology capital expenditures. If that is true, then we would expect to see double-digit growth and license fees, which yield a much higher profit margin than services. The third quarter marked the first full quarter of operations which included our recent acquisition of Demand Management. Considerable effort was expended in integrating their operations into Logility. Mike Edenfield, the President of Logility is now going to update us on Logility, including Demand Management. Thank you. Good afternoon, everyone. We're pleased with Logility's third quarter results. The key highlights for the quarter were strong operating cash flow of almost $3 million. In fact we added 21 new customers who licensed either the Logility Voyager product line or the Demand Solutions product line. Some of the notable new and existing customers included Brown Shoe Corporation, Eaton Corporation, Hooker Furniture, Hyundai Motor Australia, Johnson Brothers, Kentucky Derby Hosiery, Parker Hannifin, SAKS, and a major, household, consumer products company, whose name we cannot disclose at this time. We are encouraged by the number of new customers licensing our products, as that is a healthy sign for the future. Our strong financial position continues to be a competitive advantage against our primary competitors.

Regarding fourth quarter, we believe our pipeline activity is sufficient to have another good quarter, but as usual, closure rates will be key. While we are expecting maintenance and services revenues to increase this quarter, we must improve license fees to accomplish our growth and profitability objectives. Regarding our progress with Demand Management, we continue to be pleased with the acquisition and the performance of the Company so far. Due to the fair valuing of the acquired, deferred maintenance revenues, the acquisition has temporarily diluted our earnings, as we expected. However, Demand Management had a strong operating cash flow contribution for the quarter of approximately three-quarters of a million dollars. 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 or the acquisition. DMI was a privately held company in St. Louis specializing in supply-chain planning solutions. They were almost a $10 million-a-year company, in terms of revenues, with about 30 people, and a significant indirect channel of 23 organizations, with approximately 67 people who sell, install, and implement their solutions world-wide.

Their products, which are marketed under the Demand Solutions One brand, are being used by several thousand users in at least 30 countries around the world. They have over 800 customers paying maintenance on an annually renewable basis. Logility has owned DMI for about 5 months, and we are very pleased with the acquisition, as I stated earlier. I'd like to summarize what we see as the benefits to the acquisition. The first 2 benefits relate to expanding our market coverage. We can now address a broader market segment. Traditionally, Logility has been focused on the upper mid-tier and higher end of the market in terms of the size of the enterprise we sell to. DMI has been traditionally 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 enterprise. We believe this gives us more market coverage than any supply-chain planning vendor, both from a size of the enterprise we are selling to perspective, as well as a price point perspective.

Second 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 DS One product line. So combined, we've more than doubled our coverage with the addition of this indirect channel. It also gives us coverage in international markets we did not have a presence in, such as Australia, New Zealand, South Africa. And it more than doubles our European presence. To illustrate this, in the third quarter, we licensed 1 or more of our solutions in 11 different countries -- Australia, Brazil, Canada, China, Germany, Indonesia, Ireland, Mexico, New Zealand, the United Kingdom, and the United States.

The third key benefit is it increases our market share substantially in the supply-chain planning space. DMI has a large and satisfied installed base of over 800 maintenance paying customers. We believe this makes us number 1 in implemented supply chain systems in the world with over 1,100 combined maintenance paying customers. Our maintenance revenue has already increasing as a result of the transaction, and we expect maintenance revenues to continue to increase for at least the next few quarters. The final 2 benefits I would like to discuss are the cost and revenue synergies. From a cost synergy perspective, we've already started to realize most of the 7-figure savings we expected from the transaction. We will be getting the full benefit of these by this spring. As we discussed on the last call, the biggest saving area has just been the consolidation of 3 product development organizations down to 2.

The most exciting opportunity, however, is the revenue synergy potential. Both channels will continue to go after the respective target markets with their respective brands, independently. However, we believe by cooperating where appropriate 1 plus 1 can be greater than 2. For example, the DMI sales organization has already provided some qualified leads to the Logility sales organization of opportunities 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. And in fact, we have closed some incremental business already as a result of this. Secondly, Logility's marketing efforts now routinely identifies accounts that are not necessarily good prospects for the Logility sales organization because they are smaller enterprises who might desire a lower price point. However, they are good prospects for DMI.

As we mentioned on the last call, in 1 campaign alone we produced 400 leads for the DMI sales channel at no additional expense. So a key objective will be to continue to identify areas such as these where we can leverage the 2 sales and marketing organizations to find and sell more opportunities than the 2 companies did separately. So, in summary we're already seeing benefits from the acquisition in terms of broader and deeper geographic sales coverage, increased maintenance revenues, cost reductions with more to follow, and tangible revenue synergies. Now I'd like to turn the discussion back to Vince for a detailed review of the third quarter financial results.

Thanks, Mike. Comparing the third quarter '05 to the same period last year, total revenues for the quarter increased 21 percent to 17.7 million, compared to 14.6 million for the same quarter last year. License fees increased 6 percent to 4.1 million, compared to 3.8 for the same period. Services and other revenue increased 36 percent to 8.5 million, compared to 6.3 million, primarily due to an increase in our IT staffing business. Maintenance revenues increased 11 percent to 5.1 million, compared to 4.5 million, primarily due to increases in Logility from Demand Management. The overall gross margin was 49 percent for the quarter, compared to 54 percent in the same quarter last year. Drilling down on that, the license fee margin was 67 percent, compared to 71 percent, due to more license fees from DMI, which has an indirect VAR channel. Services margin improved to 30 percent this quarter, compared to 28 percent, due to better margin business from our IT staffing business. Our -- our maintenance margins this quarter was 66 percent, compared to 75 percent for the same quarter last year. And this is lower primarily due to the AMI -- the DMI acquisition and the GAAP purchase accounting required to fair value its deferred maintenance, which temporarily lowers the maintenance revenue for GAAP reporting.

Taking a look at operating expenses, the gross R&D expenses were 11 percent of total revenues for the current quarter, compared to 13 percent for the same quarter last year. As a percentage of revenue, sales and marketing expenses were at 19 percent of revenues, or 3.3 million, for the quarter. And that compares to 20 percent for the same quarter last year. G&A expenses were 3.1, or 17 percent of total revenues, which was the same percentage as last year. So our operating income we're reporting is 821,000 for this quarter, compared to 1.5 million for the same quarter a year ago. Our EBITDA was 1.8, compared to 2.9 in the same period year ago. Our GAAP net income was 1.4, or earnings per diluted share of $0.05 per share for the third quarter, and that compares to a net income of 2.1 million, or earnings per share of $0.08 for the same period last year. Adjusted next income, which excludes DMI's loss for the quarter, was 2 million, or $0.08 per share for the third quarter.

International revenues this quarter were approximately 7 percent of total revenues. And that's the same as the third quarter of last year, 7 percent. Taking a look at the 9 months ended January 31st, 2005, compared to the same period last year, total revenues increased 12 percent to 46.2 million, and that compares to 41.3 million. License fees were 9.2 million, compared to 9.4. Services revenue were 23 percent -- 23 million year-to-date, compared to 18.2. Maintenance revenues were 14.1 million year-to-date, compared to 13.6. Looking at the gross margin, the overall gross margin was 49 percent year-to-date, compared to 54 percent. License fee margin increased slightly to 66 percent from 65. Services margins were 30 percent, compared to 32 percent same period last year. And our maintenance margins were 70 percent when compared to 74 percent.

Looking at operating expenses, our gross R&D expenses were 12 percent of revenues for the 9 months ended January, compared to 14 percent for the same period last year. As a percentage of total revenues, our sales and marketing expenses were 20 percent for both this fiscal year year-to-date and last year, also. G&A expenses were 17 percent of revenues for both periods, also. And our operating income year-to-date is 2.2 million, compared to an operating income of 3.5 million last year. Net income year-to-date is 4 million, or $0.16 per earnings per share, and that compares to 5.5 million, or $0.22 earnings per share last year. International revenues year-to-date are 6 percent of revenues, compared to 7 percent last year.

Looking at the balance sheet, our -- the Company's cash -- financial business remains strong, with cash and investments of approximately 56.9 million at the end of the third quarter and no debt. Cash increased 1.9 million sequentially from the prior quarter ended October 31st, 2004. And during the quarter we paid 1.7 million of a quarterly dividend also. Other aspects of the balance sheet, our billed AR is 11.2 million, unbilled is 2.9. Working capital is 49.2 million, and our deferred revenues are 13.1 million. Stockholder equity is 76.2. Our current ratio is 3.2, and days sales outstanding is approximately 76 days. At this time I'd like to turn the call over to questions. Sarah?

If you would like to ask a question, please press star, and 1 on your touchtone phone. To withdraw your question from the queue, press the pound key. Once again, to register your site for a question, please press star, and 1 on your phone at this time. And first, we'll go to the site of Patrick Flavin with Flavin, Blake & Company.

Good afternoon, gents.

Good afternoon.

Vince, could you address the income tax provision for the quarter, which has typically not occurred in the past?

Sure, Pat. Actually, coming into this current fiscal year, we had 13 million of net operating losses. However, 8-point -- approximately it's 8.5 to 9 million of them relate to stock options, NOLs, which, actually, when you utilize those NOLs, they go right to the equity section and aren't -- don't get credited to the P&L. So from a purely GAAP P&L basis, we have, coming into fiscal '05, about 4 million to $5 million worth of NOLs, and we're forecasting that we're going to basically utilize those NOLs, and we have to make a, kind of, a tax provision accrual at this point to reflect that. And I'd like to point out that next year we'll probably have to have a full tax effected tax provision next year in '06, also. But having said that, we're not going to have to pay the government until we've burnt through the full $13 million worth of NOLs. Does that explain it?

Yes, it did. Now, the, basically, 20 percent rate for the quarter, is that the rate that will apply in the fourth quarter as well?

Depends on how -- what -- how the projection for the fourth quarter turns out. So it probably will be similar, yes.

Okay. And then for next year on a fully -- well, what you're saying is, next year is still not going to be a paying year until you burn through the rest of the NOLs?

Right, but we'll probably -- we will be booking a tax provision, which will probably be close to the normal tax provision percentage, which is close to, like, 37 percent.

Which is close to what?

37 percent, which is what you'd expect.

Okay. So we would be looking at a 37 percent tax rate for next year?

Yes.

And, then, finally, could you address the increase in deferred revenues for the quarter?

Yes, Pat. That's primarily due to DMI and the additional maintenance billing that we're now doing right now for them.

Okay. Thank you.

Thank you. Once again, if you would like to ask a question, please press star, and 1 on your phone at this point. And next, we'll go to the site of Sam Rabatski with SER Asset Management.

Yes, good morning -- good afternoon, gentlemen. Looking at the license revenues on American Software, they -- in the current quarter they increased about 237,000, but the costs increased 232,000. Could you talk about, you know, are you not making money on new license revenue, or could you talk about that?

Yes. I think what's happening is with the new DMI acquisition, the DMI acquisition is primarily a VAR channel. And that value-added channel, they get a higher commission than an indirect sales channel would. So as we sell more licenses through that channel, the cost of license fees would go up higher.

So the inference is that you have additional license revenue from the new acquisition and reduction in the licenses from your previous products?

That's correct. The mix is different this quarter than it has been in the previous quarters, yes.

You spoke of a three-quarters of a million dollars from -- contributed by DMI. So, is that the number that we're talking about, basically, that was increased?

No, that was a -- that was a cash flow number.

Okay. Okay. I guess, also, I guess the general administrative, I guess that's on Logility is increased substantially. Is there any unusual -- was that anything related to the acquisition?

No. No. That -- basically this is the first full quarter we had the DMI operations inside our reporting. So, typically, you would see that when you have a new acquisition compared to last year.

Okay.

Cost increases are very typical.

Now, Demand, being based in St. Louis, they do business with a lot of people with May Department Stores or people that sell to May Department Stores, and have you given any thought whether an acquisition by Federated will have a negative impact on this Company?

We don't think that they are a customer of ours. So I don't believe that it would have any impact whatsoever.

Or would you have customers that, basically, sell to May Department Stores?

I'm sure we do.

Yes. I mean, if Federated, sort of, brings some of the stuff to Cincinnati, would that -- that might have a negative impact?

I don't see how it would.

Okay. Okay. And the item that you referred to in the beginning, this potential reduction of the license number to a subsequent quarter, then whatever profit would have been in this quarter that would, in essence, be moved to the subsequent quarter? It just a -- it just a period of when the income would be picked up?

That's correct. And I'd also like to point out that this is 1 contract, it's legally binding. The customer has already paid the money, and I don't believe that, should we have to move it out of quarter or so, I don't believe that it would impact our balance sheet at all, since they've already paid.

And have you been active in buying any stock in the current quarter for either American Software or Logility, and how many shares, if you did?

We did not buy any for either Company.

Okay. Good. All right. Hopefully, you that continue to improve your license fees with better profit margins going forward.

We certainly are going all out to accomplish that.

Okay. Good luck.

Thanks.

Once again, to ask a question, please press star, and 1 on your touchtone phone now. And we'll pause for any last questions to register. And next, we'll go to the site of Benny Lorenzo with Aspire Capital Management.

Thank you, very much. Just a general question. Does it still make sense to have Logility and American Software as 2 separate Companies, given the consolidation in the software business and the need for scale, and the costs associated with having these 2 separate entities?

I think that that's a question that is always in our minds, and everything is on the table, either to, kind of, leave it like it is or to do something different. Everything is on the table. No decision has been made to change the way that it's presently set up. In the past, we've done cost analyses to try to determine, you know, what the administrative savings would be if we only had one public company, and in general, they didn't seem to -- the number didn't seem to be as much as you probably would think it would be. However, with Sarbanes-Oxley, it could be that that number is going to increase dramatically, in which case, that would maybe be another reason to do what you said.

That's what I was thinking of, because the cost will escalate, and we really are looking to have, sort of, more scale, so hopefully you'll see your way through that. Another question --

1 point. I don't think it would change the scale. In other words, we consolidate -- American Software consolidates Logility's sales and profits and expenses. So I don't quite see how it would change the scale -- change the scale of Logility, since it would go to 0.

Right. A different question. In terms of your -- as you have the Company, as you envision it going forward, what kind of an operating margin opportunity does the Company have long term? Because software companies usually have 15, 20 percent or higher operating margins. Is this Company, the way -- you know, the way your revenue mix is and the way you're doing acquisitions have that kind of opportunity?

It has the -- it has the opportunity for very good margins if we get the right mix of license fees within the overall mix. And that is the opportunity that, 1 of the opportunities that we have. For example, our growth in license fees this year, this fiscal year, has not kept pace with our growth in services, and our growth in maintenance. And part of that, we believe, is because of companies not having as large CapEx budgets as we would like for them to have. And we aren't the only software company that's impacted in this regard. Our direct competitors have suffered much more than we have. But we're hoping for better times, and we're hoping for better execution, and I think we'll get both.

I think you guys have done a great job, because you managed to remain profitable throughout this whole, tough time. So, I appreciate it. Thank you, very much.

Thank you.

Thank you. Next, we'll take a question from the site of Ron Chez with P.I.

I'm sorry that I missed a part of this, and could you tell me the -- good afternoon, by the way.

Good afternoon, Ron.

And I missed the breakout in license fees for American Software and Logility.

Yeah, Ron. This is Vince. For the third quarter the total license fees were 4.1 million and Logility was 2.7 of that.

Thank you. We'll take our next question from the site of Jason Polanski with Juniper Capital

Good afternoon. My question is about the, kind of, supplemental press release here. I just see it crossed. Can you give me a little more information about what this relates to, and, you know, is this just a timing issue?

I've been doing these conferences for -- since 1983, and this is the first time that I've had anything quite like this occur, so I would like to apologize for the story being a little more complicated and confusing, maybe, than we would ordinarily expect. I think the press release pretty well sums things -- the matter up without getting into a lot of details. It probably would be best not to do publicly.

Okay. Should we read into this anything about potential Sarbanes compliance and what, you know, the recognition of this potentially incorrectly means for that? Or is that just getting way too ahead of things?

Well, I think that Sarbanes-Oxley is increasing the amount of governance, which in turn, increases the amount of work. And so, maybe the time frames that we're accustomed to to, you know, to come up with our numbers and to have the necessary meetings with the auditors, and for them to do the things they have to do, both at the -- in the local office and maybe going back to the corporate office on various questions and issues. We probably have not fully adjusted yet to the fact that there's a lot more work in this than it used to be. And in the future we're probably going to all have to allow a little more time.

Am I correct in assuming that if this 290 is lost to this last quarter, it will be booked in the next quarter?

It will be booked in a subsequent quarter. I'm not -- I don't really know the answer as to which quarter it might occur in.

Okay. And I guess the release does not say whether it's license or maintenance. Is that correct?

License.

It's license revenue.

Yes.

Okay. So moving on to kind of a more general comment. Your thoughts on, kind of, the selling environment generally, has anything changed in the last, since the last quarter regarding what you're seeing? Any interest in RFID, which is increasing activity?

This is Mike Edenfield. I'll take that question. We had a pretty active quarter. So we've seen a pickup. There's still intense competition, and pricing pressure is pretty strong. But one of the reasons we mentioned the 21 new customers is that that's a good bit of new customers. And it's a better mix of new customers to existing customers in terms of license revenue than we've seen in a while. So we think that's a real positive sign and, you know, we're busy, we're busy chasing a lot of nice opportunities right now. So it does seem that it has picked up in terms of the amount of activity. And most of our activity has not been in the RFID, it's been more in the supply-chain planning space.

Another unrelated question. Your real estate position, have you done any more looking into, looking at realizing some value for that? Or is any plans in the works there at all?

Well we are -- we're making good progress in leasing our excess space, so that's a very positive development. And to the extent that we do that, if we were to decide to sell some of the real estate, that would make it more valuable in a selling situation.

Okay. Well, thank you, very much. Good luck to you guys.

Thank you.

Thank you. Once again, to ask a question, please press star, and 1 on your touchtone phone. And it appears we have no further questions.

Thank you very much for attending this conference call. And we look forward to talking to you again in the future.