Logility Supply Chain Solutions Inc (LGTY) 2005 Q4 法說會逐字稿

Good day and welcome to today's teleconference. At this time, all participants are in a listen only mode. Later you'll have the opportunity to ask questions during our Q&A session. I will now turn the program over to your moderator, Mr. Vince Klinges. Go ahead, please.

Good afternoon. Welcome to American Software's fourth 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 expectations that 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 in general economic conditions, the growth rate of the market for our products and services, the timely availability and the market acceptance of these products and services, the effective competitive products in pricing, and the irregular pattern of revenue. In light of these risks and uncertainties there can be no assurance the forward-looking statements will prove to be accurate.

At this time, I would like to turn the call over to Mike Edenfield, (indiscernible) President of American Software and CEO of Logility.

Thanks Vince. Good afternoon and thanks to all of you for participating on this call. We are very pleased to report the results of American Software's fourth fiscal quarter which ended on April 30th as well as the results for the fiscal year 2005. The fourth quarter marked our 17th consecutive quarter of profitability under GAAP. For the fourth consecutive quarter, total revenues increased over those obtained in the previous year. The increase for the fourth quarter was a robust 40% year over year.

We are also pleased the Company was able to deliver double-digit revenue growth in every revenue category during the fourth quarter -- license fees, services and maintenance. We like those trends, obviously.

Earnings increased sharply in the quarter with operating earnings up 38% and earnings per share up 500%. Operating earnings were diluted by non-cash asset impairment charge and acquisition-related intangible costs. Operating earnings were then more than doubled the reported amount without those charges.

We have included in our press release an adjusted net income reconciliation which shows the impact of those costs, as well as the income tax provision benefit we received. Vince will provide a more specific explanation when he reviews the financial details later on this call. But the increase to EPS for the quarter with the adjusted number vs. the GAAP numbers is $0.01 per share.

However the mix of the adjusted earnings is much more heavily weighted to operating income; and we think this better represents the Company's performance for the quarter.

For the full fiscal year 2005, the Company delivered its fourth consecutive year of profitability and we are particularly pleased with the 18% revenue growth year over year. Strong services growth in our consulting and staffing businesses, as well as nice increases in maintenance revenues, fueled the overall review growth.

As I mentioned earlier, revenue grew year over year in each of the fourth quarters of the year. But also the rate of year-over-year growth grew sequentially each quarter. It was 5% in the first quarter, 10% in the second quarter, 19% in the third quarter and then of course 40% in the fourth quarter. We very much like that trend as well.

GAAP net earnings for the year were 5.2 million, down 9% from last year but adjusted net earnings were 5.9 million -- up 2% from 2004. Both GAAP and adjusted earnings were impacted negatively by the purchase accounting treatment to fair value DMIs -- excuse me purchase accounting requirement fair value DMIs deferred maintenance which temporarily lowers the maintenance revenues reported.

The Company's balance sheet remains very strong with cash and investments of approximately 59 million with no debt. The 59 million represents about a 2.2 million sequential increase from the third quarter.

Some additional highlights for the fourth quarter fiscal year 2005 include notable new and existing customers placing orders with American Software in the fourth quarter, which included Burberry, Caremark International, (indiscernible) Design, Hamilton Beach, Honeywell, Hamatu (ph), Penavasa (ph) and Republic Beverage Company, among others.

During the quarter, software license agreements were signed with customers located in 13 different countries -- including Australia, Belgium, China, El Salvador, Germany, Italy, Malaysia, Mexico, Poland, Switzerland, the United Kingdom, the United States and Venezuela.

The Company announced that Penavasa licensed 16 server copies of its ERP software applications. The American Software solutions will be used to support their oil lubrication facilities throughout Venezuela.

The fourth quarter represented the second full quarter of operations, which included our acquisition of Demand Management. We spent a lot of time and energy in integrating their operations into Logility.

Let me now update you briefly on Logility including Demand Management. Some of Logility's key highlights for the quarter were 31% year-over-year revenue growth with all revenue streams growing at least 22%, led by maintenance with 40% year-over-year growth.

We added 13 new customers. We licensed either the Logility (indiscernible) product line or the Demand Solutions product line, we had strong operating cash flow of approximately 3.3 million.

We were encouraged by the number of new customers licensing our products as that is a healthy sign for the future. Our strong financial position at Logility continues to be a competitive advantage vs. our primary competition.

Regarding our products for Demand Management, we continue to be pleased with the acquisition and the performance of the company. Due to the fair valuing of the acquired deferred maintenance revenues previously, the acquisition has temporarily diluted Logility's earnings as expected. However, Demand Management has contributed positive operating cash flow thus far.

Regarding fiscal 2006, we believe Logility's pipeline activity is better than this time last year; but as usual closure rates will be key. We are expecting, however, both Logility's maintenance and license fee revenues to increase this quarter and in the second quarter.

I would now like to turn the call over to Vince for a more detailed review of the financial results.

Thanks, Mike. During the fourth quarter '05 the same period last year as Mike indicated total revenues increased 40% to 18.7 million compared to 13.4 million in the same quarter last year. License fees increased 17% to 3.4 million compared to 3 million for the same period last year due to an increase in Logility and ASI's ERP business unit.

Services and other revenues increased 61% to 9.9 million compared to 6.2 million, primarily due to increases in our IT staffing businesses -- (indiscernible) the proven method -- and also to a lesser degree, increases in services revenue and Logility, ASI's ERP and our new generation computing business units. And this is due to increased project implementation work during the quarter.

Maintenance revenues increased 26% to 5.4 million compared to 4.3 million, primarily due to increases in Logility from Demand Management. Cost for the quarter -- the overall gross margin was 54 -- excuse me, 51% for both the current and the prior year quarter. License fee margin increased to 71% compared to 64%, due to increase in license fee sales and lower cost of license fees from capitalized software amortization expense compared to last year.

Services margins improved to 32% this quarter compared to 29% due to better margin business in our IT staffing business and our ASI's ERP business unit. Maintenance margin this quarter was 71% compared to 73% for the same quarter last year; and this is lower due primarily to the DMI acquisition and -- as Mike indicated -- the GAAP purchase accounting, required us to fair value the deferred maintenance which temporarily lowers the maintenance revenue but not the related expenses for GAAP reporting.

Taking and looking at our operating expenses, our gross R&D expenses were 11% of total revenues for the quarter compared to 13% for the same quarter last year die to higher revenues. As a percentage of revenue sales and marketing expenses, we're at 18% of revenues and 3.3 million for the quarter compared to 22% in the same quarter last year, again due to higher revenues when compared to last year.

Our G&A expenses were 3.2 million or 18% of the revenues, which was the same as last year. We had a non-recurring charge for an asset impairment of 703,000 this quarter. Our operating income was 689,000 this quarter compared to 500,000 same quarter a year ago. Our EBITDA was 2.3 million compared to 1.8 million same period last year and our GAAP net income was 1.4 million or earnings per diluted share of $0.06 for the fourth quarter and that compared to net income of 221,000 earnings per share of $0.01 for the same period last year.

Adjusted net income for the fourth quarter -- which excludes our acquisition-related amortization costs -- and asset impairment and the tax benefit was 1.7 million or $0.07 earnings per share.

International revenues for this quarter were approximately 11% of total revenues compared to 9% same quarter last year. Comparing the full fiscal year '05 to fiscal year '04, total revenues increased 18% to 64.6 million; and that compares to 54.7 million for year '04.

License fees were 12.3 compared to 12.4 million, same period last year. Services revenues increased 35% to 32.8 million; and that compares to 24.4 million same period last year.

Maintenance revenues increased 9% to 19.5 million during fiscal '05 and that compares to 17.9 million last year.

Taking a look at our cost our overall gross margin was 50% compared to 53% for the same period last year. License fees' margins increased slightly to 66% from 65% last year. Our services margins were 31% for both current and prior year. Our maintenance margin was 71% when compared to 74% last year.

Looking at operating expenses, our gross R&D expenses were 7.7 million or 12% of revenues for '05 compared to 14% for the same period last year. As a percentage of total revenues and marketing expenses were 19% compared to 21% for the full year last year and G&A expenses were 17% of revenues for both periods.

Our operating income for fiscal '05 was 2.6 million compared to operating income of 4 million last year. EBITDA on for fiscal '05 was 7.5 million and that compares to 9.6 million for the same period last year.

Also in the fourth quarter, we recorded a tax benefit of 500,000 and that related to reducing our valuation reserve from some of our tax assets. Going forward into fiscal '06, we had approximately 9 million of net operating losses to use for future earnings. However they are related to stock option compensation which, when utilized, are credited against equity and not income so as a result of this we expect to record a normal tax provision in fiscal '06.

Also our net income was 5.2 million or $0.21 earnings per diluted share and a net income of 5.7 million. That compares to 5.7 million or $0.23 earnings per share last year.

Our adjusted net income for fiscal '05 -- which excludes our acquisition-related amortization -- the asset impairment and the tax benefit was 5.9 million or $0.24 earnings per share. International revenues for the full fiscal '05 were approximately 8% of total revenues and that compares to 7% of the same period last year.

Take a look at the balance sheet, our Company's financial position remained strong with cash -- cash in short-term and long-term investments of approximately 59.1 million at the end of the year and no debt. Cash increased 2.2 million sequentially from the prior quarter ended January 31st, 2005.

Some other aspects of our balance sheet, we had bills accounts receivables of 9 million unbilled of 3.5. Working capital was 48.8 million. Deferred revenues were 13.6 million. And stockholder equity was 76.1 million. Our current ratio is 3.2 and our day sales outstanding as of April 30th, '05 was approximately 63 days and that compared to 70 days this time last year.

At this time I would like to turn the call over to questions.

(OPERATOR INSTRUCTIONS) Justin Cable from B. Riley.

I primarily just have some financial questions. On the gross margins -- showed some nice improvement there realize that on the maintenance side it is being impacted by the accounting -- acquisition accounting. Are the gross margins of the first quarter sustainable going forward? I noticed, I think that software margins were higher than normal. I think there is probably reduced amortization there. What should we expect going forward?

We anticipate that the license fee margin will improve going forward.

Can you give us what the overall impact was, as a result of the accounting -- the acquisition-related accounting -- where you can't recognize certain maintenance contracts?

We have to estimate that. It's not like a specific number but it's -- I would say it's in the hundreds of thousands of dollars this quarter. It was less than it was the prior quarter.

In revenues?

Yes. Hundreds of thousands of revenues.

Can you give us your CapEx and depreciation for the quarter?

Yes. CapEx was about 660,000 and depreciation -- if you factor in the depreciation amortization -- excuse me depreciation was 200,000; amortization was 1.4 million which actually includes the 700,000 asset right now. So your total is 1.6.

And then the tax provisions in 2006, what should we assume?

At this point we assume a normal 38% tax provision.

Did you mention that international revenues were 8%?

For the full year, yes. For the quarter it was 11%.

Got it. Maybe talk about your plans for to grow the international business, where you expect it to see growth and what regions, obviously, you signed a lot of deals with some customers outside of the U.S. What's your growth strategy on international?

We have expanded our coverage with the acquisition of DMI and I think that is one of the things that will fuel an increase in our international business. We are also expanding the Logility direct sales organization slightly in Europe. As a matter of fact, our largest order was an international order this past quarter in Belgium.

So I think that area has been hit even harder than our domestic business was in terms of activity levels. But we see an opportunity there to grow the business there -- just because it's such a small, small part of business right now and we just have more feet on the street going into this year than we did last year.

Patrick Flavin of Flavin, Blake & Company.

Good afternoon. Can you take us through, Vince, the charge for asset impairment? What was that related to?

Yes, Pat. Part of your review when you look at capitalized software is, you do what they call a net realizable value analysis and you (technical difficulty) take a look at your future sales on different projects within your cap software area. If you don't achieve a certain amount of value on the amount you have -- asset on your books -- you take a write-down for it. And that was what the charge was related to.

Okay, so does that lower the accruals that you have to make in the intervening period?

It lowers the amortization expense going forward, yes.

And that amortization expense is due to annualized -- or to be finished when?

It would have impacted pretty much '06. So it would have been realized -- the expense would have been realized in '06.

So we should view this really as a forwarding of what would have been future expenses?

Yes. And non-cash.

Okay. Then, can you also discuss the interest income and other income line of $231,000 gain vs. $189,000 loss last year?

Yes. Last year at this time we had a write-down of one of our minority investments that we had. It was roughly around $300,000 last year. And that is what caused the swing from the loss of last year to the gain of this year.

On the minority interest line, you actually showed a gain this year. Can you talk about that?

The way that works is if Logility actually has a loss for the quarter that actually you book a game for the minority interest component of that. It works the inverse to what Logility -- whether they make money or whether they lose money.

So that is the Logility line?

Yes.

Finally on income taxes, you will be in a current pay position next year at a rate of 38%?

Yes, for GAAP purposes only. We still have $9 million of NOLs to actually utilize, prior to us paying taxes to the government. However when we utilize that 9 million it gets credited to the equity. So it has -- it really has no impact on the P&L. So we have to book a normal tax provision next year.

Thank you; it's nice to see the robust numbers this quarter.

(OPERATOR INSTRUCTIONS) Sam Rabatski of SER Asset Management.

As far as the interest income and other for the full year the 2,299,000 million vs. the 2,055,000. At the end of last year there was an item 1,258,000 as other net. Could you talk what that was and in the current year is there something like that other what -- in the current full year?

Yes. We break out our -- in the SEC filings we break out our interest income and the other net would be unrealized gains. And also from our equity portfolio and also the other component of that would be rental income. American Software actually has tenants inside of our building portfolio that we own in Atlanta; and we are actually getting rental income from that so that would go to that line also.

So in the current year there would be a similar 1,258,000 for other net?

Yes it would be a rental income. If the actual number would actually depend on what the unrealized gains component of our equity portfolio would be.

Is there unrealized gains in your equity portfolio for the current year?

Yes.

Yes there is. Okay. As far as the pipeline, how does it appear between at the end of the fourth quarter and the third quarter?

I think it's improved. We've got an opportunity to do well this quarter. We are off to a good start and we're very optimistic about our first quarter.

So the pipeline is better than it was last year. Is it taking you as short a time to close or is it the same time to close? Is it just you've got more in the pipeline?

Any deal it takes you shorter or takes you longer. I wouldn't say it's improved any there. I think we just have more quality further along in the pipeline than we did this time last year and this time last quarter.

And would you say that the -- the Logility portion where the -- you have seven months in the business of Demand Management. Would you say that Logility's previous business is off or American Software's previous business is off to the extent that the -- you have seven months of Demand Management vs. none the previous year?

The growth the American Software showed was more organic growth than in organic. Substantially more. Another way of saying it is, there was more growth without DMI than growth with DMI. The DMI contributed to the seven months you're talking to.

And as far as Sarbanes-Oxley, what do we have for the full year in the current quarter?

As far as expense?

Yes, compared to the last year.

Well, we typically don't disclose individual expense items like that but it is a big component of the G&A expense at this point, compared to last year.

Would you say it's in the range of .5 million to 1 million increase or is that -- or any -- can you give a range or --?

Yes, I can give a range. It's in there.

Do you expect that to reduce going forward now?

We believe so, yes.

So you will get benefit in the first quarter from reduction in Sarbanes-Oxley?

Yes. We're still unclear about what magnitude of reduction but we are still working with the auditors on that.

Was there any stock bought in the fourth quarter?

No. There was no stock purchases on American Software this quarter.

I'll come back into the queue. I have a couple of other questions. Thank you.

Jason Polanski of J.P. Capital Management.

Just a couple of quick ones, I think. You mentioned the organic growth was larger than the inorganic growth. I guess that you are referring to the quarter as opposed to the year or perhaps both? Can you quantify that any more?

Well we were referring to both and it's substantially larger.

That's as close is you want to get?

Yes.

On the real estate front, is there quite a bit of additional potential space that could be leased or is it pretty much full up now?

There's still a good bit that could be leased.

Would you say that you have half the space rented?

Probably not.

We actually are looking for tenants at this point. So we are in the process.

Sam Rabatski.

Is there any thoughts of combining the A and B shares and combining Logility to create one company with an easier possible valuation and getting additional investors into the picture?

In terms of combining Logility we got this question last time, too, from somewhere else, last quarter call. In the past when we've done cost benefit analysis on that, it hasn't seemed to be real black and white answer. If anything for the effort and risk and focus, there weren't a whole lot of cost savings now.

What may change that equation is Sarbanes-Oxley. And we are looking at that now and so, nothing, it hasn't been decided that we won't do it combine Logility back end with American. We haven't decided to do that or to not do that. It's open and it could be one answer one quarter and could change the next quarter. That's where our thinking is on that.

As far as the A and B shares and combining them and others -- and changing the structure?

I'm probably not the right person to talk to about that.

Thank you very much. Hopefully in the future you'll continue the improvements that you started and you'll get more interest in the Company.

Well we are planning on it. Thank you for your interest.

Patrick Flavin.

Mike, could you talk through again -- there was a sizable increase in the services component and you mentioned IT staffing and a couple of other items. Could you talk through these increases? And are these secular in nature or are these just rebounds from cutbacks earlier?

I don't believe they're rebounds from cutbacks. I believe it's -- I know it's increased business. It's interesting that I believe every business unit had growth in it. So it wasn't two of the four or one of the four or even three of the four. All four of the business units had increases in services.

So do you believe that there's the opportunity for these to become secular growth aspects of the business?

I believe there is. Now with the software part we need to increase the license fees that further grow the services. But the non-software part has got a lot of momentum right now.

It appears there are no further questions from the phone lines.

Thank you very much for your time and interest in American Software; and we are very happy with this quarter, the past quarter. But what's more important now is this quarter and future quarters. And we think we're off to a good start as we stated earlier. We think we're going to show some nice results and we look forward to the conference call at the end of the first quarter.

This concludes today's teleconference. You may disconnect at anytime.