Logility Supply Chain Solutions Inc (LGTY) 2006 Q2 法說會逐字稿

Good day. All sites are on the conference line in the listen-only mode. Please note that today's call may be recorded.

At this time I'd like to turn the conference over to your host, Vince Klinges. Go ahead, please.

Good morning. Welcome to American Software's second quarter fiscal '06 earnings conference call.

Today on the call with me is Jim Edenfield, CEO of American Software, and Mike Edenfield, Executive Vice President of American Software and CEO of Logility.

To begin I would like to remind you that this conference call may contain forward-looking statements including statements regarding among other thing 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 and 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 not limited to changes in general economic conditions, the growth rate of the market for our products and services, the timely availability of market acceptance of these products and services, the effect of competitive products and pricing, and 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'd like to turn the call over to Mike Edenfield.

Thanks, Vince. Good morning, everyone, and thank you for participating on this call.

We're very pleased to report the results of American Software's second fiscal quarter of 2006 which ended on October 31st. The second quarter marked our 19th consecutive quarter of profitability under GAAP.

For the sixth consecutive quarter total revenues increased over those attained in the previous years quarter. The increase for the second quarter was a healthy 28% year-over-year.

We are also pleased that the Company was able to again deliver growth in every revenue category during the second quarter led by license fees with 96% growth. Growth from Logility and the Proven Method were the primary contributors to the second quarter revenue growth.

Operating earnings increased sharply in the quarter, up 121% over the same period last year. Net earnings are down because of income tax expense for the quarter compared to no income tax expense in Q2 last year and several non-cash expenses most which are non-recurring.

Year-to-date revenues have increased 25%, led by strong license fee growth of 65% and operating earnings have increased a robust 83% compared to the same period last year. The Company's balance sheet continues to remain strong with cash and investments of approximately 57 million, and no debt.

Some additional highlights for the second quarter include notable new and existing customers placing orders with American Software in the second quarter include Allegheny Energy Service, A.O. Smith Water Products, Armani Exchange, Cavendish Farms, Hooker Furniture, Hughes Supply, Mendocino Forest Products, Ruiz Food Products, Shaw Industries, St. Michelle Winery, U.S. Facilities Management and Wrigley Chewing Gum Company Limited.

I would now like to go into some details on Logility's results.

Logility had an outstanding second quarter. Strong licensing and other operational improvements contributed to record quarterly operating earnings of almost $1.3 million.

Some of the key highlights for the quarter were 92% revenue growth compared to the year ago quarter when growth in all revenue streams led by 447% increase in license fees. The majority of the growth in license fees resulted from organic growth while the acquisition of Demand Management accounted for approximately 20% of the license fee growth.

22 new customers signed license agreements in the second quarter, a sequential increase from 18 new customers signed in the first quarter. Customers from seven countries signed license agreements during the second quarter.

Those countries included Brazil, Canada, China, Italy, Mexico, the United Kingdom and the United States. We continue to be encouraged by the number of new customers who have committed to license agreements for our products.

As many of you know new customers drive future maintenance and implementation services revenue and also present excellent prospects for additional product license sales.

We are also very pleased with Logility's year-to-date results. For the first half of fiscal '06 total revenues increased 57% from last year. All three revenue streams are up at least 16%.

Year-over-year license fees for the first half of fiscal 2006 were over 6 million, almost triple the number from last year. As with the second quarter revenue growth was both derived organically and from the Demand Management acquisition.

Our operating earnings for the first half of fiscal 2006 for Logility are over $2 million, which is higher than Logility has ever reported for an entire year, and we still have two quarters left in our fiscal year. So in summary Logility had a great quarter and an excellent first half.

Regarding the third quarter of fiscal 2006 pipeline activity is better than it was at this time last year. It also appears to be as good if not better than this past quarter, but as usual, closure rates will be key.

We were very pleased with Logility's closure rates in the second quarter. We're also expecting Logility's maintenance revenues to increase nicely this quarter compared to the third quarter last year.

So what do we think has contributed to these strong results? First of all, we think it is not necessarily any one thing but a number of factors working together. From a macroeconomic perspective clearly the economy continues to improve.

Secondly, we believe the globalization of the supply chain is forcing many companies to invest in the supply chain systems infrastructure. Many companies have or will move some or all of their manufacturing offshore to Asia. This is now not an option for many but a means of survival.

While this transition certainly allows them to greatly reduce their manufacturing costs, it puts significantly more pressure and less transparency on the supply chain process. Lead times are significantly longer and the cost of a mistake is much higher.

Many of our customers sell to mass merchandisers like Wal-Mart, Target, Home Depot, and Lowes and those companies are putting continual pressure on their suppliers to increase their fill rates and shrink replenishment lead times as well as reduce costs.

Specific to Logility I believe our sales and marketing team is executing well. Closure rate, and very importantly, the number of quality opportunities we are competing at have increased.

We believe this is due to the economic and industry factors I previously mentioned as well as good execution in our field organization. Our organizational and financial stability is clearly helping us establish relationships with customers and perspective customers as compared to some of our competitors.

Lastly, we're seeing some tangible revenue synergies from the Demand Management acquisition. The acquisition has broadened the presence and brand awareness of both companies in the market and provided lead referrals from one sales channel to the other as well as upgrade opportunities and cross-selling of products.

A couple examples of this would be Logility has selected an account that we hope [inaudible] this quarter where the Demand Management sales channel had an existing relationship with that customer.

The customer was looking at a, invested in some supply chain software, Logility was not on their list. They recommended that Logility be added to the list and we subsequently have been selected as a result of that referral and due diligence by the customer.

Additionally, Demand Management's provided some technology to us that we've sold in a couple of our recent deals increasing the size of the deals. That product was a sales and operations planning product that was sold with some other Logility products and Demand Management has sold a way to collaborate to some of their existing customers, so we're seeing add on sales for existing products within each other's customer base.

So very pleased with the quarter and what I'd like to do now is turn the call over to Vince for a detailed review of the financial results.

Thank you, Mike.

Comparing the second quarter of '06 to the same period last year total revenues increased 28% to 19 million compared to 14.9 million in the same quarter last year, primarily due to license fee increasing of 96% to 5 million, with the result of the overall revenue increase and that compares to 2.6 of license fees in the same period last year.

Primarily the license fees increased because of Logility, which increased their license fees by 447% compared to the same period last year. Services and other revenues increased 6% to 8.1 million compared to 7.6 million, and that's primarily due to increases in Logility and out IT staffing business, the Proven Method.

Maintenance revenues increased 26% to 5.9 million compared to 4.7 million, primarily due to increases in Logility which increased 44% compared to the same period last year.

Taking a look at some of the costs, the overall gross margin was up to 55% for the current quarter compared to 49% for the same period last year. Our license fee margin increased to 80% compared to 65% due to increases in license fee sales and lower cost of license fee from lower capitalized software amortization expense compared to the same period last year.

Our services margins decreased to 27% this quarter compared to 30% due to lower margins from our IT staffing business. Our maintenance margin this quarter was 72% compared to 71% in the same quarter last year.

Taking a look at our operating expenses, our gross R&D expenses were 12% of the total revenues for both current quarter and prior year quarter. As a percentage of revenue, sales and marketing expenses were 19% of revenues, or 3.5 million for the quarter and that compares to 19% for the same quarter last year.

G&A expenses were 3.4 million, or 18% of total revenues and that compares to 16% for the same quarter last year. The increase is primarily due to G&A expenses related to the DMI acquisition and some audit fees.

Operating income increased 121% to 1.8 million this quarter compared to 810,000 for the same quarter a year ago.

EBITDA was 2.8 million compared to 2 million the same period last year. Our GAAP net income was 813,000, or earnings per diluted share of $0.03 per share and that compares to net income of 1.5 million, or earnings per share of $0.06 for the same period last year.

Adjusted net income was 1.3 million, or earnings per diluted share of$0.05 for the second quarter and that compares to 1.6 million, or earnings per diluted share of $0.06 for the same period last year. The adjusted number excludes the following three non-cash items: Amortization expense related to our DMI acquisition, a write-down to fair value of minority investment we have, and the third item is the minority interest expense component related to a fairly material tax benefit recorded at Logility in the second quarter.

International revenues this quarter were approximately 9% of total revenues and that compares to 6% in the same quarter last year.

Just quickly going over the year-to-date numbers, the six-month ended October 31st '05, compared to the same period last year, total revenues increased 25% to 35.8 million and that compares to 28.6 million. That's primarily due to license fees increasing 65% to 8.4 million compared to 5.1 million in the same period last year.

Service revenues also increased 10% year-to-date to 15.8 million and that compares to 14.4 million last year. And our maintenance revenues increased 28% to 11.6 million compared to 9.1 million last year.

Our overall gross margins year-to-date are 53% and that's up from 50% in the same period last year, and that's primarily due to license fee margin increasing to 75% when compared to 65% last year.

Our services margins were 27% compared to 30% in the same period last year, a little lower due to our IT staffing business which is a larger component of our services revenue now. Maintenance margins were 72% for both periods.

Looking at operating expenses year-to-date our gross R&D expenses were 12% of total revenues for the six-month period compared to 13% for the same period last year. As a percentage of total revenue, sales and marketing expense were 19% compared to 20% for the same period last year and that's due to higher revenues.

G&A expenses were 18% of revenues compared to 17% the same period last year.

So our operating expenses year-to-date were 2.5 million compared to operating income of 1.4 million last year. Our GAAP net income was 1.8 million year-to-date, or $0.07 earnings per diluted share and that compares to net income of 2.6 million, or $0.10 earnings per diluted share last year.

Adjusted net income year-to-date was 2.4 million, or earnings per diluted share of $0.10 for the year-to-date and that compares to a net income of 2.8 million, or earnings per diluted share of $0.11 for the same period last year. International revenues year-to-date were 9% of total revenues and that's up from 6% to the same period last year.

Looking at the balance sheet our cash and investments are 57.2 million at the end of October and no debt. Looking at some of the other elements of our balance sheet our billed accounts receivable is 8.5 million, unbilled is 4 million, our working capital's roughly around 49 million, deferred revenues are 13.4, and our shareholder equity is 77 million.

Our day sales outstanding as of October 31st '05 was approximately 61 days, and that is down from 75 days at this time last year.

At this time I'll turn the call over to questions. Eric?

[OPERATOR INSTRUCTIONS] We have a question from the site of Patrick Flavin. Go ahead, please.

Good morning, Mike and Vince. Congratulations on a nice quarter and hopefully there's some building momentum here.

A question for you, Vince, on the interest income and other line. There's a 67% decline in positive numbers from a year ago. Can you fill us in on that and also I presume that the minority interest decline is related to the large Logility earnings?

Yes, Pat. I'll take the interest income and other line first.

Inside that number is also the write-down of a minority investment of 160,000 so that impacted the quarter. And also we have some unrealized losses on our equity portfolio this quarter, however, year-to-date they're actually unrealized gains. So if you look at the year-to-date number we're pretty much up on our other income, our other, excuse me interest income and other line.

As far as minority interest expense, yes, that's fairly large due to two reasons. First, Logility doing so well this quarter and also a tax benefit that Logility recorded this quarter which is actually one of those adjusted items down below in the adjusted reconciliation area.

Okay. And then, Vince, on the amortization of intangibles, given the annualizing of the acquisition of DMI, I assume that those are done now?

As far as the fair valuing issue on the maintenance we were impacted slightly this quarter related to that and we are, we have completed that so next quarter will be normalized, yes.

And then, Mike, can you give us a top line view of competitive features and you had mentioned that the pipeline is better looking than it has been for quite some time? Could you give us an insight into the composition of that and where the business is coming from, smaller versus larger accounts, et cetera?

From a product perspective and I'll be speaking for the verticals we focus in which are primarily, and I'm going to answer this from a supply chain perspective, typically it's distribution intensive industry's such as consumer goods, food and beverage, service parts, payroll companies, consumer durables. The real strength of the product line is the fact that it really fits those vertical markets well. If you look, we've had many, many years of focusing on those verticals and all our R&D has been very targeted for specific needs those companies have so it's very deep functionally.

But another real strength that is really playing to what the market's looking for in our opinion these days is the rapid time to benefit. In other words, you don't have to have a year and a half project or a two-year project and then wait another year or two for an ROI.

Most of our customers are looking to implement depending on the scope of their project anywhere from three to nine months and get a return within six months to a year from that. So we're able to provide [inaudible] to them in the sales cycle that shows that we're a great value.

In other words, while we charge a pretty good amount for our products when you compare it to what some other folks charge and how much it costs, the total costs of ownership, how long it takes to implement, we come out as a much better value. So it's a combination of superior functionality and a better value story in terms of the return versus the total cost of ownership. What was your other question, I'm sorry?

Can you talk a little bit about the prior hesitancy of accounts to close and whether that has changed now given the stronger economy?

Well it definitely changed the last quarter. And so far this quarter it seems to, the positive trend seems to be continuing.

We're a third through the quarter and we're pleased with what's happened so far along that line. So it does seem like the people are pulling the trigger now.

And then Vince, just a last thing, your tax rate for the quarter is 38%. Is that what we should be using for the year.

Yes, Patrick, that's roughly the effective rate, yes.

Okay. And then finally, just a suggestion, if you could now include a cash flow statement as well as your P&L and balance sheets that would be very useful.

We will take that under consideration.

Thank you.

Thank you. We'll take our next question from the site of Sam Rabatski with SER Asset Management. Go ahead, please.

Good morning, Vince and Mike, very good quarter.

The write-downs relative to the investments, could you sort of address what type investments these are? Are these and is there any possibility that, are they going to fluctuate from quarter-to-quarter?

There's really two types of investments. The one that's reconciled on adjusted net income, the 160,000 write-down of a minority investment, that's an investment Logility made back in the late 1990s.

We own 10% of a small company and their business has showed down so we've just, slowed down for a number of years so as we value the asset periodically we try to be conservative. There is really not much left on the books for it any more. I think there's less left than is in the write-down amount for this quarter for example. So we don't expect to have any more material write-offs from that.

So that's the basic thing, everything else, is it your, there's no fluctuation of your major cash, I mean they will just be reflected as an income basis, I presume?

A small portion of our 57 million is in equities and that fluctuates from quarter-to-quarter. So first quarter it was strong, it was weaker second quarter. It's already bounced back this quarter. That's what a portion of that was.

Okay. Now as far as the shorter cycle to close, so you see going forward anything in the pipeline, what is it taking to close now versus say the previous quarter, what is the, six months --

There's still a large range. There's still a large range to it. We just had more of them come in this quarter.

I think it's a combination of having more in the pipeline, more quality in the pipeline as well as in the past it seemed like more often than not we would get delays, just delay after delay after delay. And this quarter that just didn't happen.

So we saw somewhat I would call traditional sales cycles where it was six to nine months as opposed to what was becoming traditional was significantly longer than that in many cases. So, but I think the big thing that we like was just we had more quality opportunities and we believe we have that again this quarter.

So it appears that the cycle should be shorter going forward, then?

Yeah, if this is not a blip, last quarter was good. We're off to a good start this quarter. People appear to be motivated this quarter as well, so we'll see.

Does it appear they sort of feel they need your products sooner or is it, and they got an open to buy or to spend from their financial end, is that what's loosening it up or is it?

Well, supply chain software investment was clearly down the last few years, if you look at the industry, so it's not like their business was, didn't still have issues it needed to address, it's just given the overall state of the market and maybe their individual situations they were not investing. And what's happened is this globalization that I referred to earlier has continued.

So while everybody was not investing they were running a more globalized business in a more globalized economy with systems that maybe weren't' really designed for that. And so what's happening is, they're recognizing that and they're adjusting their business models and investing in systems now and their businesses are better in a lot of cases. So I think it's just a combination of things.

And it would appear that the size or dollar valuation of the pipeline is higher at this point than last quarter or the same considering that there's a shorter time to close possibly or what is the dollar amounts look like?

It's up considerably over what it was this time last year. It's, if you wanted to be optimistic it's a little up from last quarter, second quarter. Third quarter is a little up [inaudible].

That seems good, I guess. So, and as far as your ownership of Logility, is there any kind of thoughts? You've been acquiring stock in Logility and I guess you have a, you still are capable of buying and I guess has the Board thought about any plan to smooth out by combining both companies or are there any thoughts there at this point?

All options are still on the table there.

Okay. Well, good luck. Thank you.

Thank you.

Thank you. We have another question from the site of this time Justin Cable with B. Riley and Company. Go ahead, please.

Thank you. I was wondering if you could give us some kind of organic growth rate or perhaps talk about revenue comparisons from Q2 this year versus Q2 last year if we assume Demand was a part of the Company for the full quarter last year?

Did you say assume Demand was in there what the growth rate was?

Yeah, if you assume Demand was a part of the Company for the full quarter of last year what sort of the organic growth rate year-over-year on the top line?

Justin, the kind of way we looked at it and the way Mike's narrative explained it was that of the license fee growth on Logility this quarter 20% of it was due to DMI. So the rest of it was due to organic growth.

And then from a revenue point of view for Logility, the metric would be closer to 50, roughly 58% is organic growth for Logility.

Okay. That helps.

And also I guess were there any large deals or a few deals that were larger this quarter that might be been sort of a near-term benefit or were you just seeing strength across the board?

We did more deals and we did one larger deal but we did more deals as well so we definitely did more deals.

How large was the large one?

We don't disclose that but it was, it will probably be our largest deal for the year.

Okay. And deferred revenues came down sequentially during the quarter. Is this a seasonal pattern? I think maybe Q2 last year probably benefited from just having the demand, deferred revenues, but it did tick down sequentially this quarter. I was wondering if that's just a seasonal pattern?

It's maintenance revenues primarily.

Right. But is a seasonal pattern to see it come down in Q2?

Yes, Justin, it depends on anniversary dates and billing.

Right. Okay. Thank you. Once again, if you'd like to ask a question, please press the star and one on your touch-tone phones. We have a question from the site of David Soetebier with J.M. Dutton. Go ahead, please.

Thank you. Good morning, gentlemen, great quarter.

I wonder if you could just quantify though the fair value adjustment in this quarter so we can see what the base is going forward? And then at Proven Method, could you give us a feel for those contract lengths and then this business has obviously turned up rather sharply in the last year. Can this business drop off quickly or are these, is this kind of a slow up, slow down?

David. This is Vince. I'll take the first question.

The fair value issue had a fairly immaterial impact this quarter. It was around, between 100, 150,000 this quarter. And it will have no impact in the third quarter.

Could you repeat the second question, please?

On Proven Method I'm trying to get a feel for how this business grows and declines, is it quick to these contracts, can they end in a month or are these some longer running contracts?

It can go up quick and they are short-term contracts generally.

Thank you.

Thank you. It appears that's all the questions that we have at this time so I'd like to turn the program back over to Mr. Klinges.

Thank you very much for your time and interest in American Software and we're very pleased with the quarter and look forward to our next reporting of results of our third quarter fiscal '06 numbers.