Logility Supply Chain Solutions Inc (LGTY) 2006 Q3 法說會逐字稿

Welcome to the American Software third quarter fiscal year 2006 earnings results. I'll now turn the call over to Mr. Vincent Klinges. Go ahead, please.

Thank you. Good afternoon. To begin, I'd like to remind you 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 numbers of risks and uncertainties, some of which may not 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 are not limited to; changes in general economic conditions, the growth rate of the market for our products and services, the timely availability and a market acceptance of these products and services, the effective competitive products 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'd like to turn the call over to Mike Edenfield, Executive Vice President of American Software and CEO of Logility.

Thanks, Vince. Good afternoon, everyone, thank you for participating on this call. We're very pleased to report the results of American Software's third fiscal quarter of 2006, which ended on January 31st. The third quarter marked our 20th consecutive quarter of profitability. It was the seventh consecutive quarter total revenues increased over those obtained in the previous year's quarter. The increase for the third quarter revenues was a healthy 17% year-over-year. We're also pleased that the Company was able to again deliver growth in every revenue category during the third quarter, led by licensees with 32% growth. Operating earnings increased sharply in the quarter, up 298%, or almost quadruple over the same period last year. Net earnings also rose substantially to approximately $2 million or $0.08 per share for the quarter.

Year-to-date revenues have increased 22%, led by strong licensee growth of 51%. Year-to-date operating earnings were $4.6 million, an increase of 144% compared to the same period last year. Company's balance sheet remains strong with cash and investments of approximately $58.5 million and no debt.

We added a number of great customers this quarter, some of the notable new and existing customers placing orders with American Software in the third quarter include; A.O. Smith, Blair Corporation, Caremark, The Casual Male, Dawn Foods, Games Workshop Ltd., Herbalife International, Infantino, Kellwood Company, Klaussner Furniture Corporation, Pfizer, Plumber Supplies of Australia, Remy International, School Specialty, Tyco Safety Products, West Pharmaceutical, and VWR International, among others.

I'd now like to go into more detail on Logility, our majority owned subsidiary's results. As you know, Logility had an outstanding second quarter, however, the third quarter was even better. Record revenues contributed to record quarterly operating earnings of almost $2.2 million. Some of the key highlights for the quarter were 41% revenue growth compared to year ago quarter, with growth in all revenue streams led by a 65% increase in license fees. 23 new customers signed license agreements in the third quarter and customers from nine different countries signed license agreements during the third quarter. Those countries include Australia, Belgium, Canada, Germany, Malaysia, Mexico, New Zealand, the United Kingdom and the United States. We continue to be encouraged by the number of new customers who have licensed our products. new customers derive future maintenance and implementation services revenue, and also present excellent prospects for additional product sales.

We're also very pleased with Logility's year-to-date results. For the first three quarters of fiscal '06, total revenues increased 57% from last year, all three revenues streams are up at least 14%, year-over-year license fees for the first three quarters of fiscal 2006 were over $10 million, which represents 123% increase from the same period last year. Our operating earnings for the first three quarters of fiscal 2006 from Logility are $4.2 million. And it's interesting to note that in the first two quarters of this year, Logility generated more operating profit than any other entire year. Then in the third quarter, the quarter we just closed, we more than doubled the operating profit we achieved in those first two quarters.

Regarding the fourth quarter of fiscal 2006; the pipeline activity is better than it was at this time last year, and also appears to be as good if not better than this past quarter, but as usual, closure rates will be the key. We were very pleased with our closure rates in the third quarter. We are also expecting Logility's maintenance revenues to increase nicely this quarter, compared the fourth quarter last year.

As I described on the call last quarter, a number of factors are contributing to our superior performance. A combination of an improved economy, with a continued globalization of the supply chain is driving demand for our products. Many companies have, are in the process of, or will, move some or all of their sourcing offshore to Asia. While this transition certainly allows corporations to reduce their manufacturing and sourcing costs, it puts significantly more pressure and less transparency on the supply chain process. Lead times are significantly longer, transportation costs are higher, and the cost of a mistake is greater. Many of our customers sell to mass merchandisers like Wal-Mart, Target, Home Depot and Lowe's, and those companies are putting continual pressure on their suppliers to increase their fill rates, shrink replenishment lead times and reduce costs. For these reasons, we believe there will be continued investment in supply chain systems by companies in the markets that we serve.

The sales and marketing team continues to execute well. Closure rate, and very importantly, the number of quality opportunities we are competing in have increased. We believe that this is due to the economic and industry factors I previously mentioned, as well as excellent execution in the field.

Our organizational and financial stability is clearly helping us establish relationships with customers and prospective customers, as compared to some of our competitors. Additionally, in the last two quarters, particularly the last quarter, have shown the leverage we have in our business model. If we continue to grow our revenues, particularly license fees, our profits will continue to increase nicely over the long item.

Some additional highlights in the quarter I'd like to discuss are the DMI acquisition and our new partnership with SAP. Regarding the DMI acquisition we made about 18 months ago, we continue to experience tangible revenue synergies from the Demand Management acquisition. The acquisition has grown 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 across selling the products.

Last week of December we ended into a partnership with SAP. The partnership is with the SAP Small and Medium Enterprise group, or SME. SAP's SME group selected our Demand Solutions brand of products to provide supply chain planning and sales and operation planning capabilities with their Business One ERP product line for SME.

As stated by SAP executives, at the SAP American Steel kick-off meeting in early February, where they had their entire Americas field organization, as well as value-added resellers and software partners such as Logility in attendance, their objective is to go from their current customer base of about 36,000 customers to 150,000 customers by 2010. In order to do that, they must significantly penetrate the small and medium enterprise market.

They already have approximately 140 value-added resellers in North America selling and implementing their SME product, Business One. Our job is to integrate our Demand Solution product line to the SAP Business One product line and establish relationships with their 140 buyers to sell our products in conjunction with the SAP products. Just as the Demand Solutions acquisition expanded our ecosystem, this has the potential to greatly expand our reach of the marketplace. There is a lot of work to do and it will take some time, but we view this relationship as having the potential to have a a multiplicative effect on our license fees for the Demand Solutions brands of products.

In summary, we had a superb performance in the third quarter, as well as first nine months of the fiscal year. Our business model is in excellent shape from a profit generating prospective, and we have greatly expanded our ecosystem and coverage in the marketplace with a successful implementation of the Demand Management acquisition and the exciting potential of the SAP Small and Medium Enterprise partnership.

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

Thanks, Mike. Comparing the third quarter of '06 to the same period last year, total revenues for the quarter increased 17% to $20.4 million, compared to $17.4 in the same quarter last year. And as Mike indicated, one of the major reasons for the increase is the license fees increased 32% to $5 million, compared to $3.8 million for the same period last year. Logility's license fees increased 65% when you compare it to the same period last year.

Services and other revenues increased 7% to $9.1 million, compared to $8.5 million, primarily due to increases in Logility and our IT staffing business. Maintenance revenues increased 25% to $6.3 million, compared to $5.1, primarily due to increases in Logility, which increased 36% compared to the same period last year.

Taking a look at the gross margins; the overall gross margin was 53%, and that is up compared to 48% the same period last year. And license fee margin increased to 85% when compared to 64%, due to increased license fee sales and lower cost of license fees from lower capitalization -- capitalized software amortization expense, compared to the same period last year. Our services margins decreased to 22% this quarter, compared to 30%, due to lower margins from our IT staffing business unit. Our maintenance margin this quarter was 72%, and that was up from 66% the same quarter last year.

Looking at operating expenses; our gross R&D expenses were 11% of total revenues, and that compares to 12% from the prior period last year. As a percentage of revenues, sales and marketing expenses were 18% of revenues or $3.7 million for the quarter, and that compares to 19% for the same quarter last year. G&A expenses were $3.1 million or 15% of total revenues, and that compares to 18% the same quarter last year.

Our operating income increased 298% to $2.1 million this quarter, and that compares to $532,000 same quarter last year. Our EBITDA was $2.8 million and that compares to $1.5 for the third quarter last year. And our GAAP net income was $2 million, or earnings per diluted share of $0.08, and that compares to net income of $50,000 or negligible earnings per share for the same period last year. On adjusted basis, our net income was $2.1 million or earnings per diluted share of $0.08, compared to net income of $129,000 or earnings per share of $0.01 for the same period last year. The adjusted number excludes amortization expense related to the DMI acquisition. International revenues for this quarter were approximately 7% of total revenues, and that compares to 7% in the same quarter last year.

Looking at the nine months ended January 31st, 2006; total revenues year-to-date increased 22% to $56.2 million, compared to $46 million over the nine months last year. License fees increased 51% to $13.4 million, and that compares to $8.9 the same period last year. Services revenue also increased to 9% -- 9% to $24.9 million year-to-date. Maintenance revenues increased 27% to $17.9 million when compared to last year.

Looking at the gross margin for the nine-month period was 53% year-to-date, compared to 49% same period last year. And that increased primarily due to license fee margins increasing to 79% from 64%, and that was due to higher license fees and lower cost of license fees from lower cap software amortization costs year-to-date, compared to the same period last year. Services margins were 25% compared to 30% for the -- compared to the same period last year. Our maintenance margin was 72%, and it's up from 70% the same period last year.

Looking at operating expenses, our gross R&D expenses were 12% of total revenues for the nine months -- nine-month period for this year and same period last year. As a percentage of total revenues, sales and marketing expenses were 18% of revenues, and that compares to 20% last year. And G&A expenses were 17% of revenues for both year-to-date periods.

So our operating income year-to-date is $4.6 million, an increase of 144% compared to the operating income of $1.9 million last year. Our GAAP net income $3.8 million year-to-date or $0.15 earnings per share, and that compares to a net income of $2.7 or $0.11 earning per share last year. Adjusted net income was $4.5 million or earnings per diluted share of $0.18 for the third quarter, and that compares to an adjusted net income of $2.9 million or earnings per diluted share of $0.12 same period last year. This year-to-date adjusted number excludes the amortization expense related to DMI acquisition, a write-down to fair value of a minority investment, and the minority interest expense related to a material tax benefit recorded to Logility in the second quarter of this year. International revenues year-to-date were approximately 8% of total revenues, and that compares to 6% the same period last year.

Taking a look at our balance sheet; our financial position remains strong with cash and investments of approximately $58.5 million at the end of January and no debt. Our billed accounts receivable is $12.7, our unbilled close to $4 million, and our working capital is $51.4 million, and our deferred revenues are up to $14.8 million. Our shareholder equity is $78.4. Our DSO, or day sales outstanding, as of January 21, '06 is approximately 76 days, and that compares to 77 days the same time last year.

At this time I'd like to turn the call over to questions. Andrea?

[OPERATOR INSTRUCTIONS] We'll take our first question from Patrick Flavin of Flavin, Blake & Company. Go ahead, please.

Good afternoon, Mike and Vince.

Hey, Pat, how are you doing?

Congratulations on a very nice quarter.

Thank you.

Can you help out with the cost of revenues just a little bit further, Vince, in terms of the license fees going down 45% in the face of strong licensing -- help with the math on that?

Okay, Pat, a couple things going on there. We actually had lower amortization expense related to capitalized software due to some ending of some projects in the early part of Q3, which we anticipate that will actually -- we closed Voyager 7.5 in February, so we anticipate the amortization cost to go up in the fourth quarter. So that's a little bit of impact there. And also the second thing is the mix of license fees revenues this quarter is more through our direct channel as opposed to our indirect channel this quarter, compared to the same time last year.

Okay. And then the same issue with services, is this -- is this the outsourcing part of the business that's causing services margins to contract?

Yes -- yes, that was the impact this quarter. And we're anticipating that the margin is improving next quarter.

Okay. And then, Mike, in terms of the increase in momentum here and the increase in -- obviously, the strong pipeline, but you've had a strong pipeline for a while -- the increase in closure rates, is the word getting out on Logility and on AmSoft?

It seems like it is. We're -- we've got a good win rate. And I think also importantly, people are pulling the trigger. In the past we might win some deals and then they wouldn't buy for a long period of time if at all. But I think we're getting included in more opportunities. I think -- I referenced this in the talk, before Vince came back with the numbers -- and we just have more people, I think, that know about us. Because when we acquired Demand Management -- they have a lot of people out in the field and they have a lot of customers. And then, I think the fact that we've been profitable throughout the -- sort of the last few years and maybe when some of our competitors weren't doing as well -- companies want to look and partner with companies they see as stable, financially and organizationally. So I think it's a number of factors.

Okay. So the -- and the pipeline remains strong ,as we look forward?

Yes, it does.

Very good. Thank you.

Thank you. Our next question comes from the site of Justin Cable of B. Riley. Go ahead, please.

Thank you. First question is just --were there any large customers during the quarter? I know last quarter you had, I think, a large customer over 10%. Were there any large customers in the January quarter?

You mean from a licensee perspective?

Yes.

We had one that was pretty large, not as large as the first -- as the prior quarter, though. It was a decent size. But we didn't have a million-dollar licensee deals in the quarter.

Just looking at the P&L -- most of your operating income is on the American Software is generated by Logility, are there any plans to reduce costs in the legacy non-Logility business, going forward?

Primarily, if you look at what happened there is our license fees in the non-Logility portion were lower than we would like. So our plan there is to actually increase license fees. And then we did have some margin issues in the services business, and our plan there is to improve the margins. So there's a little bit of both going on there.

And what were the margin issues? I know you talked earlier about the outsourcing. But were there other issues?

No, it was primarily the mix -- the staffing business, which has the lower margins, grew faster.

Okay. In terms of the new SAP agreement, how does this -- does this have any kind of implications on your partnership with SSA Global? And, two, will SAP be selling directly or is it primarily through their channel?

It shouldn't have any impact on our partnership with SSA Global because the SSA Global partnership is directed, really, more toward larger companies that it's with the Voyager brand. The SAP agreement is for their Small and Medium Enterprise, which is a totally different product for SAP that is targeted for $200 million companies and down. I mean, they'll go higher, but it is primarily $200 million companies and down. So there really doesn't appear to be any conflict there at all. And the SAPs go-to-market strategy primarily for that space, is through their indirect channel. They don't have a direct sales force. Although they will sell to large companies that have distributed operations that will sell that product directly there. So our opportunity there is to leverage their channel.

Okay. And have you figured out what the overlap is between their channel and Demand's legacy channel?

Demand Management channel?

Yes.

Well, we -- there is a -- the overlap is, essentially, we're going to actually use our channel to go over those guys. In other words, we want to leverage our channel to -- to establish the business relationships with their channel. Because our channel in North America, for example, is -- there is ten organizations.

Okay.

And there is 140 of them for SAP.

Right.

Really -- average 14 to 1 ratio. So to really get after that and to make that work, we've got to leverage our channel to do that.

In terms of international progress, what are some of your initiatives there? It is obviously a small part of your revenues right now, and it seems like a focus is still North America, which is fine, it's obviously getting -- you are seeing a lot more traction now. But what are some of your international initiatives?

Well, we have a two-brand strategy internationally, as well. And we eventually are going to have it -- we think, we've been told we will have an opportunity to leverage the SAP bar channel internationally, which is much more established and larger than the one they have in North America. So that is -- we've been told that's going to be official mid-year, so we can start trying to leverage that.

And but we have our direct channel and they're working very hard to sell accounts directly. We got a couple of nice deals in the pipeline they're working on right now. And that's an opportunity for improvement. They did not really -- they have not really contributed a whole lot the last year or so. So we have some real nice potential upside there.

And then we have our indirect channel there. We have about 13 bar organizations outside North America that are actually doing a decent job selling. If you heard most of those countries -- I believe all of those were through the indirect channel, through the Demand Solutions brand. It is -- really trying to do the same thing we're doing in the U.S. but without as much of a direct presence as we have here.

Okay. And SAP's bar channel outside of North America, that's not included in that 140 count you gave earlier?

Right, that was just the North America.

Any idea how many resellers they have?

I've been told it is bigger, but I don't know. They have been pursuing the SME strategy in Europe a good bit longer than they have in the U.S. and they have more traction there. But they announced at the conference, at the field kick-off meeting, that they were going to open it up to -- world wide, the relationships, so we'll see if that happens or not.

Vince, just a couple questions. On interest and other income, that jumped up this quarter. What was behind those numbers? And also, if you have depreciation and amortization to get the EBITDA? And then CapEx for the quarter.

Okay. Well, the reason why the interest income and other went up is primarily due to a small portion of our investments is in equities, and that's unrealized gain during the quarter. The other thing that's happening here is, we're getting better yield in our interest-bearing income -- investments, than we did at the same time last year.

Okay.

So that's primary the two things on that. And as far the -- the depreciation was $641,000 for the quarter. And our CapEx was, I would say -- I would use around $580.

$580?

Yes.

Okay. And that depreciation, does that include amortization?

Yes, it does.

Okay. Got it. Thank you.

Thank you. [OPERATOR INSTRUCTIONS] We'll take our next question question from Sam Rabatski from SER Asset Management.

Good afternoon, Vince and Mike. Good quarter. Your pipeline, you've indicated, is better than it was previous quarter and the same time last year, and it appears that there's a shorter closure time, so could one deduce that the revenue would keep increasing in the same proportion? And what is your average cost of a sale, has that been going up or is a similar -- can you sort of give some color on that, the average sale?

I think what I've said about the pipeline is that it is better than it was this time last year, and it's -- it is the same or better as it is now -- as it was last quarter, okay? Just to clarify that, Sam.

Okay.

And the cost of -- so, yes, there is the opportunity that we can continue to increase the license fees. And obviously, that's a thing we're very focused on, as that drives the other revenue streams.

Cost of sales is really about the same. I mean, it is obviously the shorter of the sales cycle, the less the cost. However, a lot of times those could be very, very intensive. And you're still going through all of the same steps, you're just going through it faster. So cost of sales isn't really the issue, it is cost of no sales is the issue for us.

I guess I was referring to the average size of the sales ticket.

Oh, I'm sorry.

Is it the same, -- is it larger ticket sale, say, at the same time last year -- ?

I think cost of -- the average sales price is up a little bit, at least from -- at least in -- for third quarter compared to second quarter. Vince, do you know if it was up from a year-ago quarter here?

Yes, it is up.

Up from year-ago quarter, as well.

So that's very good. Now, but also, if you're closing on your pipeline quicker -- so then the revenue should keep increasing, to the extent that the pipeline is similar, you should have higher revenue, higher license fee going forward. Is that a fair assumption?

That's what we're trying to do. As you know, one or two deals can make a difference.

Okay.

But that's -- things look good, just like they looked good last quarter.

That's good. Now, as far as -- is there any real estate rental income that is part of this other income? And is that similar to the previous year?

It was up a little -- that was actually inside the number two, that is up a little bit, but that isn't making the material swing. There is about $150,000 this quarter of rental income inside that.

The write-down of the minority interest, previously, even though -- the accounting rules, I presume, if it increased in value, would not permit you to write that back up? And has anything happened with that value that you wrote down, or has that been sold? Or is it just a write-down that occurred?

It was a partial write-down. We actually are carrying about $120,000 left of that investment. But I don't anticipate the ability to go back and reverse the write-down. But at this point we're carrying $120 of the investment.

In other words -- so at this point, you don't expect it to increase in value, although it might happen. Or is that -- ?

Not in the short-term.

Pardon?

Not in the short term.

Okay. Now, the piece, as far as -- the Logility, based on the rapid success of the Logility and their stock improving, which creates a higher valuation -- I guess the board continually deals with whether there is an appropriate formula or appropriate to deal with the 12 % debts outstanding that American Software doesn't own. and I assume at this point, it's still on the for the Board of Directors to decide, but nothing has been decided? Or is there any thoughts of making a decision on that sooner rather than later?

Right now, nothing has been decided. And we -- it's discussed every board meeting and considered. But no decision to do something or not do something has been made relative to that.

Well, you've done a good job, and hopefully this continues.

Thank you. We appreciate that. And that's our job, is to make sure it continues.

Okay.

Thank you. Our next question comes from David Soetebier of JM Dutton. Go ahead, please.

Good afternoon, gentlemen. On Logility's license sales, could you give us some color on how much of that growth was traditional Logility business and how much from the acquired Demand Management?

It was mostly from the from the traditional Logility business.

Was DMI up or down year-over-year?

It was down slightly, although it was more profitable year-over-year.

Okay. And then second, on new generation computing, what is the breakdown on that business between U.S. and international?

I'd say the mix there is closer to about 8% international, right now.

Okay. And then on IT services?

That's all U.S. based.

IT? Okay. I meant on IT services -- a different question, is this business basically one large contract? Or like a little -- can you give us a little color on the outlook for that?

The business is growing right now, it does have one large customer inside of it that makes up a large share of the revenue stream, but they are trying to gain additional customers right now.

Long-term running?

It grew significantly last year and it's growing right now. So we hopefully -- our goal is to try to keep increasing revenues. All right.

Thank you. [OPERATOR INSTRUCTIONS] It appears there are no further questions at this time. I will go ahead and turn it back to our moderators for any closing remarks.

Thank you very much for your time and interest in American Software, and we look forward to talking with you next quarter.