Logility Supply Chain Solutions Inc (LGTY) 2007 Q2 法說會逐字稿

Welcome to today's teleconference, entitled American Software second quarter fiscal year 2007. Later there will be an opportunity to ask for questions during our question and answer session. At this time, all participants are in a listen-only mode. Please note this call may be recorded. I will now turn the program over to Vincent Klinges. Please go ahead, sir.

Good afternoon, and welcome to American Software's second quarter fiscal '07 conference call. To begin, I'd like to remind you that this conference call may contain forward-looking statements, including statements regarding, among other things, our business strategy and growth strategy. Any such forward-looking statements speak only as of this date. These forward-looking statements are based largely on our expectations and are subject to a number of risks and uncertainties, some of which cannot be predicted or quantified and are beyond our control. Future developments and actual results could differ materially from those set forth in, contemplated by or 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, growth rate of the market for our products and services, timely availability and 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, and thank you for participating on this call. We are pleased to report American Software's second quarter fiscal year 2007 results. The second quarter marked our 23rd consecutive quarter of profitability. For the tenth consecutive quarter, total revenues increased over those attained in the previous year's quarter. The increase for second quarter revenues was 6% year-over-year with maintenance revenue and services revenue growing 11% and 14%, respectively. License revenue was below our expectations but we have an opportunity to have a strong third quarter. From an operating unit perspective, New Generation Computing, Proven Method and Logility all contributed to revenue growth in the second quarter.

Factoring out stock option expense, operating earnings increased 10% over the same period last year. With strong interest in other income, net earnings rose substantially to approximately $1.8 million, an increase over last year of 122%. Adjusted net earnings which exclude acquisition-related expenses and stock option expenses were $2.1 million, a 99% increase over adjusted net earnings for the same period last year.

Notable new and existing customers placing orders in the second quarter include American Racing Equipment, Anvil International, BCBG, East African Breweries, Everlast, Evy of California, Ferrero Australia, Handgards, Home Depot Mexico, Kemira, Mizuno, Snyder's of Hanover, The Heat Group, Thomson Learning, Tyco Healthcare and Wet Seal, Inc., among many others. We added 35 new customers in the second quarter.

During the quarter, license agreements were signed with customers located in 12 different countries including Argentina, Australia, Belgium, Canada, China, Denmark, Germany, New Zealand, Mexico, South Africa, the United Kingdom and the United States. We continue to be encouraged by the number of new customers licensing our products. New customers are a source of future maintenance and implementation services revenue as well as being excellent prospects for additional product sales.

Some of our existing customers have received recognition from the marketplace for exemplary implementations of our systems. Logility customer Shaw Industries received a prestigious 2006 technology and business award for excellence in the consumer goods industry from Start-IT Magazine. The award honors manufacturers that have helped their businesses succeed by overcoming a challenge or solving critical business issues through the use of leading edge technology. Additionally, New Generation Computing's e-SPS solution for global sourcing and product life cycle management has helped Casual Male, which is the largest retailer of big and tall men's apparel, receive recognition from Retail Information Systems News with a 2006 fusion award in the supply chain category. We're very proud of the accomplishments of our customers in using our systems to help their businesses.

Additionally, Logility received outstanding customer satisfaction and loyalty ratings in a recent survey conducted by Porter Research. In overall customer satisfaction, Logility scored 100%. This is higher than Porter's benchmark satisfaction metric of 91%. Logility customers also rated the overall Logility relationship as 100% positive compared to Porter's benchmark referenceable metric of 86%. Based on the Porter model for customer loyalty, Logility's customers appear to be very satisfied with the customer service they get from Logility.

The Company's balance sheet remains strong with cash and investments of approximately $65.2 million and no debt. This is an increase in cash and investments of approximately $8 million compared to this time last year. Our excellent financial position continues to be an advantage over many of our competitors.

As I described on the call last quarter, a number of factors are contributing to our positive results, a combination of 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 of or all 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 their supply chain process. Lead times are significantly longer, transportation costs are higher and the cost of a mistake is greater.

Additionally, 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 cost. For these reasons, we believe there will be continued investment in supply chain systems by companies in the markets we serve.

In summary, while the first half of fiscal '07 was successful for American Software, we are striving to do better. The last three full fiscal years show a clear trend that the second half generating more revenue than the first half of the year. Based on our pipelines going into the third quarter, we believe that trend will continue this fiscal year.

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

Thanks, Mike. Comparing the second quarter of fiscal '07 with the same period last year, as Mike mentioned, some of the these numbers. Total revenues for the quarter increased 6% to $20.2 million compared to $19 million the same quarter last year. License fees decreased 13% to $4.3 million compared to $5 million for the same period last year, primarily due to timing of closing sales compared to the same period last year. Services and other revenues increased 14% to $9.3 million due to increased implementation work, particularly at Logility which grew 19% when compared to the prior period last near, and an increase in consulting services at our IT consulting business which grew 14% this quarter compared to the same period last year . Maintenance revenues increased 11% to $6.6 million compared to $5.9 million, primarily due to increases in Logility which increased 17% compared to the same period last year.

Taking a look at our gross margin, our overall gross margin was 52% compared to 55% the same period last year. Our license fee margin was 63% compared to 80% in the prior year and that is down year-over-year due to the increase in software amortization expense and an increase in license fees from Logility's indirect channel which the reseller commissions are expensed to cost of licensees.

Our services margins increased to 32% compared to 26% the same period last year due to an increase in implementation work from prior quarter license fee sales and improved billing utilization.

Our maintenance margin increased to 73% compared to 72% the same quarter, primarily due to increased maintenance revenues.

Taking a look at operating expenses 11% of total revenues from the prior year and this percentage was percentage of revenue sales and marketing expenses 7% of revenues compared to 19% in the same quarter last year and this percentage is also due to higher revenues. 16% of total revenues compared to 18% in the same last year. This is percentage is due to higher revenue. Taking a look at operating expenses, our gross R&D expenses were 11% of total revenues compared to 12% from the prior year and this percentage was lower due to higher revenues. As a percentage of revenue, sales and marketing expenses were 17% of revenues or $3.5 million for the quarter compared to 19% in the same quarter last year and this percentage is also lower due to higher revenues.

G&A expenses were $3.4 million or 16% of total revenues compared to 18% the same period last year and once again, this percentage is lower also due to higher revenues.

So our operating income was $1.8 million for this quarter, for both this quarter and the same quarter a year ago. Our EBITDA was $2.9 million compared to $2.6 the same period last year. GAAP net income was $1.8 million or earnings per diluted share of $0.07 and that compares to net income of $819,000 or $0.03 earnings per share for the same period last year. Our adjusted net income was $2.1million or earnings per diluted share of $0.08 for the second quarter and that compares to net income of $1.1 million or adjusted earnings per share of $0.04 for the same period last year and these adjustments exclude the breakdown of an investment, an amortization of intangibles related to the DMI acquisition and stock options expense for the current year.

International revenues for this quarter were approximately 10% of total revenues compared to 9% for the same quarter last year.

At this time, I'd like to look at the year-to-date numbers for the six months ended October 31, '06. Total revenues increased 13% to $40.4 million and that compares to $35.8 million. License fees increased 3% to $8.7 million compared to $8.4 million. Services increased 17% to $18.5 million and that compares to $5.8 for the six months ended last year. Maintenance revenues year-to-date increased 14% to $13.2 million compared to $11.6 million last year. Our overall gross margin year-to-date is 52% and that compares to 53% for last year and our license fee margin decreased to 65% from 75% due to an increase in software amortization expense this year and increase in license fees from Logility's indirect channel.

Services margins were 30% compared to 27% same period last year. Our maintenance margin was 73% year-to-date compared to 62, 72% the same period last year.

Looking at operating expenses, our gross R&D expenses were 11% of total revenues for the six month period compared to 12% the same period last year. As a percentage of total revenues, sales and marketing expenses were 17% compared to 19% the same period last year, again due to higher revenues. G&A expenses were 16% of revenues compared to 18% for the same period last year so our operating income year-to-date increased 36% to $3.4 million compared to an operating income of $2.5 million last year.

EBITDA year-to-date is 5.7 compared to 4.3 million. Our GAAP net income was $3.1 million year-to-date or $0.12 earnings per diluted share compared to net income of $1.8 million or $0.07 per diluted share. Adjusted net income year-to-date was $3.7 or earnings per diluted share of $0.14 compared to net income of $2.2 million or earnings per diluted share of $0.09 for the same period last year.

On a year-to-date basis, our international revenues are approximately 10% of our total revenues and that compares to 9% same period last year.

As Mike mentioned, our Company's financial position remains strong with cash investments of approximately $65.2 million at the end of October 31, 2006 with no debt and this is a sequential increase to cash investments of $1.3 million and an increase of $8 million when compared to the same time last year. Other elements of our balance sheet are billed accounts receivables $12.9 million. Our unbilled is $4.5 for a total billed and unbilled accounts receivable of $17.5. Our working capital is 58.5. Our deferred revenues are 17.3 and our shareholder equity is $79.7 million. Our current ratio for both this period and last year is 3.2.

Our day sales outstanding as of October 31, 2006 was approximately 79 days compared to 61 days this time last year and this increase is primarily due to the timing of license fee sales closing toward the end of the current quarter which temporarily raises accounts receivables balance and therefore the DSO calculation when compared to last year.

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

Thank you. [OPERATOR INSTRUCTIONS] We will take our first question from Drake Johnstone. Please go ahead.

Hi, guys. I have a question for you. First of all, looking at the second quarter, even though you show the reported revenue growth at 6%, I think what I find of interest is your deferred revenue, roughly 29% year over year and 15% sequentially, and if we look at the combination of deferred revenue plus reported revenue and look at the year over year change, we're looking at about a, actually a 15% change which is actually higher growth than you saw in the first quarter of '07 when you had about 13.5, pretty much 4% growth, so that seems to support your view that license revenue will increase in the second half of the year and I guess the question I have for you is that deferred revenue, is a significant portion of that revenue going to be recognized the second half of the year?

Drake, this is Vince. About 90% of that revenue is maintenance related so that's basically the advance billing of maintenance related deals so that will come down onto the P&L over a 12-month period of the new billing for the quarter so it's not necessarily next quarter or the next six months. It's over kind of a 12 month period.

And Drake, I think our statement that we think the license fees will be better in the second half is first of all, the last three years, that's the way it's played out. he first half has been maybe, approximately it varied from year to year, but approximately in the low 40% in terms of license fees and in the second half is high, 55% or more. That's an approximation. So we think based on our pipelines, we've got some exciting opportunities that should go down in the second half, some of which should go down. We're working hard to get them to go down in the third quarter so we think we'll see that pattern again.

You're saying on an annual basis if we look back over three years, that you usually have about 45 license fees in the first half and about 55% in the second half?

It varies. It's probably be a 45, 55, something like that. It's varied. It also varies by company and brand a little bit. But if you look at the revenues, the second half total revenues even, the second half has always the last three years has been a good bit better than the first half.

Looking at your gross margins in license services and maintenance, what's your view there? What's affecting your gross margin? You mentioned indirect sales affecting license gross margin. Do you see that stabilizing or improving?

Drake, this is Vince. Yes, it depends on the mix of the deals, whether they're coming through the direct channel or the indirect If it's through the indirect channel, then that impacts the gross margins for license fees. But if it's more of the deals are coming through the direct channel, then the gross margins are improved for license fees.

And based on the forecast, if we hit the forecast we have, we'll have a better mix, more direct versus indirect than we did last quarter so that margin should improve.

Okay. Your interest income and other line items in the second quarter, you must have had -- did you have some sale of some investments there? That looks like that's more than interest income.

Well, Drake, this is Vince again. That is interest income and also we had a fairly large unrealized gain in our equity portfolio this quarter so that, and that was material compared to the same time last year where we actually had a loss on our equity portfolio so that's why the comps are so different. And the other thing is last year's number, we actually had a write-down of minority investment inside that number so that's making that number lower than it normally would have been.

Do you actually have the number on the unrealized gain that you booked?

Yes, it's over $600,000 this quarter.

Okay. All right. Great. I'll chat with you guys later. Thank you.

Okay.

Thank you. We will take our next question from Patrick Flavin from Flavin, Blake and Company. Please go ahead.

Mike, could you embellish a little bit on the sales pipeline and what you're seeing out there by sort of industry and company type? Are you seeing a lot of larger company activity or are you seeing it amongst the smaller companies who are trying to go overseas?

We're seeing both, good activity in both. Demand Management had a very good quarter this past quarter. That's one of the reasons the cost of license was a little higher because of their indirect sales channel and the commission model we have there. But as we look at our pipeline, we have, they have a good pipeline and then we have a good pipeline for the rest of the business units on some larger opportunities and depending on how many of those come in, we could have a very good quarter. So we're seeing increased activity both on the small and the larger companies in the pipeline anyway.

Okay. So this has been a number of quarters in a row than when you've seen your pipeline becoming stronger rather than either flattening or weakening. Is that correct?

Yes, I'd say what's happened now is we have more larger opportunities which is good and bad. They're harder to predict. They're harder to close. They're more competitive. But if we can do our job the way we think we can do our job, then they can have a significant impact. So that's one thing that is different is we have more larger deals in the pipeline now than we've had the last few quarters.

Thank you.

Thank you. We will take our next question from James Vaux from Scotia Capital. Please go ahead.

Hi, Scotia Capital. So anyway, just to be, I'm going to ask this just very bluntly. Why don't you guys just acquire the remaining stub of Logility perhaps bringing in the whole company? Logility, I mean, it is the growth vehicle. You have a substantial amount of cash in your balance sheet and I'd love to know what a better use of that cash is.

Well, we've, that's a decision obviously the board of directors would have to take. We do consider that on a regular basis. There's pros and cons to it that we talk about to a lot of folks a lot of times and I won't go into that here because I don't think we have enough time. But that is always a consideration and we haven't made a decision to do it or to not do it. But right now, we don't have any plans to do it.

So what are the cons of doing it?

Well, there's a number of potential cons anyway. But first of all, it's still unclear what the benefit would be. But one con is the market would lose visibility of the Logility performance, and if can keep Logility growing the way it has been, then that should drive the value of the stock up. If it's not a separate entity, it's not as visible to the investment community.

Why don't you just break out segment revenues on a consolidate basis?

Well, obviously, we'd probably be required to do that but I don't know if it'd still have the visibility. That's one argument I've heard. Another argument is we need -- we're looking for acquisitions, and we would rather use, in general rather use cash than stock, so question is, it would take a good bit of cash to bring Logility back at this point, a significant percentage of what we have. I don't think it's really a black or white answer unfortunately. If it was, we would firmly do, announce what we were going to do one way or the other.

Okay. And then I have a follow-up as well. Just can you give us a little bit more visibility into back-half license revenue growth, anything you can quantify at all?

No, not really. It depends on whether we, how many of the larger opportunities come in.

So just pipeline, can you quantify pipeline, how it looks? I guess here's my concern. Logility overall is not showing the greatest sequential year-over-year growth trends in license revenues and it sounds like that's going to rebound. And I realize when the license revenue numbers, as small as it is, it doesn't take many deals to really move the needle a lot, but, and you guys sound really optimistic on the second half of the year. As a shareholder, you want to buy more stock but you need to get a little bit more substance behind why you're buying the stock.

Well, yes, and I think the substance will be our performance.

But what leads you to believe it's going to be a lot better in the second half of the year?

Well, I said it had the opportunity to be better. The same thing about five or six quarters ago, I was saying the same thing that our pipeline looks good. We had a chance to really improve, and we did. It took, it was one quarter later than when I first said that but we did do it. So we're seeing similar things but we've got to go out and execute and get those deals in. And if we don't execute the way I know we can and don't get the deals in, then the numbers won't improve. That's what we're trying to do is focus on sales execution and bringing the quality deals in.

Okay. And I guess the other question is for something as attractive as Logility appears to be to us, you would want to have institutional investors in this stock, I would think, given the flow and how much the stock trades. It's really not conducive to that and I'm wondering what steps you guys are going to take to change that, if any.

We don't have any plans to change that right now.

Why not?

It's just too complicated to go into on the call.

Okay.

Thank you. We will take our next question from Sam Rebotsky from AS, excuse me, SER Asset Management. Please go ahead.

Yes, good afternoon Vince and Mike. As far as the license revenues and the cost of license revenue, could you sort of explain the correlation between the reduction in the license revenue and the increase in the cost of the license revenue?

I'll take that, Vince. Sam, essentially what happened is we have direct sales channels which have much higher margins than the other type of channels we have, which are indirect channels where we have a business partner essentially selling our product. And the mix of the revenue this quarter came in higher than normal on the indirect channel. So that's reflected in a higher cost of license fee because we have to pay a higher commission when it's our business partner selling the product rather than us.

Could you break out the, between direct and indirect, the revenue?

We don't publish that number.

Okay. As far as the other interest, income and other, there was the $600,000 this quarter of deferred income. What was the write-down in the last year where you had the $201,000. How much was the write-down there?

It's actually on the press release. It's at the bottom as one of the adjusted numbers. It's $160,000.

Okay. As far as the Logility sub, what is your cost of being public for the Logility? What, do you think it's $1 million or more than that?

No. We don't think it's $1 million. We think it's under $1 million.

Do you think it's $0.5 million? Is there a number that you have that would what that cost is to be public.

A range would be between maybe $400,000 and $600,000, somewhere around there.

Okay, okay. Well, I guess your numbers have basically been improving, stock price has been improving. Hopefully, that the numbers as you may with the 55% in licenses going forward in the next quarter and the profitability and hopefully your license will have a greater profit margin. Do you expect to have a greater profit margin going forward because this is not the normal ratio?

Yes, if we hit the mix that we have in the forecast, we'll have better margins on the license revenue.

Your pipeline, I presume, has a better mix?

Yes.

All right. Well, good luck.

Thank you.

Thank you. We will take our next question from [John Finchthorn from Dialectic Capital]. Please go ahead.

Yes, hi guys. Are there any clues in your balance sheet that we can look to for visibility into your pipeline? I mean, deferred revenues were up but so were accounts receivable so I'm assuming those were maybe an offset. Is there something else I should be looking at?

As I said, the deferred revenues going up are primarily due to maintenance going up. In other words, as we close deals, license fee deals in the prior quarters, we then start billing the customers annual maintenance and that's why deferred revenue is going up. The pipeline has nothing to do with the balance sheet because that's just pending deals. So the answer I guess is no.

Can you give us any clue as to how much bigger the pipeline is, either year over year or sequentially?

It's about the same sequentially. It's -- there's different definitions of pipeline, different measurements of pipeline. And we feel like we have more quality in the short term pipeline and some larger opportunities in the short term pipeline than we did say the last couple of years, quite frankly. The question is since you have larger deals, they take longer sometimes. They always take longer than you want and usually take longer than you expect to get them and they're more competitive. So the short term pipeline looks pretty good, and it will be, but it's really going to be more what's our success rate in closing them. If we have a good success rate in closing them, we're going to have some nice numbers. If we have a mediocre rate closing, we're going to have some mediocre numbers and so forth and so on. So that's really going to be more the key.

And who are you guys up against in some of these big deals?

It's usually other vendors, best of breed suppliers like [Manugistics] and I-2.

Okay. And are these deals larger than your traditional deals? Are we talking as opposed to maybe $1 million deal which I would consider to be a very big deal for you guys, maybe a $5 million deal.

No, we don't have a $5 million deal in the pipeline.

Okay, but you've got a handful of $1 million deals and you're hoping you close some of them.

What we've been calling a big deal the last several quarters is $700,000 and up so that's what I'm talking about when I say large deals.

And the percentage of those in the short-term pipeline is maybe higher than it has been? That's what's leading you to the increased level of confidence?

Yes.

Okay. And once again with the stub, I know you say you don't have time to go into it here. I'm not really sure what could possibly be a better time to talk about it. But just maybe one, you like the visibility. I understand that is a pro and a Logility and the con is maybe you have another use for cash. But Logility really is almost a phantom stock. Are there any other pros or cons you can give us, just one more of each so we can really understand what your thinking is there?

Well, if you're like to talk about it, we talk about it with people all the time. You can give us a call. But I'm not going to tie up the whole call. We've probably had the conversation with every other shareholder on here already. But give us a call. We'll talk to you about it.

Okay. We will. Thanks. Good luck.

Thanks.

Thank you. [OPERATOR INSTRUCTIONS] We will take our next question from David Soetebier from JM Dutton. Please go ahead.

Good afternoon gentlemen. Could you give us a little more detail on the international area, specifically license sales by Logility, Demand Management and New Generation Computing, and then especially if NGC did any business in China and then the final point, your direct salesmen now the number versus a year ago.

Well, the direct sales is slightly up from a year ago. I don't have the number in front of me but it's slightly higher. We have added a few recently. We had some turnover as well. Vince, I'm remote on the west coast at a prospect's office right now barred in a private office. So I don't have the numbers in front of me that you were asking for me on the revenue. Vince, do you have them?

On the revenue, NGC did not have any China deals this quarter. It was primarily North America deals and the DMI, as indicated by the percentage breakout, Logility typically has a higher percentage international revenues than the consolidated American software. Logility was closer to 15% international to give you an indication. Does that answer your question, Dave?

Close enough. Thank you.

Thank you. It appears at this time we have no further questions.

Thanks, everyone, for your interest in and support of American Software and we look forward to having a good quarter and talking to you on the next conference call. Thank you.

This concludes today's teleconference. Thank you for your participation. You may now disconnect at any time. Thank you, and have a great evening.