Logility Supply Chain Solutions Inc (LGTY) 2007 Q3 法說會逐字稿

Welcome to today's teleconference. At this time, all participants are in a listen-only mode. Later, there will be an opportunity to ask questions during our Question and Answer Session.

I would now like the turn the program over to Vince Klinges, Chief Financial Officer of American Software.

Good afternoon, and welcome to American Software's third quarter fiscal '07 conference call. To begin, I would 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 risk 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 a market assessments 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 would like to turn the call over to James Edenfield, CEO of American Software.

Good afternoon, ladies and gentlemen. Thank you for participating in this call. We are pleased to report the results of our third fiscal quarter which ended on January 31, as well as the nine months to date. We believe the results were outstanding. License fees, maintenance revenue, total revenue, operating income and net income, were all substantially up as compared to third quarter of last year, and the comparable nine months last year.

During the quarter, software license agreements were signed with customers located in eleven countries, including Australia, Canada, Germany, Italy, Japan, Spain, Sweden, Venezuela, the United Arab Emirates, the United Kingdom, and the United States. Notable new and existing customers placing orders with the Company in the third quarter include, 3M Australia, Argo Tea, Barilla America, BJ Services, Caremark, Clement Pappas, Day-Timers, Dassault Backup Falcon Jet, Dick's Sporting Goods, EK Success Limited, Everlast Worldwide, Goody's Family Clothing, John Paul Richards, Lion Brand Yarn, NB Coatings, Newell/Rubbermaid, Sandoz, Smithfield Foods, Tyco Fire and Safety, WaterPik Technologies, Yellow River, Yurman Designs, XMA Limited, and Zotos International.

Logility reported record revenues of operating profit. These results are viewed to the phenomenal success of Logility's two-brand strategy. These brands, Logility Voyager Solutions and Demand Solutions, enable to us provide solutions across the entire spectrum of corporations, ranging from Fortune 100 enterprises to very small companies.

The demand for Logility's product and services is being driven by the combination of an improved economy and the continued globalization of the supply chain. Companies are increasingly investing in supply chain solutions as a means to combat the challenges of offshore resourcing, excuse me, offshore sourcing, and to address pressures to increase bill rates and short replenishment times and reduce costs.

As a leading Best-of-Breed solutions provider in the supply chain category, we are well-positioned to capitalize on these trends, and spur our future growth. It is interesting to note that according to Consumer Goods Technology magazine, Logility Voyager Solutions or Demand Solutions are used by 70% of the Top 10 healthcare and pharmacy companies, 60% of the Top 10 housewares and appliance companies, 50% of the Top 20 consumer packaging companies, 45% of the Top 20 footwear and apparel companies, 40% of the Top 20 food company, and 40% of the Top 10 health and beauty companies.

In the ERP space, we experienced a very strong license fee quarter. In fact, this was the best in over two years, and we hope that this is the beginning of further excellent performance. Service revenues were down primarily due to a downturn in our staffing business. One large account significantly reduced the number of consultants, but is now adding them back. We are optimistic that this will work to our advantage during the fourth quarter.

All in all, the third quarter was an excellent quarter, and we are very optimistic about the future. I would now like the turn the call over to Vince, to review the financial details, and after Vince's review, we will have questions and answers.

Thank you, Jim. Reviewing the third quarter of fiscal '07 compared to the same period last year, total revenues for the quarter increased 5% to 21.5 million, and that compares to 20.4 million in the same quarter last year. Primarily driving these revenues increases are license fees which increased 16% to 5.7 million, compared to 4.9 million for the same period last year, primarily due to improved pipeline and close rates compared to the same period last year.

Our services and Other revenues decreased 6% to 8.7 million, and as Jim indicated primarily due to our IT consulting business, which slowed down a little bit this quarter, but we anticipate increasing in the fourth quarter of this year. This increase was partly offset by a 31% increase at Logility, due to increased implementation work from increased license fee sales in the prior quarters. Our maintenance revenue increased 14% to 7.2 million, compared to 6.3 million, primarily due to increases at Logility which increased 20% compared to the same period last year, and that's again due to license fees increases in prior quarters, resulting in increased maintenance in the current quarter.

Taking a look at our gross margin, our gross margin was 57%, that is up from 53% the prior year quarter. Our license fee margin was 75% compared to 85% in the prior year quarter. It was down due to the increase in software amortization expense for the quarter, and an increase in license fees from our Logility indirect channel, which has our reseller commissions and our expense to cost of license fees. Our services margins increased to 30%, and that compares to 22% in the same period last year. That increase is due to improved implementation work, and improved billing utilization rates.

Our maintenance margin increased to 75%, compared to 72% for the same quarter, and that is primarily due to increased revenues. Taking a look at operating expenses, our gross R&D expenses were 11% of total revenues for both current and prior year. As a percentage of revenue sales, and marketing expenses were 17% of the revenues, or 3.6 million for the quarter, and that compares to 18% in the same quarter last year.

G&A expenses were 3.7, or 17% of total revenues, compared to 15% the same period last year, and this increase was partly due to the expensing of stock options this quarter when compared to no expense last year, as well as increases in G&A related expenses. Operating income increased 40% to 3 million this quarter, and that compares to 2.1 million the same quarter a year ago. It is important to note this is operating income, our operating margin was 14% this quarter, and that is the highest margin, operating margin we have had in over eight years. EBITDA increased 45% to 4 million this quarter, compared to 2.7 the same quarter last year.

Our GAAP net income was 2.5 million, or earnings per diluted share of $0.10, when compared to net income of 1.9 million, or $0.08 earnings per share for the same period last year. Adjusted net income was 2.8 million, or $0.11 earnings per diluted share. That compares to 2.1 million, or adjusted earnings per share of $0.08 for the same period last year. Adjusted numbers exclude the amortization of intangibles related to the DMI acquisition, and stock option compensation expense. International revenues this quarter were approximately 13% of total revenues, compared to 7% in the same quarter last year.

Taking a look at the year-to-date numbers, nine months ended January 31st 2007, compared to the same period last year, total revenues increased 10% to, excuse me, total revenues increased 10% to 61.9 million, and license fees increased 8% to 14.4 million, compared to 13.4 million in the same period last year. Services revenues also increased 9% to 27.1 million year-to-date, compared to 24.9 million. Maintenance revenues increased 14% to 20.3 million, and that compares to 17.9 million last year.

Looking at overall gross margins, they were 53% for both the current year-to-date period, and the same period last year. License fee margins decreased to 69% from 79% last year, and that is due to increased capitalized software amortization expense this year, and also increased license fees coming from our indirect channel, which has reseller commissions and are expensed to cost of license fees.

Our services margins improved to 30%, compared to 25% the same period last year, and this was primarily due to increases in services revenue and higher utilization rates. Our maintenance margins were 73% year-to-date, and that compares to 72% for the same period last year, and that is primarily improvement due to higher maintenance revenues.

Looking at operating expenses, our gross R&D expenses were 11% of total revenues for the nine months ended January 31 2007, and that compares to 12% for the same period last year. As a percentage of total revenues, sales and marketing expenses were 17% of revenues, compared to 18% for the same period last year. G&A expenses were 17% of revenues for both year-to-date periods.

So on an operating income basis year-to-date was 6.4 million, and that is a 38% increase over the prior year of 4.6 million. Year-to-date EBITDA increased 33% to 9.7 million, compared to 7.3 million the same period last year. Our GAAP net income increased 45% to 5.7 million, or $0.22 earnings per diluted share, compared to net income of 3.8 million, or $0.15 earnings per share.

Our adjusted net income year-to-date was 6.5 million, or earnings per diluted share of $0.25, compared to net income of 3.4 million, or earnings per diluted share of $0.17. International revenues year-to-date were approximately 11% of total revenues, compared to 8% the same period last year.

Taking a look at the balance sheet, the Company's financial position remains strong with cash and investments of approximately 70 million at the end of January 31, 2007, and no debt. This is a sequential increase in cash and investments of 4.7 million, and an increase of 11.4 million when compared to the same period last year. Other elements of the balance sheet are accounts receivable was 12.4 million billed. Our unbilled was 3.7 for a total accounts receivable of 16.1.

Our working capital is 60.9 million. Deferred revenues are 16.1, and our shareholder equity was 81.1. Our current ratio is 3.2, and that's an improvement from 3.1 the same period last year. Our days sales outstanding as of January 31, 2007, was approximately 68 days, and that's an improvement from 78 days at the same time last year.

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

[OPERATOR INSTRUCTIONS] We will take our first question will come from the site of Drake Johnstone from Davenport. Go ahead.

Hey Vince and Mike, nice quarter there!

Thank you, Drake.

I had a few questions. On licensed revenue it does look like your enterprise resource planning software generated most of that growth. To what extent was that driven by NGC versus American Software's legacy business?

Both divisions were strong. Both had real good performances.

And then looking toward the fourth quarter, I mean you had originally guided towards double digit license growth for the second half of '07, and obviously you have achieved that in the third quarter, and I do notice in prior years '06/'05, the fourth quarter those years I realize there is merger accounting contributing to some of that, but I noticed there is a sequential decline in license revenue in the fourth quarter of those years. Do you expect a similar situation this year, or do you think you can build on what you have in the third quarter?

As you know, we don't provide detailed guidance or overall guidance, but I can tell that you our pipelines are very stong, and we are very optimistic about the rest of the year.

How does your pipeline compare now, compared to the outset of the third quarter?

We think that in Logility it is very favorable, and the ERP business is not quite as favorable.

So you might get a shift where Logility might be growing licensed revenue, or be a greater contributor in the next quarter?

Entirely possible.

Okay. And of the software license deals, what percent came from new customers versus existing customers of the actual revenue?

Drake, this quarter roughly was about 61% of the license fees came from new customers.

That is great.

Yes.

How does that compare to the year ago, and the quarter just before this?

Quarter before this it was 53%, and year ago it was 49%.

Okay. And also on the IT staffing, what was the actual revenue number on that?

What was the actual revenue on the IT staffing business?

I assume you have part of your services revenue here.

Yes. Just a moment. For the third quarter, it was 4.4 million.

And if you look at that business versus the prior couple of quarters, that's quite, that is down 500,000 plus compared to second quarter, so first to second quarter was stable around 4.9 and change. Do you see it recovering? Do you see that business still declining year-over-year, or potentially returning to growth?

I think we will be up year-over-year, and we will be returning to growth. The good news is that if you have to have a revenue decline in one of your business units, that is our lowest margin unit.

So the third quarter, I can do the math later, but when you pull out the proven method, it looks like your software business all told, maintenance, license and services actually generated pretty decent growth.

Yes, that's right.

Double-digit growth. Going forward, it sounds like you have a decent pipeline, so do you feel fairly confident that your marked gross margin could remain near these levels in the upcoming quarter?

Yes, Drake, this is Vince. We are pretty comfortable with the gross margins staying fairly stable right now.

That is great. I will follow up later.

Our next question comes from the site of David Soetebier, J.M. Dutton & Assoc. Please go ahead.

Good afternoon, gentlemen. Congratulations, you beat all my estimates! On the New Generation Computing business, can you give us a little more detail on that? Is this sustainable? This business has kind of been in the doldrums for a few years, and obviously pretty spectacular growth in the quarter. In the past you have talked about possibly getting some sales in China, and I see international business was up this quarter, so is that part of the change?

New Generation had a very good quarter, and they are on-target to have a record year in license fees this year. The sales in China were basically negligible during the quarter, and that remains a long-term possibility that at some point we will be able to make sales to Chinese companies. Right now we are making sales to American companies who are operating in China.

Okay. Thank you then. On the interest and Other, could you break that out, how much of the 1.4 million was interest income, and how much was gain on investments?

Sure. 765,000 was interest, 473,000 was a gain, and 185,000 is rental income from our tenants at our buildings here.

All right. That is all I have.

We will take our next question from the site of Patrick Flavin, Flavin, Blake and Company. Go ahead.

Let me add my congratulations, guys. Nice quarter!

Thank you.

Thank you.

Can you talk a little bit about the international business in general? I realize this is coming through the DMI distribution chain, but it is becoming a notable growth factor for overall business. How much room is there here for further expansion, Jim?

Well, one of the things that we have done in the last three or four months is we have overhauled the management of the U.K. office of Logility, and we think that we have got some tigers working for us over there now, and we expect them to do better and better going forward.

And then of course we are working on some deals within DMI, that will give us some real good sales we think internationally, in the last part of this year and early part of next year. So I think it is conceivable that the international business could, it certainly is going to be growing. If it is not growing percentage-wise it may be good news, because that would only mean that our domestic business is just growing faster.

Okay. But you see this as a fertile, you know, fertile ground where you can make a lot more head way, I presume?

Absolutely. It is a big world out there, and we have got a tremendous amount of opportunity. Some of the contracts that we are working on now are with a global player, a large multinationals, and what, they are buying DMI software to use in countries where they have got very small infrastructure, like countries in South America, Africa, and so we make a sale for multiple installations, and no one installation is very large dollar-wise, but the contract as a whole is quite significant, so we are doing more of that, and excited about that.

Okay. Keep up the good work.

We will take our next question from the site of Harris Hall from Singular Research. Go ahead.

Congratulations, guys, on the quarter.

Thanks, Harris.

You went over the gross margin changes pretty quickly. That strikes me as a pretty significant increase in gross margin. Two questions. One, I was somewhat surprised that you said that you thought that 57% gross margin was sustainable, can you go a little bit more over the detail about how the constituent pieces of that increase or decreased?

Yes, well, you just take down each one, the gross margins on license fees was 75%, and as long as we keep the license fees at these levels, you know, the related costs are fairly fixed, which is the amortization of cap software, so we should be able to keep those margins, from gross margin to license fees.

Our services we are tracking along at 30%, 32%, so that should be easy to keep that one going, and then our gross margins for maintenance is 75%, and all of the last year we did 73%, so we are just picking up a few points from that because of the increase in maintenance license revenues that we have had, because we don't have to add a lot of people when we get these new license maintenance fees, so we think then in general those are sustainable margins.

That is very impressive. You also talked last quarter about some large clients you had in the pipeline. Is that, have those deals closed? I remember you talking about, it was taking longer to close these bigger deals?

I think that it always takes longer to close bigger deals, and we still have big deals in the pipeline, some of the ones we thought we would close last quarter didn't close, and they are still in the pipeline, and then we were also able to pull some in sooner than we thought, so it is kind of a mixed bag, but overall we think we have got a good pipeline of both large deals and small deals, and we are excited that although we don't publish those numbers, we are excited that our average deal size is looking better and better.

Okay. Can you give an example of some of the larger deals that did close this quarter? You have got some in the press release, but any you want to highlight?

Well, Harris, at Logility the largest deal was the high seven, excuse me, six figures on license fees. So that would be kind of what we are experiencing. I don't think we want to for competitive reasons give any more details than that.

Okay. Fantastic. That helps a lot. That is all of my questions.

[OPERATOR INSTRUCTIONS] We will take our next question from the site of Sam Rebotsky. Go ahead.

Good afternoon, gentlemen. Very good quarter. All my questions have been answered. Thank you, and keep up the good work!

Thank you very much.

[OPERATOR INSTRUCTIONS] It appears that there are no further questions at this time.

Again, thank you for joining us on the conference call. We appreciate your interest and support, and we look forward to having another good report three months from now.

This does conclude today's teleconference. You may disconnect at any time. Thank you. Have a great day.