Logility Supply Chain Solutions Inc (LGTY) 2007 Q4 法說會逐字稿

Welcome to today's teleconference. At this time, all participants are in a listen-only mode. Later you will have the opportunity to ask questions during our Q&A session. Please note this call may be recorded. I will now turn the call over to Vince Klinges. Mr. Klinges, you may begin.

Good afternoon, and welcome to American Software's fourth quarter and fiscal 2005 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 events could differ materially from those set forth in, (inaudible) by or underlying the forward-looking statements.

There are a number of factors that could cause actual results to differ materially from those [indicated] 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, and thank you for participating on this call. We are extremely pleased to report the results of American Software's fourth quarter and fiscal year 2007, which ended on April 30th of this year. The fourth quarter marked our 25th consecutive quarter of profitability. For the 12th consecutive quarter, total revenues increased over those attained in the previous year's quarter. For the quarter, strong license fee growth of 48% generated outstanding earnings. Fourth quarter operating earnings were $3.6 million, up 166% over the same period last year. Net earnings also rose substantially to approximately $2.9 million, an increase over last year of 141%.

Notable new and existing customers placing orders in the fourth quarter include 3M South Africa, Arla foods, Arla Eckrich, Caremark International, Continental Mills, Cooper Industries, a division of Schlumberger in France, Joseph Banks Clothier, Kazoo, Lance Foods, Maidenform, North American Lighting, Reliable Automatic Sprinkler, Siemens Medical Solutions, Targus, The Stanley Works, Verizon Wireless, VF Corporation, Wacoal, and Warnaco. We added 27 new customers in the fourth quarter. During the quarter, software license agreements were signed with customers located in ten different countries, including Australia, Canada, France, Ireland, Mexico, the Netherlands, South Africa, the United Arab Emirates, the United Kingdom, and the United States. We continue to be encouraged by the number of customers licensing our products. New customers are a source of future maintenance and implementation services revenue, as well as they are excellent prospects for additional product sales.

For the full year, revenues increased 10% led by license fee growth of 18%. Operating earnings were $10 million, an increase of 67% compared to the previous year. Excluding stock option expense, which was not in last year's numbers, the operating earnings increase was even better at 81%. During the year, we entered into license agreements with 121 new customers and extended our relationship with an impressive number of existing customers. Software license agreements were signed with both new and existing customers located in 26 different countries around the world. The Company's balance sheet remained strong with cash and investments of approximately $73 million and no debt. The $73 million represents about a $10 million increase over the end of last year.

I'd now like to go into more details on Logility's results. Logility had another great quarter and fiscal 2007 was our best year ever. To summarize Logility's performance in the fourth quarter, the Company set all-time records in license fees, all-time records in total revenues, and all-time records in operating earnings. For the fourth quarter, revenue was $12.7 million, a 26% increase compared to the same quarter last year, while revenue streams contributed double-digit growth, led by record license fees with 48% year-over-year growth. Operating earnings were $3 million, a new record, which was an increase of 73% over fourth quarter last year. Excluding stock option expense, which was not in last year's numbers, the operating earnings increase was even better at 78%. This is the fourth time in the last six quarters Logility has set a new record in revenues and the fourth time in the last seven quarters it has set a new record in operating earnings.

We're also extremely pleased with Logility's full fiscal year results. For fiscal 2007, total annual revenues were a record $43.6 million, which was an increase of 17% over last year's record revenues. All three revenue streams increased at least 16% over the prior year. License fees for the year were [$16.2 million] and a 17% increase from last year. Maintenance revenues were a record $20.7 million, maintenance revenues represented over 47% of total revenues for the Company, and it's comforting to that much recurring revenue in our business model. Our operating revenues for fiscal 2007 were a record $8.4 million, a 41% increase over fiscal year '06, which shattered the previous record of $6 million set last year. Excluding stock option expense, which is not in last year's numbers, the operating earnings increase was even better at 47%.

Regarding our outlook for the first quarter of fiscal 2008, the first quarter has an opportunity to be as good or better as last year's first quarter. As we have discussed in the past, our license fee revenue has been somewhat seasonal. The trend based on the last three or four years is approximately 40% to 45% of license fees coming into the first half of the fiscal year and approximately 55% to 60% are generated in the second half of the fiscal year. As I described on the call last quarter a number of factors are contributing to our excellent performance. A combination of an improved economy with the continued globalization of the supply chain is driving demand for our products. Many companies have or 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 sourcing cost, 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 (inaudible) is greatly increased. This is causing many of our prospective customers to focus on improving their sales and operations planning processes and systems. Additionally, 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 bill rates, shrink [approximate] lead times and reduce costs. For these reasons, we believe there'll be continued investment in supply chain systems by companies in the markets we serve.

Our sales and marketing teams continue to execute well. Closure rate was strong in the fourth quarter, which drove the all-time record license fees. Our organizational and financial stability is clearly helping us establish relationships with customers and prospective customers as compared to some of our competitors. Additionally, last year illustrated again 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-term. Our two-brand strategy continues to work for Logility. These brands, Demand Solutions and Logility Voyager Solutions, enable us to provide solutions across the entire spectrum of corporations, ranging from Fortune 100 enterprise to very small companies. This substantially increases the market we can provide our supply chain solutions to. So in summary, fiscal 2000 was a superb year for American Software and Logility. Our business model is in excellent shape from a profit generation perspective and we've expanded our ecosystem and coverage in the marketplace with the continued successful execution of our two-brand strategy.

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

Thanks, Mike. Comparing the fourth quarter of '07 to the same period last year, total revenues for the quarter 10% to $22.5 compared to $20.5 million in the same quarter last year. That was primarily due to the increase in license fees, which increased 48% to $6.6 million compared to $4.5 for the same period last year. Services and other revenues decreased 7% to $9.1 million, primarily due to lower consulting services at our IT consulting business when compared to the same period last year. This decrease was partly offset by a 17% decrease at Logility due to increased implementation work from license fee sales in the prior quarters. Maintenance revenues increased 8% to $6.7 million compared to $6.2 million, primarily due to increases at Logility, which increased 12% compared to the same period last year. That was due to increased license fees in the prior quarter, resulting in the increased maintenance in the current quarter.

Taking a look at overall gross margins, they increased to 57% this quarter compared to 49% the same quarter last year. The license fee margin increased to 75% compared to 71% from the prior-year quarters and that's primarily due to increased -- a decrease in software amortization expense this quarter compared to last year, and also increased license fees. Services margins increased to 33% compared to 24% in the same period last year. This is primarily due to higher margin implementation work from this quarter compared to the same period last year, and also due to improved billing utilization rates. Our maintenance margin decreased slightly to 71% compared to 74% in the same quarter last year, and this is primarily due to the timing of some of the year-end bonus expenses.

Looking at operating expenses, our gross R&D expenses were 12% of total revenues for both the current and prior-year quarter. As a percentage of revenues, sales and marketing expenses were 15% of total revenues or $3.5 million for the quarter and that compares to 17% for the same quarter last year. G&A expenses were $3.3 million or 15% of total revenues and that compares to 16% in the same quarter last year. So our operating income increased 166% to $3.6 million this quarter compared to $1.4 the same quarter last year. Our EBITDA increased 88% to $4.7 million this quarter compared to $2.5 million in the same period last year. So our GAAP net income was $2.9 million. Our earnings [per] diluted share of $0.11 per share compared to net income of $1.2 million or $0.05 earnings per share last year. Adjusted net income was $3.1 million or adjusted earnings per diluted share of $0.12 for the fourth quarter and that compares to $1.3 million adjusted earnings per share of $0.05 for the same period last year. And these adjusted numbers exclude the amortization of intangibles related to the DMI acquisition and stock-option compensation expense.

International revenues for this quarter were approximately 8% of total revenues and that compares to 10% same quarter last year. So taking a look at the full fiscal year of 2007 compared to the same -- compared to '06, total revenues increased 10% to $84.4 million compared to $76.6 million. That's due to license fees increasing 18% to $21.1 million compared to $17.9 million, services revenues increased 5% to $36.3 million for this fiscal year compared to $24.9 million last year, and our maintenance revenues also increased 12% to $27 million compared to $24.1 million last year. Our overall gross margins were 54% for fiscal 2007 and that compares to 52% last year. Our license fee margins decreased to 71% from 77% last year. That's due to increase in capitalized software amortization expense this year and an increase of license fees from our indirect channels. Services margins improved to 31% compared to 25% last year. This is due to higher margin implementation service revenue and higher utilization rates. Our maintenance margins were 73% for both fiscal years.

Looking at operating expenses, our gross R&D expenses were 12% of total revenues for both fiscal years. As a percentage of total revenues, sales and marketing expenses were 17% of total revenue compared to 18% same period last year. Our G&A expenses were 16% of total revenues for fiscal '07 compared to 17% for fiscal '06. So our operating income for the year increased 76 -- excuse me, 67% to $10 million compared to operating income of $6 million last year. Full-year EBITDA increased 47% to $14.4 million compared to $9.8 million same period last year. So our GAAP net income was $8.4 million or $0.33 earnings per diluted share compared to a net income of $5 million or $0.20 earnings per diluted share. Our adjusted net income for the full year was $9.6 million, or earnings per diluted share of $0.37 and that compares to net income of $5.7 million or earnings per diluted share of $0.23. International revenues for the full year were approximately 10% of total revenues and that compares to 9% from last year.

As Mike indicated, the Company's financial position remains strong, with cash and investments of approximately $72.8 million at the end of April. And this is a sequential increase in cash and investments from $2.9 million and an increase of over $10 million when compared to the same time last year. Some other aspects of the balance sheet: Our accounts receivable billed is $12.5 million; our unbilled is $3.9 million for a total AR billed and unbilled of $16.4 million; working capital is $63.4 million; our deferred revenues are $15.4 million; and our shareholder equity is $82.7 million. Our current ratio at the end of the quarter was $3.2 million and that compares to $3.1 same period last year. And our day sales outstanding at the end of April '07 was approximately 66 days and that compares to 71 days this time last year.

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

Certainly. (OPERATOR INSTRUCTIONS) We will take our first question from Harris Hall of Singular Research. Mr. Harris, go ahead.

Congratulations on the exceptional quarter, guys.

Thank you.

Thanks, Harris.

A couple things. First, I was shocked at the level of expense control and trying to figure out how you can have a 10% growth in revenue, but your selling and marketing line is lower in dollars than last year. Are you paying the guys commission? Did you lower the commission rates or what's going on there?

Well, a couple of things. We didn't lower the commission rates, but we did get more productivity out of our people, both from our direct -- particularly from our indirect channel. Indirect channel came in strong second half of the year in particular and we expect that to continue in the future.

Also, I noticed the G&A was down. Did you have more Sarbox expense last year or what explains the reduction in G&A?

Yes, we had a little bit more Sarbox cost last year and we actually had more bonus commission -- excuse me, bonus expenses last year compared to this year.

So is the fourth quarter level for both of those line items pretty indicative of where you expect things in fiscal '08?

For the most part. There might be some pickup of expenses in the first quarter of next year, but after that it should be normalized.

Okay. And then you guys obviously are accumulating quite a bit of cash. Do you have any plans to raise your dividend? I know when we started looking at you, you had a 5% dividend yield, but now that your stock's up 55%, your dividend yield has crept back down.

I think that is something that's reviewed every year and I think next meeting we'll be reviewing and the board will make a decision on whether to raise the dividend. But no, I think we did it last year for the second time -- it was increased the second time since the dividend was instated and we're certainly -- right now, anyway, generating plenty of cash to justify another increase in my opinion, but that'll be a decision the board has to make.

Okay. Well, again, investors have to be pretty happy with 50% stock price gain and 64% earnings growth in '07, so congratulations.

Thank you.

Thank you. We will take our next question from Patrick Flavin of Flavin, Blake & Co. Go ahead, sir.

Good afternoon, gents.

Hi, Patrick.

I missed, Vince, the EBITDA numbers for the year and for last year. Can you give those?

Sure, Patrick. Hang on a second. It was $14.4 million for the current fiscal year and $9.8 million for last year.

Okay, great. And then, Mike, can you help us with the sales pipeline and what things are happening out there? It looks as if you're getting a very much bigger reception in terms of new customers and how do you see things developing at present?

Well, we're pretty pleased with the way things have unfolded and we've -- as I've said earlier, we feel like we had the opportunity to do better this coming quarter -- first quarter than we did last first quarter. The fact that we have so many more people out there with the two brand strategy, with our direct channel and indirect channel, we seem to find more opportunities than we did by ourselves. In other words, instead of having one plus one equal two, it's something greater than two. The direct brand -- the Logility Voyager brand marketing machine might turn up some leads. They're companies that are smaller than we would qualify and we pass those over to the indirect channel. And then sometimes the indirect channel -- as a matter of fact, one of the deals this past quarter, Continental Mills, was a customer of the Demand Solutions brand products and wanted to upgrade and and they were referred to Logility and Logility closed that business, which was a nice (inaudible) quarter So there seems to be some real synergies with the two channel strategies that's helping us find more opportunities.

And in that regard, should we read anything into the lower percentage of international business this quarter? That's the first quarter in a lot of quarters when international has gone down given your DMI exposure. Is this just a one-off quarter or is there a message in that?

Patrick, this is Vince. I wouldn't read a message in it. It's actually just a percentage point sequentially down. If you look at Logility, it's actually -- it's up at Logility a percentage point. It went from 14% last year to 15% this year for the whole year.

It's up this year.

Oh, I'm sorry, it is up.

Yes, international revenues is up this year

For the full year.

Yes, for the full year.

I think what I said was for the fourth quarter, went down sequentially. But that's -- it's predicated on what businesses close in a given quarter, but for the full year it's up.

Yes, I was asking about the quarter, but I gather that the message is that there's no message.

Right.

Right.

And then finally, Mike, can you talk a little bit -- I'm seeing a lot of press these days and you must have a very large market share in NGC. Can you talk a little bit about that business, how big is it and how fast is it growing and what kind of a market dominance does it have in the textile and apparel area?

We had -- NGC had a record year this year. They grew their license fees nicely and their total revenues nicely. I wouldn't say they necessarily have a dominant share of the market, because I really haven't seen for our segment any market share information published. But they've got a who's who of the customers in the apparel, and quite frankly when you go into Logility and DMI, there's a ton of customers there in the apparel industry as well, so all three of those brands of products have done very well in apparel. Obviously, NGC is more exclusive to that.

Okay, thank you. Keep up the good work.

Thank you. We will take our next question from David Soetebier of J.M. Dutton. Go ahead.

Good afternoon, gentleman. I also congratulate you on a great quarter. But on the R&D number, that was up a little more than I expected sequentially. Was there some bonuses in the fiscal fourth quarter that drove that and then what would be the outlook for R&D for '08?

Dave, this is Vince. Yes, there were some bonus -- year-end bonuses in those numbers compared to the same period last year. There were also some -- a little additional R&D spend due to timing, but as far as a percentage of revenues, it's still in-line with what our expectations were.

All right, thank you. Then on revenues, it looks like DMI had a rather spectacular quarter. Did they have a new product out there that came out this quarter that may have added to that?

They had a very good quarter, but they didn't -- there's no new product. It's really more energizing a channel. It really did change the management of DMI about -- guess now it's been about eight months, maybe nine months and it's had a dramatic impact. The dynamic leadership and the channel just energized and doing very well.

All right, thank you.

Thank you. We'll take our next question from the site of Sam Rebotsky from SAR Asset Management. Go ahead.

Good afternoon, Mike and Vince. I guess I must reiterate, you did well and the market has been following you very closely. Can you tell me about your pipeline? Has there been a shorter time to close transactions? Do you feel your pipeline is stronger now than the same time last year? And with your deferred revenue similar to last year, do you expe -- and you expect the first quarter to be very good, is it new business that will be happening now for the first quarter also that's not in deferred revenue?

Deferred revenue is primarily maintenance.

Maintenance, okay.

And that's traditional for [the entire] industry and for us. So there's no big license fees in the deferred revenue. There might be a little bit, but not anything substantial at all. And then the sales cycle really depends on which brand of products. One of the nice things about the Demand Solutions sales cycle -- it's one of the good things and one of the bad things is it's only about 90 days. So it's really -- it's hard to forecast that business long term because you just don't see as much lead time on that, but the good thing about it is opportunities will pop up and close very, very quickly, and they're having -- so far they're having a decent quarter -- not decent, a good start to the quarter so far.

Do we see the average transactions being any larger than previous? And do we see the pipeline being stronger? I assume it's definitely stronger than it was at the same time last year, although the previous quarter -- because the first half is not -- as you indicated the revenue is not as big as the second half, would the -- but would the pipeline also be the same as the third quarter? Could you give some color on that?

Well, pipeline's good. We still have to go close the opportunities. We had very good closure rates fourth quarter. The DMI pipeline is very strong and one of the things we've seen is, for both brands the ASP has increased in the fourth quarter. And in Demand Management in particular, one niche that Demand Management has, which is quite interesting and is one of the things that has helped accelerate the growth of their product sales is the fact that with their low cost to implement and low cost to support, they are very good for large companies who have distributed operations with not a lot of IT support around the world. So for example, they did a couple of sales and operations planning deals in the most recent quarter that were worldwide and were for several hundred thousand dollars because of that; there's a lot of installation. So their ASP is much higher than it was when we bought them because of that.

Sounds good. Just to change partially to the dividend, I believe the dividend's $0.08 a quarter of $0.32 a year. Is there any kind of rationale on the -- is it the cash on hand, the earnings, or is there -- what is the rationale -- the board's rationale for the size of the dividend and where we see it going forward?

Well, once again I'm not sure I can speak totally for the board, but I think it's a combination of factors. Certainly, cash on hand would be part of that, certainly the cash flow we're generating would be major factors in that as well.

Well, good. Keep up the good work.

Thank you.

Thank you.

Thank you. We will take our next question from the site of Drake Johnstone of Davenport. Go ahead.

Hey, guys.

Hey, Drake.

The question I had is going into this quarter, you all indicated you had, I think, four or five large deals that you were working on and I was wondering if you had any color on that? I think it was -- that was probably Logility that was working on those deals. Did you close most those deals or could you provide some color on that?

We closed a couple of them and we still have a couple in the pipeline.

So as far as competitive engagements, the deals that have closed, you've won the ones that have actually closed? Did you lose any deals or did you win the deals that the client actually closed?

Well, the ones we closed, we definitely won. The ones -- the deferred are still out there. I don't think we lost any of the big deals to a competitor.

Okay. And then if you look at -- you look at your license revenue year over year, would you equate that to the same as contracted revenue that's the total billings for the quarter? Are they almost the same number or is there a difference there?

Drake, are you asking whether the licensing number that we're booking for revenue is similar to what we're actually billing customers? Is that what you asked?

Yes.

Sometimes we give payment terms for the larger deals, 90 days, sometimes possibly all the way up to six months, but for the most part, it's revenues on license fees are similar to billings. (inaudible) timing on that.

Okay. And then on Logility. Mike, you had characterized Logility in the first quarter of '08 being similar or better than the fourth quarter of '07, and I'd like to get a sense of what you mean. You're just saying that revenues should be up or a similar performance from a growth standpoint, the growth that you registered in the first quarter of '07?

I think what I said is we have an opportunity to do the same or better than we did first quarter last year.

And you mean the actual revenue growth rate in license?

I mean the same revenue or better.

All right. So you're saying the revenue could be flat or it could be up, so you're not characterizing -- you're not really -- you're saying it's not going to be down, but you thought it could be flat or up?

Well, I'm saying it could be either of those conditions, and it's the same thing I've said probably the last 12 conference calls.

And prior to the second half of 2007 you characterized or provided a view in terms of software license growth on a year-over-year basis. Do you have any characterization for the first -- either the first quarter of '08 or the first half of '08 in terms of expectation for software license growth on a year-over-year basis?

Our plan is to grow the license fees, just like it was last time -- last year at this time.

Okay. Thank you.

Thank you. (OPERATOR INSTRUCTIONS) Our next question comes from the site of Harris Hall with Singular Research. Go ahead.

Thanks, just a follow up. Obviously there was a pretty big jump in your license revenue in the fourth quarter and I'm wondering if that was one or two big deals that skewed things way up? Was there any customer concentration issues, anyone over 10% in the fourth quarter?

No.

No 10% customers in the fourth quarter?

No.

Okay.

Not for software deals.

Right, for license fees.

Right.

Wow. okay.

We did a lot of transactions, but ASP was up.

Security characterized how much ASPs were up?

No. (laughter)

Okay.

Thank you. It appears we have no further questions. At this time, I will turn the program over to Vince Klinges for any closing remarks. Go ahead, sir.

I'd like to hand the call over to Mike Edenfield right now.

Okay. Thanks, Vince. Well, thank you, everybody, for participating in the call today and for all the good questions and we appreciate your interest in American Software and look forward to another good quarter and the next call we have together. Thank you.

This concludes today's teleconference. Please feel free to disconnect.