Logility Supply Chain Solutions Inc (LGTY) 2008 Q2 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 Q&A session. Please note this call may be recorded.

I will now turn the program over to Mr. Vince Klinges. Go ahead, sir.

Welcome to the second quarter fiscal of 2008 earnings call for American Software. 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 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; the growth rate of the market for our products and services; the timing, availability and market acceptance of these products and services; the effect of 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 second quarter of fiscal 2008, the quarter ended on October 31st.

The second quarter marked our 27th consecutive quarter of profitability and, for the 14th consecutive quarter, total revenues increased over those attained in the previous year's quarter. The increase for the second-quarter revenues was 17% year over year.

Some of the highlights of the quarter from a revenue perspective were licensee growth of 11% and services growth of 25%. We also had a good increase in maintenance of 9% compared to second quarter last year. Our earnings were very good. Second-quarter operating earnings were approximately $2.8 million, up 56% over the same period last year.

We signed some great customers up. Some notable new and existing customers placing orders in the second quarter included Atek Medical, CooperVision, Cypress Medical, Henkel North America, Nike, PPG Refinish, Premier Farnell, Electrolux and SanMar Corporation. We added 27 new customers in the quarter.

During the quarter, we signed license agreements with customers located in 13 different countries. Those countries were Australia, Brazil, Canada, China, France, Germany, Italy, Malaysia, South Africa, Switzerland, Thailand, 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.

The Company's balance sheet at the end of the quarter remains strong, with cash and investments of over $76 million and no debt.

Drilling down a little bit, Logility had another good quarter. For the second quarter, revenue was about $11 million, which is an 11% increase compared to the same quarter last year. All revenue streams grew, led by services with 28% year-over-year growth, maintenance increased 12%, and license fees were up 2% over last year. Operating earnings were $2.2 million for Logility, which is an increase of 49% over the second quarter last year.

The two-brand strategy we have implemented continues to work for Logility. The Demand Solutions brand and Logility Voyager Solutions brand enable us to provide solutions across the entire spectrum of corporations, ranging from Fortune 100 enterprises to very small companies. This substantially increases the market we can provide our supply chain solutions to. During the quarter, we also expanded our distribution channel for Demand Solutions with a new VAR focusing on the US government, selling into that market, and also, our first VAR on the mainland of China, which is based in Shanghai.

Regarding our outlook for the third quarter of fiscal 2008, the third quarter has an opportunity to be better than last year's third quarter. As we have discussed in the past, our license fee revenues have been somewhat seasonal. The trend based on the last few years is approximately 40% to 45% of license fees coming in the first half of the fiscal year and 55% to 60% generated in the second half of the fiscal year. If that trend continues, we should have an excellent close to fiscal 2008, even better than the good start we've had so far. Our pipeline gives us the opportunity to finish the year strongly; but, as usual, closure rates will be key.

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

Thanks, Mike. Taking a look at total revenues for the quarter, as Mike indicated, they increased 17% to $23.6 million, compared to $20.2 million in the same quarter last year. This is driven by license fees which increased 11% to $4.8 million, compared to $4.3 million for the same period last year. Services and other revenues increased 25% to $11.6 million, and that was due to Logility, which grew 28% in the same period last year, and then the other business units increased 25% compared to the same period last year. Maintenance revenues also increased 9% to $7.1 million, compared to $6.6 million in the same period last year, and that's primarily due to increases at Logility, which increased 12% compared to the same period last year.

Taking a look at the overall gross margin, it was 50%, compared to 52% in the prior-year quarter. Our license fee margin was 68%, compared to 63% in the prior year, and that's due to increases in license fees. Our services margins decreased to 27%, compared to 32% for the same period last year. That's primarily due to a majority of the services revenue coming from our IT consulting business, which has lower margins. Our maintenance margin increased to 74%, compared to 73% for the same quarter last year, and that's primarily due to increased maintenance revenue.

Looking at our operating expenses, our gross R&D expenses were 10% of total revenues, compared to 11% from the prior year, and this percentage decreased due to higher revenues. As a percentage of revenue, sales and marketing expenses were 16% of revenues or $3.8 million for the quarter, and that compares to 17% for the same quarter last year. That decrease in the percentage is also due to higher revenue. G&A expenses were $3.2 million or 14% of total revenues, and that compares to [16]% for the same period last year. Again, that was due to higher revenues driving the percentage of revenues down for G&A.

So operating income expense increased 56% to $2.8 million for the quarter, and that compares to $1.8 million for the same quarter last year. Our EBITDA was $3.8 million, compared to $2.9 million for the same period last year. So our GAAP net income increased 40% to $2.5 million or earnings per diluted share of $0.10, and that compares to net income of $1.8 million or $0.07 earnings per diluted share for the same period last year.

On an adjusted net income basis, which excludes the amortization of intangibles related to our DMI acquisition and stock-based compensation expense, was $2.8 million or adjusted earnings per diluted share of $0.11 for the second quarter, and that compares to net income of $2.1 million or adjusted per diluted share of $0.08 for the same period last year.

International revenues this quarter were approximately 9% of total revenues, and that compares to 10% the same quarter last year.

Looking at the numbers for the six months ended October 31, 2007, total revenues year to date increased 12% to $45.3 million. License fees increased 14% to $9.9 million, compared to $8.7 million same period last year. Services revenues increased 16% to $21.4 million, and maintenance revenues also increased 6% to $14 million, compared to $13.1 million last year.

Overall, our gross margin year to date is 51%, and that compares to 52% last year, year to date. License fees margins increased to 67%, compared to 65% year to date last year. Services margins were 29%, compared to 30% same period last year, and the maintenance margins were 74% year to date, compared to 73% for the some period last year.

Looking at operating expenses on a year-to-date basis, our gross operating expenses were 11% of total revenues for both this year and the same period last year. As a percentage of total revenue, sales and marketing expenses were 16% of revenues, compared to 17% same period last year, and G&A expenses were 15% of revenues, compared to 16% in the same period last year.

So our operating income year to date increased 54% to $5.3 million, compared to $3.4 million last year. Our EBITDA was $7.4 million, compared to $5.7 million same period last year. So our GAAP net income was $4.5 million year to date or $0.17 earnings per share. That compares to a net income of $3.1 million or $0.12 earnings per share last year. On an adjusted basis, our year to date was $5 million or earnings per diluted share of $0.19, and that compares to net income of $3.7 million or earnings per diluted share of $0.14 for the same period last year. International revenues year to date were approximately 9% of total revenues, compared to 10% for the same period last year.

Looking at our balance sheet, our financial position remains strong, with cash and investments of approximately $76.4 million as of the end of October 31, 2007 and no debt. This is a sequential increase of over $800,000 and an increase year over year from the same period last year of $11.3 million.

Other aspects of our balance sheet are accounts receivable bills was $12 million, our unbilled was $5.2 million for a total of $17.3 million of accounts receivable. Our working capital, $[70.3] million, our deferred revenues are $15.3 million, and our shareholder equity is $88.9 million. Our current ratio increased to 3.7 compared to 3.2 the same period last year. Our days sales outstanding as of October 31, 2007 decreased to 66 days, compared to 79 days the same time last year.

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

(OPERATOR INSTRUCTIONS). Drake Johnstone, Davenport.

It looks like he withdrew his question.

David Soetebier, Dutton Associates.

It looks like NGC and Proven Method had very good quarters. Has something changed in that business versus, you know, we had a couple years here where it's flat to down?

Well, new generation did have a strong quarter, and they've got a good pipeline and also a strong start this quarter. So they've actually -- if you look at the long-term trends with them, they've been growing. So they're just continuing that trend.

The Proven Method did have a good increase in services, which we anticipated, and a large customer who had paused for a while got back on track. So that's the main thing that drove that.

A second one on Logility maintenance revenues -- are the maintenance renewals running at nominal rates? Has there been any change in that?

Much about where it's normally been.

(OPERATOR INSTRUCTIONS). [Jim Rainey], UBS.

Good quarter, guys, thanks. I'm recently building a position in the stock, and some of my retail clients ask me, since Logility is 80% owned by American Software, what benefits does American Software receive from having a separate kind of tracking stock, and how do those benefits outweigh the extra expenses that must be involved with having two different corporations?

Well, to go back to the reasons we structured it this way, I guess about 10 years ago now, at the time Logility was growing much faster than American recently, although it wasn't this quarter, but recently it has been doing that, particularly on the earnings line. But it was hidden. It was a sort of a hidden asset within American. So it was to highlight the fact that we did have a good asset that was growing quite fast in a hot market, the supply chain management market.

So the expenses aren't unnecessarily as large as some people think they are. We have been able to economize a lot. There are some extra expenses, but we think that at this time, anyway, the pluses outweigh the minuses.

Drake Johnstone, Davenport.

Nice quarter. A question I had for you, and I realize that you provided the detail in your 10-Q, but maybe for the benefit of people who call you might provide some more details on this call. That is, when you look at the license revenue, services and maintenance, obviously Logility -- you break out some details there. Could you break out on the call here how much of the services came from The Proven Method?

Of the $11.6 million that we reported, approximately $7 million was The Proven Method.

Could you provide more color on the maintenance revenue? To what extent was that maintenance revenue due to any sort of price increases versus maintenance derived from new software license sales?

Well, are you talking about the increase in maintenance?

Correct.

Most of it is due to the momentum we had in license fees the last two or three years now. There have been some price increases, but not to that extent.

Then you mentioned that you had -- was it 24 new clients? The question I would have is, if you look at your software license revenue line in the second quarter, what percent of the license revenue can be attributed to new clients to the firm versus existing clients?

Well, it was 27 new customers for American Software in the quarter. It has been running -- I don't know what it was this quarter. It has been running over 50%, 55% to 60%. It fluctuates, as you can imagine, from quarter to quarter.

Okay, that's great. The other question also is it looked like that in this quarter that NGC had a pretty strong quarter, which contributed nicely to results, and the legacy American Software looks like you landed some business. Mike, maybe you could comment -- with Logility, I see that you had -- and I realize with a small company, quarters tended to be lumpy in terms of signing customers, but I note in Logility that you had a 2% software license growth. Do you feel that you have a pretty solid pipeline across the Company, not only in the ERP side but also the Logility going into the third quarter?

Yes, we do. We are pleased with our pipeline going into the third quarter here. We are pleased with where we are year to date. Obviously, we would like to have done a little more in Logility for Q2 in the license fees, but Logility actually had a great Q1 [traditionally]. First half is weak for us, and Q1 didn't look weak at all; it looked very strong. That was coming off a very strong Q4.

So as you referenced, and we have said this the last several calls, we can be lumpy positively and sometimes not as positively as we would like. But we're pleased where we are, and pleased with the pipeline going into the third quarter.

So is it your feeling that, notwithstanding what's going on in the economy, that the companies that are buying supply chain software -- that demand appears to remain unabated for the supply chain software?

Yes. So far, that's what we feel. I know there is a lot in the press about recession this and recession that, but we haven't really seen it yet, knock on wood. I hope I'll probably be saying the same thing at the next call.

Sam Rebotsky, SER Asset Management.

How are you doing against your competition? Do you think you're taking any share from them, as far as the business that you've been doing?

Yes, I think we are. If you looked at our main competitors, traditional competitors from the past, their license fees have shrunk dramatically, and ours have grown. I'm speaking primarily in the supply chain market here.

In the whole software industry, I guess there's been a lot of consolidation.

Right.

SAP, IBM and Oracle trying to sort of consolidate. Do you see more consolidation going forward? What do you see relative to American Software and Logility? Do you think you should be making acquisitions or you should be acquired? Do you have any thoughts about what's sort of an ideal status? Should you be making acquisitions of companies that you may be able to sell to the same customers that you're selling to know?

I do think there's going to be more consolidation in the software industry. There has been evidence of that as recently as the last -- this week, probably, not last week.

I think one of the things that really helped us get going a few years ago is we made a very good acquisition of Demand Management. So we are constantly looking for good acquisitions.

However, we're very conservative. Just because we have $76 million doesn't mean we want to go out and buy companies for the sake of buying them and the short-term benefit. We want to look at something that we understand is very complementary for the market we're in, that comes with some assets like a good customer base, a good recurring revenue stream and a productive sales channel. We've got a lot of products to sell with the sales force we have. We don't necessarily want to go buy technology and cram that into our sales channel, although I wouldn't rule that out. But in general, we're looking for companies that can sell the product after we buy them as well at a channel.

So we're evaluating them every week, and our requirements are pretty stringent. So hopefully, we'll have one in the near future, but we might not.

So at this point, it appears that maybe some of the prices may be higher than you are willing to pony up to at this point in time? Is that that you have not seen anything or haven't made a transaction?

Well, when we find one we like, generally the price might be higher than we think it's prudent to pay. Then we look at a lot that we determine we don't like, and it doesn't matter what the price is.

So [there's no] both ways [it could go]. But I guess, at the end of the day, at some point in time, if the prices that are being bid up for a company, say, like American Software and Logility, I guess an exit strategy might be appropriate, too, I guess, if the price is right. Is that on the table also, or is that less of a -- you know, spending any time with?

Well, as a public company I think we have a fiduciary responsibility, if someone is interested in acquiring us at a fair price, to listen to it. So I can say it's off the table.

Well, good luck. Keep going to good work you are doing.

Thank you very much.

It appears we have no further questions.

Thank you very much for participating on the call and your interest and support of American Software. We look forward to publishing good results next quarter. Thank you.

This concludes today's teleconference. You may disconnect at any time. Thank you and have a great day.