Logility Supply Chain Solutions Inc (LGTY) 2008 Q4 法說會逐字稿

Welcome to today's teleconference. At this time, all participants are in a listen-only mode. Please note this call may be recorded. Later there will been an opportunity to ask questions during our Q&A session.

I would now like to turn the call over to Vincent Klinges, CFO of American Software. Please go ahead, sir.

Good afternoon, and welcome to American Software's fourth quarter, fiscal '08 earnings conference call. On the call with me are Jim Edenfield, CEO of American Software, and Mike Edenfield, Executive Vice President of American Software and CEO of Logility.

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 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 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 with no assurance that the forward-looking information will move to be accurate.

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

Thanks, Vince. Good afternoon everyone, and thank you for participating on this call. I have some comments on the fourth quarter and fiscal 2008 results. Vince will review the details on the financials and then we will take your questions.

The fourth quarter marked our 29th consecutive quarter of profitability. Revenues were $21.6 million, both maintenance and services revenue increased, however revenues were lower than we expected, and as a result, so are earnings. This resulted primarily from a shortfall in license fee revenues, which we believe were impacted by economic conditions.

Fourth quarter operating earnings were approximately $1.2 million.

Notable new and existing customers placing orders in the fourth quarter included Barry Controls, Berry Plastics Corporation, C&C Group, Electrolux Home Products, FEDCO, Fastenol, GKN Aerospace, Master Pet, PPG Industries Europe, RC Willey Furniture, Reliable Automatic Sprinkler, Rexnord, Time Customer Service, Triboro Quilt Manufacturing Corporation and Volvo.

We added 28 new customers in the fourth quarter. During the quarter, software license agreements were signed with customers located in 13 different countries including Australia, Canada, Columbia, France, Guatemala, Ireland, the Netherlands, New Zealand, Russia, Sweden, Switzerland, the United Kingdom and the United States. We continue to be encouraged by the number of new customers licensing our products, as new customers are a source of future maintenance and implementation services revenue, as well as being excellent prospects for additional product sales.

For the full year, revenues increased 5% led by services growth of 15%. Operating earnings were $8.1 million, which was a decrease of 19% compared to the previous year. During the year we entered into license agreements with approximately 115 new customers and extended our relationship with a number of existing customers. Software license agreements were signed with both new and existing customers located in 27 different countries for the year.

The company's balance sheet remains strong with cash and investments of approximately $76 million and no debt.

I would now like to go into a little more detail on Logility's results. Logility had a strong quarter from an operating earnings perspective. Fiscal 2008 was the best year ever from a revenue perspective. For the forth quarter, revenue was $11.9 million, which was an 8% decrease compared to fourth quarter last year, which was Logility's best quarter ever.

Operating earnings were $2.4 million, which was a decrease of 23% over fourth quarter last year, but a 260% sequential increase over third quarter. The third quarter did have a noncash write down of capitalized software of approximately $1.2 million, it impacted earnings. Without that write down the sequential increase in operating earnings would be 30%.

For fiscal 2008, total annual revenues were a record 44.9 million, an increase of 3% over last year's record revenues. License fees for the year were 14.6 million, which was 10% down from last year. Maintenance revenues were a record $22.5 million, which represented 50% of total revenues for the company, and we are pleased to have that much recurring revenue in our business model.

Our operating earnings for fiscal 2008 were 8.3 million, which was a 3% decrease compared to fiscal 2007. Excluding the noncash write down of capitalized software I mentioned earlier for the third quarter, the operating earnings would have been over $9 million for fiscal 2008.

For the full fiscal year, Logility signed 101 new customers. Logility made significant strides in expanding this indirect sales channel this fiscal year, For the U.S. we added distributors in Virginia, Colorado and Iowa.

Outside of the U.S. we expanded our distribution locations to include Mexico City, Italy, Moscow, and three locations in China, Shanghai, Guangzhou and Hong Kong. These new distribution and distributors contributed minimal revenues in fiscal '08 but we expect all to contribute in fiscal 2009. In fact, some have already contributed this quarter. We also expect to add additional coverage in the Americas, Asia and Europe in fiscal 2009.

So in summary, fiscal 2008 was a good year for Logility. Our business model is in excellent shape from a profit generation perspective and we have expanded our ecosystem and coverage in the marketplace with the continued successful execution of our two brand strategy.

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

Thanks, Mike. I would like to take a look at the current fourth quarter of '08 compared to the same period last year. Total revenues decreased 4% to 21.6 million, and that compares to 22.5 million the same year. License fees decreased 29% to 4.7, and that compares to 6.7 for the same period last year.

Services and other revenues increased 5% to 9.6 million, and that increase is due to more implementation work, particularly at our IT consulting business which grew 16%. Maintenance revenues increased 9% to 7.3 million, and that compares to 6.7, primarily due to increased sales in the prior periods.

Looking at costs, our overall gross margin was 52%, and that is down from 57% in the same quarter last year. Our license fee margin was 67% compared to 75% in the prior year. That's due to a decrease in license fees.

Our services margins decreased slightly to 30% compared to 33% for the same period last year, and that's due to increased service revenues from our lower margin stamping business unit. Our maintenance margin increased to 72% compared to 71% for the same quarter last year, and that's primarily due to higher maintenance revenue.

Looking at our operating expenses, our gross R&D expenses were 12% of total revenues for both the current and prior year period. As a percentage of revenue, sales and marketing expenses were 21% of revenues or 4.5 million for the quarter, compared to 15% for the same quarter last year. And this percentage is higher due to increased headcount and marketing costs, and lower license fee revenue.

G&A expenses were 3.5 million or 16% of total revenues, compared to 15% in the same period last year. So our operating income decreased 66% to 1.2 for the quarter, compared to 3.6 for the same quarter a year ago. Our EBITDA was 2.2 million, compared to 4.7 the same period last year. Our GAAP net income was 900,000 or earning per diluted share of $0.03 per share, compared to a net income of 2.9 or $0.11 earnings per snare the same period last year.

Adjusted net income, which excludes the amortization of intangibles related to the DMI acquisition and stock-based compensation expense, was 1.1 million or adjusted earnings per diluted share of $0.04 for the fourth quarter. And that compares to adjusted net income of 3 million or adjusted per diluted share earnings of $0.12 for the same period last year.

International revenues this quarter were approximately 11% of revenues, and that compares to 8% in the same quarter last year.

Looking at the full year, total revenues increased 5% to 89 million, compared to 84.4 million in the same period last year. Total license fees decreased 10% to 19 million, compared to 21.1 million in the same period last year. Services revenues increased 15% to 41.7 million, compared to 36.3 million last year. And maintenance revenues for the year increased 5% to 28.4 million, compared to 27.0 million last year.

Looking at the overall gross margin, for the full fiscal year of '08 was 52% and that compares to 54% in fiscal '07. License fee margin decreased to 68% from 71% last year. Services margins were 30% compared to 31% prior year, and maintenance margin was 73% for both fiscal '08 and fiscal '07.

Looking at operating expenses for the year, gross R&D expenses were 11% of total revenues, compares to 12% last year. As a percentage of total revenue, sales and marketing expenses were 18% for the fiscal '08 compared to 17% last year. G&A expenses were 15% of revenue, and that compares to 16% in the same period. And our operating income decreased 19% to 8.1 million, compared to 10.0 million last year, excluding the 1.2 million noncash write down in cap software, the adjusted operating income was 9.3.

EBITDA for the full year was 13.3 million, and that compares to 14.4 million last year. GAAP net income was 6.5 for the year or $0.25 earnings per diluted share, and that compares to net income of 8.4 or $0.33 earnings per share.

Adjusted net income for the year was 8 million or earnings per diluted share of $0.30, and that compares to adjusted net income for '07 of 9.2 or $0.36 per share. International revenues for fiscal '08 were 10% of total revenues for '08 and '07.

Taking a look at the balance sheet, the company's financial position remains strong with cash and investments of approximately 76.1 million at the end of April 30, '08, with no debt. This is an increase to cash and investments of approximately 3.4 million when compared to the same time last year.

In fiscal '08 the company paid approximately 8.6 million in dividends and repurchased approximately $1 million of its common stock. Also the company's subsidiary Logility, repurchased approximately 1.1 million of its common stock under its authorized repurchase program.

Other aspects of the balance sheet are accounts receivable billed with 12.6 million, our un-billed with 3.3 for a total of 15.9. Working capital of a little over 68 million, deferred revenues is 16.4 million, and shareholder equity is 86.5 million. Our current ratio improved to 3.5 compared to 3.2 last year. And our days sales outstanding as of the end of April, 30, '08, was 67 days compared to 66 days this time last year.

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

(OPERATOR INSTRUCTIONS). And we will take our first question from Bryan Murphy with Sidoti and Company. Please go ahead.

Hi, thanks for taking my question. Mike, could you just give us an update on what the pipeline looks like?

The pipeline is probably similar to what it was last quarter. It is not materially different. We typically, first quarter could be a tougher quarter to close business because of the quarter, our first quarter ends in July. A lot of people are on vacation and things like that. So that might impact us some but the pipeline is about the same.

Okay. And do you have a lot of deals that are sort of stuck at the very end of the pipeline just sort of waiting for approval?

I wouldn't say we have a lot like that, no.

Okay. And Vince, on the R&D line, R&D was pretty much flat for fiscal '08. Where can we expect that to trend in fiscal '09?

I think that that would be a good metric for next year. It might be up slightly, not materially though.

Okay. And the increase in sales and marketing, I'm assuming that's mostly related to the build out of the DMI channel. Is that right?

Yes, a good bit of it is.

And I understand you have some new additions there in terms of leadership, can you give us an idea of how those folks are ramping up?

They're doing well. We are very pleased with the new VP of Sales, and he has helped recruit a good number of these VARs based on his contacts from companies that he worked for in the past.

We are also pleased with the ramp up of some of the new VARs as well. For example, the one in Virginia is already, excuse me, the one in Russia has already closed an order fourth quarter, and the one in Virginia has already closed one this quarter. A nice size order for DMI, and has another one or two in the pipeline he's trying to get.

So all of those, I think we have less than 100,000 of revenue in license fees, probably closer to 50, from all of those new VARs I mentioned, and so we have got a lot of upside from the addition there.

Great. I will just ask one more. How did DMI do relative to Voyager in the quarter, and sort of what's the outline there for DMI next year?

DMI grew for the quarter, and we expect them to continue to grow. They're focused on the small and medium segment of the market, which we think is less penetrated, and we also think it is easier to get lower priced orders through the pipeline now compared to larger orders. So we expect them to grow this year as well.

Okay. Thank you.

We'll take our next question from David Soetebier with Dutton Associates. Please go ahead.

Good afternoon. I would like a little more detail on the economic impact on software sales. It looks like, just a quick look at the numbers, Logility had a nice rebound in Q4 sequentially, but I think you had talked on the last quarterly call that there had been a couple of delays there. So maybe something came through there.

And it looks like the ERP business, your Legacy business, was down sequentially. And also maybe a comment on Proven Method, again just a quick look at the numbers here but it looks like maybe Proven Method was down sequentially. Is that correct? And if so, why?

Proven Method was down. I believe the other--

It was down 12% sequentially, but year-over-year it was up 16%.

And then Logility did rebound nicely. Three of the orders that we talked about. I think we talked about some orders that were delayed in the third quarter. Actually, none of those came in in the fourth quarter. We do hope to get one of them this quarter, but it will be close. And another one is probably later in the year, and then another one is off the pipeline.

All right. Thank you. How about the ERP business?

It was a disappointing quarter for the ERP business, but we think they can bounce back and do better this quarter.

All right. Thanks.

We will take our next question from Drake Johnstone with Davenport. Please go ahead.

Hi guys, I apologize (inaudible)-- here, but on the expense run rates for the fourth quarter, I think in a prior question you were indicating that, I believe the sales and marketing expense in the quarter had jumped up, and also G&A expense had jumped up. To what extent in the fourth quarter was that due to sort of year-end expenses in terms of compensation versus expanded channel? And then looking into 2009, are we looking at expenses to be similar in a closed basis to what you have in the fourth quarter or somewhat higher?

Sales and marketing, I think expenses will be less than what we had in the fourth quarter on a quarterly basis going forward, unless we blow it out and we will see some increase associated with an increased revenue.

What about the other line items, such as G&A and research and development?

Yes, Drake, this is Vince, the G&A went up 4% over the quarter but year-over-year it is down 5%. So, I think the G&A expenses might trend up a little bit but not materially from the run rate of '08.

Okay, so up somewhat. And how about R&D?

R&D should be pretty much, well maybe up a little bit but not materially from the '08 number.

Okay. And then, just sort of big picture standpoint, I mean looking out over a year, even two years, I mean based on the distribution you have set up here in international markets, is there a certain goal you have in terms of what percent of international revenue might contribute to the percent of your total revenue?

We don't have a goal by, for the next year or two, but long-term, we feel like, and we really are focusing primarily on DMI here as you can tell. But long term, we think international should be more than domestic, for DMI to reach its full potential.

Now, how would you characterize long-term? Is that a three to five year time frame or what is long-term in your view?

Five years plus.

Okay. And then, another question is, in terms of margins, if revenues remain weak for a few quarters, do your margins remain in similar range as far as gross margins?

Yes.

And that's because DMI is becoming a greater contributor as Logility. Is that right?

Yes. The mix is different as far as the cost of license fees, yes.

Okay. Then one last question is, obviously right now you have 90% of your revenue in the U.S. and in the event the economy remains as it is, who knows where the quarterly results go for a few quarters, but I guess I would just ask the question, I gather from you in the past that you guys are committed to your dividend, have a lot of cash on hand. Will that still remain the case?

Yes, we are committed to the dividend.

Okay. Great. Thank you.

(OPERATOR INSTRUCTIONS). We will take our next question from Sam Robotsky with SCR Asset Management. Please go ahead.

Yes. Good afternoon, Mike and Vince. I guess it is a little disappointing this quarter. I guess your license revenue being off 2 million and your cost of license are basically the same. Is that normal for your cost of license, relative to being off 2 million and the set cost the same?

Sam, yes, it is because a big portion of the cost of license is fixed, and it is amortization of capitalized software. That's why you don't see that number fluctuating.

Okay. So, and then, as you address the increase in the sales, that's basically the reduction in the income by the $3 million. Have you considered buying any stock in the open market? Do you have a, for American Software, do you have a plan to that, is there any kind of parameters that you have that you would consider or, if no opportunity, you have been looking for opportunities I assume, you haven't found anything. So, would you consider buying stock in the open market?

Hi Sam, this is Vince. We actually did buy, both companies bought stock under the repurchase programs during the quarter.

How many shares did you buy for American Software and at what price?

For the quarter it was, it is in the press release. The company, 174,000 of its common stock for close to $1 million.

Okay.

Okay? And at Logility we purchased 114,000, a little over 114,000 shares, or Logility purchased I should say, for 787,000, so that's about 1.8 million of cash.

Okay, so how much can you continue to buy, what is available on your buy plan?

Remaining, at American there's about a little over 1.5 million shares remaining on their (inaudible) program, 1.5 million shares.

Okay.

And at Logility it's a little over 100,000 shares.

And on Logility's tax rate, was it lower relative in the fourth quarter -- let me just, compared to the previous year.

Yes, it was, the effective rate was 36% compared to 45% last year. We had some R&D tax credits we were able to take this year.

Now, evidently, would you say the market that you are selling into is a little weaker this quarter than previous, or is it, you indicated it is basically the same, but the license revenue is off compared to the same time last year. Is it taking longer to close a transaction or is it the same or--.

Well, when I said it was the same, I was comparing it to fourth quarter.

Okay.

First quarter to fourth quarter, in terms of what we see in our pipeline. It is definitely different than it was a year ago.

There's a lot more uncertainty in the marketplace, and we, our customers don't come out and say it but I think some of them are uncertain with what's going on in their business model because of, for example, just about everybody is impacted by the oil prices, gasoline prices. So until they stabilize, I think there's still going to be some uncertainty out there.

I think it actually works to our advantage that the raw materials cost and things like that are going higher because that's our value proposition, is controlling those costs.

So, once it stabilizes and everybody knows exactly what they're dealing with, I think it can be to our advantage, but when there's uncertainty as to how high is it going to go, right? Is it going to go to 4.50, 5, $6. So, that, I think uncertainty is causing people to try to figure out what's going on as opposed to starting new projects.

The other thing is the currency's benefiting you to do business off, overseas, and do you expect to do more and more overseas based on currencies, or just about the, just about the demand for your product?

Sam, this is Vince again. Yes, the currency is helping us when we sell in Euro's, obviously. So, we are getting some gains from that.

Logility is about 17% of Logility is international now, and that has increased a couple of points from last year. So that is assisting us.

So did any of the sales additions come in Europe? Is that where, or overseas?

Yes, the ones that we signed up in the year, yes. As a matter of fact, most of them were, from a DMI perspective, were over there.

Through our vantage of, we signed Mexico City, a new partner in Italy, Moscow, and then in China, we have Shanghai, Guangzhou and Hong Kong. They didn't, they were signed up throughout the year, most of them later in the year. And really contributed minimal revenues but have already contributed more in a month and a half than they did all of last year. So, and then I don't know how much you heard of, we are going to expand that coverage both in the Americas, Asia and Europe and this year as well.

Well, that sounds good. As far as acquisitions, presumably there's nothing, have you been seeing much or is everything is too expensive or--.

We see, we have looked at a good bit, and they're either too expensive or we don't like the business.

Okay.

So hopefully prices will be coming down here, as bank ties are a little tougher, and we can find a business we like for a good price.

All right. Well, good luck. Hopefully it'll get a little better next year.

Thank you.

It appears that we have no further questions at this time.

Thanks to everyone for participating in the call, and your interest in American Software. We look forward to speaking with you soon. Thank you.

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