Logility Supply Chain Solutions Inc (LGTY) 2009 Q3 法說會逐字稿

Good day and welcome to American Software's third quarter and fiscal year 2009 results call. (Operator Instructions). Later we'll conduct a Q&A session. This call is being recorded. And I'd like to turn our call now to Vince Klinges, the CFO of American Software. Please go ahead.

Good afternoon. 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 our 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 affect 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 in this call. I have some comments on the third quarter results. Vince will review the details on the financial results for the quarter, as well as year to date. And then, we will take your questions. For the third quarter, revenue was $20 million, a 9% decrease compared to third quarter last year. Operating earnings were approximately $2.1 million, which were a 37% increase from the third quarter of last year.

19 new customers signed license agreements in the third quarter. Customers from 10 countries signed license agreements with American Software in the quarter. Those countries included, Australia, Canada, Cost Rica, Italy, The Netherlands, the United Arab Emirates, United Kingdom, United States, Venezuela and Vietnam. Some of the notable new and existing customers include; Arch Chemicals; Astronics; Belkin; Bracco, based in Italy, Corning Cable; CSN Stores; Johnson Controls; Jockey International; Johnson Diversey; Merle Norman Cosmetics; Mitsubishi Motor Products; Norwood Promotional Products; Schering-Plough Healthcare; Sonoco; Techtronic Industries; and Topson Downs We continue to be encouraged by the number of new customers that license our products. New customers are a source of future maintenance and implementation services revenue, as well as being excellent prospects for additional product sales.

So, as we look forward to the fourth quarter, our business model is still in excellent shape. The Company has a strong balance sheet, with cash and investments of over $70 million. While some deals have slipped, due to economic conditions, we do have a good pipeline for the fourth quarter and have the potential to have another good quarter. As usual, close rates will be the key and the quarter appears to be back end loaded, as is typical. I would now like to turn the call back over to Vince for a detailed review of the financial results for the third quarter and year to date.

Thanks, Mike. Taking a look look at the third quarter of fiscal '09, comparing revenues for the same quarter last year. Total revenues decreased 9% to $20.0 million, compared to $22.1 million in the same quarter last year. License fees increased 9% to $4.7 million, compared to $4.3 million. Service and other revenues decreased 21% to $8.4 million and that's due primarily to lower implementation work, resulting from lower license fees sales in the prior quarters, as well as lower consulting services from our IT consulting business, when compared to the same period last year. Maintenance revenues decreased slightly, 3% to $6.9 million, compared to $7.1 million, primarily due to low license fees in the prior quarters.

Taking a look at gross margin. Our overall gross margin increased to 56% for the current quarter, compared to 52% in the same quarter last year. That's primarily due the licensee margin, which increased to 77%, compared to 68% due to higher license fee this quarter. Services margins decreased to 29%, compared to 32% in the same period and that's primarily due to the lower services revenue. Our major -- maintenance margin increased slightly to 74% for the current period, compared to 73% in the same period last year.

Looking at operating expenses. Our total gross R&D expenses were 11% of total revenues for the current period, compared to 10% for the prior year period. As a percentage of revenue, sales and marking expenses were 19% of revenues or $3.8 million for the quarter, and that compares to 19% or $4.1 million for the same period last year. G&A expenses were 17% of total revenues for the current quarter, compared to 13% for the same period last year. And that primarily increases due to a provision for doubtful accounts, as well as the reversal of some compensation accrual from the prior-year quarter and also an increase in audit related fee this quarter.

Operating income increased 37% to $2.1 million for the quarter, and that compares to $1.6 million for the same quarter a year ago, which includes a $1.2 writedown of cap software from last year. Interest income and expense and other was $195,000 expense this quarter and that compares to income of $143,000 for the same period last year. And that's primarily -- that's down from last year compared to lower yields on our investments; lower rental income; we had a loss on exchange rates; and unrealized and realized loss in our equity portfolio. Our EBITDA was $3.1 million for the current quarter, and that compares to $3.7 million for the same period last year.

GAAP net income was $775,000 or earnings per diluted share of $0.03, compared to net income of 1.1 million or $0.04 earnings per diluted share in the same period last year. Adjusted net income was $922,000 or adjusted per diluted share of $0.04 for the third quarter and that compares to net income of $2.2 million or adjusted earnings per diluted share of $0.08 for the same period last year. The adjusted number excludes amortization of intangibles related to our DMI acquisition, stocked-based compensation expense and a writedown of cap software. International revenues for the quarter were 10% of total revenues, compared to 9% in the same period last year.

At this time, I'd like to look at the full year-to-date, nine months ended January 31, 2009, compared to the same period last year. Total revenues decreased 12% to $59.1 million, compared to $67.4 million. License fees decreased 21% to 11.3%, compared to 14.3% for the same period last year. Services also decreased 17% to $26.7 million year to date, compared to $32 million last year. And our maintenance revenue was roughly $21.1 million for both the current and prior year period.

Taking a look at the costs for the nine-month period, overall gross margin was 53%, compared to 51% in the same period last year. Our license fee margin decreased to 66% from 68% last year, due to lower license fees. Our services margin was 32%, compared to 30% in the same period last year. And our year-to-date maintenance margin was 74% for both the current and prior year period.

Looking at operating expenses on a year-to-date basis. Gross R&D expenses were 12% of total revenues for the nine-month period, compared to 11%. As a percentage of total revenues, sales and marketing expenses were 19%, compared to 17% in the same period last year. And G&A expenses were 16% of total revenues, compared to 14% in the same period last year.

So, our operating year-to-date income was $5.4 million, compared to an operating income of $6.9 million last year, which last year included a $1.2 million writedown in cap software. Our EBITDA was $8.3 million year to date, compared to $11.1 million. Our GAAP net income is $1.9 million year to date or $0.07 earnings per diluted share and that compares to a net income of $5.6 million or $0.21 per current diluted share. On adjusted net income basis, our year to date it was -- we reported $2.3 million or earnings per diluted share of $0.09, compared to adjusted net income of $6.9 million or earnings per diluted share of $0.26. International revenues were approximately 10% of total revenues, compared to 9% in the same period last year.

Taking a look at the Company's balance sheet. The Company's financial position remains strong, with cash in short and long-term investments of approximately $70.3 million at the end of January 31, 2009, with no debt. During the quarter, the Company repurchased 82,500 of its common stock for approximately $338,000, under its authorized stock repurchase program and paid approximately $2.3 million in dividends.

Other aspects of the balance sheet are accounts receivable billed is $11.1 million. Nonbilled is $2.1 million. For a total of $13.2 million. Working capital is roughly $49 million. Deferred revenues are roughly $15 million and our shareholder equity is $80.6 million. Our current ratio is 3.1 versus 3.5 at the end of April. And our day sales outstanding as of January 31, 2009 was approximately 61 days, compared to 72 days at this time last year. At this time, I'd like to turn the call over to questions.

Would you like to accept questions now?

Yes, please.

Great. (Operator Instructions). First, we'll take a question from Drake Johnstone from Davenport. Please, go ahead.

Hi, Vince and Mike. Good quarter there.

Thanks.

A question I had, Mike, when you characterized this quarter, you said a potential for a good quarter. If we think about Q3 and your discussion, at the outset of the quarter, you were a bit more direct, though. You basically said, Q3 is sort of in line or better than Q2. So I think the question I have is, are you willing to provide somewhat more input there? Do you think Q4 would be in line or better than Q3 or do you have some sort of guidance -- do you think you can actually generate software license growth on a year over year basis in Q4?

I think as it relates to Q3, we could have similar license fee numbers. The question will be the close rate. We had a good close rate last quarter. Our pipeline is similar to last quarter. But it's hard to say whether the close rate would be the same.

Okay. All right. That's helpful. And then, the services business, I gather that the weakness, the sort of decline there, is really the weakness in the IT business, correct?

That's a big chunk of it but not entirely. It's really across the board in all the services business. I know -- we do expect Logility services business to pick up this quarter.

Okay. And then on the margins, I would gather that the higher software license margin there, are you having more of the deals close there at -- do you expect the mix of business in Q4 to be similar to the mix of business in Q3 in terms of software license sales?

Yes, well, we [didn't] have a very good mix of direct versus indirect. The direct channel really performed well. This quarter, I don't believe it will be as strong for the direct as it was. So, while the total could be the same, the mix might be more balanced, where it was really slanted toward direct last quarter.

So yes, that's just sort of a pretty big shift to Q3 versus Q2. So you had a 60% license gross margin in Q2 '09 and ramped to 70%, 75%. So, it might be somewhere in between? So, it may not go to the other extreme but perhaps it's sort of in between there.

That's what I would hope.

Okay. And then the other thought or -- maybe input from my end is, you guys are doing a pretty decent job with your business. Decent free cash flow, minimal cash burn after paying dividends and share repurchases. And given how far the shares have pulled back here, part of that is a market liquidity issue. Not enough people our there buying stock. And it seemed like last quarter, you had a limited window with just a few weeks to buy stock. And the amount of stock purchased was fairly minimal. My recommendation would be that you guys are more aggressive buying stocks. And hopeful also, that you might have a broader window to buy that stock. Any comments on that?

Well, let me take the window first. That's really a corporate policy set by the Board based on review of best practices of a lot of public companies. So that's -- I don't see that necessarily changing right away. The first part of your question is; Will we buy more aggressively? Well, the price is a lot lower than it was this time last quarter. So, I'm not -- that's not exactly my decision alone but certainly, your recommendation has some good reasoning behind it.

Okay. Well, thank you very much.

Sure.

Great. We'll take our next question from Brian Murphy from Sidoti & Company. Please go ahead.

Hi, thanks for taking my questions. Mike, just a followup on the question on the service revenue. It looks like, on a sequential basis, service revenue has been declining. Would you expect that trend to continue into Q4?

I believe it will decline. I don't know if it will decline as much.

Okay. Got it. And when I sort of back into the service from IT consulting, it looks like most of that sequential decline is being driven by that business. Am I on target there?

Yes, IT consulting business, which fortunately is a lower margin.

Okay. Got it. And just following up on the strong license gross margin, which it looks like that's the strongest I've seen it at in about three years. You mentioned that most of what you, had sort of a high percentage of direct business. And that implies maybe some much longer yields. I'm curious to know, it's interesting that you're doing large yields in this environment. Could you just give us some color on what may be driving the strength or demand there?

Yes, well, we did do -- we did have a couple of nice deals -- more than a couple of nice deals in the quarter, and they're all different scenarios. But the one -- the largest order we had was with the major consumer products company. I can't give the name because of the agreement doesn't allow us to. And they had a supply chain issue that they've been trying to address with a -- for some time. And were unable to with the technology they had in place. And they came to us and looked at the marketplace and selected us. And we've got the project and we're moving forward with the implementation. So, that was a large company. I don't -- I think their budgets are so big, they could cut them way back and still easily do our project.

The second largest deal we did was with a big health care company. And a lot of the health care industry is less impacted by the difficult economic times we're seeing. So, one of the things we've been doing is targeting more health care and other industry pockets that are not as impacted by what's going on. Or they're in some cases, they're actually impacted favorably by it.

So really, our value proposition, Brian, helps us -- in this environment tend to -- our value proposition is; let's squeeze costs out of your supply chain. And when revenues are down for companies, they've got to figure out a way to make money. And the only way to do that, if you can't increase revenues, which is very, very difficult to do for a lot of these companies right now, is to cut costs. And you can cut people and you can cut people but you've still got to run your business. And so, we think supply chain systems are a perfect fit for the industries we serve to help companies weather this storm.

Makes sense. Thanks very much. That's very helpful. Vince, maybe a couple for you. It looks like the tax rate has been jumping around a little bit. And it looks like this quarter, it may have cost you $0.01. Can you just give us some detail there and maybe help us out on how we should be modeling the tax rate going forward?

Yes. Brian, the last quarter, Q2 I should say, we actually had a discrete item because Congress passed the R&D tax credit. So that, actually, was a benefit to us. So, our effective rate went down in Q2. Q3, we actually had another discrete item. We had to put a valuation allowance on some of our loss carry-forwards because we don't have enough capital gains at this point to offset it. So the kind of two unique discrete items. I think the full year effective rate is going to be somewhere around 35% to 37%, somewhere in that range.

Okay. And could you break out interest income and maybe the loss on the equity portfolio in the quarter?

Sure. Of the $195,000 expense for the quarter, it breaks down into. The yield on our investments are roughly $400,000. Rental income is roughly around $91,000. And our -- we had a currency exchange rate loss of roughly around $200,000 this quarter because of the currency swings. And then, our unrealized and realized loss in our equity portfolio is roughly around $500,000. So those pieces make up the reduction.

Okay. Great. Let's see. And how about cash flow from operations, cap software and CapEx in the quarter?

The -- for the quarter, we had the usual roughly about $1 million worth of D&A. So the cash flow is -- the EBITDA number I gave was $3.1 million. So does that answer your question?

Okay. Thanks a lot. That's it for me.

(Operator Instructions). It looks like we have one from Sam Rebotsky from SER Asset Management.

Good afternoon, Mike. And good quarter. Tell me, as far as the pipeline, it's the same as the previous quarter and the same as the same quarter of the previous year?

Well, I haven't really compared it to the same quarter of the previous year -- last year but it's about the same. The mix is a little different in terms of direct versus indirect business.

And as far the time to close, in this current quarter, how many months did it take to close a transaction compared to the previous? And is your expectation that these numbers will persist similar going forward or --?

Well, I really haven't noticed it taking much longer. The deals we closed last quarter, for the most part, moved pretty well. This quarter, if they close this quarter, they'll have moved pretty well. It's more seeing projects that just don't happen. But what's happening is there, it's not like -- we haven't been going through a sales cycle generally and not having them happen. Generally, they're just -- they're not getting started. Or they get started and then, they stop quickly. So, we haven't really seen a lot of extension yet of the sales cycles.

Now the rental income, was that similar to the previous quarter and the total rental income to date, is that similar numbers, or are they up or down?

It's similar to the sequential quarter. It's down from year over year. It's down about $100,000 from last year's quarter. $110,000 is move out.

So, are the rents any weaker or is there expectation of rent being up sooner at lower rates? What's your thought there?

Well, we currently are -- have a few square feet for rent here at American Software. But the rental square foot rates are coming down a bit from last year at this time, as you would imagine.

And now, as far as your investment portfolio, the -- what type of assets are they, and those that have put it into the more than a year, the longer term, increased from $11 million to $14 million, what sort of required you to extend it, investment, non-currency, could you sort of give some color on that?

Yes, the mostly municipal bonds that extend beyond a 12-month maturity. The average maturity is somewhere between 13 months and 1.5 year, two years, somewhere around there. But they're all municipal bond. A lot of them are pre-refunded bonds, which means they're backed by the government. So, we don't have any concerns about them.

I'm sure you look at different transactions relative to acquisitions. The fact that you've been rather successful in selling your software, it would be appropriate if there was at the right price, to sort of adapt some other type of software to your line, utilize your sales folk. What is going on there or are any of the things that you'd like to acquire coming in down in price, making it more affordable? Are you seeing anything that makes sense?

Well, we've been looking continually and we see some things that interest us but there's nothing really to report yet. But we're continuing to work on things and look for good acquisitions.

Okay. And the fact that the dividend is -- the $0.09 a quarter or $0.36 a year, at this point in time, is greater than earnings. And presumably this will continue the same way or is it on a quarter-to-quarter basis?

Well, we plan on continuing the dividend, if that's the question. What we'd like to do is continue the dividend and get the earnings up.

That sounds real good.

But we have a lot of cash, so it's not like if we have a little negative cash flow it hurts our position in terms of the stability of the Company. We've got a ton of cash relatives. So, I think the dividend is safe until there's some dramatic shift in what's going on here.

Well, you're better than a bank.

Yes, that's hard to believe, isn't it? Of course, that's not saying much these days, is it?

True. We've got to watch out that the federal government doesn't come after you.

Yes, exactly. We don't want to be -- we're not a bank.

There you go. Well, keep up the good work. And hopefully, you keep improving.

Thank you, Sam.

Okay. (Operator Instructions). Okay, and I don't believe there are any more questions.

Well, thanks to everyone for participating in this call and your interest in American Software. And we look forward to talking with you soon.