Logility Supply Chain Solutions Inc (LGTY) 2010 Q2 法說會逐字稿

Good day, everyone, and welcome to today's program, American Software second quarter 2010 conference call. At this time, all participants are in a listen only mode. Later you will have the opportunity to ask questions during the question-and-answer session. (Operator Instructions). Please note this call may be recorded. It is now my pleasure to turn the conference over to Mr. Vince Klinges, Financial Officer. Please go ahead, sir.

Thank you. On the call with me today is Jim Edenfield, CEO of American Software, and Mike Edenfield, Executive Vice President 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 or are beyond our control. Future developments and actual results could differ materially from those set forth in and 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 our 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 that 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.

Thanks, Vince. Good afternoon, everyone, and thank you for participating in the call. I have some comments on the quarter as well as the year-to-date results, Vince will review the details on the financial results, and then we'll take your questions.

We had a good quarter. It was our 35th consecutive quarter of profitability. The Company delivered very strong profit growth, 188% growth compared to second quarter of last year. Year-to-date net earnings are up 135%. For the second quarter revenue was approximately $18.7 million which was a 6% decrease compared to the second quarter last year. License fees were down 6% year-over-year but year-to-date license fees are up 18%. Logility's licensees were down 14% for the quarter but year-to-date Logility's license fees have increased 20%.

Adjusted net income was $1.5 million, 117% increase over last year with increased license fees, lower cost and high other income driving the improvement. Year-to-date adjusted net income increased 139% over the prior year. 17 new customers signed license agreements in the second quarter. Customers from nine different countries signed license agreements with the Company in the quarter. Those countries included Australia, New Zealand, Singapore, Sweden, Trinidad, Turkey, United Arab Emirates, United Kingdom and the United States. Some of the notable new and existing customers included Applegate Farms, Crest Electronics, Croda Chemical Europe, Griffith Labs, ITW Proline, Kids II, L'Oreal Luxury Products, Lord Corporation, the Royal Australian Mint, Swatfame, the Land of Nod and Totes Isotoner.

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. As we look forward to next quarter our business model is in good shape. The Company has a strong balance sheet with cash and investments of approximately $56 million. Regarding our software pipeline, while some projects have slipped due to the economic conditions, we again have a good sales pipeline for the third quarter. As usual, close rates will be the key and the quarter appears to be back end loaded, as is typical.

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

Thanks, Mike. Comparing the second quarter of fiscal 2010 with the same period last year, total revenues decreased 6% to $18.7 million. That compares to $19.8 million the same quarter last year. License fees decreased 6% to $3.6 million compared to $3.8 million last year. Services and other revenues decreased 9% to $8.2 million due primarily to lower consulting services in our IT consulting business and lower implementation work resulting from lower license fee sales in the prior quarters from our ERP segment when compared to the same period last year. Maintenance revenues decrease 2% to $6.9 million compared to 7%, compared to $7 million last year, primarily due to lower license fees in the ERP in the prior quarters.

Looking at costs, our overall gross margins increased to 55% for the current quarter compared to 52% in the same quarter last year. License fees margin increased to 74% compared to 60% due primarily to as a result of the completion of amortization expenses of several projects in the third quarter of 2009 resulting in lower amortization costs in the current quarter. Services margin increased to 31% compared to 30% in the same period, primarily due to higher margins at our IT consulting business units. Our maintenance margin was down slightly to 73% gross margin compared to 74% in the same period last year.

Looking at operating expenses, our gross R&D expenses were 12% of total revenues for the current and prior year period. As a percentage of revenue, sales and marketing expenses were 20% of revenues or $3.8 million for the quarter and that compares to 17% for the same quarter last year. G&A expenses were 15% of the total revenues for the current quarter compared to 14% in the same period. The increase is primarily due to higher bonus accruals. Operating income decreased 13% to $1.7 million this quarter compared to $2 million in the same quarter last year. Our EBITDA was $2.3 million this quarter compared to $3 million for the same period last year. Our GAAP net income increased 188% to $1.4 million. Our earnings per diluted share are $0.05. That compares to net income of $470,000 or $0.02 earnings per share for the same period last year.

Looking at it, adjusted net income increased 117% to $1.5 million or adjusted earnings per diluted share of $0.06 for the second quarter, and that compares to an adjusted net income of $708,000 last year, or $0.03 earnings per share. The adjusted numbers exclude amortization of intangibles and stock-based compensation expense. International revenues this quarter were approximately 12% of total revenues and that compares to 9% in the prior year quarter.

At this time, I would like to look at the six month year-to-date as of October 31st, 2009 compared to the same period last year. Total revenue decreased 6% to $36.6 million compared to $39 million last year. License fees increased 18% to $7.7 million compared to $6.5 million in the same period last year. Services revenue was $15.1 million year to date compared to $18.3 million last year. Our maintenance revenues decrease slightly to 3% to $13.7 million compared to $14.2 million last year. Looking at the cost, overall gross margin was 57% year-to-date compared to 52%. That's primarily due to license fee margin which increased to 77% compared to 57% last year, and that's again due to higher license fees and lower capital capitalized software amortization cost. Our services margins were 32% compared to 33% year-to-date last year. Our maintenance margins were 74% year-to-date for both the current period and last year's period.

Looking at operating expenses year-to-date, gross R&D expenses were 12% of total revenues for the six month period ended October 31, 2009, and that compares to the same period last year. As a percentage of total revenue, sales and marketing expenses were 21% compared to 19% in the same period last year due primarily to higher license fees through our direct channel when compared to prior year and also increased headcount. G&A expenses were 18% of revenues compared to 15% in the same period last year. That was primarily due to, during the first quarter we had the Logility tender offer and the expenses related to that, and to a lesser extent increased variable compensation.

Operating income year to date was $3.2 million compared operating income of $3.3 million. EBITDA year-to-date is $4.3 million compared to $5.2 million the same period last year. GAAP net income was $2.5 million year-to-date or $0.10 earnings per diluted share, and that compares to $1.1 million or $0.04 earnings per diluted share last year. On an adjusted net income basis year to date we report $3.6 million, earnings per diluted share of $0.14, and that compares to net income of $1.5 million or $0.06 the same period last year. These adjusted numbers exclude the amortization of intangibles, stock-based compensation expense, and expenses related to the Logility tender offer. Year-to-date our International revenues are approximately 11% of total revenues, and that compares to 10% in the same period last year.

Looking at the balance sheet, the Company's financial position remains strong with cash and investments of approximately $56.4 million at the end of October 31st 2009, and no debt. Other aspects of the balance sheet are accounts receivable billed is $9.1 million, unbilled $2.8 million for total accounts receivable of $11.9 million. Deferred revenues are $14.2 million. Shareholder equity is a little over $73 million. Our current ratio is 2.5 versus 3.4 compared to last year. This is lower primarily due to the tender offer purchase during the first quarter this year. Our day sales outstanding as of October 31, 2009 was approximately 58 days and that compares to 56 days this time last year.

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

(Operator Instructions). We will take our first question from Drake Johnstone with Davenport.

Hi, guys, a question for you. At the outset of Q2 2010, you indicated that the software pipeline was similar to what it was the past several quarters, so that would have suggested that if you the close rate you had Q3, Q4 that maybe you would have had a shot at license revenues closer to the 47 range. So it was quite a bit lower than that at roughly 36, and you also typically grow your software license revenue sequentially in the Q2. Those deals you said slipped in the Q3, would those deals have made up that difference?

Our caveat on the pipeline, the pipeline's been about the same for several quarters in a row now. And really what drives it is the close rate, and we didn't have the close rate and we did slip some deals into this quarter. I also think we had a much better first quarter than we expected so I think we might have actually pulled some Q2 revenue into Q1. I think at the start of the year, if you would have told me that your license fees will be up 18% for the first half, I would have taken that. So I'm please where we are for the halfway point but we would have liked to have done better in the second quarter. License fees were down 6% year over year, and while we are not happy with that, I am sure, as you know, a lot of software companies, revenues, particularly their license fees are declining and in many cases that I track, there aer 20% decline, 30% declines, that type of thing. So we are not happy that it went down, but I think we are in pretty good position for the second half, but we have to increase the close rates. And typically our second half is much larger than the first half.

Would you characterize the pipeline at the outset of Q3 as similar to the pipeline over the past four quarters?

Yes, give or take a little bit, it's about the same.

How about the customer, the interaction with customers? Do you think you have a shot at having more of a normal close rate or is it too early to tell?

We are selected on some deals that we need to get and a couple of them are decent size. But they have to get the projects approved and then we've got to get the contracts in. It is not the best economy to be getting projects approved, but we have been doing it for a while now. Hopefully we can pull those through.

From the standpoint of the mix of deals you're looking at, would you say the mix for Q3 was similar to Q2 in terms of direct and indirect?

I think it will be the same or it might be better for the direct depending on what closes and what does not.

So it is sounds like gross margin could be similar and if things turn out all right, you might get upside if you get some more direct deals closing.

Right.

And then on expenses, do you anticipate keeping operating expenses fairly stable on a sequential basis over the next couple quarters?

I'd say stable would be a good word for it.

Thanks, I appreciate it.

We'll go next to Brian Murphy with Sidoti & Co.

Thanks for taking my question. Mike, we saw a pretty significant sequential increase on the service line there. Is that a good run rate going forward here, that $8 million per quarter, or would you expect that to continue to tick up on a sequential basis?

We think that might tick up a little more on a sequential basis this quarter. As you recall, the IT consulting business unit had staffed up and we still see some more growth in that unit, as well as some of the software business as having an opportunity to grow a little bit.

So the service business, is that more of a temporary phenomenon or would you say that we are seeing more of a sustainable recovery there?

We are never sure. That business can grow very quickly and then it can shrink very quickly. We certainly have pretty good visibility for the next quarter and we are pretty comfortable with the next quarter.

Seeing the G&A expense come down quite a bit on a sequential basis, you may have touched on this, is that a number that we should use as a run rate, right around that $3 million per quarter level?

Yes, Brian, I think we are pretty comfortable with that run rate at this point.

Okay. Just a general question on the business environment. Any sort of areas you guys would care to highlight in terms of pockets of strength either on a regional basis or vertical markets, where do you think you're seeing the most improvement right now?

We have been pleased with the direct sales channel and in particular, we've got a couple of larger opportunities that could help us significantly that we're selected on. The industries that are doing well are private label. The larger companies in general are more willing to invest if they've got capital budgets because of the high payback that we can show them and the evaluation cycle. The areas not doing as well still is the smaller companies because of the lack of credit and capital budgets down there.

That is helpful. Thanks very much.

We will go next to Sam Rebotsky with SER Asset Management.

Good afternoon, gentlemen. A good quarter. The International has been improving. Is there any greater part of your pipeline International, and what impact does currency have on International business?

The international pipeline is about the same as it has been the last couple of quarters. I'll let you talk about the currency.

Yes, Sam, the currency didn't really have that much material impact on us this quarter at all. The mix was a little higher towards the International.

Is there any greater profitability international, domestic, or is it similar?

No, I would say overall it is probably a little less because most of our sales are through the indirect channel in the international market. Where the US market are more direct. We have higher margins when we sell it direct.

Okay. In the interest income and other income, you had a significant turnaround in the quarter of $400,000 versus $1,187,000. To what extent was that mark to market rental dividend income? And as far as your portfolio, to what extent is it a discount? Are you carrying it at a discount from the stated value?

We mark to market the whole portfolio primarily. What you see there is last year at the time when the equity markets were going down we took a charge for that, an unrealized loss, last year at this time. So obviously that turned around this year. As far as the rental income, the rental income is up about $54,000 compared to last year at this time. We did have an exchange rate charge last year of about $200,000 during this quarter last year. We did not have any pretty much exchange rate charge this year. That is a bit of a swing too.

Sounds good, thank you.

No one else is in queue at this time. (Operator Instructions). Thank you. It appears there are no other questions at this time.

Thanks everyone for participating on the call. We look forward to the third quarter call in about 90 days. Thank you.

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