Logility Supply Chain Solutions Inc (LGTY) 2017 Q4 法說會逐字稿

Good day, everyone, and welcome to today's Fourth Quarter and Fiscal Year 2017 Preliminary Results. (Operator Instructions) Please note, this call may be recorded. (Operator Instructions) And it is now my pleasure to turn the conference over to Mr. Vince Klinges, Chief Financial Officer of American Software. Please go ahead.

Thank you, and good afternoon, and welcome to American Software's Fourth Quarter Fiscal 2017 Earnings Conference Call. On the call with me is Allan Dow, President of American Software. I will review the numbers first and then Allan will give some remarks after that.

But first, 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 forward -- excuse me, any such forward-looking statements may 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 and uncertainty 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 effect of competitive products and pricing and other competitive pressures and the irregular and unpredictable 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.

So comparing the fourth quarter of '17 to the same period last year, total revenues for the quarter decreased 9% to $26.3 million compared to $28.9 million for the same quarter last year, primarily due to license fees, which decreased 41% to $3.9 million compared to $6.6 million for the same period last year. Services and other revenues were down slightly 1% to $11.9 million for the current quarter.

At the end of the quarter, we increased our Cloud Services Annual Contract Value or ACV by approximately 59% to $6.1 million, and that compares to $3.8 million for the same period last year. Total ACV is comprised of 2 components: Software as a service ACV of $3.8 million, which increased 100% compared to $1.9 million during the same period last year; and other Cloud Services such as Managed Services and Hosting of $2.3 million ACV compared to $1.7 million the same period last year. Maintenance revenues increased 2% to $10.5 million compared to $10.3 million primarily due to additional license fees in the recent periods.

Looking at cost, our overall gross margin was 55% for both the current quarter and prior year quarter. Our license fee margins decreased to 47% for the current quarter compared to 71% the same period last year, and that's due to lower license fees and the mix of more license fees coming from our indirect sales channel.

Services margins increased to 36% for the current quarter, and that compares to 29% in the same period last year. All business units improved their margin due to improved utilization rates and the increase of higher-margin Cloud Services. Our maintenance margin increased to 79% for the current quarter and that compares to 75% to the prior year due to higher maintenance revenue and also cost improvement efforts.

Looking at operating expenses, our gross R&D expenses were 14% of total revenues for the current quarter and that compares to 13% in the prior year quarter, and that's increase due to headcount increases from our recent AdapChain acquisition. As a percentage of revenue, sales and marketing expenses were 19% of revenues for the current quarter and that compares to 21% for the prior year quarter, and that's due to lower sales commission from lower license fees.

G&A expenses were 13% of total revenues for the current period when compared to 9% in the prior year quarter. This percent increase was due to a state employer tax withholding credit of 613,000 recorded in the prior year quarter, and a majority of this credit last year was a catch-up credit from several prior years.

Operating income decreased 23% to $3 million for the current quarter and that -- compared to the same quarter last year. Adjusted EBITDA, which excludes stock-based compensation, decreased 14% to $4.9 million this quarter compared to $5.7 million for the same period last year. Our GAAP net income increased 202% to $10.3 million. Earnings per diluted share of $0.34 for the current quarter compared to net income of $3.4 million or $0.12 earnings per diluted share for the same period last year due to -- primarily due to an after-tax gain of $7.9 million from the sale of real estate.

Adjusted net income was $2.7 million or adjusted earnings per diluted share of $0.09 for the fourth quarter, and that compares to a net income of $3.3 million or adjusting -- adjusted earnings per diluted share of $0.11 for the same period last year.

Adjusted -- these adjusted numbers exclude amortization of tangible expenses related to acquisitions, stock-based compensation expense, discrete tax adjustment related to R&D tax credits and the after-tax gain from the real estate sale during the quarter.

Looking at international revenues this quarter, we're approximately 20% of total revenues, and that is up from 14% in the prior year quarter.

Looking for the full year numbers now, the total revenues for the fiscal 2017 decreased 7% to $106 million -- $106.3 million compared to $113.9 million period last year. License fees decreased 29% to $15.6 million compared to $22 million in the same period last year. Services revenues decreased 5% to $48.3 million year-to-date compared to $51.1 million last year and our maintenance revenues increased 4% to $42.4 million compared to $40.7 million.

Looking at cost, our overall gross margin was 52% for the current year and prior year periods. License fee margin decreased to 51% compared to 65% and that's primarily due to lower license fees. Services margins increased to 30% compared to 27% last year and that's due to improved utilization margins and also higher Cloud Services margins.

Our maintenance margin was 77% year-to-date for both periods. And looking at operating expenses, our gross R&D expenses were 15% of total revenues for the 12 months ended April 30, 2017, compared to 13% the prior year. That's up due also -- primarily due to the AdapChain acquisition. As a percentage of total revenue, sales and marketing expenses were 19% for both the current and prior year. G&A expenses were 13% of revenues for the year compared to 11% for the same period last year.

Operating income year-to-date was $7.8 million compared to operating income of $13.5 million. Adjusted EBITDA year-to-date was $15.8 million compared to $20.7 million for the same period last year. So our GAAP net income for the year of 2015 -- excuse me, 2017 was $14.6 million or $0.49 earnings per diluted share and that compares to net income of $10.4 million -- $10.2 million or $0.35 earnings per diluted share.

Adjusted net income year-to-date was $8 million or earnings per diluted share of $0.27 compared to $10.5 million or earnings per diluted share of $0.36, and these adjusted numbers exclude the amortization of intangibles related to acquisitions, stock-based compensation expense, discrete tax adjustments related to R&D credits and the sale of real estate this quarter. International revenues for the year 2017 were 18% and that's up from 17% in the prior year.

Taking a look at the balance sheet. The company's financial position remains strong with cash and investments of approximately $89.8 million at the end of April 30, 2017, which increased $11.9 million when compared to April 30, 2016.

During fiscal '17, we paid $12.5 million worth of dividends. Other aspects of the balance sheet, our billed accounts receivable of $17 million, our unbilled is $2.8 million for a total AR of $19.9 million. Our deferred revenues, current and long term, are close to $30 million. Shareholder equity is $104 million at the end of April, and our current ratio is 2.6x compared to 2.4x in the same period last year, and our days sales outstanding at the end of April 30, 2017, was 69 days, up slightly from 65 days the same period last year.

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

Thank you, Vince. In the fourth quarter, we added 14 new customers, which brings our total to 34 new customers for the fiscal year 2017. We also had a number of existing customers who extended their investments in our solutions to drive incremental business value for their organizations. Agreements were signed in -- with the customers in 18 different countries during the fiscal 2017, including Australia, Belgium, Canada, China, Denmark, Ecuador, Finland, Ireland, Japan, Mexico, New Zealand, Norway, Sweden, Switzerland, Tunisia, United Kingdom, United States and Uruguay. Of course, many of these customers operate global or multinational businesses. The breadth of our engagements clearly shows our global reach.

Our close rate during the fourth quarter improved over the prior periods of the fiscal year 2017, and the trend towards subscription licenses for our solutions as a preferred engagement method is accelerating. This is good news for our company and our customers but results in some downward pressure on the quarterly reported revenue, specifically the license fees. The results of this transition is positively highlighted by our 59% increase in Annual Contract Value for Cloud Services and the doubling of our SaaS revenue, which Vince mentioned earlier in the call.

Our transition to SaaS is a positive trend for our future financial results and improved predictability of revenue and profitability. Furthermore, we believe it is a trend that will serve our customers well as they leverage our expertise in managing the applications on their behalf. Customers will also be able to quickly take advantage of our advancements in artificial intelligence and advanced supply chain analytics to improve their operating performance and overcome the supply chain talent shortage that is impinging their possible growth and speed to market.

Although the market activity has picked up, we continue to see some macroeconomic sluggishness as prospects work through multiple stages and iterations towards gaining investment approvals. Our pipeline remains strong across all of our software divisions, and we anticipate the first quarter will be consistent with or slightly exceed historical trends. We do expect to see the trend toward a preference for SaaS subscription contracts to continue and have aligned our operating plans to this engagement model.

Diving a little deeper into some of the specific market trends. We are continuing to see an uptick in advanced retail planning opportunities. However, the continued shakeout of traditional brick-and-mortar retailers is putting downward pressure on overall capital spending in the retail sector. Demand for our optimization solutions remains strong and is leading to an increase in the average selling price and overall scope of our global services engagements as more customers leverage these advanced capabilities. In fact, our services backlog continues to grow as a result of the strong fourth quarter close rate and some early first quarter fiscal year 2018 wins. We are well positioned to absorb the additional workload, serve our customers well and respond to the increased preference for SaaS deployments, which will be reflected in the Q1 results as those projects get underway.

During the fourth quarter, our NGC Software division announced through a release a general availability of its next-generation cloud platform for fashion retailers and brand owners called Andromeda. Andromeda powers the Connected Enterprise in a single cloud-based solution that connects retailers, brand owners, vendors and suppliers by spanning the merchandising, product development, sourcing, compliance, purchasing, production, quality, logistics, marketing and sales operations into a holistic business planning and execution platform.

Furthermore, the new Vendor Compliance capabilities allow retailers and brand owners to ensure corporate social responsibility compliance by streamlining the vendor management and reporting processes. We are excited about the potential of this new platform and are ready -- already seeing the positive impact and excitement as the pipeline grows and leading companies launch new projects.

Earlier this year, Jockey International, a global apparel brand owner, went live on the Andromeda platform and spoke at our May User Conference about the impressive benefits they've gained from this project.

The adoption of the SaaS platform is seen most prominently in organizations who are seeking a streamlined and efficient deployment and operation of a supply chain planning platform. This accelerated SaaS environment is right at the heart of our mission for our Demand Solutions brand, with a single supply chain planning platform designed for the cloud. The results shift towards a SaaS preference in this market segment is being seen in the improved operating performance of our Demand Management division.

Since we offer the option of SaaS or perpetual contracts based on the customer's preferred engagement platform across all of our brands, our ability to forecast recognized license fees in any given quarter has become more challenging. However in the long run, we win regardless of the deployment model selected by our customers because we can deliver an industry-leading ROI to them regardless of their preferred engagement approach. Having a choice in deployment models continues to differentiate our brands in the marketplace.

In summary, we're continuing to monitor the global economic conditions and our sales team's progress to move our healthy pipeline design contracts. We were pleased with the overall results from our fourth quarter and remain optimistic about the potential ahead in fiscal year 2018. With cash and investments of approximately $90 million and no debt, clearly, the overall financial condition of the company remains very strong, leaving us in a position to fund the shareholder dividend along with the capacity for our appropriate strategic investments to continue leading our growth objectives.

As we continue our thoughtful and measured transition from perpetual licensing to a SaaS subscription engagement model, we will continue to offer our customers the choice to select from the option that aligns with their strategic goals. During this transition, we expect our perpetual license fee revenue recognition will continue to fluctuate quarter-to-quarter. However, as the SaaS subscriptions become the platform of choice, the company will gain better visibility of future revenue flow and continued growth in ACV, allowing us to continue our aggressive investment in research development and expanding our global presence.

Fiscal year 2018 is off to a great start. We've completed a number of contracts already, including one 7-figure ACV project. And we remain optimistic about our growth plans but cannot overlook the continued global market risk, which impacted fiscal year 2017 and may introduce additional uncertainty in the results ahead. During this period, we have not lost sight of our mission to exceed customers' expectations and truly believe that we can achieve profitable growth during this transition to a preferred SaaS engagement model that will deliver incremental benefits for our customers.

At this time, we'd like to open the call for any questions. Savanna, I'll turn the line back to you.

(Operator Instructions) We can go to our first question from Kevin Liu with B. Riley & Co.

Allan, you mentioned that Q1 and fiscal '18 is off to a pretty good start here. Should we take that as kind of an indication that you guys would just be able to close deals that slipped out of the prior quarter? Or is it more of a sign that the environment indeed is getting a bit stronger and you're continuing to see win rates and close rates improve?

The first quarter results are a reflection of what we expected to do in the first quarter. We didn't have a lot of slippage. We actually had very strong close rate at the end of the fourth quarter. So I think it's a reflection of what's going on in the market right now.

Got it. And in terms of this transition towards more SaaS deals, can you give us a sense for how many of the new deals you completed in Q4 were SaaS as opposed to on-premise? And how do you expect that to change over the course of this year?

Kevin, this is Vince. Yes, we closed, for the full year, 12 SaaS deals in fiscal '17. I would say, about 5 of them closed in the fourth quarter, just to give you kind of a run rate.

And in terms of how aggressively that mix shifts toward SaaS, are you expecting it to be more of a gradual shift over the course of '18? Or are you indeed driving hard for the vast majority of deals to come in on the SaaS side?

Kevin, this is Allan again. It's accelerating. When we look at the pipeline today, about 40% of the pipeline that we have, that we're working right now, is a SaaS contract position. So it's going much faster than we had anticipated.

Got it, that's helpful. And then the last one for me. Just in terms of this new Andromeda platform, can you talk about whether you expect that to drive growth in kind of the ERP or NGC segments of the business? And how much of that business will contribute to SaaS as opposed to come in on-premise?

So the Andromeda platform is not part of the ERP platform. It's really a supply chain application. It helps with the supply chain execution platform. It's really geared towards accelerating the supply chain, the compliance and allowing -- giving customers more visibility into what's happening as they bring those products into the marketplace. The interesting factor there is in fact the percentage of business in the pipeline from the Andromeda platform is biased even stronger to SaaS than it is across the rest of the business.

(Operator Instructions) We can take our next question from Matthew Galinko with Sidoti.

A couple of questions for you. One being, as you're managing this transition more towards cloud, I'm just wondering if there's any duplicative development efforts. And if maybe as cloud becomes more of a default choice for the customers, you might be able to get some additional efficiencies compared to where you're at now?

Matthew, this is Allan speaking. So as far as the duplicative investments in R&D, that is not the case. In fact, for a number of years now, we've been very focused on the SaaS platform and that we anticipated the preference to move in that environment. We are able -- fortunately, because of that investment, you can still leverage that investment back into the on-premise solution, it's a fairly easy transition to go in that direction. So we are able to leverage the investments we've made on the SaaS platforms to serve the broad market requirements. I've got to ask you to repeat the second half of that question. I think you have the other one in there.

All right. So I know you touched on macro. Was there anything specific that you're hearing as you work towards deal closure or getting deals into the pipeline? Or is it just sort of general sentiment that's out there?

It's a general sentiment. Of course, we can't predict what's going to happen in the marketplace going forward. But as we all know, there's a lot of angst and turmoil and potential risks out there, and any of those can cause a ripple effect. I think the general sentiment that we're seeing that comes down through the investments is the amount of scrutiny that our prospects are having to go through to get the funding in place to launch the project. And that's where we see the real impact of this is that it's just a couple of extra layers, a couple of extra rounds and a lot more focus on the value proposition and whether it's well understood and whether the project is staffed well and those sorts of things. So it's extending the time period to close those projects.

Got you. Are there any kind of triggers that you could see of pulling off some of that tape to make deals a little bit easier to get through? Or is there something specific you could point to now that would help us to predict that?

I think in general terms, the larger enterprises can absorb the investments easier than maybe the small to medium enterprises can. I think they also have a longer-range view in general about what's happening in the marketplace and where they want to go. And surprisingly, that's one of the areas we're seeing the transition to SaaS much faster, is in the larger enterprises, I think a reflection of that one project that we've already closed that I mentioned in the earlier comments.

Got you. All right, one more for me. I appreciate the time. I realize that you're fairly strategic acquirers when that does happen. Clearly, you're sitting on a pretty nice cash position here. So I'm just wondering if that changes the calculus at all now or if you're actively evaluating things or really no increased motivation at this point.

That's a good question, Matthew. We are always looking for the right fit, the strategic investment that might allow us to serve our customers in a new way and broader. We are very structured and methodical about the approach to any acquisition. And the fact that we've got some incremental cash doesn't -- hasn't encouraged us to loosen that approach or vision or strategy around an acquisition. We believe that our strategy is a well-defined one that serves us and our customers well, and we're going to stick to that strategy just because we've got a growing cash pocket. We're not going to loosen the criteria for making such an investment.

(Operator Instructions) It appears we have no further questions at this time.

All right. Savannah, thank you very much for your help. We'll close the call.

You're very welcome, and thank you, everyone, for your participation today. You may disconnect at anytime and have a great day.