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| LGTY > SEC Filings for LGTY > Form 10-Q on 10-Mar-2009 | All Recent SEC Filings |
10-Mar-2009
Quarterly Report
FORWARD-LOOKING STATEMENTS
This report on Form 10-Q contains forward-looking statements relating to our future financial performance, business strategy, financing plans and other future events that involve uncertainties and risks. You can identify these statements by forward-looking words such as "anticipate," "intend," "plan," "continue," "could," "grow," "may," "potential," "predict," "strive," "will," "seek," "estimate," "believe," "expect," and similar expressions that convey uncertainty of future events or outcomes. Any forward-looking statements we make herein are pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements concerning future:
• results of operations;
• liquidity, cash flow and capital expenditures;
• demand for and pricing of our products and services;
• acquisition activities and the effect of completed acquisitions;
• industry conditions and market conditions; and
• general economic conditions.
ECONOMIC OVERVIEW
Corporate capital spending trends and commitments are the primary determinants of the size of the market for business software. Corporate capital spending is, in turn, a function of general economic conditions in the U.S. and abroad, and in particular may be affected by conditions in U.S. and global credit markets. In recent years, the weakness in the overall world economy and the U.S. economy, in particular, has resulted in reduced expenditures in the business software market.
Overall information technology spending continues to be relatively weak as a result of the current global economic environment. We believe, over the long-term, that information technology spending will incrementally improve as increased global competition forces companies to improve productivity by upgrading their technology systems. Although this improvement could slow or regress at any time due in part to the recent concerns in the global capital markets and general economic conditions, we believe that our organizational and financial structure will enable us to take advantage of any sustained economic rebound. Customers continue to take long periods to evaluate discretionary software purchases.
BUSINESS OVERVIEW
We provide supply chain management (SCM) solutions to streamline and optimize the market planning, management, production and distribution of products for manufacturers, suppliers, distributors and retailers. The supply chain refers to the complex network of business relationships with trading partners (customers, suppliers and carriers) used to forecast, source, manufacture, store and deliver products and services to multiple locations and customers by various modes of transportation. Supply chain operations include forecasting, demand management, supply planning, sourcing, manufacturing, logistics, warehouse management and transportation operations within an enterprise as well as with other business-to-business collaborative processes among customers, suppliers and carriers. Our solutions enable enterprises to increase their market visibility, build competitive advantages and increase profitability by reducing costs, increasing revenues, improving operational efficiencies and collaborating with suppliers and customers to more effectively respond to dynamic market conditions. Additionally, our solutions streamline and automate the executive Sales and Operations Planning (S&OP) process to create and assess business plans that profitably match supply with demand while synchronizing supply chain operations with strategic corporate goals.
We derive revenues primarily from three sources: software licenses, services and other, and maintenance. We generally determine software license fees based on the number of modules, servers, users and/or sites licensed. Services and other revenues consist primarily of fees from software implementation, training, and consulting services. We bill primarily under time and materials arrangements and recognize revenue as we perform services. Maintenance agreements typically are for a one- to three-year term, usually commencing at the time of the initial product license. We generally bill maintenance fees annually in advance under agreements with terms of one to three years, and then recognize the resulting revenue ratably over the term of the maintenance agreement. Deferred revenue represents advance payments or billings for software licenses, services and maintenance billed in advance of the time we recognize the related revenues.
Due to intensely competitive markets, we sometimes discount our license fees from our published list prices in response to pricing pressure in our industry. Numerous factors contribute to the amount of the discounts provided, such as previous customer purchases, the number of customer sites utilizing the software, the number of modules purchased and the number of users, as well as the overall size of the contract. While all these factors affect the discount amount of one contract, the overall percentage discount has not materially changed in recent reported fiscal periods. Accordingly, changes in our revenues from period to period primarily are due to the volume of products and related services sold in any period and the amounts of products or modules purchased with each sale, rather than variations in pricing.
Our cost of revenue for licenses includes amortization of capitalized computer software development costs, salaries and benefits, and value added reseller (VAR) commissions. Costs for maintenance and services revenues include the cost of personnel to conduct implementations, customer support and consulting, and other personnel-related expenses, as well as agent commission expenses related to maintenance revenue generated by the indirect channel.
Gross product research and development costs include all non-capitalized and capitalized software development costs which principally include the salary and benefits for our development personnel. Our selling expenses generally include the salary and commissions we pay to our direct sales professionals, along with marketing, promotional, travel and associated costs. Our general and administrative expenses generally include the salary and benefits we pay to executive, corporate and support personnel, as well as office rent, utilities, communications expenses, and various professional fees.
We currently view the following factors as the primary opportunities and risks associated with our business:
• Dependence on Capital Spending Patterns. There is risk associated with our dependence on, and the risks associated with, the capital spending patterns of U.S. and international businesses, which in turn are functions of economic trends and conditions over which we have no control.
• Acquisition Opportunities. There are opportunities for select acquisitions or investments to expand our sales distribution channels and/or broaden our product offering by providing additional solutions for our target markets.
• Acquisition Risks. There are risks associated with acquisitions of complementary companies, products and technologies, including the risk that we will not achieve the financial and strategic goals that we contemplate at the time of the transaction. More specifically, in any acquisition we will face risks and challenges associated with the uncertain value of the acquired business or assets, the difficulty of assimilating operations and personnel, integrating acquired technologies and products and maintaining the loyalty of the customers of the acquired business.
• Competitive Technologies. There is a risk that our competitors may develop technologies that are substantially equivalent or superior to our technology.
• Competition in General. There are risks inherent in the market for business application software and related services, which has been and continues to be intensely competitive; for example, some of our competitors may become more aggressive with their prices and/or payment terms, which may adversely affect our profit margins.
A discussion of a number of additional risk factors associated with our business is included in our Annual Report on Form 10-K for the fiscal year ended April 30, 2008 and in Item 1A of Part II of this report.
COMPARISON OF RESULTS OF OPERATIONS
Three-Month Comparisons. The following table sets forth certain revenue and
expense items as a percentage of total revenues and the percentage changes in
those items for the three months ended January 31, 2009 and 2008:
Percentage of Total Pct. Change in
Revenues Dollars
2009 2008 2009 vs. 2008
Revenues:
License 34 % 24 % 57 %
Services and other 12 19 (34 )
Maintenance 54 57 1
Total revenues 100 100 7
Cost of revenues:
License 9 14 (27 )
Services and other 7 9 (12 )
Maintenance 11 13 (4 )
Write-down of capitalized computer software - 12 nm
Total cost of revenues 28 48 (37 )
Gross margin 72 52 46
Operating expenses:
Research and development 12 12 -
Sales and marketing 23 24 1
General and administrative 11 9 36
Amortization of acquisition-related intangibles 1 1 -
Total operating expenses 46 46 7
Operating income 26 6 313
Other income, net - 5 nm
Earnings before income taxes 26 11 126
Income tax expense 9 4 161
Net earnings 16 % 7 % 110 %
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nm-not meaningful
Subtotals may not total due to rounding.
Percentage of Total Pct. Change in
Revenues Dollars
2009 2008 2009 vs. 2008
Revenues:
License 29 % 32 % (14 )%
Services and other 14 18 (29 )
Maintenance 57 50 4
Total revenues 100 100 (8 )
Cost of revenues:
License 12 14 (17 )
Services and other 8 9 (16 )
Maintenance 12 11 2
Write-down of capitalized computer software - 4 nm
Total cost of revenues 32 37 (19 )
Gross margin 68 63 (1 )
Operating expenses:
Research and development 12 12 (3 )
Sales and marketing 24 22 (2 )
General and administrative 11 11 -
Amortization of acquisition-related intangibles 1 1 -
Total operating expenses 48 45 (2 )
Operating income 20 18 2
Other income, net - 4 nm
Earnings before income taxes 20 22 (17 )
Income tax expense 7 9 (29 )
Net earnings 13 % 13 % (8 )%
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nm-not meaningful
Subtotals may not total due to rounding.
REVENUES:
For the three months ended January 31, 2009, the increase in revenues from the three months ended January 31, 2008 was attributable to an increase in license fees and maintenance revenues partially offset by a decrease in services revenues. The decrease in revenues for the nine months ended January 31, 2009 compared to the same period last year was primarily attributable to decreases in license fees and services revenues partially offset by an increase in maintenance revenues. International revenues represented approximately 17% of total revenues for both the three and nine months ended January 31, 2009, respectively, and 18% and 17% for the three and nine months ended January 31, 2008, respectively. For the quarter ended January 31, 2009, international revenues were primarily from Europe and to a lesser extent Asia.
Our revenues may fluctuate substantially from period to period primarily because we derive most of our license fee revenues from a relatively small number of customers in a given period. No single customer accounted for more than 10% of our total revenues in the three and nine months ended January 31, 2009 or 2008.
LICENSES. We believe the 14% decrease in license fees in the nine months ended January 31, 2009 compared to the same period last year was due to the recent economic uncertainties in the global markets. In particular, the financial crisis that emerged during recent quarters has negatively impacted customers' normal sources of financing and has greatly increased the level of uncertainty about future economic conditions. We believe the 57% increase in license fees in the three months ended January 31, 2009 compared to the same period last year was due to our ability to close several large license fee transactions. We therefore cannot accurately determine whether the improved third quarter license fee revenues indicate a reversal of the trend in the preceding two quarters.
The direct sales channel provided approximately 78% and 58%, respectively, of license fee revenues for the three and nine months ended January 31, 2009 compared to approximately 44% and 54%, respectively, in the comparable period a year ago. This increase in the direct sales percentage was due primarily to the signing of several large license agreements for our Voyager product line that had been in the pipeline for several quarters through our direct channel and a reduced number of license agreements signed through our indirect channel. For the three and nine months ended January 31, 2009, our margins after commissions on direct sales were approximately 83% and 85%, respectively, and our margins after commissions on indirect sales were approximately 47% and 49%, respectively, for these two periods. These margins did not change significantly from the three and nine months ended January 31, 2008, during which our margins after commissions on direct sales were approximately 82% and 86%, respectively, and our margins after commissions on indirect sales were approximately 46% and 49%, respectively. These margin calculations include only commission expense for comparative purposes and do not include other costs of license fees such as amortization of capitalized software.
Our sales pipeline includes large transactions, which we define as transactions greater than $500,000; mid-size software sales opportunities, which range from $100,000 to $500,000; as well as many smaller opportunities. There is inherent uncertainty in our sales pipeline due to the nature of our sales cycle. As a result, we have limited ability to accurately project future quarterly results, which we expect will continue to be subject to normal quarter-to-quarter variability.
SERVICES AND OTHER. Our services revenue stems primarily from software implementation project work from our Voyager product line. The 34% and 29% decreases in services and other revenues for the three and nine months ended January 31, 2009, respectively, from the corresponding periods in the previous fiscal year were primarily the result of a decrease in overall software implementation services related to timing of project work from lower license fee sales in previous quarters. We have observed that there is a tendency for services and other revenues to lag changes in license revenues by one to three quarters, as new licenses in one quarter often involve implementation and consulting services in subsequent quarters, for which we recognize revenues only as we perform those services.
MAINTENANCE. The 1% and 4% increases in maintenance revenues for the three and nine months ended January 31, 2009, respectively, compared to the corresponding periods in the previous fiscal year were related to new software sales, rate increases on annual renewals and reinstatements of previously cancelled maintenance agreements. These factors were substantially offset by decreases in recurring maintenance revenues due to attrition in our maintenance customer base. Typically, our maintenance revenues have had a direct relationship to current and historic license fee revenues, since new licenses are the potential source of new maintenance customers. We believe our annual recurring maintenance revenue base provides significant stability and enhances our ability to maintain profitable operations.
GROSS MARGIN:
The following table provides both dollar amounts and percentage measures of
gross margin:
16
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Three months ended Nine months ended
January 31, January 31,
($000's omitted) 2009 2008 2009 2008
Gross margin on license fees: $ 2,677 73 % $ 969 42 % $ 5,220 58 % $ 5,891 57 %
Gross margin on services and other: 521 41 % 1,080 56 % 1,785 42 % 3,087 52 %
Gross margin on maintenance: 4,490 79 % 4,404 78 % 13,669 79 % 13,027 78 %
Write-down of capitalized computer
software development costs (1,196 ) (1,196 )
Total gross margin: $ 7,688 72 % $ 5,257 53 % $ 20,674 68 % $ 20,809 63 %
Total gross margin excluding write-down
of capitalized computer software
development costs $ 7,688 72 % $ 6,453 65 % $ 20,674 68 % $ 22,005 67 %
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For the three months ended January 31, 2009, the increase in total gross margin percentage was due primarily to an increase in the license fee gross margin percentages partially offset by a decrease in the services gross margin percentage. The increase in total gross margin percentage for the nine months ended January 31, 2009 compared to the same period in the prior year was due primarily to the fact that services revenues represented a substantially smaller proportion of total revenues and services revenues typically have relatively low margins.
LICENSES. The increase in gross margin percentage on license fees for the three months ended January 31, 2009 were primarily due to higher license fee software sales particularly through our direct channel, which has higher gross margins. The slight increase in gross margin percentage on license fees for the nine months ended January 31, 2009 was due to the higher proportion of license fee software sales generated through our direct channel, compared to our indirect channel. License fee gross margin percentage tends to be directly related to the level of license fee revenues due to the relatively fixed cost of computer software amortization expense and amortization of acquired software, which are the primary components of cost of license fees. To a lesser degree, our license fee gross margin percentage in a given period is related to the variable expense of DMI's agent commissions, and the proportion of license fees represented by DMI in that period. The bulk of our indirect channel sales are of DMI software.
SERVICES AND OTHER. For the three and nine months ended January 31, 2009, services and other gross margin percentage decreased when compared to the same period in the prior fiscal year due to decreased software implementation project work from our Voyager product line from license fee sales in the prior quarters. Services and other gross margin normally is directly related to the level of services and other revenues. The primary component of cost of services and other revenues is services staffing, which is relatively fixed in the short term.
MAINTENANCE. For the three and nine months ended January 31, 2009, maintenance gross margin percentage was relatively unchanged compared to the same periods last year.
WRITE-DOWN OF CAPITALIZED COMPUTER SOFTWARE DEVELOPMENT COSTS. We make ongoing evaluations of the recoverability of our capitalized software projects by comparing the unamortized amount for each product to the estimated net realizable value of the product. If such evaluations indicate that the unamortized software development costs exceed the net realizable value, we write off the amount by which the unamortized software development costs exceed net realizable value. For the three-month and nine-month periods ended January 31, 2008, we incurred a charge of $1,196,000 related to the write-off of certain capitalized software development costs based on this evaluation.
EXPENSES:
RESEARCH AND DEVELOPMENT. Gross product research and development costs include
all non-capitalized and capitalized software development costs. A breakdown of
the research and development costs is as follows:
17
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Three months ended (in thousands)
January 31, Percent January 31,
2009 Change 2008
Gross product research and development costs $ 1,725 (0 )% $ 1,719
Percentage of total revenues 16 % 17 %
Less: Capitalized computer software research
and development costs $ (482 ) (0 )% $ (480 )
Percentage of gross product research and
development costs 28 % 28 %
Product research and development expenses $ 1,243 (0 )% $ 1,239
Percentage of total revenues 12 % 12 %
Total amortization of capitalized computer
software development costs * $ 596 (2 %) $ 610
Nine months Ended (in thousands)
January 31, Percent January 31,
2009 Change 2008
Gross product research and development costs $ 5,298 (4 %) $ 5,544
Percentage of total revenues 17 % 17 %
Less: Capitalized computer software research
and development costs $ (1,503 ) (8 )% $ (1,635 )
Percentage of gross product research and
development costs 28 % 29 %
Product research and development expenses $ 3,795 (3 %) $ 3,909
Percentage of total revenues 12 % 12 %
Total amortization of capitalized computer
software development costs * $ 1,757 (7 )% $ 1,886
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* - These expenses are included in cost of license fees
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