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| AMSWA > SEC Filings for AMSWA > Form 10-Q on 7-Dec-2012 | All Recent SEC Filings |
7-Dec-2012
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;
• viability and effectiveness of strategic alliances;
• industry conditions and market conditions;
• acquisition activities and the effect of completed acquisitions; and
• general economic conditions.
Although we believe that the goals, plans, expectations, and prospects that our forward-looking statements reflect are reasonable in view of the information currently available to us, those statements are not guarantees of performance. There are many factors that could cause our actual results to differ materially from those anticipated by forward-looking statements made herein. These factors include, but are not limited to, continuing U.S. and global economic uncertainty, the timing and degree of business recovery, unpredictability and the irregular pattern of future revenues, dependence on particular market segments or customers, competitive pressures, delays, product liability and warranty claims and other risks associated with new product development, undetected software errors, market acceptance of our products, technological complexity, the challenges and risks associated with integration of acquired product lines, companies and services, as well as a number of other risk factors that could affect our future performance. All forward-looking statements included in this Form 10-Q are based upon information available to us as of the filing date of this Form 10-Q. We undertake no obligation to update any of these forward-looking statements for any reason. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance, or achievements to differ materially from those expressed or implied by these statements. We discuss certain factors in greater detail in "Business Overview" below. The terms "fiscal 2013" and "fiscal 2012" refer to our fiscal years ending April 30, 2013 and 2012, respectively.
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 global credit markets.
In October 2012, the International Monetary Fund ("IMF") provided an update to
the World Economic Outlook ("WEO") for the 2012 world economic growth forecast.
The update noted that, "The global economy has deteriorated further since the
release of the July 2012 WEO Update, and growth projections have been marked
down. Downside risks are now judged to be more elevated than in the April 2012
and September 2011 World Economic Outlook (WEO) reports." The IMF also noted:
"Indicators of activity and unemployment show increasing and broad-based
economic sluggishness in the first half of 2012 and no significant improvement
in the third quarter. Global manufacturing has slowed sharply."
For the remainder of fiscal 2013, we expect the world economy to continue to be weak, which could result in a difficult selling environment. Overall information technology spending continues to be relatively weak as a result of the current global economic environment, particularly in the United States, when compared to the period prior to the last recession. We believe information technology spending will incrementally improve over the long term 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 concerns in 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.
We believe weak economic conditions may be driving some businesses to focus on achieving more process and efficiency improvements in their operations and to invest in solutions that improve operating margins, rather than make large infrastructure-type technology purchases. If this trend continues, we believe it may tend to favor solutions such as our Logility supply chain solutions, which are designed to provide a more rapid return on investment and are targeted at some of the largest profit drivers in a customer's business. While the current economic crisis has had a particularly adverse impact on the weaker companies in our target markets, we believe a larger percentage of our customers are seeking to make investments to strengthen their operations, and some are taking advantage of current economic conditions to gain market share.
BUSINESS OVERVIEW
American Software was incorporated as a Georgia corporation in 1970. We develop, market and support a portfolio of software and services that deliver enterprise management and collaborative supply chain solutions to the global marketplace. We have designed our software and services to bring business value to enterprises by supporting their operations over intranets, extranets, client/servers or the Internet. References to "the Company," "our products," "our software," "our services" and similar references include the appropriate business unit actually providing the product or service.
We provide our software solutions through three major business segments, which
are further broken down into a total of four major product and service groups.
The three business segments are (1) Supply Chain Management ("SCM"),
(2) Enterprise Resource Planning ("ERP") and (3) Information Technology ("IT")
Consulting. The SCM segment consists of Logility, a wholly-owned subsidiary that
provides collaborative supply chain solutions to streamline and optimize the
production, distribution and management of products between trading partners.
The ERP segment consists of (i) American Software ERP, which provides purchasing
and materials management, customer order processing, financial, e-commerce and
traditional manufacturing solutions, and (ii) New Generation Computing ("NGC"),
which provides industry-specific business software to both retailers and
manufacturers in the apparel, sewn products and furniture industries. The IT
Consulting segment consists of The Proven Method, an IT staffing and consulting
services firm.
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, consulting and customization services. We primarily bill under time and materials arrangements and recognize revenues as we perform services. We typically enter into maintenance agreements for a one- to three-year term at the time of the initial product license. We generally bill maintenance fees annually in advance and then recognize the resulting revenues ratably over the term of the maintenance agreement. Deferred revenues represent advance payments or billings for software licenses, services and maintenance billed in advance of the time we recognize the related revenues.
Our cost of revenue for licenses includes amortization of capitalized computer software development costs, royalties paid to third-party software vendors, and agent commission expenses related to license revenues generated by the indirect channel, primarily from Demand Management, Inc. ("DMI"). Costs for maintenance and services include the cost of personnel to conduct implementations and customer support, consulting, other personnel-related expenses, and agent commission expenses related to maintenance revenues generated by the indirect channel, primarily from DMI. We account for the development costs of software intended for sale in accordance with the Intangibles-Goodwill and Other topic of the Financial Accounting Standards Board's ("FASB") Accounting Standards Codification. We monitor the net realizable value of our capitalized software on a quarterly basis based on an estimate of future product revenues. We currently expect to fully recover the value of the capitalized software asset recorded on our consolidated balance sheet; however, if future product revenues are less than management's current expectations, we may incur a write-down of capitalized software costs.
Our selling expenses generally include the salary and commissions paid to our sales professionals, along with marketing, promotional, travel and associated costs. Our general and administrative expenses generally include the salary and benefits paid to executive, corporate and support personnel, as well as facilities-related costs, 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 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 selective acquisitions or investments to provide opportunities 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 risks 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.
• 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, 2012.
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 October 31, 2012 and 2011:
Three Months Ended October 31,
Percentage of Total Pct. Change in
Revenues Dollars
2012 2011 2012 vs 2011
Revenues:
License 21 % 28 % (22 )%
Services and other 47 41 17
Maintenance 32 31 5
Total revenues 100 100 3
Cost of revenues:
License 5 6 (3 )
Services and other 31 30 7
Maintenance 8 7 6
Total cost of revenues 44 43 6
Gross margin 56 57 -
Research and development 9 8 18
Sales and marketing 19 19 3
General and administrative 11 12 (2 )
Amortization of acquisition-related
intangibles - 1 (7 )
Provision for doubtful accounts 1 - nm
Total operating expenses 40 39 5
Operating income 16 18 (10 )
Other income (expense):
Interest income 1 1 (16 )
Other, net - (1 ) nm
Earnings before income taxes 17 19 (6 )
Income tax expense (7 ) (7 ) (3 )
Net earnings 11 % 12 % (7 )%
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Six-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 six months ended October 31, 2012 and 2011:
Six Months Ended October 31,
Percentage of Total Pct. Change in
Revenues Dollars
2012 2011 2012 vs 2011
Revenues:
License 20 % 28 % (23 )%
Services and other 48 40 25
Maintenance 32 32 6
Total revenues 100 100 6
Cost of revenues:
License 5 7 (15 )
Services and other 32 29 16
Maintenance 8 7 7
Total cost of revenues 45 44 9
Gross margin 55 56 3
Research and development 8 8 13
Sales and marketing 19 18 7
General and administrative 12 12 (1 )
Amortization of acquisition-related
intangibles - 1 (7 )
Provision for doubtful accounts 1 - 123
Total operating expenses 40 39 6
Operating income 15 17 (4 )
Other income (expense):
Interest income 1 1 (16 )
Other, net - (1 ) nm
Earnings before income taxes 16 17 2
Income tax expense (6 ) (6 ) 7
Net earnings 10 % 11 % (1 )%
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COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED OCTOBER
31, 2012 AND 2011
Revenue
Three Months Ended October 31,
% of Total Revenue
2012 2011 % Change 2012 2011
(in thousands)
License $ 5,504 $ 7,048 (22 )% 21 % 28 %
Services and other 12,312 10,535 17 % 47 % 41 %
Maintenance 8,447 8,015 5 % 32 % 31 %
Total revenues $ 26,263 $ 25,598 3 % 100 % 100 %
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Six Months Ended October 31,
% of Total Revenue
2012 2011 % Change 2012 2011
(in thousands)
License $ 10,586 $ 13,736 (23 )% 20 % 28 %
Services and other 24,807 19,802 25 % 48 % 40 %
Maintenance 16,784 15,769 6 % 32 % 32 %
Total revenues $ 52,177 $ 49,307 6 % 100 % 100 %
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For the three months ended October 31, 2012, the 3% increase in revenues over the three months ended October 31, 2011 was attributable primarily to a 17% increase in services and other revenues and, to a lesser extent, a 5% increase in maintenance revenues. This was partially offset by a 22% decrease in license fee revenues. For the six months ended October 31, 2012, the 6% increase in revenues over the six months ended October 31, 2011 was attributable primarily to a 25% increase in services and other revenues and, to a lesser extent, a 6% increase in maintenance revenues which was partially offset by a 23% decrease in license revenues. The primary reason for the increase in services and other revenues in the three and six months ended October 31, 2012 was an increase in the level of implementation services at our SCM and ERP business units resulting from increased sales in recent quarters and, to a lesser extent, an improvement in our IT consulting services due to increased demand for IT temporary staff and project services.
Due to intensely competitive markets we do discount license fees from our published list price due 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 may affect the discount amount of a particular contract, the overall percentage discount has not materially changed in the recent reported fiscal periods.
The change in our revenues from period to period is primarily due to the volume of products and related services sold in any period and the amount of products or modules purchased with each sale.
International revenues represented approximately 12% of total revenues in the three and six months ended October 31, 2012, and represented approximately 13% and 15% of total revenues in the three and six months ended October 31, 2011, respectively. Our revenues, in particular our international 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.
License Revenue
Three Months Ended October 31,
2012 2011 % Change
(in thousands)
Enterprise Resource Planning $ 567 $ 1,346 (58 )%
Supply Chain Management 4,937 5,702 (13 )%
Total license revenues $ 5,504 $ 7,048 (22 )%
Six Months Ended October 31,
2012 2011 % Change
(in thousands)
Enterprise Resource Planning $ 992 $ 1,684 (41 )%
Supply Chain Management 9,594 12,052 (20 )%
Total license revenues $ 10,586 $ 13,736 (23 )%
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For the three and six months ended October 31, 2012, license fee revenues decreased 22% and 23%, respectively, when compared to the same periods in the prior year. While we expect a degree of quarterly fluctuation due to the timing of signing license fee agreements, our SCM and ERP units experienced a decline in license fee close rates in the first half of the current fiscal year when compared to the same period last year due to cancellation and/or delays in business investment as a result of an uncertainty in the direction of the global economy. In the three and six months ended October 31, 2012, license fee revenues from our SCM business unit decreased 13% and 20%, respectively, when compared to the corresponding periods in the prior year. Our SCM business unit constituted 90% and 91% of total license fee revenues for the three and six months ended October 31, 2012, respectively, compared to 81% and 88% for the three and six months ended October 31, 2011, respectively. Our ERP business unit license fee revenues decreased by 58% and 41% for the three and six months ended October 31, 2012, respectively, when compared to the same periods in the prior year, primarily due to a decrease in license fee sales to the apparel and retail industries.
The direct sales channel provided approximately 75% and 74% of license fee revenues for the three and six months ended October 31, 2012, respectively, compared to approximately 81% and 74% of license fee revenues for the three and six months ended October 31, 2011, respectively. The decrease in the proportion of sales by our direct sales channel, which tends to target larger companies, for the current quarter when compared to the prior year period is primarily due to the delay of several larger sales compared with the same time last year. In general, large and midsized companies do not require access to capital markets to fund expenditures to the same degree as do smaller companies. Thus, our indirect sales channel faces relatively greater challenges in the current economy, as the indirect channel tends to target smaller companies. For the three and six months ended October 31, 2012, our margins after commissions on direct sales were approximately 87% compared to 83% for the three and six months ended October 31, 2011, respectively. The margins increased in the current periods due to the concentration (or mix) of sales staff achieving certain commission rate levels when compared to the same periods last year. For the three and six months ended October 31, 2012, our margins after commissions on indirect sales were approximately 43% and 46%, respectively, compared to 43% and 45% for the three and six months ended October 31, 2011, respectively. The indirect channel margins for the six months ended October 31, 2012 increased slightly when compared to the same period in the prior year due to the mix of value-added reseller ("VAR") commission rates. 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.
Services and Other Revenue
Three Months Ended October 31,
2012 2011 % Change
(in thousands)
Enterprise Resource Planning $ 1,844 $ 1,502 23 %
Supply Chain Management 4,031 2,787 45 %
IT Consulting 6,437 6,246 3 %
Total services and other revenues $ 12,312 $ 10,535 17 %
Six Months Ended October 31,
2012 2011 % Change
(in thousands)
Enterprise Resource Planning $ 3,768 $ 2,601 45 %
Supply Chain Management 7,575 5,055 50 %
IT Consulting 13,464 12,146 11 %
Total services and other revenues $ 24,807 $ 19,802 25 %
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For the three and six months ended October 31, 2012, services revenue increased by 17% and 25%, respectively, primarily due to increased services revenues from our SCM and ERP business segment implementation services and, to a lesser extent, IT Consulting business segments. For the three and six months ended October 31, 2012, services and other revenues from Logility (SCM) increased by 45% and 50%, respectively, when compared to the prior year periods. Logility services revenues increased for the current quarter due to improved license fee sales in recent periods, which tend to increase services implementation revenue. For the three and six months ended October 31, 2012, our ERP segment's revenues increased 23% and 45%, respectively, when compared to the prior year periods due to increased implementation project work particularly in the apparel industry. . . .
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