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AMSWA > SEC Filings for AMSWA > Form 10-Q on 9-Sep-2013All Recent SEC Filings

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Form 10-Q for AMERICAN SOFTWARE INC


9-Sep-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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.


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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 2014" and "fiscal 2013" refer to our fiscal years ending April 30, 2014 and 2013, 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.

On July 9th, 2013, the International Monetary Fund ("IMF") provided an update to the World Economic Outlook ("WEO") for the 2013 world economic growth forecast. The update noted that, "Global growth is projected to remain subdued at slightly above 3 percent in 2013, the same as in 2012. This is less than forecast in the April 2013 World Economic Outlook (WEO), driven to a large extent by appreciably weaker domestic demand and slower growth in several key emerging market economies, as well as a more protracted recession in the euro area. Downside risks to global growth prospects still dominate: while old risks remain, new risks have emerged, including the possibility of a longer growth slowdown in emerging market economies, especially given risks of lower potential growth, slowing credit, and possibly tighter financial conditions if the anticipated unwinding of monetary policy stimulus in the United States leads to sustained capital flow reversals."

For the remainder of fiscal 2014, 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, which consists of Logility, a wholly-owned subsidiary, as well as its subsidiary, Demand Management, Inc. ("DMI"), 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.


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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 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.

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, 2013.

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 July 31, 2013 and 2012:



                                         Three Months Ended July 31,
                                 Percentage of Total           Pct. Change in
                                       Revenues                   Dollars
                                 2013            2012          2013 vs. 2012
          Revenues:
          License                    14 %            20 %                  (37 )%
          Services and other         48              48                    (10 )
          Maintenance                38              32                      6

          Total revenues            100             100                    (10 )


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                                                             Three Months Ended July 31,
                                                   Percentage of Total                 Pct. Change in
                                                         Revenues                         Dollars
                                                 2013                2012              2013 vs. 2012
Cost of revenues:
License                                                5                  5                        (15 )
Services and other                                    34                 33                         (7 )
Maintenance                                            8                  7                          3

Total cost of revenues                                48                 46                         (6 )

Gross margin                                          52                 54                        (13 )

Research and development                               9                  8                         -
Sales and marketing                                   19                 19                         (9 )
General and administrative                            14                 12                          1
Amortization of acquisition-related
intangibles                                            1                 -                          -
Provision for doubtful accounts                       -                   1                         -

Total operating expenses                              41                 40                         (5 )

Operating income                                      11                 14                        (36 )

Other income (expense):
Interest income                                        1                  1                        (18 )
Other, net                                            (1 )               -                          nm

Earnings before income taxes                          11                 15                        (39 )
Income tax expense                                     4                  6                        (47 )

Net earnings                                           7 %                9 %                      (36 )%

nm-not meaningful

COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JULY 31, 2013 AND
2012

REVENUE



                                             Three Months Ended July 31,
                                                                      % of Total Revenue
                            2013         2012       % Change          2013            2012
                             (in thousands)
     License              $  3,218     $  5,082           (37 )%          14 %           20 %
     Services and other     11,228       12,495           (10 )           48             48
     Maintenance             8,872        8,337             6             38             32

     Total revenues       $ 23,318     $ 25,914           (10 )%         100 %          100 %

For the three months ended July 31, 2013, the 10% decrease in revenues over the three months ended July 31, 2012 was attributable primarily to a 37% decrease in license fee revenues during the three months ended July 31, 2013 when compared to the same period last year and, to a lesser extent, a 10% decrease in services and other revenues. This was partly offset by a 6% increase in maintenance revenues. The decrease in license fee revenues was a result of continued uncertainty in the economy that is resulting in delayed software purchases. The primary reason for the decrease in services and other revenues in the three months ended July 31, 2013 was a decrease in the level of implementation services at our ERP segment, which includes NGC, and in our IT consulting services due to decreased demand for IT temporary staff. This was partially offset by an increase in services revenue at our SCM business unit.

Due to intense competition in our industry, we do discount license fees from our published list price. 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.


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International revenues represented approximately 18% and 12% of total revenues in the three months ended July 31, 2013 and 2012, 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 July 31,
                                          2013             2012        % Change
                                             (in thousands)
        Enterprise Resource Planning   $      402       $      425            (5 )%
        Supply Chain Management             2,816            4,657           (40 )

        Total license revenues         $    3,218       $    5,082           (37 )%

For the three months ended July 31, 2013, license fee revenues decreased 37% when compared to the same period in the prior year. In the three months ended July 31, 2013, license fee revenues from our SCM business unit decreased 40% when compared to the corresponding period in the prior year. We believe that the decrease in the first quarter was due primarily to a difficult selling environment as a result of continued uncertainty and weakness in the economy that is resulting in delayed software purchases. Our SCM business unit constituted 88% and 92% of total license fee revenues for the three months ended July 31, 2013 and 2012, respectively. Our ERP business unit license fee revenues decreased by 5% for the three months ended July 31, 2013 when compared to the same period in the prior year, primarily due to decreased license fee sales to the apparel and retail industries.

The direct sales channel provided approximately 72% of license fee revenues for the three months ended July 31, 2013, compared to approximately 73% in the comparable quarter a year ago. The slight decrease in the proportion of sales by our direct sales channel was due to a lower decrease in license fee revenue from Logility's indirect sales channel, which primarily sells software products through its DMI subsidiary to small and midsize companies. For the three months ended July 31, 2013 and 2012, our margins after commissions on direct sales were approximately 86% and 87%, respectively. The margins decreased slightly in the current period due to the mix of sales commission rates based on each individual salespersons' quotas and related achievement. For the three months ended July 31, 2013 and 2012, our margins after commissions on indirect sales were approximately 50% and 48%, respectively. The indirect channel margins for the current quarter 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 July 31,
                                             2013             2012       % Change
                                                (in thousands)
      Enterprise Resource Planning        $     1,193       $  1,924           (38 )%
      Supply Chain Management                   3,670          3,544             4
      IT Consulting                             6,365          7,027            (9 )

      Total services and other revenues   $    11,228       $ 12,495           (10 )%

For the three months ended July 31, 2013, services revenue decreased by 10% primarily due to decreased services revenues from our ERP and IT Consulting business and, to a lesser extent, an improvement in our SCM implementation services segment. For the three months ended July 31, 2013, services and other revenues from our ERP segment decreased by 38% when compared to the same period in the prior year due to decreased project work particularly at NGC. These decreases in the current quarter are due to lower license fee sales in recent periods, which tend to decrease services implementation revenue. For the three months ended July 31, 2013, our IT Consulting segment's revenues decreased 9% when compared to the prior year period due to a decline in IT staffing and project work from customers, particularly its largest customer, The Home Depot, when compared to the same period last year. We have observed that there is a tendency for services and other revenues, other than from IT Consulting, 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.


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Maintenance Revenue



                                              Three Months Ended July 31,
                                         2013              2012         % Change
                                             (in thousands)
       Enterprise Resource Planning   $     1,157       $     1,089             6 %
       Supply Chain Management              7,715             7,248             6

       Total maintenance revenues     $     8,872       $     8,337             6 %

For the three months ended July 31, 2013, maintenance revenues increased 6% when compared to the same period in the prior year, due primarily improved maintenance renewal rates. Logility accounted for 87% of total maintenance revenues for the three months ended July 31, 2013 and 2012. 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.

GROSS MARGIN

The following table provides both dollar amounts (in thousands) and percentage
measures of gross margin:



                                                   Three Months Ended July 31,
                                               2013                   2012
       Gross margin on license fees:         $  2,057       64 %    $  3,713       73 %
       Gross margin on services and other:      3,188       28         3,872       31
       Gross margin on maintenance:             6,910       78         6,425       77

       Total gross margin:                   $ 12,155       52 %    $ 14,010       54 %

For the three months ended July 31, 2013, total gross margin percentage decreased when compared to the same period in the prior year primarily due to a decrease in the license fee gross margin and, to a lesser extent, lower services and other gross margins.

Gross Margin on License Fees

License fee gross margin percentage for the three months ended July 31, 2013 decreased nine percentage points when compared to the same period in the prior year primarily due to lower license fees. 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, amortization of acquired software and the sales mix between our direct and indirect channels.

Gross Margin on Services and Other

For the three months ended July 31, 2013, the gross margin percentage on services and other revenue decreased three percentage points when compared to the same period in the prior year primarily due to lower services revenue that resulted in fewer implementation projects, particularly in our ERP unit. Services and other gross margin 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 inelastic in the short term. The decline is also due to a decline in IT staffing and project work from customers particularly its largest customer, The Home Depot, when compared to the same period last year due to timing of projects.

Gross Margin on Maintenance

Maintenance gross margin percentage for the three months ended July 31, 2013 increased when compared to the same period in the prior year primarily due to an improvement in maintenance retention. Maintenance gross margin normally is directly related to the level of maintenance revenues. The primary component of cost of maintenance revenue is maintenance staffing, which is relatively inelastic in the short term.


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EXPENSES



                                                                  Three Months Ended July 31,
                                                                                        % of Revenue
                                                           2013          2012         2013        2012
                                                             (in thousands)
Research and development                                 $   2,100      $ 2,106           9 %         8 %
Sales and marketing                                          4,394        4,821          19          19
General and administrative                                   3,153        3,110          14          12
Amortization of acquisition-related intangible assets          125          125           1          -
Provision for doubtful accounts                                 -           127          -           -
. . .
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