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AMSWA > SEC Filings for AMSWA > Form 10-Q on 12-Mar-2014All Recent SEC Filings

Show all filings for AMERICAN SOFTWARE INC

Form 10-Q for AMERICAN SOFTWARE INC


12-Mar-2014

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.

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.

In January 2014, the International Monetary Fund ("IMF") provided an update to the World Economic Outlook ("WEO") for the world economic growth forecast. They noted that, "Global activity strengthened during the second half of 2013, as anticipated in the October 2013 World Economic Outlook (WEO). Activity is expected to improve further in 2014-15, largely on account of recovery in the advanced economies. Global growth is now projected to be slightly higher in 2014, at around 3.7 percent, rising to 3.9 percent in 2015, a broadly unchanged outlook from the October 2013 WEO. But downward revisions to growth forecasts in some economies highlight continued fragilities, and downside risks remain."

For the remainder of fiscal 2014, we expect the world economy to improve when compared to the prior year, which could result in an improved selling environment. Overall information technology spending continues to be relatively weak as a result of the current global economic environment when compared to the period prior to the last recession. However, we noted some improvement in sales activity in the U.S. and Europe, the Middle East, and Africa during the second and third quarter of fiscal 2014. 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.


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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 current economic conditions have 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, as well as its subsidiary, Demand Management, Inc. ("DMI"), which together provide 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 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.


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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 January 31, 2014 and 2013:



                                        Three Months Ended
                                           January 31,
                                                                             Pct. Change in
                                   Percentage of Total Revenues                 Dollars
                                               2014                               2013                  2014 vs 2013
Revenues:
License                                                       20 %                        21 %                      2 %
Services and other                                            42                          42                        6
Maintenance                                                   38                          37                        8

Total revenues                                               100                         100                        6

Cost of revenues:
License                                                        3                           8                      (60 )
Services and other                                            32                          32                        5
Maintenance                                                    8                           8                        8

Total cost of revenues                                        43                          48                       (5 )

Gross margin                                                  57                          52                       16

Operating expenses:
Research and development                                       9                           9                        6
Sales and marketing                                           21                          21                        3
General and
administrative                                                12                          11                       11
Amortization of
acquisition-related
intangibles                                                    1                           1                       -
Provision for doubtful
accounts                                                      -                           -                        nm

Total operating expenses                                      43                          42                        7

Operating income                                              14                          10                       54

Other income (expense):
Interest income                                                1                           1                      (21 )
Other, net                                                    -                            1                       nm

Earnings before income
taxes                                                         15                          12                       36
Income tax expense                                            (5 )                        (3 )                    107

Net earnings                                                  10 %                         9 %                     16 %

nm-not meaningful


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Nine-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 nine months ended January 31, 2014 and 2013:

                                                          Nine Months Ended January 31,
                                                                                           Pct. Change in
                                             Percentage of Total Revenues                     Dollars
                                            2014                      2013                  2014 vs 2013
Revenues:
License                                           19 %                      21 %                        (7 )%
Services and other                                44                        45                          (4 )
Maintenance                                       37                        34                           7

Total revenues                                   100                       100                          (1 )

Cost of revenues:
License                                            4                         6                         (32 )
Services and other                                32                        32                          (1 )
Maintenance                                        8                         8                           3

Total cost of revenues                            44                        46                          (4 )

Gross margin                                      56                        54                           2

Operating expenses:
Research and development                           9                         9                          (3 )
Sales and marketing                               19                        19                          (1 )
General and administrative                        12                        11                           5
Amortization of
acquisition-related intangibles                    1                         1                          -
Provision for doubtful accounts                   -                         -                           nm

Total operating expenses                          41                        40                           -

Operating income                                  15                        14                          10
Other income (expense):
Interest income                                    1                         1                         (21 )
Other, net                                        -                         -                           nm

Earnings before income taxes                      16                        15                           6
Income tax expense                                (6 )                      (5 )                         6

Net earnings                                      10 %                      10 %                         6 %

nm-not meaningful

COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED JANUARY
31, 2014 AND 2013

Revenue



                                           Three Months Ended January 31,
                                                                     % of Total Revenues
                            2014         2013       % Change         2014             2013
                             (in thousands)
     License              $  5,002     $  4,926             2 %           20 %           21 %
     Services and other     10,167        9,564             6 %           42 %           42 %
     Maintenance             9,258        8,586             8 %           38 %           37 %

     Total revenues       $ 24,427     $ 23,076             6 %          100 %          100 %


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                                            Nine Months Ended January 31,
                                                                      % of Total Revenues
                           2014         2013        % Change          2014             2013
                            (in thousands)
    License              $ 14,412     $ 15,512             (7 )%           19 %           21 %
    Services and other     33,057       34,371             (4 )%           44 %           45 %
    Maintenance            27,207       25,370              7 %            37 %           34 %

    Total revenues       $ 74,676     $ 75,253             (1 )%          100 %          100 %

For the three months ended January 31, 2014, the 6% increase in revenues over the three months ended January 31, 2013 was attributable primarily to an 8% increase in in maintenance revenues, a 6% increase in services and other revenues and a 2% increase in license fee revenues. For the nine months ended January 31, 2014, the 1% decrease in revenues over the nine months ended January 31, 2013 was attributable primarily to a 7% decrease in license revenues and a 4% decrease in services and other revenues which was partially offset by a 7% increase in maintenance revenues.

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.

International revenues represented approximately 17% of total revenues in the three and nine months ended January 31, 2014 and represented approximately 17% and 14% of total revenues in the three and nine months ended January 31, 2013, 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 January 31,
                                         2014               2013         % Change
                                             (in thousands)
      Enterprise Resource Planning   $        421       $        412             2 %
      Supply Chain Management               4,581              4,514             1 %

      Total license revenues         $      5,002       $      4,926             2 %


                                             Nine Months Ended January 31,
                                         2014               2013         % Change
                                             (in thousands)
      Enterprise Resource Planning   $      1,821       $      1,404            30 %
      Supply Chain Management              12,591             14,108           (11 )%

      Total license revenues         $     14,412       $     15,512            (7 )%

For the three and nine months ended January 31, 2014, license fee revenues increased 2% and decreased 7%, 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 an increase in license fee close rates in the current quarter when compared to the same period last year due to an improvement in business investment activity toward the end of the quarter. In the nine months ended January 31, 2014, license fee revenues from our SCM business unit decreased 11% when compared to the corresponding periods in the prior year due to poor close activity in the first quarter of fiscal 2014 as a result overall uncertainty in global economic markets at the time. Our SCM business unit constituted 92% and 87% of total license fee revenues for the three and nine months ended January 31, 2014, respectively, compared to 92% and 91% for the three and nine months ended January 31, 2013, respectively. Our ERP business unit license fee revenues increased by 2% and 30% for the three and nine months ended January 31, 2014, respectively, when compared to the same periods in the prior year, primarily due to an increase in license fee sales to the apparel and retail industries due to improved sales execution and sales environment.


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The direct sales channel provided approximately 79% and 69% of license fee revenues for the three and nine months ended January 31, 2014, respectively, compared to approximately 68% and 72% of license fee revenues for the three and nine months ended January 31, 2013, respectively. The increase 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 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 nine months ended January 31, 2014, our margins after commissions on direct sales were approximately 83% and 84% compared to 81% and 85% for the three and nine months ended January 31, 2013, respectively. For the three months ended January 31, 2014 compared to the same period in the prior year our direct margins increased due to the concentration (or mix) of sales staff achieving certain commission rate levels when compared to the same period last year. For the three and nine months ended January 31, 2014, our margins after commissions on indirect sales were approximately 45% and 52%, respectively, compared to 32% and 41% for the three and nine months ended January 31, 2013, respectively. The indirect channel margins decreased for the three months ended January 31, 2014 and increased for the nine months ended January 31, 2014 when compared to the same periods 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 January 31,
                                           2014               2013         % Change
                                               (in thousands)
   Enterprise Resource Planning        $      1,009       $      1,079            (6 )%
   Supply Chain Management                    3,269              2,906            12 %
   IT Consulting                              5,889              5,579             6 %

   Total services and other revenues   $     10,167       $      9,564             6 %


                                               Nine Months Ended January 31,
                                           2014               2013         % Change
                                               (in thousands)
   Enterprise Resource Planning        $      3,338       $      4,847           (31 )%
   Supply Chain Management                   10,764             10,481             3 %
   IT Consulting                             18,955             19,043             0 %

   Total services and other revenues   $     33,057       $     34,371            (4 )%

For the three months ended January 31, 2014, services revenue increased by 6%, due to increase from our SCM implementation services and IT Consulting business segments, partially offset by a decrease in ERP. For the nine months ended January 31, 2014, services revenue decreased by 4%, due primarily to decrease in our ERP business segment partially offset by an increase from our SCM business . . .

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