8-K: American Software Reports Mixed Q3 Results: Subscription Growth Up, Overall Revenue Down

American Software's third quarter fiscal year 2024 saw a 9% increase in subscription fees but a 7% decrease in total revenue, alongside a decline in profitability.

Summary

• American Software reported its preliminary financial results for the third quarter of fiscal year 2024, which ended on January 31, 2024.
• Subscription fees increased by 9% to $14.1 million compared to $13.0 million in the same quarter last year.
• Total revenues decreased by 7% to $25.5 million, down from $27.4 million in the prior year, primarily due to a decline in services and maintenance revenue.
• Recurring revenue from maintenance and cloud subscriptions reached $21.8 million, representing 86% of total revenues, compared to $21.7 million or 79% in the same period last year.
• Maintenance revenues decreased by 11% to $7.7 million, partly due to the divestiture of the Transportation group in November 2023.
• Professional services and other revenues declined by 28% to $3.4 million, driven by lower project work and outsourcing of some services.
• Software license revenues decreased significantly to $0.3 million from $1.0 million, reflecting a shift towards cloud services.
• Operating earnings decreased to $0.8 million from $2.7 million in the same quarter last year.
• GAAP net earnings from continuing operations were $4.2 million, or $0.12 per diluted share, compared to $3.2 million, or $0.09 per diluted share, in the prior year.
• Adjusted net earnings from continuing operations were $6.3 million, or $0.19 per diluted share, compared to $4.4 million, or $0.13 per diluted share, in the same period last year.
• EBITDA from continuing operations was $2.4 million, down from $3.5 million in the prior year.
• Adjusted EBITDA from continuing operations was $4.0 million, compared to $4.8 million in the same period last year.
• For the nine months ended January 31, 2024, subscription fees increased by 10% to $41.2 million, while total revenues decreased by 5% to $77.1 million.
• The company's cash and investments stand at approximately $78.3 million.
• The company repurchased approximately 516,000 shares for $5.4 million during the quarter, completing the buyback program with a total of 946,000 shares for $10.2 million.

Sentiment

Score: 5

Explanation: The sentiment is neutral to slightly negative. While there are positives like subscription growth and a strong cash position, the overall revenue decline and decreased profitability are concerning. The company is on track with guidance, but the results show some weakness.

Positives

• Subscription fee revenue increased by 9% in the third quarter and 10% year-to-date, showing strong growth in cloud services.
• Recurring revenue streams now make up 86% of total revenue, indicating a stable and predictable income base.
• Adjusted net earnings per share increased by 46% in the third quarter and 26% year-to-date, demonstrating improved profitability.
• The company has a strong cash position with $78.3 million in cash and investments.
• The company completed a share buyback program, returning capital to shareholders.

Negatives

• Total revenues decreased by 7% in the third quarter and 5% year-to-date, primarily due to declines in services and maintenance revenue.
• Operating earnings decreased significantly by 70% in the third quarter and 55% year-to-date.
• EBITDA and adjusted EBITDA decreased by 31% and 16% respectively in the third quarter and 29% and 15% year-to-date.
• Professional services revenue declined by 28% in the third quarter and 29% year-to-date, indicating a weakness in project-based work.
• Software license revenue decreased by 73% in the third quarter and 61% year-to-date, reflecting a shift away from traditional licenses.

Risks

• The company faces risks related to economic uncertainty, which could impact business recovery and revenue patterns.
• Dependence on specific market segments or customers could pose a risk to revenue stability.
• Competitive pressures and market acceptance of products and services are ongoing concerns.
• Technological complexity and potential software errors could lead to product liability or warranty claims.
• The company faces challenges in integrating acquired product lines and companies.

Future Outlook

American Software reaffirmed its fiscal year 2024 financial outlook, projecting total revenues of $100.0 million to $104.0 million, including total recurring revenues of $85.0 million to $88.0 million, and adjusted EBITDA of $14.5 million to $16.0 million.

Management Comments

• Allan Dow, CEO and President of American Software, stated that the company delivered solid third quarter results and remains on track to achieve its fiscal 2024 guidance.
• Allan Dow also noted an increase in activity with both existing and prospective customers adopting their AI-first supply chain planning solutions.

Industry Context

The results reflect a broader industry trend of shifting towards cloud-based subscription models, with a decline in traditional software licenses and professional services. The company's focus on AI-driven supply chain solutions aligns with the increasing demand for advanced technologies in supply chain management.

Comparison to Industry Standards

• While American Software's subscription revenue growth of 9% is positive, it is important to compare this to other SaaS companies in the supply chain space. For example, companies like Kinaxis and Anaplan have shown higher growth rates in recent quarters, indicating a more aggressive expansion in the market.
• The decline in professional services revenue by 28% is a concern, as many software companies rely on services to drive adoption and implementation. This contrasts with companies like SAP and Oracle, which have large professional services divisions that contribute significantly to their revenue.
• American Software's adjusted EBITDA margin of 16% is lower than some of its peers in the software industry. Companies like Salesforce and Workday often report adjusted EBITDA margins above 20%, indicating higher profitability.
• The company's focus on AI and machine learning in its Logility platform is in line with industry trends, but the impact of these technologies on revenue and profitability needs to be closely monitored against competitors like Blue Yonder and Manhattan Associates, who are also investing heavily in AI.

Stakeholder Impact

• Shareholders may be concerned about the decrease in total revenue and profitability, but encouraged by the subscription growth and share buyback.
• Employees may be impacted by the shift in revenue streams and the company's focus on AI-driven solutions.
• Customers will benefit from the company's focus on AI and advanced supply chain planning tools.
• Suppliers may be affected by the company's efforts to improve supply chain transparency and compliance.

Next Steps

• The company will continue to focus on growing its subscription revenue and expanding its AI-driven supply chain solutions.
• American Software will aim to improve its professional services revenue and overall profitability.
• The company will monitor the impact of its AI investments on revenue and profitability.

Key Dates

Keywords

Subscription Fees, Cloud Services, EBITDA, Adjusted EBITDA, Recurring Revenue, Software Licenses, Supply Chain, Logility, AI, Financial Results