American Software(AMSWA) - 2023 Q1 - Quarterly Report

PART I—FINANCIAL INFORMATION This section presents the unaudited financial information for American Software, Inc. for the quarter ended July 31, 2022 Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements for American Software, Inc., including the balance sheets, statements of operations, shareholders' equity, and cash flows, along with detailed notes on accounting policies, revenue recognition, acquisitions, and other financial disclosures for the quarter ended July 31, 2022 Condensed Consolidated Balance Sheets This statement provides a snapshot of the company's financial position, including assets, liabilities, and equity | Metric | July 31, 2022 (in thousands) | April 30, 2022 (in thousands) | | :----- | :--------------------------- | :---------------------------- | | Total Assets | $187,599 | $192,835 | | Cash and cash equivalents | $97,878 | $110,690 | | Total Liabilities | $54,418 | $59,859 | | Total Shareholders' Equity | $133,181 | $132,976 | Condensed Consolidated Statements of Operations This statement details the company's revenues, expenses, and net earnings over the reporting period | Metric | Three Months Ended July 31, 2022 (in thousands) | Three Months Ended July 31, 2021 (in thousands) | % Change YoY | | :----- | :---------------------------------------------- | :---------------------------------------------- | :----------- | | Total Revenue | $31,296 | $29,271 | 7% | | Subscription fees | $12,062 | $9,788 | 23% | | Operating Income | $2,557 | $1,773 | 44% | | Net Earnings | $2,133 | $2,947 | (28)% | | Basic EPS | $0.06 | $0.09 | (33)% | | Diluted EPS | $0.06 | $0.09 | (33)% | Condensed Consolidated Statements of Shareholders' Equity This statement outlines changes in the company's equity accounts over the reporting period | Metric | July 31, 2022 (in thousands) | April 30, 2022 (in thousands) | | :----- | :--------------------------- | :---------------------------- | | Total Shareholders' Equity | $133,181 | $132,976 | | Net earnings | $2,133 | N/A | | Dividends declared | $(3,705) | N/A | | Stock-based compensation | $1,306 | N/A | Condensed Consolidated Statements of Cash Flows This statement summarizes cash flows from operating, investing, and financing activities | Cash Flow Activity | Three Months Ended July 31, 2022 (in thousands) | Three Months Ended July 31, 2021 (in thousands) | | :----------------- | :---------------------------------------------- | :---------------------------------------------- | | Net cash (used in) provided by operating activities | $(1,518) | $3,034 | | Net cash used in investing activities | $(8,072) | $(302) | | Net cash (used in) provided by financing activities | $(3,222) | $464 | | Net change in cash and cash equivalents | $(12,812) | $3,196 | Notes to Condensed Consolidated Financial Statements – Unaudited This section provides detailed explanations and disclosures supporting the condensed consolidated financial statements A. Presentation and Summary of Significant Accounting Policies This note outlines the basis of financial statement preparation and key accounting principles applied - The unaudited Condensed Consolidated Financial Statements are prepared in accordance with U.S. GAAP for interim financial information and SEC rules, relying on management estimates and assumptions[23][24] - The company is evaluating the potential effects of ASU 2021-08, which requires recognizing and measuring contract assets and liabilities acquired in a business combination in accordance with Topic 606[26] B. Revenue Recognition This note details the company's policies and methods for recognizing revenue from various sources - Revenue is recognized when control of promised goods or services is transferred to clients, following a five-step process, from software licenses, maintenance, professional services, and Software-as-a-Service (SaaS)[27][29] - Subscription fees (SaaS) are recognized ratably over the arrangement term, while professional services revenue is recognized over time as performed[30][32] | Metric | July 31, 2022 (in thousands) | April 30, 2022 (in thousands) | | :----- | :--------------------------- | :---------------------------- | | Deferred revenue, current | $38,299 | $41,953 | | Total deferred revenue | $38,299 | $41,953 | - Remaining performance obligations totaled approximately $125 million as of July 31, 2022, with 47% expected to be recognized over the next 12 months[38] | Revenue by Geography | Three Months Ended July 31, 2022 (in thousands) | Three Months Ended July 31, 2021 (in thousands) | | :------------------- | :---------------------------------------------- | :---------------------------------------------- | | Domestic | $25,659 | $24,427 | | International | $5,637 | $4,844 | | Total Revenue | $31,296 | $29,271 | - Total deferred sales commissions were $3.3 million at July 31, 2022, down from $3.4 million at April 30, 2022, with amortization included in sales and marketing expense[42] C. Declaration of Dividend Payable This note discloses the details of quarterly cash dividends declared by the Board of Directors - On May 25, 2022, the Board of Directors declared a quarterly cash dividend of $0.11 per share for Class A and Class B common stock, paid on August 26, 2022[43] D. Earnings Per Common Share This note explains the calculation of basic and diluted earnings per share for common stock - The company uses the 'two-class' method for basic EPS and diluted Class B shares, and the 'if-converted' method for diluted Class A shares, due to its two classes of common stock with different dividend and convertibility rights[44][46][47] | EPS Type | Three Months Ended July 31, 2022 | Three Months Ended July 31, 2021 | | :------- | :------------------------------- | :------------------------------- | | Basic EPS (Class A & B) | $0.06 | $0.09 | | Diluted EPS (Class A) | $0.06 | $0.09 | | Diluted EPS (Class B) | $0.06 | $0.09 | - Options to purchase 3,227,891 Class A Common Shares (2022) and 315,924 shares (2021) were excluded from diluted EPS computation because their exercise prices exceeded the average market price[54] E. Acquisitions This note provides details on recent business acquisitions, including purchase price and strategic rationale - Effective June 28, 2022, the company acquired certain assets of Starboard Solutions Corp., an innovator of supply chain network design software, for approximately $6.5 million in cash[56][59] - The acquisition includes potential contingent earnout payments up to $6.0 million over a three-year period, based on subscription revenue targets[59] - The acquisition aims to integrate Starboard's unique supply chain visualization and optimization solution into the Logility Digital Supply Chain Platform, enhancing integrated business planning[57][58] - A preliminary purchase price allocation assigned $3.32 million to goodwill, deductible for income tax purposes and assigned to the Supply Chain Management segment[59][60] F. Stock-Based Compensation This note describes the company's stock option plans and accounting treatment for stock-based compensation | Metric | Three Months Ended July 31, 2022 | Three Months Ended July 31, 2021 | | :----- | :------------------------------- | :------------------------------- | | Options granted (Class A shares) | 1,362,000 | 377,500 | | Stock option compensation cost | ~$1.3 million | ~$0.8 million | - Unrecognized compensation cost related to unvested stock option awards was approximately $17.0 million as of July 31, 2022, expected to be recognized over a weighted average period of 2.06 years[63] G. Fair Value of Financial Instruments This note outlines the valuation methods and hierarchy used for the company's financial instruments - The company measures investments using a fair value hierarchy (Level 1, 2, 3), prioritizing market price observability[64] - Cash equivalents and marketable securities are primarily valued using Level 1 inputs (quoted prices in active markets)[66] | Asset | July 31, 2022 (in thousands) | April 30, 2022 (in thousands) | | :---- | :--------------------------- | :---------------------------- | | Cash equivalents | $91,848 | $98,459 | | Marketable securities | $16,954 | $16,826 | | Total | $108,802 | $115,285 | H. Stock Repurchases This note details the company's stock repurchase programs and shares bought back - The Board of Directors authorized the repurchase of an additional 2.0 million shares of Class A common stock on August 19, 2002[69] - As of July 31, 2022, a total of 4,588,632 shares of common stock have been repurchased under all authorized plans at a cost of approximately $25.6 million[70] I. Comprehensive Income This note clarifies the presentation of comprehensive income in relation to net earnings - Condensed consolidated statements of comprehensive income are not included as comprehensive income and net earnings are substantially the same[72] J. Industry Segments This note provides financial information broken down by the company's operating segments - The company manages its business through three operating segments: Supply Chain Management (SCM), Information Technology Consulting (IT Consulting), and Other (including legacy ERP and unallocated corporate expenses)[74][75] | Segment | Revenue (2022, in thousands) | Revenue (2021, in thousands) | Operating Income (2022, in thousands) | Operating Income (2021, in thousands) | | :------ | :--------------------------- | :--------------------------- | :------------------------------------ | :------------------------------------ | | Supply Chain Management | $26,182 | $24,251 | $7,179 | $5,356 | | IT Consulting | $4,515 | $4,476 | $215 | $163 | | Other | $599 | $544 | $(4,837) | $(3,746) | K. Major Clients This note discloses information regarding client concentration and revenue dependency - No single client accounted for more than 10% of total revenue for the three months ended July 31, 2022, or 2021[77] L. Contingencies This note addresses potential future obligations arising from past events, such as indemnifications - The company indemnifies clients against intellectual property infringement claims and warrants product functionality, but historically has not incurred material costs and expects none in the future[79][80] M. Subsequent Event This note reports significant events that occurred after the balance sheet date but before financial statement issuance - On August 18, 2022, the Board of Directors declared a quarterly cash dividend of $0.11 per share for Class A and Class B common stock, payable on December 2, 2022[81] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance, liquidity, and capital resources for the three months ended July 31, 2022. It discusses revenue and expense trends, segment performance, economic outlook, and critical accounting policies, highlighting a 7% increase in total revenue driven by subscription fees, but a 28% decrease in net earnings FORWARD-LOOKING STATEMENTS This section cautions readers about statements regarding future events that are subject to risks and uncertainties - This report contains forward-looking statements regarding future financial performance, business strategy, and other events, which are subject to uncertainties and risks[84] - Actual results may differ materially from those anticipated, and the company undertakes no obligation to update these statements[85] ECONOMIC OVERVIEW This section discusses the global economic environment and its potential impact on the company's operations and strategy - The company is cautious about the global economic recovery, noting that uncertain conditions and complex supply chain challenges may drive businesses to invest in solutions that improve operating margins and offer rapid return on investment, such as their supply chain solutions[86] - The IMF's July 2022 World Economic Outlook projects global growth to slow from 6.1% in 2021 to 3.2% in 2022 and 2.9% in 2023, with global inflation anticipated to reach 6.6% in advanced economies and 9.5% in emerging markets this year[90] COMPANY OVERVIEW This section provides a general description of the company's business, segments, products, and strategic focus - American Software operates through three segments: Supply Chain Management (SCM), Information Technology Consulting (IT Consulting), and Other (legacy ERP and corporate overhead), with SCM being the core market[91] - The Logility Digital Supply Chain Platform leverages AI and machine learning to optimize supply chain processes, addressing challenges like consumer expectations and talent shortages[92][93][94] - The company serves approximately 860 clients in 80 countries, with revenue derived from subscriptions, software licenses, maintenance, and services[96][97] - Primary opportunities include selective acquisitions, while key risks involve dependence on capital spending, acquisition integration challenges, competitive technologies, and market competition[98][99][100] COMPARISON OF RESULTS OF OPERATIONS This section analyzes the company's financial performance by comparing key operational metrics over different periods | Metric | Three Months Ended July 31, 2022 | Three Months Ended July 31, 2021 | % Change YoY | | :----- | :------------------------------- | :------------------------------- | :----------- | | Total Revenue | $31,296k | $29,271k | 7% | | Gross Margin | 60% | 57% | +3 ppts | | Operating Income | $2,557k | $1,773k | 44% | | Net Earnings | $2,133k | $2,947k | (28)% | REVENUE This section analyzes the company's revenue streams and their year-over-year changes | Revenue Source | Three Months Ended July 31, 2022 (in thousands) | Three Months Ended July 31, 2021 (in thousands) | % Change YoY | | :------------- | :---------------------------------------------- | :---------------------------------------------- | :----------- | | Subscription fees | $12,062 | $9,788 | 23% | | License | $320 | $492 | (35)% | | Professional services and other | $10,009 | $9,529 | 5% | | Maintenance | $8,905 | $9,462 | (6)% | | Total Revenue | $31,296 | $29,271 | 7% | - International revenue increased to approximately 18% of total revenue in the three months ended July 31, 2022, up from 17% in the prior year[108] Subscription Fees This subsection details the growth and drivers of subscription fee revenue - Subscription fees revenue increased 23% year-over-year, driven by an increase in contracts, including those with higher cloud services annual contract value (ACV), and multi-year contracts, reflecting a successful transition to the cloud subscription model[109] License Revenue This subsection examines trends and factors influencing software license revenue - License fee revenue decreased 35% year-over-year, primarily attributable to the SCM segment, with the majority of current license revenue from existing on-premise clients expanding usage[110] - The direct sales channel accounted for approximately 100% of license fee revenues in the three months ended July 31, 2022, with margins after commissions increasing to approximately 90%[111] Professional Services and Other Revenue This subsection discusses the performance of professional services and other revenue streams - Professional services and other revenue increased 5% year-over-year, driven by growth across the Other segment (+26%), SCM segment (+8%), and IT Consulting segment (+1%), due to increased project work and higher implementation activity[113] Maintenance Revenue This subsection analyzes the changes in revenue generated from maintenance contracts - Maintenance revenue decreased 6% year-over-year, primarily in the SCM segment, due to a normal client attrition rate[114] GROSS MARGIN This section analyzes the company's gross margin performance across different revenue categories - Total gross margin percentage increased by 3 percentage points to 60% year-over-year, driven by higher margins across subscription fees, license fees, maintenance, and professional services[117] Gross Margin on Subscription Fees This subsection details the gross margin percentage for subscription fees revenue - Gross margin percentage on subscription fees revenue increased from 67% to 70% year-over-year, primarily due to increased subscription revenue and related cost efficiencies[117][118] Gross Margin on License Fees This subsection examines the gross margin percentage for license fee revenue - License fee gross margin percentage increased by 4 percentage points to 72% year-over-year, influenced by the level of license fee revenue, fixed computer software amortization, and the sales mix between direct and indirect channels[117][119] Gross Margin on Professional Services and Other This subsection discusses the gross margin percentage for professional services and other revenue - Gross margin percentage on professional services and other revenue increased to 27% year-over-year, driven by higher revenues, improved utilization, and better billing rates, despite a slight decrease in IT Consulting segment margin[117][120] Gross Margin on Maintenance This subsection analyzes the gross margin percentage for maintenance revenue - Maintenance gross margin percentage increased from 79% to 82% year-over-year, primarily due to increased maintenance revenue and personnel cost management[117][121] EXPENSES This section provides an analysis of the company's operating expenses, including R&D, sales, and G&A | Expense Category | Three Months Ended July 31, 2022 (in thousands) | Three Months Ended July 31, 2021 (in thousands) | % Change YoY | | :--------------- | :---------------------------------------------- | :---------------------------------------------- | :----------- | | Research and development | $4,454 | $4,424 | 1% | | Sales and marketing | $5,912 | $6,120 | (3)% | | General and administrative | $5,765 | $4,534 | 27% | | Amortization of acquisition-related intangible assets | $24 | $53 | (55)% | Research and Development This subsection details changes in research and development costs and their drivers - Total product research and development costs increased by 1% year-over-year, primarily due to an increase in the use of third-party contractors[126] - Amortization of capitalized software development costs decreased 49% year-over-year as some projects were fully amortized[126] Sales and Marketing This subsection analyzes trends in sales and marketing expenditures - Sales and marketing expenses decreased from 21% to 19% of revenue year-over-year, attributed to marketing cost containment[127] General and Administrative This subsection discusses changes in general and administrative expenses - General and administrative expenses increased from 15% to 18% as a percentage of revenue year-over-year, primarily due to higher personnel costs, third-party contractors, and insurance[128] Operating Income/(Loss) This section analyzes the operating income or loss across the company's business segments | Segment | Three Months Ended July 31, 2022 (in thousands) | Three Months Ended July 31, 2021 (in thousands) | % Change YoY | | :------ | :---------------------------------------------- | :---------------------------------------------- | :----------- | | Supply Chain Management | $7,179 | $5,356 | 34% | | IT Consulting | $215 | $163 | 32% | | Other | $(4,837) | $(3,746) | 29% | | Total Operating Income | $2,557 | $1,773 | 44% | - SCM segment operating income increased by 34% due to improved gross margins, while IT Consulting segment operating income grew by 32% due to higher margin project work and decreased expenses[130][131] - The Other segment's operating loss increased by 29% primarily due to an increase in variable compensation and stock option expenses[131] Other Income This section details non-operating income and expenses, including investment gains and losses - Other income decreased year-over-year, mainly due to lower unrealized gains from investments ($285k), higher exchange rate losses ($134k), and higher realized investment losses ($30k), partially offset by a gain on interest income of $116k[132] - Investments generated an annualized yield of approximately 1.55% for the three months ended July 31, 2022, compared to approximately 1.65% in the prior year[132] Income Taxes This section explains the company's income tax expense or benefit and effective tax rate - The company recorded an income tax expense of $543,000 for the three months ended July 31, 2022, compared to an income tax benefit of $737,000 in the prior year[134] - This shift was primarily due to lower discrete stock compensation benefits ($34k in 2022 vs $1.2 million in 2021) and a reduction in research and development credits (4.0% reduction in effective tax rate in 2022 vs 5.7% in 2021)[134] Operating Pattern This section describes the typical quarterly fluctuations in the company's operating results - The company experiences an irregular pattern of quarterly operating results due to fluctuations in software license and subscription contract volumes and the timing of revenue recognition, a pattern expected to continue[135] LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION This section assesses the company's ability to meet its short-term and long-term financial obligations - The company primarily funds operations and capital expenditures with cash generated from operating activities and has no debt obligations or off-balance sheet financing arrangements[136] - Total cash and investments were $114.8 million as of July 31, 2022, with a current ratio of 2.7 to 1 and Days Sales Outstanding (DSO) of 68 days[141][142][143] - Management believes current liquidity and capital resources are sufficient to satisfy anticipated requirements for at least the next twelve months[143] Sources and Uses of Cash This subsection details the primary sources and applications of cash during the reporting period | Cash Flow Activity | Three Months Ended July 31, 2022 (in thousands) | Three Months Ended July 31, 2021 (in thousands) | | :----------------- | :---------------------------------------------- | :---------------------------------------------- | | Net cash (used in) provided by operating activities | $(1,518) | $3,034 | | Net cash used in investing activities | $(8,072) | $(302) | | Net cash (used in) provided by financing activities | $(3,222) | $464 | | Net change in cash and cash equivalents | $(12,812) | $3,196 | - The net decrease in cash from operating activities was primarily due to changes in deferred revenue, client accounts receivables, and lower net earnings[138] - Increased cash used in investing activities was mainly due to the acquisition of Starboard and increased purchases of property and equipment[139] - Increased cash used in financing activities was primarily due to higher dividends paid, partially offset by lower proceeds from stock option exercises[139] CRITICAL ACCOUNTING POLICIES AND ESTIMATES This section highlights accounting policies requiring significant management judgment and estimates - The preparation of financial statements requires significant management judgments and estimates, particularly in revenue recognition, which affects reported assets, liabilities, revenue, and expenses[146] Revenue Recognition This subsection elaborates on the critical judgments involved in the company's revenue recognition policy - Critical judgments in applying ASC 606 relate to determining distinct performance obligations and evaluating the standalone selling price (SSP) for each, which can impact the timing of revenue recognition[147][149] - For on-premise licenses, where SSP is not readily discernible, a residual approach is used to allocate the transaction price after other performance obligations are assigned their SSPs[150] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section discusses the company's exposure to market risks, including foreign currency, interest rates, and inflation. It notes foreign currency exchange rate losses from international sales, management of interest rate risk through a high-quality, short-maturity investment portfolio, and the impact of inflation on operational expenses Foreign Currency This section describes the company's exposure to foreign currency exchange rate fluctuations - Approximately 18% of revenue is generated outside the United States, with sales denominated in various foreign currencies, leading to foreign currency exchange rate losses[152] - The company recorded an exchange rate loss of approximately $0.2 million for the three months ended July 31, 2022, and does not engage in hedging activities[152] Interest Rates and Other Market Risks This section details the company's management of interest rate risk and other market-related exposures - The company has no debt and manages interest rate risk by maintaining an investment portfolio of high-credit-quality, short-average-maturity instruments, including money-market instruments and various debt obligations[153] - The fair market value of these investments was approximately $108.8 million as of July 31, 2022[153] - Risks include declining investment income if interest rates fall and potential principal losses if fixed-rate securities are sold prematurely due to rising interest rates[155] Inflation This section discusses the impact of inflation on the company's costs and pricing strategies - Inflation has affected the company through increased costs of employee compensation and other operational expenses[156] - The company attempts to recover these increased costs by periodically increasing prices, to the extent permitted by the marketplace[156] Item 4. Controls and Procedures This section confirms that management, including the principal executive and financial officers, evaluated the effectiveness of the company's disclosure controls and procedures as of July 31, 2022, and concluded they were effective. No material changes in internal control over financial reporting occurred during the quarter Management's Report on Internal Control Over Financial Reporting This section presents management's assessment of the effectiveness of the company's internal controls over financial reporting - The company's disclosure controls and procedures are designed to provide reasonable assurance that information required for SEC reports is recorded, processed, summarized, and reported timely[158] - The principal executive officer and principal financial officer concluded that disclosure controls and procedures were effective as of July 31, 2022[159] Changes in Internal Control over Financial Reporting This section reports any material changes in the company's internal control over financial reporting - There have been no changes in internal control over financial reporting during the fiscal quarter that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[160] PART II—OTHER INFORMATION This section provides additional information not covered in the financial statements, including legal, risk, and exhibit disclosures Item 1. Legal Proceedings The company is not currently involved in any legal proceedings that require disclosure under this item - The company is not currently involved in legal proceedings requiring disclosure[162] Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the company's Annual Report for fiscal 2022 - No material changes to the risk factors previously disclosed in the Annual Report for fiscal 2022[163] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities or use of proceeds to report for the period - None to report[163] Item 3. Defaults Upon Senior Securities This item is not applicable to the company for the reporting period - Not applicable[163] Item 4. Mine Safety Disclosures This item is not applicable to the company for the reporting period - Not applicable[163] Item 5. Other Information There is no other information to report under this item for the reporting period - None to report[164] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including corporate governance documents (Amended and Restated Articles of Incorporation, By-Laws), certifications (Rule 13a-14(a)/15d-14(a), Section 906), and XBRL taxonomy documents - Exhibits include Amended and Restated Articles of Incorporation, Amended and Restated By-Laws, Rule 13a-14(a)/15d-14(a) Certifications, Section 906 Certifications, and various XBRL documents[164][165] Signatures The report is officially signed by the company's principal executive officer (CEO and President), principal financial officer (CFO), and principal accounting officer (Controller), affirming its submission on September 2, 2022 - The report is signed by H. Allan Dow (Chief Executive Officer and President), Vincent C. Klinges (Chief Financial Officer), and Bryan L. Sell (Controller and Principal Accounting Officer)[169] - The signing date for the report is September 2, 2022[168]