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|
Item 2.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q (this “Quarterly Report”) 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:
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|
•
|
liquidity, cash flow and capital expenditures;
|
|
|
•
|
demand for and pricing of our products and services;
|
|
|
•
|
annual contract value (“ACV”);
|
|
|
•
|
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 Quarterly Report are based upon information available to us as of the filing date of this Quarterly Report. 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.
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 July 2019, the International Monetary Fund (“IMF”) provided an update to the World Economic Outlook for 2019. The update noted that, “Global growth remains subdued. Since the April World Economic Outlook (WEO) report, the United States further increased tariffs on certain Chinese imports and China retaliated by raising tariffs on a subset of US imports. Additional escalation was averted following the June G20 summit. Global technology supply chains were threatened by the prospect of US sanctions, Brexit related uncertainty continued, and rising geopolitical tensions roiled energy prices. Against this backdrop, global growth is forecast at 3.2 percent in 2019, picking up to 3.5 percent in 2020 (0.1 percentage point lower than in the April WEO projections for both years). GDP releases so far this year, together with generally softening inflation, point to weaker-than anticipated global activity. Investment and demand for consumer durables have been subdued across advanced and emerging market economies as firms and households continue to hold back on long-term spending. Accordingly, global trade, which is intensive in machinery and consumer durables, remains sluggish. The projected growth pickup in 2020 is precarious, presuming stabilization in currently stressed emerging market and developing economies and progress toward resolving trade policy differences."
For fiscal 2020, we expect the global economy to improve modestly when compared to the prior year. 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, which could result in an improved selling environment. 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 improved economic conditions may be driving some businesses to focus on achieving more process and efficiency enhancements 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 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.
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 segment actually providing the product or service.
The Company enables enterprises to accelerate their operations from product concept to customer availability. Our four brands - Logility, Demand Solutions, Halo and NGC Software - provide a single platform spanning eight supply chain process areas, including demand optimization, inventory optimization, supply optimization, retail optimization, quality and compliance, product lifecycle management, sourcing management and integrated business planning. Our platform includes advanced analytics and is fueled by supply chain master data, allowing for the automation of critical business processes through the application of artificial intelligence and machine learning algorithms to a variety of internal and external data streams.
Our primary operating units under our SCM segment include Logility, Inc., New Generation Computing, Inc. (“NGC”), Demand Management, Inc. (“DMI”), and Halo Business Intelligence (“Halo”). Logility and NGC are wholly-owned subsidiaries of American Software; DMI is a wholly-owned subsidiary of Logility; and Halo is a division of Logility. In addition to our core SCM software business, we also offer technology staffing and consulting services through our wholly-owned subsidiary, The Proven Method, Inc., in the IT Consulting segment. The Other segment consists of software and services provided to our legacy enterprise resource planning (“ERP”) customers, as well as corporate overhead and other common expenses.
We derive revenues primarily from four sources: software licenses, subscriptions, professional services and other, and maintenance. We generally determine software license and SaaS fees based on the depth of functionality, contractual term, number of production deployments, users and/or sites licensed and/or subscribed. Professional services and other revenues consist primarily of fees from software implementation, training, and consulting services. We bill primarily under time and materials arrangements and recognize revenues as we perform services. SaaS and maintenance agreements typically are for a one- to three-year term, commencing at the time of the initial contract. We generally bill these fees annually in advance under agreements with terms of one to three years, and then recognize the resulting revenues ratably over the term of the agreement. Deferred revenue represents payments or billings for subscriptions, software licenses, services and maintenance in advance of the time we recognize the related revenues.
Our cost of revenue for licenses and subscriptions includes amortization of capitalized computer software development costs, amortization of acquired developed technology, royalties paid to third-party software vendors, and agent commission expenses related to 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 Software topic of the FASB ASC. 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 Condensed Consolidated Balance Sheets; 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 mainly include the salary and commissions paid to our sales professionals, along with marketing, promotional, travel and associated costs. Our general and administrative expenses mainly 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:
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|
•
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Acquisition Opportunities. There are opportunities for selective acquisitions or investments to expand our sales distribution channels and/or broaden our product offering by providing additional solutions for our target markets.
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|
|
•
|
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 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.
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|
|
•
|
Competitive Technologies. There is a risk that our competitors may develop technologies that are substantially equivalent or superior to our technology.
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|
|
•
|
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 for fiscal 2019. Additional information and other factors that could affect future financial results may be included, from time to time, in our filings with the Securities and Exchange Commission (“SEC”).
Recent Accounting Pronouncements
For information with respect to recent accounting pronouncements, if any, and the impact of these pronouncements on our consolidated financial statements, if any, see Note A in the Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report.
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, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 31,
|
|
Percentage of Total
Revenues
|
|
Pct. Change in
Dollars
|
|
2019
|
|
2018
|
|
2019 vs. 2018
|
Revenues:
|
|
|
|
|
|
License
|
7
|
%
|
|
6
|
%
|
|
4
|
%
|
Subscription fees
|
16
|
%
|
|
12
|
%
|
|
41
|
%
|
Professional services and other
|
37
|
%
|
|
40
|
%
|
|
(8
|
)%
|
Maintenance
|
40
|
%
|
|
42
|
%
|
|
(4
|
)%
|
Total revenues
|
100
|
%
|
|
100
|
%
|
|
—
|
%
|
Cost of revenues:
|
|
|
|
|
|
License
|
5
|
%
|
|
6
|
%
|
|
(19
|
)%
|
Subscription fees
|
8
|
%
|
|
4
|
%
|
|
99
|
%
|
Professional services and other
|
27
|
%
|
|
32
|
%
|
|
(15
|
)%
|
Maintenance
|
7
|
%
|
|
8
|
%
|
|
(16
|
)%
|
Total cost of revenues
|
47
|
%
|
|
50
|
%
|
|
(6
|
)%
|
Gross margin
|
53
|
%
|
|
50
|
%
|
|
6
|
%
|
Research and development
|
12
|
%
|
|
13
|
%
|
|
(9
|
)%
|
Sales and marketing
|
20
|
%
|
|
20
|
%
|
|
8
|
%
|
General and administrative
|
18
|
%
|
|
15
|
%
|
|
15
|
%
|
Amortization of acquisition-related intangibles
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Total operating expenses
|
50
|
%
|
|
48
|
%
|
|
5
|
%
|
Operating income
|
3
|
%
|
|
2
|
%
|
|
31
|
%
|
Other income:
|
|
|
|
|
|
Interest income
|
2
|
%
|
|
2
|
%
|
|
(6
|
)%
|
Other, net
|
—
|
%
|
|
1
|
%
|
|
(80
|
)%
|
Earnings before income taxes
|
5
|
%
|
|
5
|
%
|
|
(3
|
)%
|
Income tax expense/(benefit)
|
1
|
%
|
|
—
|
%
|
|
—
|
%
|
Net earnings
|
4
|
%
|
|
5
|
%
|
|
(17
|
)%
|
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE ENDED JULY 31, 2019 AND 2018 REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 31,
|
|
|
|
|
|
|
|
% of Total Revenue
|
|
2019
|
|
2018
|
|
% Change
|
|
2019
|
|
2018
|
|
(in thousands)
|
|
|
|
|
|
|
License
|
$
|
1,778
|
|
|
$
|
1,702
|
|
|
4
|
%
|
|
7
|
%
|
|
6
|
%
|
Subscription fees
|
4,458
|
|
|
3,168
|
|
|
41
|
%
|
|
16
|
%
|
|
12
|
%
|
Professional services and other
|
10,137
|
|
|
11,008
|
|
|
(8
|
)%
|
|
37
|
%
|
|
40
|
%
|
Maintenance
|
11,010
|
|
|
11,521
|
|
|
(4
|
)%
|
|
40
|
%
|
|
42
|
%
|
Total revenues
|
$
|
27,383
|
|
|
$
|
27,399
|
|
|
—
|
%
|
|
100
|
%
|
|
100
|
%
|
For the three months ended July 31, 2019 compared to July 31, 2018 revenues remained flat attributable primarily to a 41% increase in subscription fees and a 4% increase in license revenues that were partially offset by an 8% decrease in professional fees and other revenues and a 4% decrease in maintenance revenues, when compared to the same period last year.
Due to intense competition in our industry, we sometimes discount license fees from our published list price. Numerous factors contribute to the amount of the discount 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 number of products or modules purchased with each sale.
International revenues represented approximately 22% of total revenues in the three months ended July 31, 2019 and 20% for the same period in the prior year. Our revenues, particularly 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 Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 31,
|
|
2019
|
|
2018
|
|
% Change
|
|
(in thousands)
|
|
|
Supply Chain Management
|
$
|
1,707
|
|
|
$
|
1,682
|
|
|
1
|
%
|
Other
|
71
|
|
|
20
|
|
|
255
|
%
|
Total license revenues
|
$
|
1,778
|
|
|
$
|
1,702
|
|
|
4
|
%
|
For the three months ended July 31, 2019, license fee revenues increased 4% when compared to the same period in the prior year. In the three months ended July 31, 2019, license fee revenues from our SCM segment remained flat when compared to the corresponding period in the prior year due to an increased focus on Logility’s cloud services platform that requires revenue to be deferred over the life of the contracted period, which is typically one to three years. For the three months ended July 31, 2019 and 2018, our SCM segment constituted approximately 96% and 99% of total license fee revenues, respectively. Our Other segment license fee revenues increased by 255% for the three months ended July 31, 2019 when compared to the same period in the prior year primarily due to additional sales to our existing ERP customers.
The direct sales channel provided approximately 95% of license fee revenues for the three months ended July 31, 2019, compared to approximately 89% in the comparable period last year. For the three months ended July 31, 2019, our margins after commissions on direct sales were approximately 93%, compared to 92% in the comparable period last year. The increase in margins is due to the mix of sales commission rates based on each individual salesperson’s quotas and related achievement. For the three months ended July 31, 2019 and 2018, our margins after commissions on indirect sales were approximately 54% and 50%, respectively. The indirect channel margins for the current quarter increased 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.
Subscription Fees
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 31,
|
|
2019
|
|
2018
|
|
% Change
|
|
(in thousands)
|
|
|
Supply Chain Management
|
$
|
4,458
|
|
|
$
|
3,168
|
|
|
41
|
%
|
Total Subscription fees revenues
|
$
|
4,458
|
|
|
$
|
3,168
|
|
|
41
|
%
|
For the three months ended July 31, 2019, subscription fees revenues increased by 41%, entirely due to the increased subscription fees revenues from our SCM segment.
For the three months ended July 31, 2019, cloud services ACV increased approximately 54% to $20.3 million compared to $13.2 million in the same period of the prior year due to increased sales of our products on our Cloud Services platform that require revenue to be deferred over the life of the contracted period, which is typically one to three years. ACV is a forward-looking operating measure used by management to better understand cloud services (SaaS and other related cloud services) revenue trends within our business, as it reflects our current estimate of revenue to be generated under existing client contracts in the forward 12-month period.
Professional Services and Other Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 31,
|
|
2019
|
|
2018
|
|
% Change
|
|
(in thousands)
|
|
|
Supply Chain Management
|
$
|
5,492
|
|
|
$
|
5,446
|
|
|
1
|
%
|
IT Consulting
|
4,378
|
|
|
5,357
|
|
|
(18
|
)%
|
Other
|
267
|
|
|
205
|
|
|
30
|
%
|
Total Professional services and other revenues
|
$
|
10,137
|
|
|
$
|
11,008
|
|
|
(8
|
)%
|
For the three months ended July 31, 2019, professional services and other revenues decreased by 8%, primarily due to decreased professional services and other revenues from our IT Consulting segment. This decrease was partially offset by an increase of 30% in professional services and other revenues from our Other segment, due to an increase in project work from existing and new customers, while the SCM segment remained flat. We have observed that there is a tendency for services and other revenues, other than from IT Consulting, to lag changes in license and subscription revenues by one to three quarters, as new licenses and subscriptions in one quarter often involve implementation and consulting services in subsequent quarters, for which we recognize revenues only as we perform those services.
Maintenance Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 31,
|
|
2019
|
|
2018
|
|
% Change
|
|
(in thousands)
|
|
|
Supply Chain Management
|
$
|
10,691
|
|
|
$
|
11,162
|
|
|
(4
|
)%
|
Other
|
319
|
|
|
359
|
|
|
(11
|
)%
|
Total maintenance revenues
|
$
|
11,010
|
|
|
$
|
11,521
|
|
|
(4
|
)%
|
For the three months ended July 31, 2019, maintenance revenues decreased 4% when compared to the same period in the prior year. Our SCM maintenance revenue decreased 4% and our Other segment decreased 11% for the three months ended July 31, 2019, when compared to the same period last year. The SCM segment accounted for 97% of total maintenance revenues for the three months ended July 31, 2019 and for the same period in the prior year. 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,
|
|
|
2019
|
|
|
|
|
2018
|
|
|
|
|
Gross margin on license fees
|
$
|
398
|
|
|
22
|
%
|
|
$
|
(12
|
)
|
|
(1
|
)%
|
|
Gross margin on subscription fees
|
2,333
|
|
|
52
|
%
|
|
2,100
|
|
|
66
|
%
|
|
Gross margin on professional services and other
|
2,732
|
|
|
27
|
%
|
|
2,342
|
|
|
21
|
%
|
|
Gross margin on maintenance
|
9,159
|
|
|
83
|
%
|
|
9,322
|
|
|
81
|
%
|
|
Total gross margin
|
$
|
14,622
|
|
|
53
|
%
|
|
$
|
13,752
|
|
|
50
|
%
|
|
For the three months ended July 31, 2019, our total gross margin percentages increased when compared to the same period in the prior year primarily due to higher margins on license fees, professional fees and other and maintenance revenue. This increase was partially offset by a decrease in our gross margin on subscription fees.
Gross Margin on License Fees
License fee gross margin percentage for the three months ended July 31, 2019 increased to 22% for the three months ended July 31,2019 when compared to (1)% in the same period in the prior year due to lower VAR commission expense and amortization of capitalized software expense when compared to the same period in the prior year. 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 Subscription Fees
Our gross margin percentage on subscription fees revenues decreased from 66% to 52% for the three months ended July 31, 2018 and July 31, 2019, respectively, primarily due to an increase in capitalized software amortization expense and hosting expense.
Gross Margin on Professional Services and Other
Our gross margin percentage on professional services and other revenues increased from 21% to 27% for the three months ended July 31, 2018 and July 31, 2019, respectively. This increase was primarily due to higher gross margins in our SCM segment servcies of 31% for the three months ended July 31,2019 compared to 19% in the same period in the prior year due to cost containment efforts and improved utilization. This increase was partially offset by a decrease in our IT Consulting segment professional gross margin from 23% to 21% due to the timing of project work. The primary component of cost of services and other revenues is services staffing, which is relatively inelastic in the short term.
Gross Margin on Maintenance
Maintenance gross margin percentage increased from 81% for the three months ended July 31, 2018 to 83% for the three months ended July 31, 2019 due to cost containment efforts. The primary cost component is maintenance staffing, which is relatively inelastic in the short term.
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 31,
|
|
|
2019
|
|
2018
|
|
% of Revenues
|
|
|
2019
|
|
2018
|
|
|
(in thousands)
|
|
|
|
|
|
Research and development
|
$
|
3,328
|
|
|
$
|
3,675
|
|
|
12
|
%
|
|
13
|
%
|
|
Sales and marketing
|
$
|
5,579
|
|
|
$
|
5,180
|
|
|
20
|
%
|
|
20
|
%
|
|
General and administrative
|
$
|
4,821
|
|
|
$
|
4,193
|
|
|
18
|
%
|
|
15
|
%
|
|
Amortization of acquisition-related intangible assets
|
$
|
97
|
|
|
$
|
97
|
|
|
—
|
%
|
|
—
|
%
|
|
Other income, net
|
$
|
525
|
|
|
$
|
753
|
|
|
2
|
%
|
|
3
|
%
|
|
Income tax expense/(benefit)
|
$
|
170
|
|
|
$
|
(25
|
)
|
|
1
|
%
|
|
—
|
%
|
|
Research and Development
Gross product research and development costs include all non-capitalized and capitalized software development costs. A breakdown of the research and development costs is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 31,
|
|
2019
|
|
2018
|
|
% Change
|
|
(in thousands)
|
|
|
|
|
Total capitalized computer software development costs
|
$
|
1,285
|
|
|
$
|
884
|
|
|
45
|
%
|
Percentage of gross product research and development costs
|
28
|
%
|
|
19
|
%
|
|
|
Total research and development expense
|
3,328
|
|
|
3,675
|
|
|
(9
|
)%
|
Percentage of total revenues
|
12
|
%
|
|
13
|
%
|
|
|
Total gross research and development expense and capitalized computer software development costs
|
$
|
4,613
|
|
|
$
|
4,559
|
|
|
1
|
%
|
Percentage of total revenues
|
17
|
%
|
|
17
|
%
|
|
|
Total amortization of capitalized computer software development costs *
|
$
|
1,487
|
|
|
$
|
1,053
|
|
|
41
|
%
|
|
|
|
|
|
|
|
|
*
|
Included in cost of license fees and subscription fees.
|
For the three months ended July 31, 2019, gross product research and development costs remained relatively flat when compared to the same period in the previous year. We expect capitalized product development costs to decrease due to the timing of projects and we expect capitalized software amortization expense to be relatively stable in the coming quarters. Costs included in gross product development are salaries of product development personnel, hardware lease expense, computer software expense, telephone expense and rent.
Sales and Marketing
For the three months ended July 31, 2019, sales and marketing expenses increased 8% when compared to the same period a year ago, primarily due to higher commissions in the current quarter due to an increase in sales revenue.
General and Administrative
For the three months ended July 31, 2019, general and administrative expenses increased 15%, when compared to the same period a year ago, primarily due to an increase in variable compensation and to a lesser extent legal fees.
At July 31, 2019, the total number of employees was 415 compared to 471 at July 31, 2018.
Operating Income/(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 31,
|
|
|
2019
|
|
2018
|
|
% Change
|
|
|
(in thousands)
|
|
|
|
Supply Chain Management
|
$
|
3,851
|
|
|
$
|
3,067
|
|
|
26
|
%
|
|
IT Consulting
|
178
|
|
|
360
|
|
|
(51
|
)%
|
|
Other*
|
(3,232
|
)
|
|
(2,820
|
)
|
|
15
|
%
|
|
Total Operating Income
|
$
|
797
|
|
|
$
|
607
|
|
|
31
|
%
|
|
|
|
*
|
Includes all corporate overhead and other common expenses.
|
Our SCM segment operating income increased by 26% in the three months ended July 31, 2019 when compared to the same period in the prior year primarily due to an overall increase in revenues and decrease in costs of revenues.
Our IT Consulting segment’s operating income decreased by 51% for the three months ended July 31, 2019 compared to same period in the prior year primarily due to decreased revenues and gross margins.
Our Other segment operating loss increased by 15% for the three months ended July 31, 2019 when compared to the same period in the prior year due to an increase in corporate expenses, partially offset by an increase in revenues.
Other Income
Other income is comprised of net interest and dividend income, rental income, exchange rate gains and losses, and realized and unrealized gains and losses from investments. For the three months ended July 31, 2019, the decrease in other income is mainly due to higher unrealized losses on investments when compared to the same period last year, which was partially offset by lower exchange rate losses of $0.1 million in the current quarter when compared to an exchange rate loss of $0.2 million in the same period last year. We recorded net realized gains of approximately $0.1 million and $0.4 million for the three months ended July 31, 2019 and July 31, 2018, respectively, from our trading securities portfolio.
For the three months ended July 31, 2019, our investments generated an annualized yield of approximately 1.41% compared to approximately 1.49% for the same period in the prior year.
Income Taxes
We recognize deferred tax assets and liabilities based on the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their tax bases. We measure deferred tax assets and liabilities using statutory tax rates in effect in the year in which we expect the differences to reverse. We establish a deferred tax asset for the expected future benefit of net operating loss and credit carry-forwards. Under the Income Tax Topic of the FASB ASC, we cannot recognize a deferred tax asset for the future benefit of our net operating losses, tax credits and temporary differences unless we can establish that it is “more likely than not” that the deferred tax asset would be realized.
During the three months ended July 31, 2019 and 2018, we recorded income tax expense of $170,000 and an income tax benefit of $25,000, respectively. The reported amount of income tax expense differs from an expected amount based on statutory rates primarily due to discrete stock compensation benefits of $61,000 and $274,000, respectively, net of normal income tax expense from operations. After adjusting for these discrete tax benefits, our effective tax rate would have been 17.0% in the three months ended July 31, 2019 compared to our effective tax rate of 18.3% in the three months ended July 31, 2018. In addition, research and development and foreign tax credits reduced our effective tax rate by 7.4% in the three months ended July 31, 2019, compared to 5.6% in the three months ended July 31, 2018.
Operating Pattern
We experience an irregular pattern of quarterly operating results, caused primarily by fluctuations in both the number and size of software license and subscription contracts received and delivered from quarter to quarter and our ability to recognize revenues in that quarter in accordance with our revenue recognition policies. We expect this pattern to continue.
LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION
Sources and Uses of Cash
We have historically funded, and continue to fund, our operations and capital expenditures primarily with cash generated from operating activities. The changes in net cash that our operating activities provide generally reflect the changes in net earnings and non-cash operating items plus the effect of changes in operating assets and liabilities, such as investment trading securities, trade accounts receivable, trade accounts payable, accrued expenses and deferred revenue. We have no debt obligations or off-balance sheet financing arrangements, and therefore, we used no cash for debt service purposes.
The following table shows information about our cash flows and liquidity positions during the three months ended July 31, 2019 and 2018. You should read this table and the discussion that follows in conjunction with our Condensed Consolidated Statements of Cash Flows contained in Item 1 in Part I of this Quarterly Report and in our Annual Report for fiscal 2019.
|
|
|
|
|
|
|
|
|
|
Three Months Ended
July 31,
(in thousands)
|
|
2019
|
|
2018
|
Net cash provided by operating activities
|
$
|
4,811
|
|
|
$
|
4,361
|
|
Net cash used in investing activities
|
(1,395
|
)
|
|
(1,598
|
)
|
Net cash used in financing activities
|
(1,982
|
)
|
|
(702
|
)
|
Net change in cash and cash equivalents
|
$
|
1,434
|
|
|
$
|
2,061
|
|
For the three months ended July 31, 2019, the net increase in cash provided by operating activities when compared to the same period last year was due primarily to the following: (1) higher proceeds from the maturity and sales of trading securities, (2) a relative increase in accounts payable and other accruals due to timing of payments, (3) a relative increase in deferred revenue due to timing of revenue recognition, (4) an increase in depreciation and amortization, (5) lower gains on investments compared to a higher gain in the same period last year and (6) an increase in stock-based compensation expense.
This increase in cash provided by operating activities was partially offset by: (1) an increase in purchases of trading securities, (2) a relative increase in customer accounts receivables caused by the timing of closing customer sales and related collections, (3) a relative increase in prepaid expenses when compared to the same period in the prior year due to the timing of purchases, (4) a decrease in net earnings and (5) a decrease in deferred income tax.
The decrease in cash used in investing activities when compared to the same period in the prior year was mainly due to a decrease in purchases of property and equipment, partially offset by higher capitalized computer software development costs.
The increase in cash used in financing activities compared to the prior year was due primarily to a decrease in proceeds from exercise of stock options and an increase in dividends paid.
The following table shows net changes in total cash, cash equivalents, and investments, which is one measure management uses to understand net total cash generated by our activities:
|
|
|
|
|
|
|
|
|
|
As of July 31,
(in thousands)
|
|
2019
|
|
2018
|
Cash and cash equivalents
|
$
|
62,722
|
|
|
$
|
54,855
|
|
Short and long-term investments
|
25,270
|
|
|
32,501
|
|
Total cash and short and long-term investments
|
$
|
87,992
|
|
|
$
|
87,356
|
|
Net (decrease) in total cash and investments (three months ended July 31)
|
$
|
(490
|
)
|
|
$
|
(452
|
)
|
Our total activities used more cash and investments during the three months ended July 31, 2019, when compared to the prior year period, primarily due to normal business operations.
Days Sales Outstanding in accounts receivable were 68 days as of July 31, 2019, compared to 57 days as of July 31, 2018. This increase is primarily due to the timing of billings and cash collections. Our current ratio on July 31, 2019 was 2.6 to 1 and on July 31, 2018 was 2.8 to 1.
Our business in recent periods has generated substantial positive cash flow from operations, excluding purchases and proceeds of sale of trading securities. For this reason, and because we had $88.0 million in cash and investments with no debt as of July 31, 2019, we believe that our sources of liquidity and capital resources will be sufficient to satisfy our presently anticipated requirements during at least the next twelve months for working capital, capital expenditures and other corporate needs. However, at some future date we may need to seek additional sources of capital to meet our requirements. If such need arises, we may be required to raise additional funds through equity or debt financing. We do not currently have a bank line of credit. We can provide no assurance that bank lines of credit or other financing will be available on terms acceptable to us. If available, such financing may result in dilution to our shareholders or higher interest expense.
On August 19, 2002, our Board of Directors approved a resolution authorizing the repurchase of up to an additional 2.0 million shares of our Class A common stock. We have made and will make these repurchases through open market purchases at prevailing market prices. The timing of any repurchase will depend upon market conditions, the market price of our common stock and management’s assessment of our liquidity and cash flow needs. Under this repurchase plan, through July 31, 2019, we have repurchased 1,053,679 shares of common stock at a cost of approximately $6.2 million. As of July 31, 2019, under all repurchase plans previously authorized, including this most recent plan, we have repurchased a total of 4,588,632 shares of common stock at a cost of approximately $25.6 million.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We have based the foregoing discussion and analysis of financial condition and results of operations on our Condensed Consolidated Financial Statements, which we have prepared in accordance with U.S. GAAP. The preparation of these Condensed Consolidated Financial Statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities at the date of the Condensed Consolidated Financial
Statements and the reported amounts of revenues and expenses during the reporting period. Note 1 in the Notes to the Consolidated Financial Statements in our Annual Report for fiscal 2019, describes the significant accounting policies that we have used in preparing our Condensed Consolidated Financial Statements. On an ongoing basis, we evaluate our estimates, including, but not limited to, those related to revenue/collectability, stock-based compensation and income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results could differ materially from these estimates under different assumptions or conditions.
We believe the critical accounting policies listed below affect significant judgments and estimates used in the preparation of the Condensed Consolidated Financial Statements.
Revenue Recognition. For information with respect to revenue recognition policy, see Note B in the Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report.
Income Taxes. We provide for the effect of income taxes on our financial position and results of operations in accordance with the Income Tax Topic of the FASB ASC. Under this accounting guidance, income tax expense is recognized for the amount of income taxes payable or refundable for the current year and for the change in net deferred tax assets or liabilities resulting from events that are recorded for financial reporting purposes in a different reporting period than recorded in the tax return. Management must make significant assumptions, judgments and estimates to determine our current provision for income taxes and also our deferred tax assets and liabilities and any valuation allowance to be recorded against our net deferred tax asset. Our judgments, assumptions and estimates relative to the current provision for income tax take into account current tax laws, our interpretation of current tax laws, allowable deductions, and projected tax credits. Changes in tax law or our interpretation of tax laws could significantly impact the amounts provided for income taxes in our financial position and results of operations. Our assumptions, judgments and estimates relative to the value of our deferred tax assets take into account our expectations of the amount and category of future taxable income. Actual operating results and the underlying amount and category of income in future years, which could significantly increase tax expense, could render inaccurate our current assumptions, judgments and estimates of recoverable net deferred taxes.