MAM Software First Quarter Fiscal 2015 Earnings Call November 12, 2014

Transcription

1 MAM Software First Quarter Fiscal 2015 Earnings Call November 12, 2014 Operator: Good day and welcome to the MAM Software First Quarter Fiscal 2015 Earnings Call. Today s conference is being recorded. At this time, I would like to turn the call over to James Carbonara. Please go ahead, sir. James Carbonara: Good morning and welcome to MAM Software s Fiscal First Quarter 2015 Earnings Call. With me on the call are Michael Jamieson, President and Chief Executive Officer; and Charles Trapp, Executive Vice President and Chief Financial Officer. I would like to begin the call by reading the Safe Harbor statement. All statements made on this call, with the exception of historical facts, may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Actual results may differ considerably from the Company's expectations due to changes in operating performance and other technical and economic factors. During the course of this meeting and any questionand-answer period afterwards, representatives of the Company may make forward-looking statements regarding future events or the future financial performance of the Company, including statements about future events based on current expectations, potential product development efforts, near and long-term objectives, potential new business strategies, organization changes, changing markets, future business performance and outlook. Such statements are predictions only and actual events or results could differ materially from those made in any forward-looking statements due to a number of risks and uncertainties. Actual results and trends may differ materially from historical results or those projected in any such forward-looking statements depending on a variety of factors. For a discussion of such risks and uncertainties which could cause actual results to differ from those contained in the forward-looking statements, see Risk Factors in the Company's reports on Forms 10-K and 10-Q, as well as other reports that the Company files from time to time with the Securities and Exchange Commission. All forward-looking statements are qualified in their entirety by this cautionary statement and the Company undertakes no obligation to update publicly any forward-looking statement for any reason, except as required by law, even as new information becomes available or other events occur in the future.

2 I would now like to introduce Michael Jamieson, President and Chief Executive Officer of MAM Software Group. Mike, please go ahead. Mike Jamieson: Thank you. Good morning and thank you for joining us on this earnings call. The first quarter of Fiscal 2015 represented a solid start for MAM. We delivered continued top-line growth, year-over-year improvement in our gross margin due to higher SaaS revenue, and more importantly, looking prospectively, our pipeline is growing. We are still seeing positive SaaS and DaaS trends, as we predicted, and are encouraged by the progress we have made and our confidence is further bolstered by a growing pipeline of opportunities particularly in the US and an improved conversion rate in recent months. I am particularly pleased with the continued progress that we are making in transitioning to become more of a services-based provider of technology solutions to the automotive aftermarket. In the first quarter, we saw year-over-year increases in revenue for SaaS and DaaS of 69% and 14%, respectively. On the last earnings call we did reference on the back of Goodyear, we expected to see an improvement in the pipeline and that has happened. In the latter part of Q1, pipeline did turn into bookings. There was an increase in deals occurring in Q1 over previous quarters and looking to the pipeline for the remainder of Fiscal 2015, we expect more things to come in. During Fiscal 2014, we experienced a delay in buying decisions that created a bit of a logjam within our pipeline. We are pleased to see that this has begun to loosen over the last 90 days or so, and contracts are being awarded. It is sometimes difficult to see this improvement since, for a variety of reasons, contract awards are not always publicly announced. Our bookings were up during the quarter, adding to our backlog of almost 1.7 million, an increase of more than 9% since the end of June. The Goodyear project is now in full swing. We are pleased with the early progress that has been made in what is a major development cycle. The MAM project team is fully engaged with their counterparts at Goodyear, and we are on target to pilot the software in the latter part of Fiscal On the last earnings call, we talked about one of our large UK customers going into administration, leading to the company incurring a bad debt charge of 285,000. I am pleased to report that we have, subsequently, replaced that revenue with over 400,000 of one-time revenues that are directly related to this account. In addition, and more importantly, we

3 have redirected virtually all of the recurring revenue associated with that account. The majority of the recurring revenue came from our customer distributing a white label version of Autowork Online to their downstream auto repair shop customers. Autowork Online is a leading cloud-based business management software solution for the auto repair shop in the UK. This highlights the stickiness of MAM s offering; that is, although the auto parts distributor ceased trading, causing significant business disruption, the auto repair shop continued to use our software and purchase their auto parts from alternative distributors. One of the key initiatives that I ve talked about previously is ALLDATA, and I wanted to provide you with an update. ALLDATA are a leading provider of manufacturers technical repair information in North America and have a subscriber base of 80,000 customers. ALLDATA promote Manage Online, a white label version of Autowork Online and continue to bring new subscribers online each month. We have been working with ALLDATA to incorporate new functionality into the next release of the software that will allow them to promote the product to a wider audience. We remain excited about the prospects for accelerating this relationship in 2015 and beyond. Partnering with some of the industry s largest and best known brands sends a very strong message to the commercial market about the validity and the efficacy of our solutions. The dynamics of our market are such that procurement decisions, particularly those of considerable scale and complexity, are generally very long-term decisions. While product performance and service are always essential to customer retention, all of the things being equal, switching costs in our industry often means that once a customer makes a decision it is a multi-decade decision. Enduring the rigor of the competitive bidding process and then following through to deliver on our promises is sending a very strong message to prospective customers; however, the shift to a subscription price cloud-based software as a service model is providing a catalyst for new decisions and MAM Software is well aligned with this industry trend. We are encouraged by the pickup in deals and proposal activity and also remain committed to and focused on executing on our strategic initiatives to accelerate top and bottom line growth. As you may recall, we have identified five areas of strategic focus. First is growing our revenues from SaaS-based business. Autowork Online, our auto repair shop solution in the UK, and Autoparts Online, our parts distribution solution, were internally developed, are being developed under the cloud computing model. This segment of our business has shown promising growth, and, as we reported, during Q1, we exceeded the 1,000 active user milestone for Autoparts Online in the UK. This represents approximately 10% of our current customer base, and with 75% of new customers choosing the cloud over the on-premise option, we are confident that this transition to SaaS will continue in the UK.

4 Turing to the US, we are now making progress as we seek to replicate the successes seen in the UK. Autowork Online or Manage Online is the product that ALLDATA are selling, and we are seeing increased levels of interest in our Autoparts Online solution, with an increase albeit from the lower base of 76% in the number of active users in Q1 compared to Q4. Second is our sales and marketing strategy within the US. We continue to believe that investment in this key area is necessary to further develop the MAM brand and extend our reach. As our success in the marketplace continues, it is important that we communicate these achievements with the automotive community, and investing in our sales and marketing tool will provide us with the resources to do so. We saw a 54% increase in leads in Q1 over Q4 that have been generated through marketing activity in the US. We also saw an 18% year-over-year increase in web traffic to our US website. Third is the launch of our information service Autocat+ in the US. Autocat+ is an auto part electronic catalog that utilizes that DaaS distribution model. Launched in April, Autocat+ maintains data for users to access from our business management software, business-to-business or business-to-consumer e-commerce solutions. Feedback to date has been positive with good levels of interest, including Team Allied who are the largest independent warehouse distributor of automotive exhaust in the US. Team Allied recently went live on Autocat+ and Autoparts. We expect to see Autocat+ start to gain traction within the US in the coming months. Fourth is sustaining our revenue growth in the UK by focusing on vertical markets which share common issues to that of the automotive market. We are now bringing our new business on a regular basis for our Trader solution and recent success announcements have included Sky Blue Fixings, Alex Robertson and A.R. Aspinall & Sons, and again the trend for cloud in services is being reflected within these markets. Fifth is the continued investment in research and development that will allow us to deliver innovative new solutions and modules in support of the previous four key areas. Recent additions include the release of a number of e-commerce solutions including a parts listing tool for ebay and B2C and B2B websites, as well as the continued development of our mobile apps, CarSide and SalesRep. These modules have been designed to integrate with our existing solutions, creating up-sell opportunities for our sales team. With a solid vision and these five very specific strategies, our focus is clear with incremental results in sight. We are gaining traction, as evidenced by the financial results we are reporting today, as well as the commercial market validation that we are receiving as we inked new contracts and engage with prospective customers.

5 Charlie will review the financial results in detail in a moment but let me touch on a few of the highlights for the quarter. Revenues for the quarter were up 8.5% to $8.2 million, with 72.6% of total revenue derived from recurring revenue. Software-as-a-Service revenue increased 69%, compared to same period last year, again demonstrating the progress we are making in increasing this important revenue source. During the quarter, we also generated Adjusted EBITDA of approximately $1.2 million, and we continue to expect Adjusted EBITDA non-gaap for the year to increase by approximately 20% from the $4.2 million reported in All in all, we are off to a solid start in Fiscal We charted our course and remain committed to executing our plans in order to deliver top line growth and improved earnings. We look forward to more good things to come as we progress through I ll now turn the call over to Charles Trapp, our Chief Financial Officer, for some additional detail about the financial results for the quarter. Charles Trapp: Thank you, Michael. For the first fiscal quarter ended September 30, 2014, we reported revenues of $8.2 million, an increase of $646,000 or 8.5% over the $7.6 million reported in the same quarter last year. Let me break this down a bit. Our UK revenue was $6.1 million for the three months compared to $5.3 million, an increase of $822,000 or 7% over the first quarter of Fiscal Revenue from the US operation for quarter was $2.1 million, a decrease of $177,000 or 7.8% from the $2.3 million reported in the prior period, due to lower perpetual license revenue as we transition our business to a SaaS model in the US. Recurring revenue for the first quarter was $6 million, an increase of $760,000 or 14.6% over the $5.2 million reported in the comparable quarter of last year. Sequentially, recurring revenue increased $68,000 or 1.2%. Recurring revenue was 72.6% of total revenue for the quarter. Software-as-a-Service or SaaS revenue for the first quarter was $1.1 million, an increase of 68.4% compared to the prior period, and a 7.6% increase sequentially. SaaS year-on-year quarterly increase in customers was 13.9% and our customer churn rate for customer relations that we own was 2%. Our customer acquisition cost recovery period was six months. Autowork Online SaaS revenue for the first quarter was $776,000, an increase of 46.9% year-over-year, and Autopart Online SaaS revenue for the first quarter was $308,000, an increase of 97% compared to the

6 prior year period. Data-as-a-Service, DaaS revenue for the first quarter increased 14.2% to $2.5 million. Our gross profit for the first quarter was $4.9 million or 59.7% of total revenue compared to 4.4 million or 57.5% of total revenue reported in the first quarter of Gross profit increased by approximately $551,000 or 12.7% as a result of an increase of $646,000 or 8.5% of revenue which was partially offset by a $95,000 or a 3% increase in cost. Our research and development expenses increased $196,000 or 23.7% to $1 million for the first quarter of Fiscal 2015 due to an increase in catalog departmental costs in the US in the year 2014 compared to the year- ago quarter. Our sales and marketing expenses increased $42,000 or 3.8% to $1.2 million for the first quarter of Fiscal 2015 due to the addition of a salesperson in the UK which was partially offset by lower costs associated with our rebranding efforts, compared to last year. Our general and administrative expenses increased $398,000 or 31% to $1.7 million for the quarter ended September 30, This increase was due to increased administrative salaries of $250,000, including strategic goal incentives of $196,000, training costs of $60,000, additional travel expenses of $52,000 and the absence of a vendor credit of $25,000 received in Operating income for the first quarter was $812,000, a decrease of $45,000 or 5.3% lower than the $857,000 reported in the comparable quarter of last year. I'd like to take a minute here and reiterate that the vast majority of our increase in operating expenses which resulted in lower operating income is a direct result of increased expenses related to investments aimed at accelerating growth. The investments designed to accelerate growth in the US are now largely complete. We have built the US-based marketing organization, secured our partners and positioned the company to grow its revenue base in North America. Investors should expect to see a reduction in current fixed expense levels for the balance of 2015, and we expect revenue from North America to increase, driving incremental growth and profitability. Income before income taxes for the first quarter was $808,000, a decrease of $22,000 or 2.7%, and net income after taxes was $609,000 compared to net income of $692,000 in the first quarter of Fiscal 2014, a decrease of $83,000.

7 Adjusted earnings before interest, taxes, depreciation and amortization or Adjusted EBITDA was $1.2 million for the first quarter of Fiscal 2015 versus $1.3 million for the first quarter of Fiscal We continue to expect the Adjusted EBITDA non-gaap for the year to increase by approximately 20% from the $4.2 million reported in We generated $218,000 in operating cash flow for the three months ended September 30, 2014, compared to $543,000 for the same period last year, a decrease of approximately 59.9%. Capital expenditures were $493,000 and repurchase of treasury shares utilized $17,000 in cash. We ended the quarter with cash and cash equivalent of $6.4 million, a decrease of $636,000 or 9.1%, compared to the quarter ended June 30, The Company has no debt outstanding. Shareholder equity decreased by $627,000 or 3.6% to $16.6 million. As of September 30, 2014, we have approximately $2.7 million left on our previously approved stock buyback program, which we intend to use selectively as circumstances and market conditions warrant. As of September 30, 2014, we had approximately 14.3 million shares of common stock outstanding. With that, I will turn it back to you, Michael. Mike Jamieson: Thank you, Charlie. In summary, our strategy is clear, and we are executing step-by-step. The cloud-based technologies we have developed are resonating with customers and prospects, fueling our transition to a cloud-based business model. We've laid out our strategy and developed a roadmap to achieve our goals. We look forward to providing you with additional updates as we progress through the remainder of the year. This concludes our prepared remarks. Thank you, once again, for joining us this morning. Charlie and I will now take any questions you may have. Operator, please open the lines for questions. Operator: Thank you. If you would like to ask a question, you may do so by pressing star, one, on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, it is star, one, to signal for a question, and we'll pause for a moment to assemble the queue. with B. Riley & Company. We ll take our first question from Sarkis Sherbetchyan

8 Sarkis Sherbetchyan: Yes, good morning. Thank you for taking my questions. So just to kick it off, with regards to the gross margin line, we saw a year-over-year and sequential improvement. Can you guys maybe talk a little bit about the puts and takes of that line and also kind of if you expect this same level of gross margin on a go-forward basis or should we expect anything materially different? Charles Trapp: Yes, the improvement in margin in the period was primarily driven by the SaaS revenue versus perpetual licensing revenue where in previous quarters we had a high percentage of hardware costs associated with perpetual license revenue which we did not have in this quarter. Sarkis Sherbetchyan: Okay, that s helpful. Charles Trapp: Going forward, we re not always sure where the perpetual license revenue will fall versus SaaS, but we are seeing an improvement in the SaaS bookings versus perpetual license bookings. Sarkis Sherbetchyan: Okay, great, and then as you guys mentioned, you have a growing confidence that you re seeing the pipeline of opportunities increase. You re also seeing improved conversion rates in recent months. Can you may be touch upon those comments and maybe expand upon that? Mike Jamieson: Yes, certainly. In the last earnings call, Sarkis, we talked about the impact of Goodyear, both positive and not so positive; the not so positive being the holding pattern that the process created for us in what had been quite a positive sales channel. So the announcement that Goodyear had made the decision allowed us to go back to speak to a number of prospects who we felt were in that holding pattern, and we did see a positive response. We were always confident about our ability to convert, and probably even moreso with the Goodyear logo behind us. So it really was a timing thing for us, and whilst we are very excited about the future prospects, we know that some of the larger and more complex deals, they do take a while to progress through the sales cycle, but there are some positive signs there and we are definitely encouraged. Sarkis Sherbetchyan: Okay, that s helpful, and speaking to those larger, more complex deals, we kind of understand that it would take let s say a little bit longer than usual, but assuming you do go ahead and get that into your system, those are, again, recurring in nature, and probably have a reasonable stickiness to that. Is that the right way of thinking about it? Mike Jamieson: Yes, absolutely. I think any business management success that we have, whether it be with our vast product Autoparts or Autowork, then we have a very good record of retaining our customers for literally decades. It becomes a very sticky offering, not only from the business management

9 perspective, but when you add in e-commerce, you add in data, then we re very confident about the longevity of our customer relationships. Sarkis Sherbetchyan: Okay, great, and maybe switching gears a little bit to the UK side of the house of the business, seems like it s performing nicely. Can you maybe kind of talk about the market dynamics there and what you re seeing and just kind of give us some more color around that side of the business? Mike Jamieson: Yes, most certainly. We have seen a nice trend within our existing customer base of parts distributors moving from on-premise or perpetual license deals to the cloud or the software-as-a-service license deal. The comment I made in the prepared remarks about the 1,000 user active user milestone being passed, that figure only represents about 10% of our current installed base. We re very encouraged by the prospects there because, in the majority of cases, MAM has sold hardware to our customers in the UK in the past. We are that one-stop shop, so we know when these hardware refresh anniversaries are coming along, and now our marketing, our message, is very much focused on the software-as-a-service model and the cloud, rather than the historical options. That has been very well received by our customer base to date. In addition, 75% of new business in the UK, those prospects are opting for the cloud as well. So, there s a couple of nice trends there, and when you add in our auto repair shop solution, Autowork Online, we continue to grow our market share there. So across the board, there are some nice trends there. We recently or earlier this year, we signed an agreement with Epicor who were our main competitor in the UK and in North America, for them to become a reseller of our catalog solution in the UK. Not only has that created an additional revenue stream for us, it s also led to a number of discussions about the changing migration of business management software, and we ve seen some success there. We re very focused on automotive; that is where we see a number of opportunities. I ve touched upon a few, but there are others. In addition, we look we do talk about the other verticals. That s still a very small part of what we do today, but as we commented, we ve seen some success in that area as well. I have referred to it as a slow-burner in the past, and I still believe that is the case and we can step things up at the appropriate time, but our focus is very much on the automotive opportunities that exist today and the results point towards the UK market being fairly buoyant for us. Sarkis Sherbetchyan: All right, that s great. Maybe the last question from me here, on the operating expense side, particularly the G&A side of the house, do you guys foresee this level, this run-rate level to kind of be the level we should expect going forward or was there anything unusual in the quarter which you would kind of anticipate on trailing off in future periods?

10 Charles Trapp: I would expect the future periods to be less than the current G&A number. This quarter was impacted by some one-time G&A salary costs. Sarkis Sherbetchyan: Good luck, guys. Mike Jamieson: Okay, thanks, Charles. I ll hop back in the queue. Thank you. Operator: As a reminder it is star, one, to signal for a question. We ll go next to John Rolfe with Argand Capital. John Rolfe: Hi, guys. Just a quick question regarding I guess guidance for the year on the EBITDA side. So you did 1.2 million for the quarter and if my math is correct you re confirming guidance for somewhere around the $5 million mark for the year. So frankly, not much of an increase from the current quarterly run-rate, yet you re talking about fixed expense levels coming down as we go forward, at least in the US. You re growing the top line this quarter year-to-year at high single digits, so I m just trying to pencil through the expectations here. It would seem to me that there would be some reasonable upside to that $5 million number, given the guidance on fixed expense levels, unless you re expecting that gross margin to come back in. I know you did comment that there might be some variability there given the difficulty forecasting SaaS versus traditional license. So could you just maybe give a little bit more color in terms of your thoughts, conservatism and the current guidance and sort of how we should be thinking about that EBITDA run-rate going forward? Charles Trapp: Sure. Well, on the current guidance, the 20% over the 2014 EBITDA of $4.2 million would have us over a $5 million number. Our current EBITDA of $1.2 million would be an annualized $4.8 million EBITDA. So we are expecting improvement in the next three quarters. John Rolfe: Yes, understood, but I mean, the scale if you re talking about fixed expense levels coming down, I guess you said sort of it s unclear to me whether you ve said your expectation for the year is 5 million or a minimum of 5 million, but I guess it just seems is there do you guys feel like you re being conservative? Is there some reasonable chance of decent upside to that $5 million number? I m still just penciling through high single digit revenue growth with fixed expenses coming down. I m getting to potential EBITDA levels that are possibly considerably above that $5 million number. So, is there some uncertainty about the gross margin going forward or are you guys being particularly conservative or what? When I look at the split between the current run-rate of 4.8 and guidance of 5, that doesn t imply much growth in EBITDA over the next three quarters.

11 Mike Jamieson: John, I think (cross talking). John, I think you touched upon a key point and that s the unpredictable nature of some of our deals going forward. Whilst we are seeing these trends towards the services model and the cloud, we re still seeing perpetual deals in our sales cycle and in the pipeline, and bringing those deals on or not or someone making a decision between SaaS or perpetual; that can make quite a significant short-term impact to our revenue and our bottom line as well. So, we re still being careful about what we say about the remainder of the year because some of the deals that we have at the moment, we re unsure as to whether or not they will be subscription, SaaS or perpetual. So, there is an element of caution in what we re saying at the moment. John Rolfe: Okay. Okay, that s fair enough. On the ALLDATA side, could you just repeat you said that on a sequential basis, the number of seats had grown what percentage rate? Mike Jamieson: We again, the unfortunate nature of unfortunate nature but where we are with both ALLDATA and Goodyear, we are contractually restricted as to what we can say. I think at the moment we re seeing the number of subscribers increase each month and but remember ALLDATA own that customer relationship. We we re very close to launching the next software update and that will hopefully widen the audience for ALLDATA. We re pretty excited about where this relationship can go in the next few months, certainly in We recently attended the major tradeshow in Las Vegas where ALLDATA had a large booth and in terms of business management software, there was no sign of their legacy product. The only business management software you could see on their booth was Manage Online. It s a clear indication of their future plans. So, we re very excited. It s unfortunate we can t share the numbers with you, and whilst they are growing, we expect to accelerate things in the coming months as we add more functionality. Some of that functionality is actually creating more integration with other key ALLDATA initiatives. I often describe our business management software as being the ecosystem of our customer s business, and with ALLDATA, it s no different. Everything they do, from a customer facing perspective, will have a link back to Manage Online. So, it s we re limited in what we can say, but we re pretty excited about what might what could happen in John Rolfe: Okay, yes, and I do understand you can t disclose absolute numbers. I thought in your prepared remarks you had made a comment about the sequential growth rate quarter-to-quarter and the number of ALLDATA seats, or something like that, but maybe I was mistaken. Mike Jamieson: No, I wouldn t I didn t say that, John. No, it would ve been referring to another product or another customer. John Rolfe: Okay, but so ALLDATA, just qualitatively, do you guys feel like the number of seats and the level of interest in the pipeline and that

12 ALLDATA user base is sort of on track with what your expectations were six months ago, or when the deal was originally signed? I mean is it more or less in line with your internal expectations? Mike Jamieson: I think that s a good question, and for us, we re very keen to make sure we deliver the new features of the amendment that our partner needs to go and sell the product in the marketplace. We re very comfortable with the relationship; it s a strong relationship. We re very excited about the future. Of course, we would ve liked to have seen more subscribers onboard by now, but I can understand. As we ve got more deeper into the relationship, there are things that they want to achieve that we can help them with that may have slowed things down a little bit, but we re fully committed to delivering the software that they need to go out and promote it to a wider audience. It s a unique situation; there s no one else in the marketplace who has that reach, 80,000 existing customers. Not all of them are suitable for Manage Online, but no one else can provide MAM with the reach that ALLDATA has, and like any other relationship, there s been some unexpected things we ve had to take care of but I d like to think that we have stepped up as a partner and we are excited about the future. John Rolfe: Okay, great. Thanks very much. Operator: We have no other questions at this time. I d like to turn the conference back over to Mr. Carbonara for any additional or closing remarks. James Carbonara: This concludes the MAM Software Fiscal Quarter 2015 Earnings Call. I would like to thank Mr. Jamieson and Mr. Trapp for making themselves available this morning, and on behalf of the Management and Board of Directors of the Company, we appreciate your support and look forward to speaking to you again soon when we discuss the Company's second quarter Fiscal 2015 results. Operator: you for your participation. Again this does conclude the conference. We thank