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| LGTY > SEC Filings for LGTY > Form 10-Q on 9-Sep-2008 | All Recent SEC Filings |
9-Sep-2008
Quarterly Report
FORWARD-LOOKING STATEMENTS
This report on Form 10-Q contains forward-looking statements relating to our future financial performance, business strategy, financing plans and other future events that involve uncertainties and risks. You can identify these statements by forward-looking words such as "anticipate," "intend," "plan," "continue," "could," "grow," "may," "potential," "predict," "strive," "will," "seek," "estimate," "believe," "expect," and similar expressions that convey uncertainty of future events or outcomes. Any forward-looking statements we make herein are pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements concerning future:
• results of operations;
• liquidity, cash flow and capital expenditures;
• demand for and pricing of our products and services;
• acquisition activities and the effect of completed acquisitions;
• industry conditions and market conditions; 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 economic uncertainty, the timing and degree of business recovery, unpredictability and the irregular pattern of future revenues, competitive pressures, delays and other risks associated with new product development, the challenges and risks associated with integration of acquired product lines and companies, the effect of competitive products and pricing, the difficulty of predicting the effectiveness and duration of third-party marketing agreements, undetected software errors, and risks associated with market acceptance of our products and services. The terms "fiscal 2009" and "fiscal 2008" refer to our fiscal years ending April 30, 2009 and 2008, respectively.
ECONOMIC OVERVIEW
Corporate capital spending trends and commitments are the primary determinants of the size of the market for business software. Corporate capital spending is, in turn, a function of general economic conditions in the U.S. and abroad and in particular may be affected by conditions in U.S. global credit markets. In recent years, the weakness in the overall world economy and the U.S. economy in particular, has resulted in reduced expenditures in the business software market.
Overall information technology spending continues to be relatively weak as a result of the current global economic environment particularly in the United States. We believe, over the long term, information technology spending should incrementally improve as increased global competition forces companies to improve productivity by upgrading their technology systems. Although this improvement could slow or regress at any time due in part to the recent concerns in the 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.
BUSINESS OVERVIEW
We provide supply chain management (SCM) solutions to streamline and optimize the market planning, management, production and distribution of products for manufacturers, suppliers, distributors and retailers. The supply chain refers to the complex network of business relationships with trading partners (customers, suppliers and carriers) used to forecast, source, manufacture, store, and deliver products and services to multiple locations and customers by various modes of transportation. Supply chain operations include forecasting, demand management, supply planning, sourcing, manufacturing, logistics, warehouse management, and transportation operations within an enterprise as well as with other business-to-business collaborative processes among customers, suppliers and carriers. Our solutions enable enterprises to increase their market visibility, build competitive advantages and increase profitability by reducing costs, increasing revenues, improving operational efficiencies and collaborating with suppliers and customers to more effectively respond to dynamic market conditions. Additionally, our solutions streamline and automate the executive Sales and Operations Planning (S&OP) process to create and assess business plans that profitably match supply with demand while synchronizing supply chain operations with strategic corporate goals.
We derive revenues primarily from three sources: software licenses, services and other, and maintenance. We generally determine software license fees based on the number of modules, servers, users and/or sites licensed. Services and other revenues consist primarily of fees from software implementation, training, and consulting services. We bill primarily under time and materials arrangements and recognize revenues as we perform services. Maintenance agreements typically are for a one- to three-year term, usually commencing at the time of the initial product license. We generally bill maintenance 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 maintenance agreement. Deferred revenues represent advance payments or billings for software licenses, services and maintenance billed in advance of the time we recognize the related revenues.
Our cost of revenues for licenses includes amortization of capitalized computer software development costs, salaries and benefits and value added reseller (VAR) commissions. Costs for maintenance and services revenues include the cost of personnel to conduct implementations, customer support and consulting, and other personnel- related expenses as well as agent commission expenses related to maintenance revenues generated by the indirect channel.
We account for the development costs of software intended for sale in accordance with SFAS No. 86, "Accounting for Costs of Computer Software to be Sold, Leased, or Otherwise Marketed." We monitor the net realizable value of our capitalized software on a quarterly basis based on an estimate of future product revenues. We currently expect to fully recover the value of the capitalized software asset recorded on our consolidated balance sheet; however, if future product revenues are less than management's current expectations, we may incur a write-down of capitalized software costs.
Gross product research and development costs include all non-capitalized and capitalized software development costs which principally include the salary and benefits for our development personnel. Our selling expenses generally include the salary and commissions we pay to our direct sales professionals, along with marketing, promotional, travel and associated costs. Our general and administrative expenses generally include the salary and benefits we pay to executive, corporate and support personnel, as well as office rent, utilities, communications expenses, and various professional fees.
We currently view the following factors as the primary opportunities and risks associated with our business:
Dependence on Capital Spending Patterns. There is risk associated with our dependence on, and the risks associated with, the capital spending patterns of U.S. and international businesses, which in turn are functions of economic trends and conditions over which we have no control.
Acquisition Opportunities. There are opportunities for select acquisitions or investments to expand our sales distribution channels and/or broaden our product offering by providing additional solutions for our target markets.
Acquisition Risks. There are risks associated with acquisitions of complementary companies, products and technologies, including the risks that we will not achieve the financial and strategic goals that we contemplate at the time of the transaction. More specifically, in any acquisition we will face risks and challenges associated with the uncertain value of the acquired business or assets, the difficulty of assimilating operations and personnel, integrating acquired technologies and products and maintaining the loyalty of the customers of the acquired business.
Competitive Technologies. There is a risk that our competitors may develop technologies that are substantially equivalent or superior to our technology.
Competition in General. There are risks inherent in the market for business application software and related services, which has been and continues to be intensely competitive; for example, some of our competitors may become more aggressive with their prices and/or payment terms, which may adversely affect our profit margins.
A discussion of a number of additional risk factors associated with our business is included in our Annual Report on Form 10-K for the fiscal year ended April 30, 2008.
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, 2008 and 2007:
Three Months Ended July 31,
Percentage of Total Pct. Change in
Revenues Dollars
2008 2007 2008 vs 2007
Revenues:
License 21 % 39 % (57 )%
Services and other 17 17 (22 )
Maintenance 62 44 10
Total revenues 100 100 (22 )
Cost of revenues:
License 13 14 (23 )
Services and other 10 8 (12 )
Maintenance 13 9 10
Total cost of revenues 36 31 (10 )
Gross margin 64 69 (27 )
Operating expenses:
Research and development 14 12 (6 )
Sales and marketing 26 20 1
General and administrative 13 11 (8 )
Amortization of acquisition-related intangibles 1 1 -
Total operating expenses 54 44 (3 )
Operating income 10 25 (67 )
Other income, net 2 3 (62 )
Earnings before income taxes 12 28 (67 )
Income taxes 5 13 (71 )
Net earnings 7 % 15 % (62 )%
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COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JULY 31, 2008 AND
REVENUES:
For the quarter ended July 31, 2008, the 22% decrease in revenues from the three-months ended July 31, 2007 was primarily attributable to decreases in license fees and services and other revenues, partially offset by an increase in maintenance revenues. International revenues represented approximately 19% and 17% of total revenues for the three-months ended July 31, 2008 and 2007, respectively. Our revenues and 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. No single customer accounted for more than 10% of our total revenues for the three-months ended July 31, 2008. One customer accounted for approximately 12% of our total revenues for the three-months ended July 31, 2007.
LICENSES. The 57% decrease in license fees in the first quarter of fiscal 2009 as compared to the first quarter of fiscal 2008 was primarily due to reduced sales of our Voyager product and an overall decrease in DMI sales in both cases resulting from a more difficult selling environment as a result of the overall slowdown in the economy. The direct sales channel provided approximately 35% of license fee revenues for the three-months ended July 31, 2008 compared to approximately 59% in the comparable period a year ago due to a change in the sales mix between Voyager and DMI products. For the three-months ended July 31, 2008, our margins after commissions on direct sales were approximately 85% compared to approximately 87% in the previous year. Our margins after commissions on indirect sales were substantially unchanged, being approximately 50% for the three-months ended July 31, 2008 and 2007. These margin calculations include only commission expense for comparative purposes and do not include other costs of license fees such as amortization of capitalized software.
SERVICES AND OTHER. The 22% decrease in services and other revenues in the first quarter of fiscal 2009 as compared to the first quarter of fiscal 2008 was primarily due to a decrease in overall software implementation services related to decreased license fee sales in recent quarters and the completion of a service contract with a significant customer. We have observed that there is a tendency for services and other revenues to lag changes in license revenues by one to three quarters, as new licenses in one quarter often involve implementation and consulting services in subsequent quarters, for which we recognize revenues only as we perform those services.
MAINTENANCE. The 10% increase in maintenance revenues in the first quarter of fiscal 2009 as compared to the first quarter of fiscal 2008 were primarily due to improved customer retention and an increase in average per customer fees. The increase is also slightly due in part to an increase in DMI license fees in the prior periods resulting in increased maintenance revenues in the current quarter. 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 and percentage measures of
gross margin:
Three-months ended
July 31,
($000's omitted) 2008 2007
Gross margin on license fees: $ 757 38 % $ 3,043 65 %
Gross margin on services and other: 667 43 % 991 49 %
Gross margin on maintenance: 4,619 80 % 4,195 80 %
Total gross margin: $ 6,043 64 % $ 8,229 69 %
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For the three-months ended July 31, 2008, the decrease in total gross margin percentage was due to decreases in gross margin percentages for both license fees and services and other.
LICENSES. The decrease in gross margin percentage on license fees for the three-months ended July 31, 2008 was primarily due to a decrease in license fee revenues and an increase in deals sold by our indirect sales force, which typically carry higher agent commissions, 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 and amortization of acquired software, which are the primary components of cost of license fees. To a lesser degree, our license fee gross margin percentage in a given period is related to the variable expense of DMI's agent commissions, and the proportion of license fees represented by DMI in that period.
SERVICES AND OTHER. For the three-months ended July 31, 2008, services gross margin percentage decreased due to decreases in billing activity and overall decreases in services and other revenues. Services and other gross margin varies based on resource utilization and related billing rates as well as the level of services and other revenues. The primary component of cost of services and other revenues is services staffing, which is relatively fixed in the short term.
MAINTENANCE. Maintenance gross margin percentage remained consistent for the first quarter of fiscal 2009 as compared to the first quarter of fiscal 2008. The primary component of cost of maintenance revenues is staffing, which is relatively fixed in the short term.
EXPENSES:
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 ($000's omitted)
July 31, Percent July 31,
2008 Change 2007
Gross product research and development costs $ 1,772 (6 )% $ 1,877
Percentage of total revenues 19 % 16 %
Less: Capitalized computer software research
and development costs $ (507 ) (3 )% $ (525 )
Percentage of gross product research and
development costs 29 % 28 %
Product research and development expenses $ 1,265 (6 )% $ 1,352
Percentage of total revenues 13 % 11 %
Total amortization of capitalized computer
software development costs $ 555 (13 )% $ 638
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For the three-months ended July 31, 2008, both capitalized software development costs and gross product research and development costs decreased when compared to the prior year period. This change was due to lower research and development spending, no bonus accrual in the first quarter of fiscal 2009 due to lower earnings when compared to the first quarter of fiscal 2008 and a decrease in projects which qualify for capitalization. We expect capitalized product development costs to be lower in coming quarters as a result of fewer capitalizable R&D projects in the pipeline. However, we expect capitalized software amortization expense to remain relatively consistent with the current quarter for the remainder of fiscal 2009. 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, 2008, sales and marketing expenses were $2.5 million, which is a 1% increase when compared to the three-months ended July 31, 2007. The increase primarily is due to increased headcount, partially offset by a decrease in direct sales commissions. We generally include commissions on indirect sales in cost of sales.
GENERAL AND ADMINISTRATIVE. For the three-months ended July 31, 2008, the 8% decrease in general and administrative expenses to $1.2 million was primarily due to decreased variable compensation costs and lower headcount from the comparable period a year ago. For the three-months ended July 31, 2008 and 2007, the total number of employees were approximately 133 and 140, respectively.
AMORTIZATION OF ACQUISITION-RELATED INTANGIBLE ASSETS. Acquisition-related intangible assets of DMI are stated at historical cost and include certain intangible assets with definitive lives. We are amortizing these intangible assets on a straight-line basis over their expected useful lives of three to six years.
OTHER INCOME:
Other income is principally comprised of investment earnings. For the three-months ended July 31, 2008, the investment earnings decreased by approximately $251,000 when compared to the same period last year due primarily to lower investment yields resulting from a decrease in money market yields by the US Fed. This was partially offset by an increase in the average cash balance. For the three-months ended July 31, 2008, these investments generated an annualized yield of approximately 1.50% compared to approximately 5.20% for the three months ended July 31, 2007.
INCOME TAXES:
We are included in the consolidated federal income tax return filed by American Software; however, we provide for income taxes as if we were filing a separate income tax return. We recognize deferred tax assets and liabilities for 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. In accordance with Statement of Financial Accounting Standards No. 109 ("SFAS No. 109"), Accounting for Income Taxes, we review annually our deferred
tax assets for recoverability to determine whether any negative factors are present that would indicate the need for a valuation allowance. We recorded $448,000 in income tax expense in the quarter ended July 31, 2008 compared to $1.6 million in the quarter ended July 31, 2007 (which includes a charge of approximately $283,000 for the establishment of a valuation allowance for a discrete item that occurred in the first quarter of 2008). We expect the Company's effective tax rate to be in the range of 38% to 40% during fiscal year 2009.
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 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 use no cash for debt service purposes.
The following table shows information about our cash flows and liquidity positions for the quarters ended July 31, 2008 and 2007. You should read this table and the discussion that follows in conjunction with our condensed consolidated statements of cash flows contained in "Item 1. Financial Statements" in Part I of this report and in our Annual Report on Form 10-K for the fiscal year ended April 30, 2008.
Three-Months Ended
July 31
(in thousands)
2008 2007
Net cash provided by operating activities $ 2,329 $ 4,202
Net cash (used in) provided by investing activities (14,819 ) 8,633
Net cash (used in) provided by financing activities (96 ) 273
Net change in cash and cash equivalents $ (12,586 ) $ 13,108
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For the three-months ended July 31, 2008, the decrease in cash provided by operating activities when compared to the same period last year was due primarily to decreases in net earnings, tax benefit of stock options exercised, deferred revenue, deferred income taxes and accounts payable when compared to the same period last year. This decrease was partially offset by an increase in collections of customer accounts receivable. The increase in cash used in investing activities when compared to the same period in the prior year period was due primarily to purchases of investments partially offset by proceeds in maturities of investments. Cash used in financing activities increased compared to the same period in the prior year, due primarily to a decrease in the excess tax benefit from stock-based compensation. This was partially offset by an increase in proceeds from stock option exercises, a decrease in contributions to ASI related to the tax sharing agreement and repurchases of common stock.
The following table shows net changes in total cash, cash equivalents, and investments, which is one measure management uses to view net total cash generated (used) by our activities:
As of July 31,
(in thousands)
2008 2007
Cash and cash equivalents $ 26,133 $ 29,252
Investments 18,296 6,968
Total cash and investments $ 44,429 $ 36,220
Net change in total cash and investments (three-months ended
July 31) $ 1,697 $ 3,904
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The change in total cash generated for the three-months ended July 31, 2008 when compared to cash used in the comparable period in the prior year was due primarily to the changes in operating assets and liabilities noted above.
Days Sales Outstanding in accounts receivable were 59 days as of July 31, 2008, compared to 68 days as of July 31, 2007. This decrease was due to improved cash . . .
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