AMSWA - American Software Sees No Growth In New Fiscal Year

2023-06-13 19:08:10 ET

Summary

• American Software, Inc. reported its FQ4 and fiscal 2023 financial results on June 8, 2023.
• The firm provides supply chain management software and related services to organizations.
• American Software leadership has guided fiscal 2024 top line revenue to no growth, and the stock's valuation looks full at best.
• I'm on Hold for American Software stock in the near term until management can profitably reignite revenue growth.

A Quick Take On American Software

American Software, Inc. ( AMSWA ) reported its FQ4 2023 financial results on June 8, 2023, missing revenue but beating EPS consensus estimates.

The firm provides supply chain management software and consulting services to companies worldwide.

American Software management has guided to no revenue growth for the upcoming fiscal year, and the stock appears to be fully or overvalued at its current price.

I'm on Hold for AMSWA in the near term.

American Software Overview

Atlanta, Georgia-based American Software, Inc. was founded in 1970 to develop supply chain management software and also provide consulting services to clients globally.

The firm is headed by President and CEO H. Allan Dow, who joined subsidiary Logility in 2000 and was appointed to president in 2015.

The company's primary offerings include the following:

• Supply chain management.

• Enterprise resource planning.

• IT consulting.

American Software acquires customers through its direct sales and market efforts and through partner referrals.

The firm has more than 900 customers in 80 countries among Global 1000, enterprise and SMB market segments.

American Software's Market & Competition

According to a 2021 market research report by Allied Market Research, the market for supply chain management software and services was an estimated $18.7 billion in 2020 and is forecast to reach $52.6 billion by 2030.

This represents a forecast CAGR of 10.7% from 2021 to 2030.

The main drivers for this expected growth are demand for increased supply chain visibility, especially after the disruptions caused by the COVID-19 pandemic.

Also, the chart below shows the supply chain management market changes between 2020 and 2030, by solution type:

Major competitive or other industry participants include:

• Epicor Software.

• HighJump.

• Info.

• IBM.

• JDA Software Group.

• Kinaxis.

• e2open.

• Oracle.

• SAP.

• Descartes Systems Group.

• Manhattan Associates.

• Others.

American Software's Recent Financial Trends

• Total revenue by quarter has fallen in recent quarters; Operating income by quarter has also dropped recently, as the chart shows below:

• Gross profit margin by quarter has been stable in recent quarters; Selling, G&A expenses as a percentage of total revenue by quarter have trended higher more recently:

• Earnings per share (Diluted) have fluctuated in positive territory as shown below:

(All data in the above charts is GAAP).

In the past 12 months, AMSWA's stock price has fallen 33.94% vs. that of E2open Parent Holdings, Inc.'s ( ETWO ) drop of 25.82%, as the chart indicates below:

For the balance sheet , the firm ended the quarter with $115.1 million in cash, equivalents and short-term investments and no debt.

Over the trailing twelve months, free cash used was $3.4 million, during which capital expenditures were $3.9 million.

Valuation And Other Metrics For American Software

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha.)

Below is an estimated DCF (Discounted Cash Flow) analysis of the firm's projected growth and earnings:

Assuming generous DCF parameters, the firm's shares would be valued at approximately $8.42 versus the current price of $10.55, indicating they are potentially currently overvalued, with the given earnings, growth, and discount rate assumptions of the DCF.

The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.

AMSWA's most recent Rule of 40 calculation was 5.6% as of FQ4 2023's results, so the firm is in need of improvement in this regard, per the table below:

(Source - Seeking Alpha.)

Commentary On American Software

In its last earnings call ( Source - Seeking Alpha ), covering FQ4 2023's results, management highlighted the expansion of its remaining performance obligations (RPOs) by 4% sequentially.

Cloud revenue increased by 18% year-over-year, and recurring revenue accounted for 71% of the firm's total revenue during the quarter.

However, its IT staffing services revenue dropped and management intends to reduce labor costs in that segment to improve margins.

Management did not disclose any company or dollar retention rate metrics, but said the firm was "negatively impacted by a bankruptcy, and we put a few contracts into suspension due to delays on renewals and payments."

Total revenue for Q1 2023 fell 13.6% YoY, while gross profit margin dropped 2.2 percentage points.

Selling, G&A expenses as a percentage of revenue rose 3.3 percentage points, a negative signal indicating reduced efficiency, and operating income decreased 58.2% year-over-year.

Looking ahead, management sees significant uncertainties with a potential recession looming and clients scrutinizing and/or delaying their purchasing decisions.

Leadership guided fiscal 2024 top line revenue to $123 million at the midpoint of the range, or flat year-over-year.

Adjusted EBITDA is expected to be $20 million at the midpoint.

The company's financial position is strong, with ample liquidity, no debt, and small free cash burn.

AMSWA's Rule of 40 performance has been lackluster and in need of significant improvement.

From management's most recent earnings call, I prepared a chart showing the frequency of key terms mentioned (or not) in the call, as shown below:

I'm most interested in the frequency of potentially negative terms, so management or analyst questions cited "Recession" three times, "Uncertain" nine times, "Challeng[es][ing]" twice, "Macro" twice and "Volatil[e][ity]" four times.

The negative terms refer to the myriad uncertainties the firm's customer base is facing as economies slow under the weight of a higher cost of capital environment.

Regarding valuation, the market is valuing AMSWA at an EV/Sales multiple of around 1.9x.

The Meritech Capital Index of publicly held SaaS application software companies showed an average forward EV/Revenue multiple of around 7.9x on June 1, 2023, as the chart shows here:

So, by comparison, AMSWA is currently valued by the market at a substantial discount to the broader Meritech Capital SaaS Index, at least as of June 1, 2023.

Risks to the company's outlook include an economic slowdown that may be underway, reduced credit availability which may affect customer/prospect spending plans and lengthening sales cycles which may reduce its revenue growth potential in the near term.

A potential upside catalyst to the stock could include a pause or even a drop in the cost of capital environment, which could reduce downward valuation pressure on the stock.

However, with a flat forward topline revenue growth forecast and an apparent full or overvaluation based on my discounted cash flow calculation, my outlook on American Software is on Hold for the near term.

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