2023-12-07 13:55:10 ET
Summary
- American Software, Inc. reported financial results below expectations.
- The company develops and sells supply chain management software and consulting services globally.
- The market for supply chain management software and services is expected to grow due to increased demand for supply chain visibility.
- American Software's revenue and earnings are declining, so my outlook for the stock is to Sell.
A Quick Take On American Software
American Software, Inc. ( AMSWA ) reported its FQ2 2024 financial results on November 16, 2023, missing both revenue and consensus earnings estimates.
The firm provides supply chain management software and related services worldwide.
I previously wrote about AMSWA with a Hold outlook on slow sales cycles and a capital allocation review.
While the Board has authorized some share repurchases, the company will need to reignite revenue growth.
For the time being, my outlook on AMSWA is to Sell.
American Software Overview And Market
Georgia-based American Software develops and sells supply chain management software and also provides consulting services to clients globally.
AMSWA is led by president and CEO H. Allan Dow, who joined the subsidiary Logility in 2000 and was appointed president in 2015.
The firm’s primary offerings include the following:
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Supply chain management
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Enterprise resource planning
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IT consulting.
The company seeks new customers through its direct sales and marketing teams and referrals from partners.
AMSWA has more than 900 customers in 80 countries among industrial, enterprise and SMB customer types.
According to a 2023 market research report by Stratview Research, the market for supply chain management software and services was an estimated $26.2 billion in 2022 and is forecast to reach $47.5 billion by 2028.
This represents a forecast CAGR of 10.37% from 2023 to 2028.
The primary reasons for this expected growth are continued demand for improved visibility into supply chains, which has become particularly important after the disruptions caused by the COVID-19 pandemic and the war in Ukraine.
The chart below shows the expected growth for the supply chain management software market from 2022 to 2028:
Major competitive or other industry participants include:
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Epicor Software
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HighJump
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Info
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IBM
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JDA Software Group
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Kinaxis
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E2open
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Oracle
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SAP
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Descartes Systems Group
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Manhattan Associates
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Others.
American Software’s Recent Financial Trends
Total revenue by quarter (blue columns) has continued to decline markedly; Operating income by quarter (red line) has also dropped in recent quarters:
Seeking Alpha
Gross profit margin by quarter (green line) has turned higher recently; Selling and G&A expenses as a percentage of total revenue by quarter (amber line) have also trended higher, indicating less efficiency in generating revenue:
Seeking Alpha
Earnings per share (Diluted) have fallen in recent quarters per the chart below:
Seeking Alpha
(All data in the above charts is GAAP.)
In the past 12 months, AMSWA’s stock price has fallen 28.26% vs. that of E2open Parent Holdings’ (ETWO) drop of 30.07%:
For balance sheet results, the firm ended the quarter with $82.9 million in cash, equivalents and short-term investments and no debt.
Over the trailing twelve months, free cash flow was $17.3 million, during which capital expenditures were $1.6 million. The company paid $5.2 million in stock-based compensation in the last four quarters.
Valuation And Other Metrics For American Software
Below is a table of relevant capitalization and valuation figures for the company:
Measure (Trailing Twelve Months) | Amount |
Enterprise Value / Sales | 2.2 |
Enterprise Value / EBITDA | 24.8 |
Price / Sales | 2.9 |
Revenue Growth Rate | -6.6% |
Net Income Margin | 9.4% |
EBITDA % | 8.8% |
Market Capitalization | $348,500,000 |
Enterprise Value | $264,610,000 |
Operating Cash Flow | $18,910,000 |
Earnings Per Share (Fully Diluted) | $0.33 |
Forward EPS Estimate | $0.37 |
Free Cash Flow Per Share | $0.51 |
SA Quant Score | Sell - 1.80 |
(Source - Seeking Alpha.)
Below is an estimated DCF (Discounted Cash Flow) analysis of the firm’s projected growth and earnings:
Based on the DCF, the firm’s shares would be valued at approximately $8.14 versus the current price of $10.20, indicating they are potentially currently overvalued.
As a reference, a relevant partial public comparable would be E2open:
Metric (Trailing Twelve Months) | E2open | American Software | Variance |
Enterprise Value / Sales | 3.5 | 2.2 | -38.4% |
Enterprise Value / EBITDA | 13.4 | 24.8 | 86.1% |
Revenue Growth Rate | 7.9% | -6.6% | --% |
Net Income Margin | -96.8% | 9.4% | --% |
Operating Cash Flow | $117,200,000 | $18,910,000 | -83.9% |
(Source - Seeking Alpha.)
AMSWA’s most recent unadjusted Rule of 40 calculation was negative (2.0%) as of FQ2 2024’s results, so the firm’s results have deteriorated sequentially, per the table below:
Rule of 40 Performance (Unadjusted) | FQ1 2024 | FQ2 2024 |
Revenue Growth % | -6.2% | -6.6% |
Operating Margin | 9.7% | 4.7% |
Total | 3.5% | -2.0% |
(Source - Seeking Alpha.)
Commentary On American Software
In its last earnings call (Source - Seeking Alpha ), covering FQ2 2024’s results, management’s prepared remarks highlighted the successful completion of its Garvis acquisition.
The technology has been rebranded as DemandAI+ and provides improved demand intelligence capabilities within the company's Logility platform.
With the integration, management hopes to grow its larger customer base and speed up conversion to its cloud offerings within its existing customer base.
The company also divested its IT staffing and consulting business as well as its transportation business so leadership can increase its focus on being a "pure-play supply chain software leader."
In response, the Board instituted a share buyback program and had 274,000 shares remaining on the program as of November 16.
I prepared a chart showing the frequency of a variety of keywords and terms used by management and analysts on the call.
Seeking Alpha
The chart illustrates moderate negativity with various mentions of "uncertain," "headwind," "macro," and "volatile" words.
Analysts asked company leadership about forward guidance, FQ3 business trends and capital allocation.
Management said that the majority of the guidance adjustment was due to the divestitures, while some was due to soft bookings at the beginning of the year.
FQ3 is showing some promise as a result of a growing pipeline and some delays from FQ2’s deals.
On capital allocation, the firm will likely exhaust its current share buyback authorization by Christmas, the dividend will remain as-is for now. Acquisitions are under consideration, but management doesn’t anticipate any movement until at least Spring of 2024.
For the quarter’s results, total revenue fell 18.2% year-over-year, while gross profit margin increased by 3.6%.
Selling and G&A expenses as a percentage of revenue grew by 4.8%, a negative result indicating reduced efficiency in generating revenue, and operating income dropped by 57.1% to $1.2 million.
However, the company's financial position is quite strong, with plenty of liquidity, no debt and good free cash flow.
AMSWA’s Rule of 40 performance has been poor and deteriorated into negative results in the most recent quarter.
Management didn’t provide any customer or revenue retention rate metrics, other than to refer to "normal quarterly churn."
Looking ahead, consensus revenue estimates for fiscal 2024 suggest revenue is expected to drop by 17.3% over fiscal 2023.
If so, that would represent a strong drop in revenue decline versus fiscal 2023’s drop of 3.13% versus fiscal 2022.
In the past twelve months, the firm's EV/EBITDA valuation multiple has changed little net-net, although it has experienced volatility, as the chart from Seeking Alpha shows below:
A potential upside catalyst to the stock could include some larger-sized customer wins.
However, management will need to do some heavy lifting to reignite topline revenue growth.
My outlook on American Software, Inc. shares is now a Sell until the firm can produce a positive revenue trajectory.
For further details see:
Declining Revenue Pressures American Software As It Invests In Supply Chain AI