A Software Company Touches All Bases

01/31/2008 12:00 am EST

Focus:

John Buckingham

Editor, The Prudent Speculator

John Buckingham of Prudent Speculator TechValue Report finds a small software company that covers lots of ground inside and outside organizations.

Founded in 1970, American Software (NASDAQGS: AMSWA) is a supply-chain man­agement (SCM) and enterprise resource-planning (ERP) soft­ware provider, in addition to providing information technology staffing and consulting services. American’s SCM software is used to optimize the forecasting, production, distribution, and management of products within a supply chain.

AMSWA [gets all] of its SCM revenue stream via an 88%-owned subsidiary, Logility (NASDAQGM: LGTY). The now publicly traded entity was spun out of American Software in 1997 to take ad­vantage of what were at the time premium multiples on SCM companies. The company’s ERP software, on the other hand, is used for purchasing and materials management, customer order process­ing, financial, e-commerce and tradition­al manufacturing solutions.

Put in layman’s terms, SCM soft­ware helps customers track product flow outside the company, while ERP software helps them manage the flow of data within the organization. Their primary goal is to save money through the reduction of redundant paperwork (or any paper­work at all), to better track assets (both people and inventory) and to enhance financial and operational reporting for better decision making.

In the latest-quarter earnings conference call, management noted that the company had just turned in 27 consecutive quar­ters of profitability and 14 quarters of year-over-year revenue growth—such a long time that neither number is all that impres­sive any more.

Rather, the more important figure to come out of the report was the fact that revenue had jumped by 17% on the year, the largest increase in five quarters. At $23.6 mil­lion, revenue generated was the highest figure since the quarter ended January 2000. The better performance helped cut ERP operating losses in half to $205,000, while SCM op­erating income jumped just under 38% to $2.61 million.

A fair chance of recessionary conditions ahead makes us wary of picking up shares in a company that’s dependent on positive economic activity to further growth. Still, American Software’s cash-rich balance sheet, currently sporting $3.00 per share in cash and near cash, eases most fears and we agree with man­agement’s contention, so nicely put, that, “technology spending has incrementally improved and should continue to improve as increased global competition forces companies to improve pro­ductivity by upgrading their technology environment systems,” [so] that AMSWA should come out of a downturn well posi­tioned to take full advantage of a sustained rebound.

AMSWA shares actually have held up pretty well compared to many of its small-cap tech value peers. The stock remains reasonably valued, though, trading at 2.2x trailing revenue while yielding 4.6%, providing further support to our investment thesis, despite the rising chance of continued eco­nomic weakness. (American Software closed at around $8.50 Wednesday—Editor.)

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