American Software Inc (AMSWA): A Stagnant and Perpetual Floater, Cheap for a Reason | Recommendation: PASS

Based out of Atlanta, GA, American Software Inc (AMSWA) is a vertical software provider Capitalization ($m except Price)
serving supply chain planning needs primarily for mid-market sized companies ($500m - $1b in Price $11.57
annual revenue). Their flagship product is Logility and serves over 800 customers including Diluted Shares Outstanding 34.2
large blue-chip customers across a variety of sectors. The current annual revenue run rate is Market Capitalization $396
Cash on Hand $84
$100 to $104m (FY24 guidance) at ~15% adj. EBITDA margins. Since 2018, AMSWA has been Debt $0
undergoing migration to the SaaS model and away from on-prem licenses and are currently at Enterprise Value $312
~52/32/16 subscription fees/maintenance/professional services with minimal on-prem license
revenue (less than 1% of total revenue). As of FQ2’24, recurring revenue (subscription + maintenance) made up ~84% of total revenue.
On the surface, fundamentals may have plenty of upside and ($ in millions) 2019 2020 2021 2022 2023 2024E 2025E 2026E
License 7.1 7.6 3.0 5.4 2.8 0.6 0.4 0.3
AMSWA looks relatively cheap for an arguably sticky vertical
y/y -53.6% 6.4% -60.5% 80.1% -48.9% -80.0% -30.0% -10.0%
SaaS business trading at less than 3x FY25E sales, I Subscription Fees 14.0 22.0 28.9 42.1 50.4 56.5 63.2 70.8
recommend passing on this for the following reasons: y/y 58.4% 57.1% 31.1% 45.7% 19.8% 12.0% 12.0% 12.0%
Professional services & other 42.2 42.8 39.6 43.5 35.9 18.0 15.3 14.1
1) It’s incredibly difficult to trust management as there y/y -5.6% 1.5% -7.4% 9.7% -17.3% -50.0% -15.0% -8.0%
Maintenance 45.4 43.1 39.9 36.6 34.6 29.0 25.5 22.5
are severe cultural issues largely rooted in the senior
y/y 3.6% -5.1% -7.3% -8.3% -5.6% -16.0% -12.0% -12.0%
leadership team given their track record over the Total Revenue 108.7 115.5 111.4 127.6 123.7 104.0 104.4 107.7
years. y/y -3.5% 6.2% -3.5% 14.5% -3.1% -15.9% 0.4% 3.1%
Recurring Revenue 59.4 65.1 68.8 78.7 85.0 85.5 88.8 93.3
Lack of channel relationships: American Software was y/y 12.8% 9.6% 5.7% 14.4% 8.0% 0.6% 3.9% 5.1%
historically antagonistic toward 3rd parties, a horrible mistake in % of Total Revenue 54.7% 56.4% 61.8% 61.7% 68.7% 82.2% 85.0% 86.6%
a business where the big three (Deloitte, EY and Accenture) Total Gross Profit 56.7 63.2 61.0 75.8 74.3 69.6 70.5 73.0
control 80% of the market in terms of product evaluations by Gross Margin 52.2% 54.7% 54.7% 59.4% 60.1% 66.9% 67.5% 67.7%
potential customers. This anti-3rd party mentality essentially
Operating Income 5.3 6.0 4.4 13.2 10.6 7.3 4.6 3.9
allowed mid-market peer o9 over the years to go from nothing
y/y 14.5% 14.5% 14.5% 14.5% -3.1% -31.2% -37.2% -13.9%
to overtaking Logility in size as o9 grew through large deal with Operating Margin 4.9% 5.2% 3.9% 10.3% 8.5% 7.0% 4.4% 3.6%
the help of Deloitte and EY. Kinaxis, a much larger player also Net Income 6.8 6.7 8.1 12.8 10.4 6.2 4.2 3.7
established monumental relationships with the likes of y/y -43.6% -0.9% 20.0% 58.0% -18.5% -40.6% -32.7% -11.4%
= Adj. EBITDA 14.6 16.6 13.2 21.1 18.1 14.9 12.6 12.1
Accenture which helped expand them into adjacent new y/y -32.7% 13.3% -20.3% 59.7% -14.3% -17.4% -15.7% -4.2%
verticals like life science. Margin 13.4% 14.3% 11.8% 16.5% 14.6% 14.4% 12.1% 11.2%
= Free Cash Flow 16.7 22.4 16.5 28.1 -4.3 7.0 11.4 16.1
American Software on the other hand tackled their customer y/y 3102.5% 33.9% -26.5% 70.7% -115.3% -262.8% 63.3% 40.7%

base with a transaction mindset essentially rushing the % of Total Revenue 15.4% 19.4% 14.8% 22.0% -3.5% 6.7% 10.9% 14.9%

implementation resulting in customers spending a lot of money without getting the full value of their software as the implementation and
training / ramp-up process was ineffective. This along with lack of product development over the years prompted the likes of Gartner to de-rank
Logility in their Magic Quadrant. AMSWA realized this too late and has been in major catch-up mode over the last 2 years (as evident in their
customer count having gone from ~1,350 to 900 over the past 4 years).
Serious execution issues due to culture and lack of vision: Channel checks indicate major issues within their sales force as they lack an
inside sales team and have had issues hiring personnel and making zero traction in bringing in new logos. This was largely why Logility has
been relegated to the mid-market where peers like o9 and Kinaxis don’t really operate anymore as they’ve grown large enough to go after
enterprise customers. What’s worse is that the company philosophy has been more about application logic and algorithms than user
experience. These are guys from Georgia Tech who wrote the back-end logic (which was fantastic in its functionality) but had a distaste and
lack of respect for the importance of user experience.
Also important to note is the lack of urgency and motivation from senior management who are rooted in the South. The gist was that this was
run by a bunch of guys who were basically happy to show up for a fat check while working an easy 9 to 4 and going hunting every weekend.
Based on their proxies over the years, they’ve been well rewarded to stick to $100m to $120m of revenue over the past 5 to 7 years. Overall
very old school mentality (e.g., everyone had to wear a tie, no town halls, budgets rarely increased y/.y, etc.) with a chairman who believes in
growth only through acquisitions. Another red flag for investors looking for an innovative drive (in today’s world where AI is all the talk) is the
fact they pay a dividend (historically ~80% of FCF was paid out in dividends) instead of reinvesting back into the business for further product
functionality/expansion.
Issues with the existing customer base: The average customer is now over 10 years old and as millennials and Gen-Z move up the ranks
within their client base, Logility is increasingly viewed by the younger generation as obsolete and complicated. We can see this in the consistent
erosion of their maintenance revenue (5 consecutive years of decline) which is a strong signal that your customer is planning to leave (and the
corresponding customer count over the years demonstrate this). Their core customer base is comprised mostly of lethargic types of businesses
who are anti-technology adoption (e.g., furniture and paint companies in the South). Their investor presentation boasts blue chip names like
Alcon, Johnson Controls, Thermo Fisher, etc. but keep in mind customers in this space often use several vendors for their supply chain
planning solutions.
2) Too much competition within the supply chain planning space where Logility operates with channel checks confirming that
several players including privates (e.g. Blue Yonder) have much better traction and outlook than Logility.
Lagging peers in product development and cloud migration: Logility has had a number of failed cloud migration and implementation with
existing users due to not having been aggressive enough to cut deals with their customer base. Leadership unfortunately was too slow to
recognize this and put forth the development effort (this goes back to the culture). They also have a warehouse management product where the
functionality was very robust on-prem but they failed to invest resources to successfully replicate this in the cloud. Logility pitches itself as a
niche for consumer companies but the problem is that both Kinaxis and o9 are both very competitive in this vertical. Kinaxis launched an
initiative in 2023 to go after the $500m - $1b market space with implementation partners which will be a huge problem for Logility who lacks a
clear channel strategy. Logility also hasn’t been rolling out AI/ML as fast as the rest of the market nor are they doing a good job tying these
capabilities from end to end as supply chain is now a boardroom topic of conversation post-COVID.
Logility is falling behind curve in a trend toward platforming: There are six categories within the supply chain software market with
planning being the biggest (40-50%) and whose market is heavily commoditized. This has driven major players like Blue Yonder, E2Open,
Manhatton Associates, and Kinaxis to shift toward end-to-end platforms covering most if not all six categories (planning, transportation
management, warehouse management, procurement, order management and store operations). Customers as well prefer to have less vendors
as CFOs want to minimize the number of vendors they are purchasing from. Platform concepts, especially in this world of connectivity, are
attractive to CFOs (e.g., E2Open has their Harmony platform, Manhattan has their platform Blue Yonder has the Luminate platform, etc.).
Issues with planning software in the mid-market: Correspondingly, Gartner used to rank Logility quite highly but over the years dropped
them off given their lack of product development and modernization. Even as American Software speaks highly of their cloud migration, it isn’t
actually a true cloud (API driven, multi-tenant, true SaaS). Instead, Logility operates as hosted cloud with dedicated hardware and single tenant.
Additionally, planning software per industry experts is not that sticky relative to other SC categories like warehouse management systems.
Customers can always rip it out even on-prem as all the communication between the software and the ERP is done through APIs so customers
can rip this out and stand up a different tool and run it in parallel. The stickiness in planning software is driven largely by the number of SKUs
where the more SKUs you have in the system, the stickier and more difficult it is to be ripped out. The second factor is the number of locations
and nodes therefore it’s stickier in industries with more manufacturing and inventory locations. This means the lower down market you go and
the smaller the customer size (Logility), the more risk you have relative to enterprise vendors.
3) There are better and arguably ways to play vertical SaaS even within the supply chain software space.
Valuation shouldn’t always be the primary catalyst and I believe this is a perfect example of why something is, has and will remain cheap for
good reason. On an adj. EBITDA basis, AMSWA isn’t exactly cheap either when we look at the peer group.
Relative Comps EV/FY24E EBITDA FY24E Margin EV/FY25E EBITDA FY25E Margin
Kinaxis (KXSCF) 33.8x 17.6% 22.9x 17.6%
E2Open Parent Holdings (ETWO) 9.7x 34.4% 9.6x 34.4%
Manhattan Associates (MANH) 45.0x 29.0% 37.9x 29.0%
Descartes Systems Group (DSG) 27.9x 43.1% 24.5x 44.6%
SAP (SAP) 19.6x 30.7% 17.2x 30.0%
Oracle (ORCL) 14.2x 49.1% 12.8x 50.3%
SPS Commerce 34.9x 29.7% 29.5x 30.0%
Group Average 26.4x 33.4% 22.1x 33.7%
American Software (AMSWA) 21.3x 13.7% 25.3x 10.7%

Relative Comps EV/FY24E Revenue FY24E Growth EV/FY25E Revenue FY25E Growth
Kinaxis (KXSCF) 33.8x 18.0% 22.9x 22.0%
E2Open Parent Holdings (ETWO) 9.7x -3.0% 9.6x 2.0%
Manhattan Associates (MANH) 13.1x 10.0% 11.7x 12.0%
Descartes Systems Group (DSG) 12.0x 18.0% 10.9x 10.0%
SAP 5.2x 9.0% 4.7x 12.0%
Oracle (ORCL) 7.0x 7.0% 6.4x 8.0%
SPS Commerce 10.4x 15.0% 9.1x 15.0%
Group Average 13.0x 10.6% 10.8x 11.6%
American Software (AMSWA) 2.9x -13.7% 2.9x 0.2%

This isn’t a short either due to the following:

1) There is a good chance this is an acquisition candidate by a larger peer or private equity with potentially a large takeout
premium.
American Software overall despite all their internal issues still has a solid product with good functionality (although lagging peers). They are
known to be strong on the supply side of the planning equation particularly within industrial and manufacturing companies. Additionally, despite
their cloud migration challenges, they still have a solid install base that needs to move to the cloud (big revenue uplift potential if they pull this
off) but they’ll need to streamline the upgrade path for these clients. That said, their days as a standalone planning-only solution are numbered
unless they expand but the best solution in their case is a takeout by a strategic or private equity who has the capital to get rid of the existing
management team and right size the strategy.
2) The entire sector could re-rate higher if it plays into the consensus belief of high-single-digit to low-double-digit long-term
growth.
In hindsight, COVID was the best thing to happen to this space as the industry didn’t appreciate or understand the true value of planning
software until the pandemic which showed people that having the best just-in-time product flow and inventory set-up isn’t enough to withstand
major disruptions if you lack the redundancy, resilience and planning. There is still tremendous growth ahead for planning software with many
small and mid-sized customers still using Excel sheets and such. These customers in particular are in catch-up mode as large enterprises have
already gone through much of the modernization during COVID and are more susceptive to the SaaS model as they won’t have to write big
checks anymore.
3) Lastly, peak bearish may already be priced into the stock and fundamentals could improve despite my lack of trust in the
leadership team.
The stock is still down 65% from its all-time high (Nov 2021) and down 21% on a TTM basis so an eventual reversion to the mean is within the
realm of possibilities. Management is guiding to $100m - $104m of revenue and $14.5m - $16m of adj. EBITDA for FY24. I expect flattish
growth for FY25 before a low-single-digit pick-up thereafter. This is assuming there are no changes within the leadership team but if we see
major changes in the senior line-up, there is no telling what kind of improvements they may make given that the hole they’ve dug themselves
into was largely a result of them not being able to get out of their way own.