The third quarter proved disappointing for supply chain software provider Logility Inc., which today reported a drop in revenue and net income.
Despite signing 18 new customers in 14 countries in the quarter, the company reported a 40% drop in license fees, a shortfall that modest year-over-year increases in services and maintenance fees could not offset.
Total revenue for the quarter ended Jan. 31, 2008, was $9.9 million, down 12% from $11.3 million in the year-earlier quarter. License fees accounted for $2.3 million, down from $3.9 million. Services brought in $1.9 million, up from $1.7 million, while maintenance revenue was essentially flat — up 1% — at $5.7 million.
On a conference call with analysts this morning, Logility CEO Mike Edenfield said, "This shortfall on license fee revenues was primarily due to a number of evaluations taking longer than we anticipated."
Software license revenue was also the weak spot in Logility's second quarter, when the company reported only a 2% year-over-year gain. However, in that quarter, services rose 28% and maintenance revenue increased 12%.
In the latest quarter, the company's bottom line took a hit due to a one-time, non-cash writedown of capitalized software development costs of $1.2 million related to poor sales in an unspecified product line in the quarter. The writedown contributed to a 61% decline in earnings before taxes to $1.2 million, from $3.1 million in the year-ago quarter, and a 58% drop in GAAP net earnings to $835,000, from $2 million a year ago.
In response to analysts' questions, Edenfield declined to identify the product line that necessitated the writedown, saying only that it is a product that the company has had for a long time and continues to sell. "Obviously, for this product line, we had not been selling it as much as the other products, so lately it has not been as competitive. However, we think it can be competitive and we believe we will sell it."
The company's collaborative supply chain planning product lines include the Logility Voyager Solutions suite, which includes performance monitoring for supply chain visibility; demand, inventory, and replenishment planning; sales and operations planning; supply and global sourcing optimization; transportation planning; and warehouse management. The company's Demand Solutions suite provides forecasting, demand planning, and point-of-sale analysis.
Despite the performance in the quarter, Edenfield said the company's balance sheet remains strong, with cash and short-term investments of $41.4 million as of Jan. 31, a sequential and year-over-year improvement. And, he noted, this was the company's 11th consecutive quarter of profitability.
Though Logility executives don't provide specific guidance for upcoming quarters, Edenfield told analysts, "We have enough deals in the pipeline to have a very good fourth quarter. However, our close rate must improve significantly in order to increase our license fee revenues compared to the third quarter."
He closed the news conference by saying: "We look forward to having better numbers to report next quarter."
Indeed, it will be during the fourth quarter that Logility will "feel the most pressure to close deals," said John Fontanella, AMR Research analyst, in an interview with Managing Automation. The fact that the company has now experienced two quarters of slower license sales "tells me companies are delaying their buying decisions," he said. "January was a tough quarter for everyone. It's just the economic news. Customers are still going to buy software, but they will take longer making the decision." Fontanella views Logility as a "fundamentally very strong company" that has good relationships with customers and a strong base.
Another AMR analyst, Lora Cecere, commenting via e-mail, said she still thinks the supply chain management market is strong and that Logility will continue to do well. Regarding the deals that "slipped through" during the third quarter, Cecere cited three factors at work: "general concern about market stability with rising commodity prices , greater confusion in IT landscapes as companies try to maximize current ERP investments with impending upgrade requirements, and a general movement from the back office to front-office spending."
Logility signed deals in the quarter with Arch Chemicals, GST Autoleather, Huhtamaki LTD, Johnson Diversey Japan, PPG Industries Europe, Puma, and Unilever UK Ltd. Also in the quarter, Verizon Wireless selected Logility Voyager Solutions for its inventory, demand, and sales operations planning, and Intertape Polymer Group implemented Logility Voyager Solutions.