Description

Thesis

AMSWA is a sticky supply chain planning software business that is overcapitalized and trading with limited downside as its current EV equals its run-off/liquidation value, and has 80-100% upside as the company cuts costs to expand cash flow margins and several catalysts could lead the company to unlock other sources of upside in the next 12-18 months.

While the company has been under-managed for a long time, we believe AMSWA’s Board has decided to unlock value, as they recently reduced their workforce by ~10% ($6M in annual cost saves), are potentially considering a sale of their owned corporate headquarters, and have shifted their focus to expanding cash flow margins as they are considering reducing the Chairman/Founder’s excessive pay. They are also potentially looking to divest two non-core businesses: their staffing segment (The Proven Method) and their transportation analytics business (mature service/software business). Founder, Jim Edenfield, controls 100% of the super voting common shares and is being pressured by ISS and Glass Lewis, two leading proxy advisors, to eliminate the dual class share structure[1]. We believe this proxy advisor pressure will be effective in forcing an elimination of AMSWA’s dual class share structure and unlocking better governance, higher margins and more shareholder friendly capital allocation policies in the coming 12-18 months.

Cash flow growth over the next few years should average low double digits as new logo growth remains weak, but customer retention holds in the 95% range and costs are reduced, allowing cash flows to grow much faster than sales.

Logility: Supply Chain Planning

Logility, AMSWA’s core supply chain planning platform, is a leading enterprise supply chain with 95% unit/customer retention 105% net dollar retention rate and blue chip customers (over 800 customers), which includes leading large companies like Fastenal, Parker Hannifin, Ashley Furniture, Novartis, Moen, The Home Depot, Berry Global, Hasbro, Foot Locker. AMSWA has a significant market share among large global retailers and consumer discretionary companies; the company also has significant customers in the following verticals: healthcare,  industrial and specialty chemicals. AMSWA’s customer base is susceptible to macro-economic pressures and when the economy slows, AMSWA’s retention and growth metrics are pressured. Key competitors include: Kinaxis, O9, Blue Yonder. While we do not use relative valuation as a component of our investment thesis, leading supply chain companies trade for 40x+ EV/EBITDA.

Our customer and other checks suggest that AMSWA’s Logility platform are in fact high quality and sticky, with average customer tenure around 20 years[2].

Growth and new customers

Over the last five years, recurring revenue growth has averaged 10% (see below) and recurring revenues comprise greater than 70% of total revenues.

AMSWA’s primary sources of growth are: upsell and price increases to existing customers and new customer acquisition. Over time, growth has been 60% driven by upsell and price to new customers and 40% from adding 35 new customers/logos per year. We model this existing customer growth continuing but we only assume 15 new logos per year.

Margins over time

AMSWA is under-earning largely due to some low margin, non-core businesses they have maintained and due to excessive G&A: an expensive exec Chairman, owned real estate carrying costs, overpaid executives, and other public company costs including an expensive Board of Directors. To state it simply, AMSWA should be earning 30% EBITDA margins, and while the below will likely allow AMSWA to exceed 20%, there is quite a bit more one could do to push margins higher, closer to 30%+, where their competitors like MANH, KXS.CN, ETWO already exhibit those high margins, and therefore higher multiples.

While EBITDA margins have hovered around the mid-teens over the last few years, there are several factors that we believe will push margins to 20% and beyond in the coming periods as the below cost cuts approximate $6-7M and remove low margin non-recurring revenues:

1. A recent May 2023 40-person reduction in force (RIF) that predominately effected R&D heads; ($6M of cost cuts);
2. The potential divestiture of  low margin staffing (Proven Method) and other non-core data analytics;
3. The potential sale of the $14M assessed value, owned[3], oversized (2.9 acres/ 127K sq ft office) corporate headquarters (which has significant maintenance and other carrying costs which we believe are well above $1M given property taxes alone are $250K p.a.[4]) and a reduction in Exec Chairman compensation, which currently is ~$1.2M per year, he is the second highest salaried—and third in respect of total compensation—  person in the firm although he is 88 years old and not active in daily operations.

We also note that as their cloud business scales, gross margins there will approach 80% and are currently ~70%, this could help the company hit a mid-20s EBITDA margin over the coming years.

The catalysts

Catalyzing the aforementioned changes are ISS and Glass Lewis, which have stated that:

“ISS will target companies with dual class share structures (what they call “unequal voting rights”) more aggressively in 2023… ISS will recommend voting against all nominees for director of the applicable companies.

Note that this policy update means that, starting February 1, 2023, ISS will likely be recommending against directors at many large or iconic U.S. companies that have unequal voting rights structures.”

AMSWA has already begun reaching out to institutional shareholders and sharing its thoughts. Note that when AMSWA was pressured by ISS to include DEI when nominating Board members, they quickly adjusted and nominated and elected a female Asian Board member late in calendar 2022.

The company itself has noted that the only way to resolve the dual share structure is for the company to tender for Edenfield’s super voting shares, and they have also said that the founder believes the shares are worth at least $20/share, if not higher. The company has received offers for the business at much higher prices than the current valuation; in fact, the company received a bid for the company around $8 per share way back in 2008 according to old filings. One way or another, Edenfield’s super voting shares will be gone—either the company buys his shares, or the whole company gets sold. The company has also admitted that only buying his (founder Edenfield) shares would not be straightforward and would involve significant conflicts of interest which they hope to avoid.

What is the downside? What is the upside?

We believe this is a highly asymmetrical investment as run-off value is approximately $10-11 per share using a 10-12% discount rate. Downside from here is limited, as one could halt all new license sales and run-off the existing business and earn an attractive return (10-12% p.a.) taking on very limited execution risk.

Risks are that management continues to mis-execute, they could do a bad acquisition and start hiring, causing margins to decline. For the reasons stated above, we do not think this happens.

As the company focuses on making the required governance changes, they have admitted that EBITDA margins must come up. Assuming the multiple holds, we have assumed ~$7M of cost cuts, most of which have already happened, this gives us $26M of EBITDA, which if valued at a still discounted 12x EV/EBITDA multiple, implying a 7% FCF Yield, yielding a $312M EV, add in the net proceeds from real estate and divestitures of $10M and the cash of $115M, giving us an equity value of $13.25 per share, or 30% upside in the near term (next 12 months).

Now for mid-term upside in the next 18-24 months, if we assume the company is sold for 6x gross profit—  which would be well below the acquisition of a similar asset QAD Software for 8.5x by Thoma Bravo— we would get $17.50 per share for AMSWA. 7x would yield $20 per share for AMSWA. So the 18-24 month upside target is anywhere from 75-100% upside.

Catalyst

Collapse of dual-class share structure

Sale of company