QAD Delivers A Beat And Raise Quarter

| About: QAD Inc (QADA)

On Tuesday evening, QAD Inc. (NASDAQ:QADA) and (NASDAQ:QADB) reported Q2 revenue of $65.2 million. Earnings-per-share was $0.08 for QADA and $0.07 for QADB. These results topped the Wall Street estimate, which called for $63.8 million and $0.08, respectively.

To go along with the Q2 revenue beat, QAD also issued positive Q3 guidance, calling for $65 million in revenue, topping the Wall Street estimate of $64.4 million. On the conference call CEO Karl Lopker was equally upbeat:

"We had a good quarter in our core business … but we're most excited by our strong On Demand activity, which hasn't yet been reflected in our reported numbers. For the first half of the year, we booked more On Demand business than in the entire previous year."

As healthy as the quarter was, those On Demand bookings created little (if any) revenue in the quarter. On Demand business is recognized in gradual increments over the duration of each contract. However, QAD incurs up-front sales costs associated with the On Demand bookings, which hurts profitability in the near term (with commensurate benefits in the long term). Despite the up-front expenses, QAD still delivered commendable bottom line results, setting the stage for a brighter future.

Digging into the numbers, license revenue grew 25% to $8.6 million. QAD closed 16 deals with license revenue greater than $100,000, up from 11 a year ago. 6 of these deals were greater than $300,000 versus just 2 last year. Subscription revenue rose 19% to $4.5 million. Maintenance and other revenue rose to $34.3 million in the quarter, up from $33.9 million in Q2 of last year, contributing to solid growth in QAD's total recurring revenue (subscription plus maintenance).

It should be noted that subscription revenue is cannibalistic to license and maintenance revenue, because paying via subscription is an alternative to paying a one-time license fee plus annual maintenance. Despite this, license and maintenance revenue have continued to increase at QAD, even as subscription now tops 35% of the license/subscription mix.

QAD's deferred revenue balance was $86 million (up 12% year over year). This is particularly encouraging because deferred revenue is a forward-looking indicator of future revenue. $70.8 million of the total balance was made up of deferred maintenance (up 19% year over year), $6.4 million was deferred subscription (up 33% year over year), $5.7 million was deferred license (up 418% year over year) and $3.1 million was deferred professional services (up 138% year over year). These are all very healthy numbers, especially since subscription bookings cannibalize deferred maintenance, as we mentioned above.

Overall, QAD availed itself quite well. We continue to be pleased with its steady progress (and 2.4% dividend yield). This is especially relevant considering our belief that QADA and QADB both have an unlocked value of $20+ per share, well over 50% above current levels.

For the time being, the charts of QADA and QADB both appear poised for a reversal and have plenty of room to run in into the high teens (see chart below). You can review the details of our valuation analysis in our Q1 report, as well as the original report we issued on Seeking Alpha. In light of the company's continued progress, those views remain unchanged.

(Click to enlarge)

Disclosure: I am long QADA, QADB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.