QAD's CEO Discusses F4Q 2014 Results - Earnings Call Transcript

Mar.13.14 | About: QAD Inc (QADA)

QAD Inc. (NASDAQ:QADA)

F4Q 2014 Earnings Conference Call

March 13, 2014 5:00 PM ET

Executives

John Neale - SVP, Finance and Treasurer

Karl Lopker - CEO

Daniel Lender - CFO

Pamela Lopker - Chairman and President

Analysts

Matthew Paul - Sidoti & Company

Mark Schappel - The Benchmark Company

Operator

Welcome to the QAD Fiscal 2014 Fourth Quarter Financial Results Conference Call. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to turn the conference over to Senior VP of Finance and Treasurer, John Neale. Please go ahead.

John Neale

Hello everybody, and welcome to today's call. I'm John Neale, QAD's Senior Vice President and Treasurer. Earlier today, we issued a press release announcing QAD's financial results for the fiscal 2014 fourth quarter and full year ended January 31, 2014. The press release and associated financial statements are available through the Investor Relations section on our Web site at qad.com. Additionally, please be advised that this call is being webcast live on our website.

Before I begin, I need to ensure that everybody on today's call understands that our discussion might contain forward-looking statements that are based on certain expectations and analysis. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated. QAD takes no obligation to revise or update these forward-looking statements to reflect events or circumstances after the date of this call.

For a complete description of these risks and uncertainties, please refer to QAD's 10-K and 10-Q filings with the Securities and Exchange Commission.

Now I would like to turn the call over to Karl Lopker, QAD's Chief Executive Officer.

Karl Lopker

Well good afternoon, and thank you for joining us to discuss our fourth quarter results. Pam Lopker, President; and Daniel Lender, Chief Financial Officer, join me on the call.

For the fourth quarter, we are very happy to report total revenue above our guidance and record revenue for the entire fiscal year. We took advantage of a positive manufacturing economic environment, and a pickup in acceptance of the QAD enterprise cloud. Our profitability was also higher than planned for the quarter, due to the strong revenue. Although solid bookings for QAD Cloud apps increased our expenses for sales commissions on sales that have not yet been built.

We are extremely excited to see subscription revenue, which comes from our QAD Cloud apps, up 43% over the previous fourth quarter. Dan will give the detailed numbers, and I will discus the rest of it.

Daniel Lender

Thank you, Karl. We reported record revenue for fiscal 2014 and finished the year strong, with a very solid fourth quarter. Total revenue for the quarter grew to $73.5 million, up 12% from $55.8 million a year ago. The increase was driven by growth in licenses, subscription revenue and professional services. Maintenance revenue was down slightly.

Currency, had a measurable impact on total revenue for the quarter. License revenue grew more than 50% to $14.6 million, up from $9.5 million last year. We closed 16 license deals greater than $200,000 compared to 14 in last year's quarter.

The current fourth quarter benefited by a net $1.2 million of license deferrals that were recognized in the quarter. Last year's fourth quarter's license revenues were negatively affected by a net $5 million of deferrals.

Maintenance and other revenue was $34.5 million versus $35.4 million last year. The year-over-year decline was primarily related to currency effects, and recognition of prior deferrals in the prior year quarter, with some impact from customers' transitioning to the QAD Enterprise Cloud. When customers' transition their deployment to QAD's Enterprise Cloud, they no longer need to pay for maintenance, as those services are included as a component of our subscription offering.

Subscription revenue was up 43% to $5.8 million compared to $4.1 million last year, due to the growth and success of our cloud offering. Bookings for the QAD's Enterprise Cloud remained strong for the quarter, with the majority coming from North America, consistent with historical patterns.

Professional Services grew 11% to $18.7 million from $16.9 million last year. The increase is consistent with a growth of our overall business. Product revenue related to the acquisition of CEBOS, our quality management system, was $1.3 million, with associated costs of $1.2 million. For the fourth quarter of fiscal 2013, CEBOS contributed $200,000 in revenue, with associated costs of $400,000.

Looking at total revenue by vertical, high tech and industrial represented 35%, Automotive 27%, consumer products and food and beverage 22%, and Lifesciences 16%. By geography, North America 43%, EMEA 34%, Asia Pacific 17% and Latin America 6%.

During the fourth quarter, we had 44 deals representing more than $500,000 each in combined license, maintenance subscription, and professional services billing, including 12 in excess of $1 million, four of which were greater than $2 million.

Gross profit grew to $42.8 million or 58% of revenue for the fourth quarter of fiscal 2014, compared with $38.4 million or 58% of revenue for the same quarter last year. Sales and marketing expenses were $18.9 million versus $17.2 million during the fourth quarter of last year. The increase, primarily reflected sales commissions, including commissions for orders where revenue was deferred, and cloud orders, where revenue will not be recognized until future periods. As a percentage of revenue, sales and marketing expense totaled 26% for both the fiscal 2014 and 2013 fourth quarters.

R&D expense for the fiscal 2014 fourth quarter was $10.1 million compared with $9.9 million for the same quarter last year. As a percent of revenue, R&D expense was 14% and 15% respectively for the fourth quarters of fiscal 2014 and fiscal 2013.

General and administrative expense was $7.8 million versus $7.9 million last year. As a percentage of revenue, G&A expense was 10% and 12% respectively for the fourth quarters of fiscal 2014 and fiscal 2013. This brings total operating expenses to $37 million or 50% of revenue for the fiscal 2014 fourth quarter, versus $35.1 million or 53% of revenue for the same period one year ago.

Equity compensation expense was $966,000 for the fiscal 2014 fourth quarter versus about $1 million a year ago. Operating income increased to $5.8 million from $3.2 million for the last year's fourth fiscal quarter. Net income grew to $4.3 million or $0.27 per diluted Class A share and $0.23 per diluted Class B share from $2 million or $0.13 per diluted Class A share and $0.11 per diluted class B share last year. Our tax rate for the fourth quarter of fiscal 2014 was 29%.

Cash flow provided by operations was $12.6 million for the fourth quarter of fiscal 2014, versus $5.3 million for the prior year fourth quarter. The increase related primarily to strong collections.

Now, I would like to briefly review our full year results. Revenue rose to a record $266.3 million, up from $252.2 million last year. Product revenues related to CEBOS and DynaSys, our supply chain acquisition, was $12 million for the full fiscal year, compared with $3.7 million last year. Associated costs were $11.6 million for fiscal 2014, and $5 million for fiscal 2013. Starting in the first quarter of fiscal 2015, we will no longer break out this metric.

Gross margin was 56% of revenue versus 57% for the fiscal 2013. Total operating expenses were $140 million or 52% of revenue, compared with $132.8 million or 52% of revenue last year. Net income before tax was $10.2 million for fiscal 2014, versus $10.3 million for last year. Our tax rate for the year was 37.1% and for fiscal 2015, we expect the tax rate of approximately 38%.

Fiscal 2014 net income totaled $6.4 million or $0.41 per diluted Class A shares and $0.34 per diluted Class B share. Last year, net income was $6.6 million or $0.42 per diluted Class A share and $0.35 per diluted Class B share. I'd like to note that fiscal 2014 was negatively affected by weak first quarter, as well as additional costs related to our acquisitions of CEBOS and DynaSys. Cash flow provided by operations totaled $24.1 million for fiscal 2014, compared with $16 million for the prior fiscal year.

Moving on to the balance sheet, we ended fiscal 2014 with cash and equivalents of $76 million, up from $65 million at the end of fiscal 2013. Accounts receivable equaled $71.3 million, down slightly from $72.6 million at the end of fiscal 2013. Days sales outstanding using our countback method was 49 days for the fourth quarter of fiscal 2014, versus 52 days for the fourth quarter of last year, and the quality of our receivables remains good.

Our deferred revenue balance was $104.2 million, comprised of $87.3 million of deferred maintenance, $7.6 million of deferred subscription, $4 million of deferred license and $5.3 million of deferred professional services. Our deferred revenue balance was $101.2 million at the end of fiscal 2013.

Our business outlook for fiscal 2015 first quarter calls for total revenue of approximately $67 million at above breakeven earnings per share. For the full year, we expect revenue growth rate similar to what we achieved in 2014, with net income roughly equal to fiscal 2014 levels.

And that concludes my remarks, Karl, back to you.

Karl Lopker

Okay. Thanks Daniel. Well we had a good quarter in licenses build similar to last year. Services continue to grow roughly at the rate of total revenue. Upgrades continue to be the fastest growing part of that business. This is important, because most cloud conversions also include an upgrade, and if the customer doesn't decided to move to QAD Enterprise Cloud, an upgrade usually indicates a renewed commitment to our QAD solutions for the foreseeable future.

The most exciting growth area was in subscription revenue. We have strong subscription growth in excess of 25% each quarter this past year, and 43% in the fourth quarter. Approximately one third of our subscription revenue comes from countries outside the U.S., reflecting our focus on multinational customers.

QAD Cloud apps bookings exceeded our internal targets, and we added 12 new sites this quarter. And this quarter, as in the third quarter, we received the majority of our cloud bookings from new divisions of existing customers. These customers usually start out with fewer users than they will finally use, so there is an opportunity for growth in these accounts. In fact, new users from previous cloud sales were around 20% of our cloud bookings.

The funnel for QAD Cloud Apps continues to be around 25% of our total funnel. While the total funnel is down around 6% from last year, this is more a reflection of a strong closing of sales cycles in the fourth quarter.

Europe showed good strength in the quarter, which reflects a more positive economic situation for manufacturing in that region. The revenue breakdown by vertical was maintained at the historical averages, and full time employee headcount was flat from last year at 1,544, reflecting our constant control on costs.

Now I am going to turn the call over to Pam for a closer look at the QAD Cloud activity.

Pamela Lopker

Sure Karl. We had a busy Q4. We are adding users to existing deployment, plus 12 new deployments of QAD Cloud ERP. I'd like to highlight three of these new deals in Q4.

First of all, a global U.K. based consumer products company, selling shampoos, soaps and other related products. The company has been a QAD on-premise customer in the U.K. for several years. They moved to the cloud in the U.K. a few quarters back. They currently have a global expansion initiative, and in Q4, we signed a cloud deal for a new Brazilian manufacturing site.

The second company is a $1 billion plus global tier-1 automotive supplier of safety systems based in the U.S. The company grew through acquisition, and ended up with four major ERP systems, including an older version of QAD. In Q4, they signed up for QAD cloud ERP for a worldwide rollout, replacing all their legacy systems, and covering their manufacturing operations in nine countries.

The last example is a Brazilian technology based performance material and chemical company. They are a subsidiary of a $1.5 billion company that uses SAP. QAD Cloud ERP was appealing for three main reasons. First of all, our SSAE16 security that QD cloud provides, is much better than they could provide on-premise. Second, the company runs very lean [ph], with QAD Cloud ERP, they can have a robust and complete solutions with very few IT resources in Brazil.

Third, we then -- the Brazilian legal and fiscal requirements are very complex, and requiring continuous updating. The QAD Enterprise Cloud takes care of this for them, and alleviates the need for the U.S. operations to bother with that complex environment.

I think this gives us a good overview of what kind of deals that we see in our cloud sales divisions, companies, implementing the cloud, somebody that has an SAP centric view, buying QAD for operations globally, and then brand new large customers, just making the decision to standardize QAD Cloud, replacing legacy ERP systems. We see obviously more opportunity this quarter from these customers and going forward into subsequent quarters.

Before I give it back to Karl, I'd like to mention Explore 2014 will be holding our annual exploring user conference, May 5 to May 8 in New Orleans. We are expecting it to be well attended from customers around the globe. We will be sharing QAD's vision of the future and customers will be sharing best practices and success with our solutions. We have over 25 track sessions, hands-on training with apex credits for some sessions, and we will be helping customers look to convert to the cloud, or update to our latest revision.

Thanks Karl.

Karl Lopker

Okay. Thank you, Pam. As you can see, we are excited about the prospects for QAD Cloud Apps, and our goal is to grow subscription revenue 30% to 50%, while maintaining profitability. On the balance sheet, cash continued to increase, which is important, as our growth in QAD Cloud Apps continues to accelerate, and puts additional demand on our business.

Now, as usual, we will take questions from the analysts. Operator, can you give us the instructions.

Question-and-Answer Session

Operator

(Operator Instructions). And the first line we will go to, is Matthew Paul with Sidoti. Please go ahead.

Matthew Paul - Sidoti & Company

Hi guys. Thanks for having me. I wanted to ask my first question, if you focus on the license line in the quarter. Is the growth this quarter in the license -- do you feel that that's cannibalizing subscription growth at all moving forward?

Daniel Lender

Hi Matt. I don't believe its cannibalizing subscription. Obviously, if there was a customer that is going on a perpetual license, they are not going to be going to the cloud immediately. But actually, there is a good amount of our cloud business that is coming from conversions. So anything that we can actually build on to the bays, it will be an actual prospect in the future, it may just not be ready at this point in time to go to the cloud.

Matthew Paul - Sidoti & Company

Okay. Moving forward, you guys have guided next quarter for a breakeven quarter, and with the exception of first quarter fiscal 2014, you operated at a much higher profitability in the first quarter. I wanted to poke around, see if that's an indication of strong subscription growth you have set in the quarter, or maybe that you have recognized licensed deals in this quarter, a bit ahead of schedule. Any insight you can give there, that will be great?

Daniel Lender

Yeah so usually, our first quarter, we have some additional expenses on the sales and marketing side, as we have a number of sales related, [indiscernible] event that happened in Q1. Also as Karl mentioned, we did have significant amount of closings on licensed deals in our Q4. So even though we are expecting our growth to continue for the full year, we do see some funnel rebuilding that will need to happen in Q1. So I think, a combination of those things would lead us to have -- about a breakeven, and you add to that, the level of subscription growth that we are getting, that requires investment. So there is definitely investment ahead of the growth that is happening in that particular area.

Matthew Paul - Sidoti & Company

Okay. And the last question I believe Dan, you noted that bookings following traditional stats is heavily weighted towards North America, and I think Karl noted that, a third of the subscription revenue in the quarter came from non-North American countries. I just kind of wanted to ask, what the environment is like, for yourself then, trying to, I guess, walk new customers into the [indiscernible] solution, and how they are adjusting and reacting?

Karl Lopker

You mean walking people into the -- under the cloud?

Matthew Paul - Sidoti & Company

Sorry, sorry, on-demand versus on-premise.

Karl Lopker

Right. Well certainly North America is more accepting of the cloud environments, and people are now starting to ask for more. In Europe, Europe is behind the United States, but they are starting to warm up a bit to it too. The same thing in Asia Pacific. We like Japan, actually. Japan seems to be probably the second most accepting after North America, and I believe that's because they have their homegrown systems, then when they go offshore from Japan, they are looking to get more U.S. style software, and going on demand that makes a lot of logical sense to them.

Matthew Paul - Sidoti & Company

All right. Thank you guys. Congrats on the quarter, on the record revenues. Congrats to the sales team on closing some of those deals and talk to you guys soon.

Karl Lopker

All right. Thanks a lot Matt.

Operator

All right. Now we go to the line of Mark Schappel with Benchmark. Your line is open.

Mark Schappel - The Benchmark Company

Hi, good evening, and nice job on the quarter. Daniel, starting with you. With respect to the four year outlook that you provided for next year. If I recall correctly, net income is expected to be relatively equal with last year, and even we are expecting single digit revenue growth. I was wondering if you just kind of go into that -- why that is?

Daniel Lender

Yes. We expect a lot of the revenue growth to be driven by the subscription line, and as I mentioned, some of the impact in Q1, Mark. There is investments that we need to do as a company, in order to support that growth. In addition to that, we do recognize a number of expenses on the sale side, ahead of the revenue offshore [ph] coming in. so it does affect current earnings more than what you have at the -- if that growth were coming from the other revenue line.

Mark Schappel - The Benchmark Company

Okay thanks. And then Karl, just going back to your prepared remarks. You mentioned that in the quarter, the strong demand in the quarter was due to a pickup in your view of the manufacturing environment. I was wondering how sustainable you feel that is, or what do you think [indiscernible]?

Karl Lopker

We look at the PMI, the global PMI and also the country PMI. Its amazing, how when they are positive, our sales are positive, even we are a small boat in the sea, if you will. But it does reflect what our customers are doing. So in North America, the PMI is quite high and the customers are more willing to make decisions. In China, the PMI just dipped below 50, which means a little bit of a contraction. But a lot of the business we have in China, I don't know, 45% of it, is from U.S. based companies doing business in China. So we are not as effective by any slowdown in China. And Europe is coming back actually. Europe had a pretty good quarter, and their PMI is positive. I think that, it looks like that's going to continue for a while. Its not hugely positive, so it can still continue to grow.

Mark Schappel - The Benchmark Company

Okay. Thank you.

Operator

I will turn the conference back to Mr. Lopker. Please go ahead.

Karl Lopker

No other? Okay. Well thanks for your attendance and your questions. We will update you again in May, with our first quarter results. Bye for now.

Pamela Lopker

Thank you. Bye-bye.

Operator

And ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and using AT&T Executive Teleconference. You may now disconnect.

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