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QAD Inc. (NASDAQ:QADA)

Q1 2015 Earnings Conference Call

May 29, 2014 05:00 PM ET

Executives

Karl Lopker - CEO

Daniel Lender - CFO

Pamela Lopker - Chairman and President

John Neale - SVP, Finance and Treasurer

Analysts

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the QAD Fiscal 2015 First Quarter Financial Results Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, today’s conference is being recorded.

Now I turn the conference over to Mr. John Neale, QAD’s Senior Vice President and Treasurer. 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 2015 first quarter ended April 30, 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 Web site.

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 first quarter results. Pam Lopker, President; and Daniel Lender, Chief Financial Officer, join me on the call.

For the first quarter, we’re happy to report total revenue above our guidance with cloud subscription revenue now growing above 50% year-over-year. Our profitability was as planned for the quarter, and improved quite a bit from last year’s loss. Daniel will give the number then I will discuss the detail. Daniel?

Daniel Lender

Well thank you, Karl. We had a very productive first quarter with increased revenue across all of our business lines compared with last year. Growth in our subscription based products was particularly strong. Comparing to the same quarter last year, total revenue for the quarter rose 11% to $68.5 million, up from $61.9 million. License revenue grew 7% to $6.7 million, up from $6.2 million. During the first quarter, we closed five license deals greater than $200,000 compared with four in last year’s first quarter.

Subscription revenue was up 53% to $6.2 million, compared with $4 million last year due primarily to the continued growth and success of our cloud offering. We saw continued momentum in bookings for the QAD Enterprise Cloud with a similar level of deals coming from North America and EMEA where we saw significant increase from prior period.

Maintenance and other revenue improved 3% to $36.1 million, from $35.2 million last year. This first quarter is the first period in which we were able to recognize the full value of CEBOS maintenance revenue, which added about $250,000. Our maintenance revenue was negatively impacted by customers that have transitioned to the cloud as they no longer need to pay for maintenance, since those services are included as a component of our subscription offering.

Professional services grew 19% to $19.6 million, up from $16.5 million last year. The improvement is consistent with our overall growth with several large engagements in our EMEA region making an important contribution.

Looking at total revenue by vertical, high-tech and industrial represented 33%, automotive 29%, consumer products and food and beverage 23% and life sciences 15%. And by geography, North America was 42%, EMEA 36%, Asia Pacific 16% and Latin America 6%.

Gross profit grew to $37.1 million compared with $33.3 million for the same quarter last year. As a percentage of revenue, gross margin was 54% in both periods. Sales and marketing expenses were $16.5 million versus $16.1 in the first quarter of last year. As a percentage of revenue, sales and marketing expenses decreased to 24% from 26% primarily resulting from higher revenue levels. The increase in sales and marketing expenses primarily related to personnel and travel.

R&D expense for the fiscal 2015 first quarter was $11.2 million or 17% of revenue compared with $10.8 million or 18% of revenue for the same quarter last year. The increase was driven primarily by increased personnel expense. R&D expense include a professional fees incurred to develop next generation CEBOS MQ1 Elements quality management software, which we released in the quarter.

General and administrative expense was $8.9 million versus $7.9 million last year. As a percent of revenue, G&A expense was 13% for both periods. The increase was primarily driven by higher personnel costs, including expenses related to our own QAD Enterprise Applications upgrade and professional fees. This brings total operating expenses to $36.8 million or 54% of revenue for the fiscal 2015 first quarter, versus $35 million or 57% of revenue last year.

Equity compensation expense was $876,000 for the fiscal 2015 first quarter versus $944,000 a year-ago. Operating income improved significantly to $300,000 up from an operating loss of $1.7 million for the last year's first fiscal quarter. Other expense was $350,000 for this year’s first quarter compared with other income of $167,000 last year. The change related primarily to foreign exchange.

Net loss for the fiscal 2015 first quarter was approximately breakeven, or $0.01 loss per Class A share and $0.00 per Class B share.

Net loss for last years first quarter totaled $1.3 million or $0.08 per Class A share and $0.07 per Class B share. Our tax rate for the first quarter fiscal 2015 was approximately 46% different from our expected full year’s rate as a result of breakeven result. We expect a tax rate of approximately 39% for the fiscal 2015 full-year. Cash flow provided by operations was $3.2 million for the first quarter fiscal 2015 versus $12.3 million for the prior-year first quarter. The decline relates primarily to the net effect of both higher billing and slightly lower collections in the current quarter compared with the prior-year quarter.

Moving on to the balance sheet, we ended the first quarter with cash and equivalents of $78.2 million up from $73.8 million at this time last year and $76 million at the end of fiscal 2014. Accounts receivable equaled $51.4 million up from $43.3 million at the end of last years first quarter and down from $71.3 million at the end of fiscal 2014 related to the customary seasonal decline. Days sales outstanding using the countback method was 65 days for the first quarter of fiscal 2015, compared with 59 days last year and 49 days at the end of fiscal 2014. The quality of our receivables remains good.

Our deferred revenue balance was $97.3 million comprised of $81.8 million of deferred maintenance, $8.1 million of deferred subscriptions, $3 million of deferred license and $4.4 million of deferred professional services. Our deferred revenue balance was $92.7 million at this time last year and $104.2 million at the end of fiscal 2014. Our deferred revenue continues to grow year-over-year as a result of our strong line of recurring revenues that include our solid maintenance business and our growing cloud offering.

Our business outlook for the fiscal 2015 second quarter calls for total revenue of approximately $70 million and $0.05 per diluted Class A share and $0.04 per diluted Class B share. For the full-year our guidance remains unchanged with revenue growth at a similar rate similar to what we achieved in fiscal 2014, and earnings roughly equal to 2014 levels.

That concludes my remarks. So, I’ll turn things back to you Karl.

Karl Lopker

Okay, well thanks Daniel. Well we’re especially proud of the first quarter revenue increase over last year given that our funnel was down 6% at the beginning of the quarter due to strong sales in our fourth quarter. This performance was driven by both cloud subscriptions and services. Services was largely driven by implementation and upgrade as in the recent past. Licenses and maintenance also continued to perform during our transition to a greater portion of business in the cloud. But the most exciting area for QAD has been the increase in cloud subscription. This has been a major focus for QAD and we have been seeing results. We booked 10 new sites this quarter for QAD Cloud App. Our total funnel was about even with last year with Cloud Apps representing about one-third of the opportunities up from 25% last year at this time. The majority of our funnel for Cloud Apps is for conversions from on-premise. Conversions generally produce cloud subscription revenue faster than new accounts since users usually cut over at a faster pace than new customers.

Europe continued to show good strength in the first quarter which reflects a more positive economic environment situation for manufacturing in that region. We are also starting to see more interest from Europe in Cloud App which is very encouraging. Revenue breakdown by vertical was maintained at historical averages. Full time employee headcount was up around 3% from last year at 1,560, mostly due to increases in our cloud operations group.

Let me turn the call over to Pam for a closer look at our QAD Cloud activity and our Explore Customer Conference which was held at the beginning of May.

Pamela Lopker

Thanks Karl. As Karl said, we continue to have great momentum in the cloud. I’d like to give you some color on a couple of deals that we closed in Q1. First of all, it was a contract [technical difficulty] company that’s privately held, focused on pharma and personal products. They are about a $150 million in revenue with seven sites all in the U.S. Although the engagement started as an on-premise opportunity our cloud offering became a clear differentiator and allowed us to compete and win against the Oracle JDE and SAP applications. The Cloud EDI was also particularly compelling. It adheres to the new EDI requirements dictated by Cloud and was something that the customer could not handle with their existing systems and traded a compelling reason that they needed to move and move fast. It also complemented their aggressive growth strategy. Lastly, our experience on life science and the ability to offer a validated solution were key to earning the business.

Another example is that of a large multi-billion dollar water controlled product company. We started with them in the Cloud in Europe, actually in Germany and this quarter we moved to Asia Pacific. Also very exciting is our quality management product. This was an acquisition that we did last year and during March we launched the release of MQ1 Elements and QAD quality management suite. This is a browser based capability built from the ground up for cloud deployment.

During the first quarter we had a successful data customer with a global Tier 1 automotive company, and they’ve given us a nod for the rollout. So, it's a very exciting addition to our cloud product. And the way we designed the cloud product for quality management is using our service oriented architecture for integration which allows us to integrate not only to the QAD Enterprise application suite, but also to non-QAD ERP Apps. So this gives us a great opportunity to sell quality management not only with the QAD application but with competitive applications, competitive ERP applications as well.

I’d also like to mention Explore. We just finished our Explore Conference this month in New Orleans. Our attendance was about 15% up from last year and we had attendees from 27 different countries representatives. At Explore we focused on our goal of helping our customers become more effective enterprises, leveraging our product to better meet their strategic plans. We hear customer success stories and we helped the attendees to learn network and discover new capabilities at Explore.

On the main stage, we focused on customer success moving to the QAD Enterprise Cloud, tips to become more effective and the industry analysts’ views on the evolution of the market. Feedback from the attendees ranked from Explore as the best ever and it showed great loyalty and the many attendees share their plan for upgrade and projects for the near future.

As always it's great to see so many of our customers on one place and hear about their success, and we’re happy to be able to help them with their future plans. If you’re interested in seeing the sessions from Explore, you can go to our website explore.qad.com. Thanks Karl, back to you.

Karl Lopker

Okay, thanks Pam. Well as you can see we’re excited about the prospects for QAD Cloud App and our goal is to continue to grow subscription revenue 40% to 50% while maintaining profitability. On the balance sheet cash continues to increase which is important to our growth in QAD Cloud App continues to accelerate and puts additional demands on our business. So, as usual we will now take questions from both sell side and buy side analysts.

Operator, can you give the instructions please.

Question-and-Answer Session

Operator

(Operator Instructions) At this time we have no questions in queue. Please continue.

Karl Lopker

Okay, well thanks for your attendance. We wish we had a few questions. We do know a few of our analysts have been on airplanes, so -- but we appreciate your attendance. We’ll update you again in August with our second quarter results. Goodbye for now.

Operator

Ladies and gentlemen this conference will be available after 4:00 PM Pacific Time today through midnight Pacific Time on June 5. You may access the AT&T executive replay service at any time by dialing 1800-475-6701 and entering access code 318-938. International participants dial 320-365-3844. Those numbers again are 1800-475-6701 and 320-365-3844 and access code 318938. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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Source: QAD's (QADA) CEO Karl Lopker On Q1 2015 Results - Earnings Call Transcript

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