A strong increase in service revenue couldn’t mask QAD’s struggles against the flagging economy in its second quarter, the manufacturing ERP specialist’s balance sheet revealed on Thursday.
Riding the benefits of currency fluctuations that accounted for half of its top-line growth, QAD reported an 8% jump in total revenue to $69.5 million for the second quarter of fiscal 2009, which ended July 31. A pillar of that growth was the company’s services offerings, which garnered $23.6 million, 34% higher than the year-earlier $17.6 million. Maintenance sales managed an 8% jump to $34.5 million, but license revenue acted as a counterweight, dropping 23% to $11.4 million from $14.8 million in the like period last year.
The slump contributed to a $1.4 million net loss for QAD, which in the year-earlier period recorded income of $544,000.
While QAD CEO Karl Lopker, on a conference call with analysts yesterday, praised the company’s performance in growing service revenue, he noted, “license revenue and profit building were not where we wanted them to be.”
The company attributed the fall in license revenue mainly to a tepid world economy, which officials believe has made prospective customers anxious and extended QAD’s sales cycles. Lopker noted that the company signed a greater number of deals year over year, but that the average size of those deals declined. “Customers are trying to buy [ERP software] in smaller and smaller increments,” he told analysts.
QAD also “faced resources challenges related to the breadth of our product line,” Lopker said, a portfolio that now includes the product information technology QAD acquired with its April purchase of FullTilt. Lopker said QAD will bulk up its salesforce in Q3.
The company was also challenged to recognize the revenue from its deals, as its “days sales outstanding,” or DSO, metric slipped to 82 days in the second quarter, an unwanted increase over last year’s 72 days.
QAD recently joined the tide of enterprise software providers offering customers the option of on-demand, or Web-based, software implementations. While some vendors making the transition to remote software delivery see license sales drop as their revenue begins to shift to the recurring maintenance sales that fuel SaaS, QAD did not have that to blame for its software woes. So far, according to Lopker, QAD’s on-demand model has sputtered as manufacturers persist in their preference for traditional, on-premises software delivery.
“The on-demand [business] is still starting out fairly slow for us,” Lopker said in response to an analyst’s question. In the most recent quarter, he said, the company’s SaaS model saw some traction among customers of QAD’s supply chain visualization offering; just one ERP customer in the period opted for on-demand delivery. “We’re offering it in probably 40% of the deals that are out there,” Lopker explained, “but the customers in ERP are still pretty much used to buying on a permanent basis, especially in the manufacturing area.”
Still, he remains upbeat about the prospects. “We still have a lot of faith that the on-demand market will be 20% to 30% of our revenue, I’d say, over the next three or four years.”
The outlook for QAD’s third quarter is for revenue of $69 million to $73 million, the company said, and for earnings per share to break even or show a “small profit.” The company maintained its full year prediction of $280 million to $290 million in revenue and EPS of $0.10 to $0.18.
Like some of its competitors, QAD raised its maintenance fees 5% to 6% earlier in the year, a bump that Lopker expects to show up in revenue in the latter half of the year. The company will also release its QAD 2008 Enterprise Edition, which features a full financial functionality, after this summer, officials said.