QAD Inc.'s recently released fiscal third-quarter results reveal a mid-tier enterprise software vendor in search of business recovery within its core automotive sector and an infusion of management talent to help reverse sub-par performance in its European operations. After rebounding last period from a tough first quarter, the Carpinteria, CA company's third quarter ended October 31 showed net profits of $2.7 million, down 13% from the comparable period last year. Total revenues in the quarter declined 7% to $51.4 million from the same prior-year period, and were off considerably from the $58 million posted in the previous quarter. License revenue for the most recent quarter declined steeply from $13.8 million to $10.1 million, while maintenance and other revenue increased marginally to $29.3 million. Services revenue dropped to $12.0 million from $13.2 million in last year's third quarter. In a conference call with Wall Street financial analysts, QAD CEO Karl Lopker said lackluster license and services revenues were due to production cut-backs and bankruptcies in the company's core automotive market, as well as lingering softness in its medical and consumer products businesses. He said that even if a large deal from Japan that was completed late in the previous period had held to the third quarter, the results were still "below our expectations." In fact, Lopker said the number of deals which QAD competed in the period was "down 20%" compared with the previous quarter. On the plus side, QAD's "ratio of wins to losses [did] not change from previous experience," he noted. Lopker said the slight increase in maintenance-related revenue reaffirmed the company's ability to retain customers. Nonetheless, QAD's customers and prospects are "taking time to make decisions," he said, pointing to one unidentified medical products company that had signaled its intent to buy the company's software late last year but which has yet to sign a contract. Moreover, QAD's European operations have been without a top manager and half its management team since June, which Lopker said has undermined the unit's effectiveness. While the company continues to search for a new European director, the unit under Lopker's direction is "poised to put up good numbers" in the fourth quarter, he said. Despite the disappointing third quarter, Lopker said, QAD remains committed to its current operational plan, though the company is closely monitoring business activities to see if any mid-course corrections are needed. "We believe the third quarter shortfall was probably a dip that does not necessarily show a longer trend," he said. "If that does not prove to be the situation, we will take appropriate actions to bring costs in line with market potential."

Even with the automotive industry's monumental structural problems, Lopker hasn't lost faith in the segment's business potential. "We still think there's a lot of opportunity in automotive," he told analysts. "When there's a shock to the system people tend to stop buying for a while."

Bob Parker, a vice president at Manufacturing Insights, a research arm of International Data Corp. (Framingham, MA), said QAD, like other companies dependent on automotive and major consumer products sectors, is dealing not only with economic issues but a dramatic change in the way these businesses operate. For instance, the automotive supply chain is transitioning from its historic "one plant, one kingdom" roots to a multiple-plant management style that requires greater informational consistency as well as wider operational flexibility and maneuverability. To make this transition, automotive suppliers need uniform financial data that spans the manufacturing enterprise, Parker said, which plays into QAD's new GXE enterprise edition, aimed at customers with globally dispersed operations. While QAD can't control cyclical gyrations that are slowing purchase decisions within its key business segments, the "neutral news" for the company is that it remains an attractive alternative for manufacturers seeking enterprise software to run multiple plant operations from a centralized back office, he explained. "It has to gear its message to those type of companies [whose buying decisions] are heavily influenced by the ability to support internal operations, which [QAD is] good at," he said, citing GXE's service-oriented architecture and innate ability to support lean manufacturing, just-in-time sequencing, and score-carding. GXE has been well received, according to Pam Lopker, QAD's president. Already, over 100 customers have either purchased or upgraded to the new enterprise software suite, she told financial analysts, adding that GXE is key to the purchase proposition with most new customers in QAD's pipeline. On the software development front, the company is opening its own facility in India after years of relying on a third party, and is adding personnel to its Shanghai, China R&D facility to accelerate code upgrades and lower operational costs. "Now is the time to invest in architecture," she said. Those investments are unlikely to pay dividends before next fiscal year. The company's fiscal 2006 outlook calls for earnings in the range of 35 cents to 42 cents and revenues of between $220 million and $225 million. That would be below the $231.2 million in revenues reported in fiscal 2005, ended January 31 of this year, which was up marginally from the $230.7 million reported in fiscal 2004. For the nine-month period this fiscal year, QAD's net earnings fell to $9.0 million, or 27 cents a share, from the $10.7 million or 30 cents reported in the like period last year. Results for this year's period include tax benefits of $800,000, or 2 cents a share, compared with $1.3 million, or 4 cents a share, in fiscal 2005. Revenues for the first nine months of this year were $165.4 million, down from the $170.5 million posted in the comparable period of fiscal 2005. Its stagnant financial results aside, the closely-held company boasts a stronger balance sheet than it did at this time last year ($52.8 million in cash and equivalents compared with $44.5 million) and has maintained its gross margins at 59%. Even though sales and marketing expenses increased 7% -- due in part to a planned sales force increase to 94 people (from 81 at this time last year) -- and higher R&D expenses (related in part to GXE), the company remains well positioned in the dynamic but quickly consolidating mid-tier enterprise software market, Manufacturing Insight's Parker said. While the applications business at larger competitors such as SAP AG and Oracle Corp. is faring better, QAD is "doing all the right things," Parker emphasized. "They deserve patience here," he said, pointing to the company's continued emphasis on product architecture enhancements, which recently progressed with the release of an advanced scheduling module that will help more sophisticated customers institutionalize lean manufacturing techniques as they transition to a multi-plant view of their operations. "They have good products," said Parker. "The financials have to get better."