Following a tough fiscal third quarter, QAD Inc. reported fiscal fourth-quarter and full-year results that showed the mid-tier ERP software vendor treading water amid continuing weakness in its domestic automotive segment.
For the fiscal 2006 fourth quarter ended January 31, QAD posted total revenue of $60.1 million, off marginally from the same period last year, but up substantially from its poor third quarter. Net income in the period also declined to $11.7 million, or 35 cents per diluted share, from $13.8 million, or 40 cents per diluted share, reported in the comparable period last year.
Fiscal 2006 fourth-quarter net income included a $10.7 million tax benefit, equivalent to 32 cents per diluted share, primarily attributable to the reversal of deferred tax asset valuation allowances, the company said. In the fourth quarter of fiscal 2005, the company reported a similar tax benefit of $5.3 million, or 15 cents per diluted share.
Significantly, new license revenue for the quarter declined to $17.7 million from $18 million in the like period last year, due primarily to continuing softness in the automotive sector, company officials said during a conference call with financial analysts. Maintenance and related revenue increased marginally to $29.7 million from $28.9 the fourth quarter of fiscal 2005.
Services revenue, however, dropped to $12.6 million in the fourth quarter from $13.8 million in the like period last year -- a direct result of weakness in new license deals signed in the prior period, noted QAD's CEO Karl Lopker. Overall, Q4 "made up ground" from the prior period's disappointing results, Lopker said, and reaffirmed statements made during his previous conference call with analysts in which he characterized the Q3 revenue shortfall as a temporary dip -- not indicative of a "longer trend."
The fourth quarter, he said, got off to a strong start, with a large order from an unidentified customer. License revenue from new customers in the fiscal fourth quarter increased 20% from the like period of fiscal 2005, Lopker said, offsetting a decrease in new user licenses from existing customers.
During the quarter, the company signed six contracts valued at over $1 million, and landed four deals over $2 million, noted Dan Lender, QAD's chief financial officer. New contracts were inked with: Actaris, Avery Dennison, Caterpillar, Enodis, Genzyme, GKN, Imana Foods, John B. Sanfilippo & Son, Johnson & Johnson, Kraft Foods, Lear, Spacelabs Medical, Philips Electronics, and Watts Water Technologies, the company said.
Softness in the domestic automotive business, however, remains a drag on the top line. The sector accounted for 20% of new license revenues in the fiscal fourth quarter, Lender said. That figure was well below the company's fiscal 2006 quarterly average of between 30% and 33%, Lopker added.
The domestic automotive license base is "actually shrinking," QAD president Pam Lopker revealed, as more and more customers shift their operations to Asia/Pacific, particularly China. "There's a lot of [automotive sector] growth in China at this point," particularly among smaller, locally operated companies, she said.
Still, North America accounted for 42% of total revenues during the quarter; EMEA (Europe, the Middle East, and Africa) accounted for 34%; while Asia/Pacific and Latin America were responsible for 18% and 7%, respectively, Lender noted.
For the fiscal year, total revenue declined to $225.5 million from $231.2 million in fiscal year 2005. License revenues for the year fell to $57.9 million from the $60.5 million reached in the previous year. Maintenance and other revenue in fiscal 2006, however, increased to $117.1 million from $113.7 million reported in fiscal 2005, consistent with historical performance and reflective of the company's strong customer retention rate, Lender said. Services revenue, however, fell to $50.4 million from $56.9 million posted in fiscal year 2005.
During fiscal 2006, QAD's revenue mix shifted from Europe to Asia/Pacific and Latin America, which is to be expected, Karl Lopker said, given the movement of manufacturing from "high wage to low wage countries." The company recently hired Jean Claude Walravens as vice president of QAD Europe, to help revitalize European operations after a difficult fiscal 2006.
"It's taken some time for things to settle down [in Europe] although [the region] is already showing some improvement." Karl Lopker said.
Net income for fiscal year 2006 declined to $20.7 million or 62 cents per diluted share, from $24.5 million for fiscal 2005, or 70 cents per diluted share. Results for fiscal 2006 included tax benefits of $11.5 million, equivalent to 34 cents per diluted share, compared with $6.6 million, or 19 cents per diluted share, for fiscal 2005.
On the plus side, QAD's balance sheet remains strong. Cash and equivalents at the close of fiscal 2006 reached $59.9 million, up from $55.2 million at the same time last year. Cash flow from operations was $26.8 million, an increase of 17% from fiscal 2005, the company said, noting that QAD has now achieved seven consecutive years of positive annual cash flow from operations.
The company plans to put its financial clout to good use. Karl Lopker said QAD is looking to acquire point applications during fiscal 2007 to round out its enterprise software suite. Without providing details, Lopker told analysts that QAD is focusing its attention on demand planning, CRM, and possibly human resources software.
QAD also continues to invest heavily in the service-oriented architecture that underlies upgrades to its enterprise suite, known as GXE enterprise edition. The company plans to soon deliver enhancements that include user interface improvements to conform with the latest release of Microsoft .Net and expanded financial accounting capabilities, such as adherence to global localization requirements, Pam Lopker said.
To meet increased development challenges, the company expanded its operations in India and China during fiscal 2006, which increased its R&D spending as a percentage of revenue. Increased R&D spending, however, won't mean much unless the company can resume top-line growth. And fiscal 2007 is not expected to get off to a strong start, Karl Lopker said.
QAD expects to earn between one and four cents per diluted share in fiscal first quarter 2007 on revenue of between $54 million and $57 million. The projected revenue range is down sequentially from fiscal fourth quarter of 2006, but flat with the like period last fiscal year. The reason for the tempered projections: the company's sales pipeline was depleted in its fiscal fourth quarter and is down between 10% and 15% on a weighted-dollar basis compared with the like time last year, Karl Lopker said.
"It will take some time to rebuild [the pipeline], but the good news is that we have a much more experienced and larger sales team than at this time last this year due to aggressive hiring and training in the last fiscal year," Karl Lopker said.
For fiscal 2007, QAD expects to earn between 16 cents and 33 cents per diluted share on revenues of between $230 million and $245 million, up slightly from fiscal 2006.