Mid-market ERP vendor QAD Inc. yesterday announced healthy fiscal 2006 Q2 results and is once again growing its top line after hitting a rough patch earlier in the year.
Overall licensing, maintenance and services revenues were up for the company's second quarter which ended July 31, with much of the uptick stemming from nine customer orders including an Asia Pacific deal with an unidentified automotive supplier worth more than $5 million.
Company executives, encouraged by the market opportunity, said they are now actively growing the global sales force and creating a flexible business model that shadows manufacturing trends.
QAD posted net earnings in Q2 of $3.8 million on revenues of $58 million, compared with net profits of $2 million on revenues of $56.8 million in the same period last year. According to a company statement, gross margin was 62% compared with 58% in the year ago period due primarily to a higher proportion of license revenues in the mix.
For the six-month period, QAD reported net income of $6.4 million, on revenues $114 million. In the corresponding period last year, QAD reported net earnings of $7.6 million on revenues of $115 million.
The strong second quarter helps get the company back on track after a weak first quarter. Back in April and May, the company noticed a slow down in sales, which forced company executives to reset their guidance to financial analysts.
However, Q1's net earnings of $2.5 million, on slightly deflated revenue of $56 million, looked worse than expected, because the company had "raised the bar" in its initial guidance, noted QAD CEO Karl Lopker, in discussing the results with analysts. Softness in the European market, struggles in the automotive sector and the lack of trained sales staff contributed to the lackluster quarter.
Once adjusted, however, things began to fall into place. "We had a $5 million deal this quarter with a major Japanese supplier to Toyota," said Aileen Osborn, QAD's vice president of finance, in an interview with Managing Automation. "We went head-to-head with SAP on this deal. One of the reasons they chose QAD was we had strength in the region, our software was quick to implement and we have lean principals adopted in our software, which is pertinent to anybody supplying to Toyota."
Financial analysts agree that the opportunity for mid-tier ERP players is wide open. "I do believe the mid-market will experience a resurgence in spending," said Peter Goldmacher, vice president of SG Cowen & Co. "It's not huge, but enough to be interesting. And I think QAD can benefit, but one quarter is not a trend."
Goldmacher keeps a conservative outlook despite the fact SG Cowen & Co. released a report last week forecasting that QAD and Epicor Software will outperform the market by 15% over the next 12 months. That same report positions Lawson Software and SSA Global Technologies to outperform the market by 30%. The report cites growth drivers of an under penetrated market, ongoing desire for operational efficiency and an architectural transition to .Net --Microsoft's web services middleware and development tools.
Even with these market dynamics in play, however, it all comes down to landing the deal. Had QAD not been awarded the $5 million Japanese contract, it may have experienced yet another lackluster quarter, Goldmacher said in an interview.
QAD is responding by beefing up the sales force, which will see an increase of 20% by the end of September. According to Osborn, QAD recruited a number of new sales representatives displaced during the Oracle/PeopleSoft merger. The staff will concentrate its efforts in North American and Asia Pacific regions, where growth opportunities abound.
"We are constantly realigning how we are operating ... with the business requirements of our customers," Osborn said. "We mirror manufacturing. If manufacturing moves to China, we'll move our R&D efforts to that area."