Still smarting from a compressed sales funnel and protracted turbulence in its key automotive sector, QAD Inc. today reported "disappointing" first-quarter results caused by continuing softness in new license revenue, although the company maintained its guidance for the fiscal year.
For the first quarter ended April 30, the mid-market enterprise applications vendor posted revenues of $53.4 million compared with $56.0 million in the like period last year. QAD's top line was off slightly from the estimate of between $54 million and $57 million the Carpinteria, CA, company provided earlier in the year.
License revenue for the quarter, meanwhile, was off 26% to $10.3 million from the comparable period last year, the result of a tighter sales funnel that emerged as the company pushed to close business before the close of fiscal 2006, noted QAD CFO Daniel Lender in a conference call with financial analysts.
Softness in new license revenues carried over from the previous period, which impacted revenues derived from services in the first quarter. Services revenues, in fact, decreased to $12.9 million in the quarter from $13.5 million in the like period last year. Maintenance and other revenue, however, rose to $30.2 million, compared with $28.6 million in the first quarter of fiscal 2006.
Following the top-line decline, net income for the fiscal 2007 first quarter was down 44% to $1.4 million, or 4 cents a diluted share. This figure included stock compensation expense of $1.3 million, or 2 cents a diluted share, the company said. In the comparable period last year, QAD's net profits were $2.5 million, or seven cents a diluted share. This figure included a one-time charge of $900,000, or two cents per diluted share, related to facility exit costs, and a tax benefit of $400,000, or one cent per diluted share.
CEO Karl Lopker told financial analysts that the company's business challenges were felt equally in all regions of the world, though the North American market was stronger than elsewhere. New license revenue was also equally distributed across all of the company's six key business segments, though "automotive was down more than the other vertical markets," he said.
Lopker also pointed to the absence of big deals in the quarter as a key factor that contributed to QAD's lower than expected results. Only four deals worth at least $1 million were inked in the fiscal-first quarter, Lender said. Only one contract valued at over $2 million was signed in the period, he added.
Among the major deals signed in the first quarter were contracts with Arvin Meritor; Ben Venue Laboratories, David Yurman, Ericsson, Freudenberg & Co.; Harris RF Communications; J Cortes Cigars; Kolmar Laboratories; Raypak; Rockwell Automation; SanDisk; and Schlumberger. Contract values were not disclosed.
Despite the tough first quarter, QAD maintained its full-year fiscal 2007 financial guidance. The company expects revenue to reach between $230 million and $245 million and earnings to come in at between 16 cents to 33 cents per diluted share.
QAD is betting that the impending release of its new Microsoft .Net interface software and new demand management and distributed order manage modules for its year-old Global Enterprise Edition (GXE) software will help the company make up the first-quarter revenue shortfall, Lopker said.
The products, which debuted at the company's annual user conference held last week in Denver, received a warm reception, according to QAD president Pam Lopker, who pointed out that attendance at the event reached 1,100, up 20% from its previous high, set earlier in the decade.
Assessing the conference mood, Karl Lopker added: "There seemed to be money for projects this year versus past years."
AMR Research Inc. analyst Simon Jacobsen, who attended the conference, told Managing Automation upon his return that he is gung-ho about QAD's prospects despite its lackluster financial performance. He noted that accelerating consolidation within the mid-tier ERP space -- as evinced by this week's agreement by Infor to acquire arch-rival SSA Global -- would work in QAD's favor.
Unlike its consolidation-minded competitors that are "living off maintenance revenue and struggling to integrate acquired products" QAD is filling out functional gaps in its single enterprise applications architecture both organically and through partnerships. "[QAD has] spent the past year internalizing the strategy and [it] appears to be ready to move forward," he said in an interview.
In a research brief released yesterday, Jacobson cited partnerships with IQS and NetRegulus to enhance GXE's quality management functionality and the suite's use of Microsoft .Net technology (which will improve the usability and interoperability with Microsoft Office productivity applications) as momentum-building developments. QAD's strategy, he said "demonstrates clear ROI and total cost of ownership benefit to customers in the mid-market that are looking for a single supplier that offers industry-specific functionality with high ease of use," he wrote.
Given its single product set, QAD is in a "potential catbird seat" compared with industry consolidators that currently offer competing product lines and confusing roadmaps. He also pointed out that [QAD's] longevity in the mid-market provides an edge against the complexities that prospects perceive Oracle and SAP will bring to smaller companies."
QAD's balance sheet also remains strong. The company's cash and equivalents balance as of April 30 was $69.0 million, up marginally from the like period last year. Cash flow from operations, meanwhile, nearly tripled from the comparable time last year to $11.5 million.
Total operating expenses, however, increased to $31.4 million in the period from $30.1 million in the corresponding period last year. The increase was fueled by a planned 13% spike in the company's research and development activities in China and India and increases in stock compensation expense, Karl Lopker explained.
Meanwhile, QAD expects to post fiscal 2007 second-quarter revenues of between $55 million and $58 million, which would be nearly equivalent to the $56 million posted in the like period last year. Earnings are expected in the range of 0 to three cents a diluted share. The guidance included a three cents a diluted share net charge for stock compensation expense. QAD's net earnings were $2.5 million in last year's fiscal first quarter.