Higher expenses and lower-than-expected license revenue conspired to drag down fiscal third-quarter earnings at mid-tier ERP vendor QAD Inc. For the period ended October 31, the company's net earnings were $900,000, or 3 cents per diluted share, compared with $2.7 million, or 8 cents per diluted share, in the like quarter last year. This year's third quarter included pre-tax stock compensation expenses of $1.3 million, while the comparable period last year benefited from a $500,000 insurance settlement, the company said. Moreover, the recently completed quarter was marked by higher development as well as sales and marketing expenses, QAD's CFO Daniel Lender told financial analysts during a conference call yesterday. Overall operating costs increased to $32.9 million from $27.5 million in the like period last year, although they were down sequentially from the $34.2 million registered in the previous quarter. The year-over-year spending increase was spawned by a $4.5 million rise in R&D expenses and $1.7 million hike in sales and marketing expenses tied in part to personnel increases, Lender said. In the quarter, QAD's top line increased 11% to $57.3 million from the like period last year, propelled by strong services revenues and a respectable increase in license and maintenance revenue compared with last year's "weak" third quarter, CEO Karl Lopker told analysts. Services revenue, in fact, jumped 28% to $15.4 million in the period. Meanwhile, license revenue increased 9% to $11 million, while maintenance and related revenue increased 6% to $30.9 million. Lopker attributed the services revenue increase to an uptick in demand for business consulting focused on process improvements and key performance metrics. Customers were attracted to QAD's tiered pricing, which offers the ability to mix and match onshore and offshore resources, he explained. While expressing satisfaction with the results in what is traditionally a tough quarter for QAD, Lopker said license revenues were still "below plan." He pointed to a shaky ramp-up of the company's recently released Microsoft .NET graphical user interface (GUI) for its GXE enterprise applications suite as one reason for the shortfall. QAD President Pam Lopker said the company's field force struggled to keep pace with pent-up customer demand for demos of the new interface, which undercut its sales effort. Nevertheless, the new interface is helping the company gain converts to the new SOA-enabled software, she maintained. "It's really helping in our win rate with new customers," she noted, adding that the GUI is propelling QAD up the short list in competitive bids and is contributing to the company's overall increase in it sales funnel. That sales funnel is "up over 30% from last year," Karl Lopker said. "We expect to have this turn into revenue in the fourth quarter and position us well going into the first quarter next year," he noted. Recent acquisitions of enterprise asset management software developer FBO Systems and transportation management software purveyor Precision Software are helping to broaden the company's potential market, Lopker noted. Both acquired companies are expected to turn in double digit-growth over the next few quarters, fueled in part by products that were built to work out of the box with QAD's MFGPro ERP software and the retention of both companies' management teams, which has smoothed the transition to new ownership, he noted. In fact, Precision contributed $800,000 in revenues in the third quarter, Lender said. Such contributions will be important as QAD contends with prolonged softness in its core automotive market. While the domestic automotive market remains difficult, Pam Lopker noted that QAD is beginning to see "some very large opportunities." She pointed to one potential contract at an undisclosed company that is considering converting to QAD from a competitor's ERP suite. "Stay tuned on that for next quarter," she promised. Karl Lopker said the third quarter was carried by order strength from CPG customers. The European market performed best relative to plan, though there were encouraging signs for business improvement in North America, he added. QAD said 15 deals in the third quarter represented more than $500,000 each in combined license, support, and services billings, of which four exceeded $1 million. Customers signed in the period included: Arthrex; Atlas Copco North America; Continental Structural Plastics; Delta Pekarny; Firmenich; Genzyme; Hewlett-Packard; New Horizons Baking Co.; PepsiCo.; R.W. Beckett; Valmont; and Youngs Bluecrest. Overall, Lender said the company signed contracts with 36 new customers, which represented 20% of overall license revenue in the period. The performance helped the company make up for a lackluster first half of the fiscal year. In the nine-month period, QAD's revenues were $169.1 million, up slightly from the $165.4 million posted in the comparable period last year. Net income was $3.5 million, or 10 cents per diluted share, which included pre-tax stock compensation expenses of $3.8 million, or 7 cents per diluted share net of tax. In the same nine-month period last year, net income was $9 million, or 27 cents per diluted share, which included $800,000 in tax benefits and a $500,000 benefit from an insurance settlement, offset by $1.1 million related to facility exit costs. Cash and equivalents at the end of the third quarter were down $9.6 million from the $59.9 million on the books at the beginning of the fiscal year due to costs related to acquisitions and the company's stock repurchase plan, Lender said. For the full year, QAD revised its revenue expectations downward and narrowed its earnings projections from guidance provided earlier in the year. The company now expects revenue of between $233 million and $237 million, and earnings of between 18 cents and 24 cents per diluted share for the fiscal year. Despite continuing market challenges, Karl Lopker remained upbeat about QAD's prospects. "Overall, we are still seeing a positive attitude in our customer and prospect base, as shown by the increase in our funnel from last year," he said. "We do have some concerns over the manufacturing activity indexes in the U.S., although overall the larger economic situation appears to remain positive. Our guidance for the full year remains consistent with these trends."