ERP software provider QAD this week released second-quarter financial results that showed double-digit revenue growth, a welcome improvement over its "weak" first quarter, according to CEO Karl Lopker.
The second-quarter results come on the heels of a sluggish start to fiscal 2008, when the company took a $1.9 million loss as license revenue fell slightly and overall sales grew just 6%. But in the second quarter, which closed July 31, sales surged and QAD returned to the black. Overall revenue totaled $64.2 million, 10% better than the $58.4 million recorded in the second quarter a year earlier, and 13% better than the first quarter's $56.6 million.
QAD attributed much of the revenue growth to acquired products, which have been positioned as add-on modules to the company's technology. Specifically, the addition of Precision Software, a purveyor of transportation management software, in September 2006, and enterprise asset management specialist FBO Systems in November, accounted for $3.6 million in revenue.
The core product line — previously known as MFG/Pro but now dubbed QAD Enterprise Applications 2007, or QAD 2007 — should remain a steady source of revenue, but growth prospects are somewhat limited, CEO Lopker told financial analysts on a conference call to discuss the quarterly results.
"We might get a kick from the on-demand type of sales we've been doing [for QAD 2007], but we are expecting a lot more of the growth to come from the acquired products," Lopker said in response to an analyst's question.
Higher expenses in the second quarter ate away at some of the revenue gains, leading to net income of $500,000, compared to $1.1 million in the year-earlier quarter. In particular, personnel costs tied to the aforementioned acquisitions came in higher than expected, as did the cost of training programs for sales teams, officials said.
The company is working to reverse a disappointing performance in fiscal 2007. Total revenue last year reached $235.6 million, which was just 4% above the $225.5 million recorded in fiscal 2006 and included a 6% year-over-year decline in license sales. Concurrently, net income dropped from $20.7 million to $8.2 million.
Lopker evinced a guarded optimism yesterday, saying, "We're glad to be back on track, but we are expecting more from our new products and on-demand offerings."
QAD is also struggling to right its sales force, which has been challenged on multiple fronts: transitioning to an on-demand model for software deployment; selling new add-on products to the company's core QAD 2007 software; and contending with a slumping domestic auto market, which accounts for 25% of QAD's revenue base. The company hopes that a "high impact sales training program" held in June will inspire sales improvements.
The transition to an on-demand model for software may represent the company's biggest challenge and most promising opportunity. QAD offers its products in three versions: traditional on premises, on appliance, and on demand.
"Although we did not close many additional on-demand deals this quarter, interest in on-demand delivery is picking up," Lopker said on Thursday's call.
Lopker and company are relying on that interest to drive sales of its just-released SaaS product for the automotive market. QAD Enterprise Applications 2007 Automotive Edition, he said, includes prefab templates that will help auto manufacturers more quickly implement the system. The templates, Lopker said, hew to the Automotive Industry Action Group's guidelines.
The software is deployed on a multi-tenancy model, according to Charlie Eggerding, QAD's vice president of automotive, meaning that the company hosts a standard version of the application that all on-demand customers access remotely. QAD has already signed up its first customer for the on-demand offering, an unnamed major global automotive supplier with 450 users of the product, Eggerding told Managing Automation today.
He declined to specify the monthly subscription cost, saying that variables such as the customer's country location and amount of EDI transaction will affect it widely.
"The primary drivers behind on-demand deployment are acquisitions, divestitures, or companies that are moving rapidly into new markets," Eggerding said. While conceding that "there's still going to be that constituency that wants to have its applications in house for whatever reason," he predicted that in the future, on-demand will be the "primary buying pattern for automotive suppliers."
QAD is making the same wager on its other primary vertical markets, and will soon roll out on-demand offerings for life sciences, consumer products goods, industrial, and electronics companies.
On yesterday's earnings call, QAD President Pam Lopker characterized the company's embrace of the on-demand model as a good news/bad news scenario. The good news, she said, is that the SaaS model should generate larger long-term revenue; the bad news is that it draws money away from current quarterly license revenue, a paradox many software vendors are dealing with as they explore the new paradigm.
Looking ahead, the company issued third-quarter revenue guidance of $60 million to $64 million, with earnings per share in the range of $0.0 to $0.05. For fiscal 2008, QAD narrowed its expectations, predicting sales of $250 million to $257 million and earnings of $0.12 to $0.23 per diluted share.