QAD Inc.
Q1 2022 Earnings Call Transcript

Published: 26 May 2021

[Operator:]

Good day and welcome to the QAD Financial Results for First Quarter Fiscal Year 2022. Please note that this event is being recorded. I would now like to turn the conference over to Kara Bellamy, Chief Accounting Officer. Please go ahead.

[Kara Bellamy:]

Hello, everyone and welcome to today’s call. Before we begin, I would like to ensure that everybody understands that our discussion may contain forward-looking statements that are based on certain expectations and analysis. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated. QAD undertakes no obligation to revise or update these forward-looking statements to reflect events or circumstances after the date of this call. For a complete description of these risks and uncertainties, please refer to QAD’s 10-K and 10-Q filings with the Securities and Exchange Commission. Please also note that during this call, we will be discussing non-GAAP pre-tax income, which is a non-GAAP financial measure as defined by SEC Regulation G. A reconciliation of this non-GAAP financial measure to the most directly comparable GAAP measure is included in today’s press release, which is posted on the company’s website.

[Anton Chilton:]

Thank you, Kara and good afternoon, everyone and thank you for joining today’s call to discuss QAD’s fiscal ‘22 first quarter results. Joining me on the call as usual are Pam Lopker, our President and Daniel Lender, Chief Financial Officer. Our march towards our published long-term goals continues with another set of solid results, growth in subscription revenue of 19% when compared to the same quarter last year, but a slightly ahead of guidance for the quarter. Similarly, improvements in subscription and professional services margins over last year’s Q1 contributed to another good performance from a bottom line perspective and put us ahead of our guided profitability number. We are also pleased to have achieved our highest first quarter bookings ever, with growth over 50% from last year’s numbers, giving us a good head start to our financial year. We were also excited to welcome Foreign Trade Zone, our latest acquisition to QAD in early April. FTZ is very well-known for their expertise in this space. Having the team and the solution integrated into our global trade and transportation execution portfolio will help customers simplify duty management and improve transportation execution and trade compliance at the same time. In line with our strategy to grow our partner ecosystem, we signed 15 new channel partners in the quarter. With those partners focused on cloud sales or supporting our professional services capability, this represents a significant step in our strategic vision and expands our ecosystem around the world. In summary, growth across all revenue lines, improved profitability and a strong cloud bookings performance made for another good quarter. I will now turn it over to Daniel to discuss the details of the financial results.

[Daniel Lender:]

Well, thank you, Anton. We are very pleased with our first quarter results, which exceeded expectations and were strong across the board. Subscription margins improved to 67% from 66% for the same quarter last year. The improvement would have been more meaningful, except that in the quarter, we started expensing the amortization relating to our recent acquisitions and there was an additional impact of 1% expense related to one-time technology purchases. Going forward, we expect amortization of approximately $450,000 per quarter in the subscription cost of revenue line. Professional services margin improved 5 percentage points to 10% due to our ongoing ability to deliver remote implementations, improved utilization and the ongoing strategy of building and using our partner network. Currency had an approximate $2.8 million positive impact on total revenue compared with last year’s first quarter, but negligible impact compared with the fourth quarter of fiscal 2021. Our bottom line was positively impacted by about $700,000 versus the prior year quarter, but also negligible on a sequential basis.

[Anton Chilton:]

Thank you, Daniel. On the sales front, you might recall that we have talked in the past about our efforts to grow lead generation capability in the context of new customers. We have also discussed how these efforts have contributed to the growth of our sales pipeline over the past few quarters. I am very happy to report in this quarter, as Daniel said we welcomed 23 new customers to the QAD cloud, demonstrating that our work in this area is paying off. Alongside them with the 10 conversions that Daniel mentioned of our on-premises customers for 33 deals in the quarter, which is a 135% increase of customer count over the same period last year, and a record number of new cloud customers for a quarter. We continue to see a good representation of each of our key vertical markets in the cloud sales mix with Industrial and Electronics leading the charge slightly ahead of the Automotive sector. That said, we know a good proportion of supplies in automotive are feeling the ongoing effects of the global microchip shortage we discussed in our last call. With the pandemic lingering in some parts of the world and travel and entertainment in the very early stages of recovery, there are still a few sub-segments in those verticals that are having a tough time. But with global manufacturing PMI at a 10-year high, the vast majority have a positive outlook. From a geographic perspective, North America and our EMEA regions had another set of solid bookings numbers for the quarter, although the picture is still a little mixed inside of Europe with countries in various states of lockdown and vaccine distribution. In Asia-Pacific, we are starting to see more activity in China and Australia, and that contributed to an improvement in cloud sales over recent quarters, while Latin America had another quiet period. All three of our divisions, Allocation, DynaSys and Precision had strong quarters, reflecting the interest and demand for supply chain and supplier management solutions in the market. The pandemic and recent events such as the grounding of the Ever Given ship in the Suez Canal and the global microchip shortage, underline the need for visibility across supply chains globally and the ability to make intelligent decisions about how to respond to what can often be unforeseen and unexpected events. We believe demand will continue to be strong going forward as manufacturers look to add resilience into their supply networks.

[Pam Lopker:]

Great. Thanks, Anton. It’s also wonderful to see all the new customers in Q1. Today, I would like to talk about two acquisitions we announced recently. Consistent with our acquisition philosophy, both acquisitions fill out required – requirements that customers are requesting and help with our competitive positioning. QAD has a very strong supply chain execution and quality offering that was missing the front end area of sourcing. Allocation Network provides a strong offering in this area, including generating RFQs, facilitating supplier response to sourcing events, including auctions, analyzing, comparing and recommending supplier bids, awarding supplier contracts, and supplier onboarding. With the acquisition of Allocation Network, QAD is able to complete our supply side, supply chain, providing a single place for the manufacturer and its supplier to manage end-to-end collaboration and interaction, which now includes supplier management, sourcing, auctions, supplier quality, demand and delivery, as well as invoicing. Allocation Network is a Munich, Germany based company with a strong German customer base. Since acquiring AN in December 2020, we have already made new sales, and of course, all these sales are in the cloud. For our most recent acquisition, it was FTZ, a recognized leader in Foreign Trade Zone software, consulting and contract operations. FTZ Corp. is headquartered in Mobile, Alabama, and has implemented over 1,000 trade zone projects, primarily in the United States. FTZ implementations enable companies to realize significant savings on customers’ custom duties, fees and taxes. Combining FTZ with QAD precision global trade and transportation execution division’s portfolio capabilities strengthens our competitive offering and provides ability to expand FTZ globally. We see many synergies in the cross-selling and installed bases and have been building our funnel to expand the QAD precision FTZ solution to free trade zones around the world. With our sole focus on manufacturing, QAD can continue to develop, acquire and deliver the needed capabilities to both large and smaller companies in a rapid and efficient manner that enables companies to accelerate their growth. Back to you, Anton. Thanks.

[Anton Chilton:]

Thank you, Pam. Thanks for that color. Okay. So looking to the future, we remain confident about our long-term goals and have again taken another solid step towards them with our first quarter results. Our pipeline growth and new customer wins in the quarter continue to demonstrate the attractiveness of our entire cloud solution portfolio aimed at solving challenges faced in today’s world by global manufacturers and companies operating complex supplier networks. Following on from the success of our virtual Fort Stream Event, QAD Tomorrow, last September, we hosted a second edition of the event just last week, focused specifically on the challenges of managing today’s complex supply chain and supplier networks. The event had record registration in attendance globally and has already generated significant interest in our supply chain offerings. While COVID-19 continues to drive uncertainty in several countries around the world, we do see growth in manufacturing activity with our global PMI level at a 10-year high as reported earlier. However, we remain vigilant and continue to keep a close eye on the key business trends in new business sales, cloud conversions and renewals with existing customers. But as things stand right now with the manufacturing economy buzzing and our strong pipeline, we feel increasingly positive about the year ahead. And as reported on our last call, we remain in good shape to drive another year of progress towards our published goals. Operator, we are ready to take questions from analysts.

[Operator:]

Our first question today will come from Bhavan Suri with William Blair. Please go ahead.

[Bhavan Suri:]

Great. Thank you. And thanks for taking my question, and congrats on those new customer wins. I guess, just to start there, Anton, Pam. Are you seeing some of the events that we discussed kind of the shortages, the Suez Canal, etcetera, driving those or were these kind of even earlier than that, and they just sort of closed as you worked them through the pipeline? I just like to understand sort of are we seeing sales cycles kind of shorten, because some of these effects, some of the things you’ve talked about sort of the need for transparency, etcetera playing out or is it still a little early to see those converting the pipeline into deal?

[Anton Chilton:]

Yes. I would, Bhavan, the majority of those – they weren’t caused by those recent events. But I think those did serve as catalysts to sort of underpin the value that the solutions bring and did help them get them closed for sure. That said, I do believe going forward, we’ve seen a growth in our funnel opportunities around automated supply chain planning, forecasting, logistics solutions, and so we do think that each time something like this happens, it just adds more fuel to that fire in terms of the value of visibility and using digital technologies to manage that visibility and responses to that, too.

[Bhavan Suri:]

Got it. Got it. And if you take the un-weighted pipeline for a second, you now had several quarters of that number. The year-over-year growth is pretty spectacular, right? And I understand stuff will fall out of the pipeline, but if you look at the number of new customer wins, you look at sales cycles improving, maybe demand environment is improving, and you look at the guidance, which seems really conservative. It doesn’t feel like you’re accounting for a massive close rate. Just help me reconcile some of those things, because I think you are being conservative with the guidance, but I’d love to understand sort of how you are thinking about that guide vis-à-vis the wins, the conversions, which obviously are a bigger dollar amount. Line growing 20% on a weighted basis, 60%, 70% on an un-weighted basis. Just put that all together for me a little clear and maybe Daniel might want to chime in here.

[Anton Chilton:]

Sure. So as you recall Bhavan, we issued our guidance for the year a little more over a month ago. And so I think that the first quarter results give us good confidence with regards to those numbers. Obviously, as the year progresses along, we will evaluate whether we need to adjust that maybe after Q2, if needed. Now it is – we are coming off of COVID, which elongated a number of sales cycles during that time. So we are seeing a number of those now starting to convert and to start to shorten again, but it’s – we’re still being cognizant of the fact that the world isn’t yet back to normal, and we need to take all of that into account. And we want to make sure that we can meet the expectations that we set out there.

[Bhavan Suri:]

Got it. Got it. I might squeeze one last one in for me before jumping back in queue. And on the partners, so obviously, professional services were strong, you have seen margins come back. I really like the move of adding partners. Help us think through how that plays out. Again, not over even this year, but say over the next 24 months or how do you envision it playing out over the next 24 months versus in terms of how much you are going to allocate to partners and what they are going to bring in and how much you might sort of try and keep yourselves in terms of training, implementation, education, etcetera?

[Anton Chilton:]

Yes. Sure, Bhavan. So yes, the medium to long-term strategy for that is that professional services and our ability to get implementations done really quickly when compared to the larger competition remains a critical differentiator for us. So we always want to make sure that we’ve got enough capacity directly to be able to properly influence that and work in partnership with our partners to manage that as well. So there will be that balance. And so we think we’ve hit the good sort of critical mass point to be able to do that and hence, why we are seeing sort of the expansion of partners around the world. We do expect to grow our direct consulting capabilities over time, but at a much lower rate than the rest of the company is growing. And that’s really just to maintain that competitive edge. So in short, what you should expect to see is continued expansion of the use of partners as the overall professional services for QAD demand grows, but a more modest growth around our direct workforce for that as our partners take on more of the lion’s share of that work.

[Bhavan Suri:]

Fair enough. Fair enough. Thanks for the taking my questions. Thanks for the candor. Appreciate it.

[Anton Chilton:]

Great. Well, thanks, Bhavan.

[Operator:]

Our next question will come from Kevin Liu with K. Liu & Company. Please go ahead.

[Kevin Liu:]

Hi, good afternoon and nice start to the fiscal year here. First question for me is just can you talk a little bit more about just what the pipeline of conversion opportunities looks like? Are you seeing customers more interested in that or is really a lot of the organizations focus more on driving as many new deals as possible?

[Anton Chilton:]

So no, I think over the longer term, we still see a lot of interest in conversions and from the on-premises space. This quarter just happened to be a skew in that the new business favor, but I think we’re still calling, as we have been consistently over the last couple of years now that we expect the mix to be roughly 50-50 of new customers to converting customers into the cloud. Of course, that will tail off at some point as we’ve eroded into that Maintenance base more, but for now, we’re expecting to see that continue. Of course, for that ratio to hold, new business has to grow as well. And so we do expect to see more and more new customers coming on board. But at the same time, we will see the conversions continue to grow too for the foreseeable future.

[Kevin Liu:]

Understood. And just as it relates to the competitive environment obviously, SAP has talked a lot about pushing – making a bigger push to get their customer base into the cloud. Wondering how you’re seeing that impact your sales cycles? Are you seeing more opportunities coming into the funnel? And where is there more – any sort of pricing pressure or anything of that nature that’s kind of out there as you’re talking to folks?

[Anton Chilton:]

Yes. I think our supply chain capabilities are obviously attracting interest, and that’s good in the sense that those solutions can stand-alone as well as be integrated with our core ERP system. So that allows us to shorten up some of those sales cycles compared to an ERP. And so we’re seeing growing demand in that sector, and that’s good. At the same time, though, we are seeing in the competitive landscape, large global manufacturers that have or are using – or have been using in the past, SAP, for example, still face that challenge of the question over another reimplementation of SAP on S/4HANA or seek for an alternative that’s perhaps a faster rollout and more nimble and agile once it’s in, and we represent that. And so a good portion of our funnel is represented by that type of opportunity, too. And then I do think that both what’s happened in the supply chain over the last sort of 12 months or so will continue to add fuel to that side of the business, as well as the pandemic underlying that, hey, having your solutions in the cloud, your applications running in the cloud is a much safer bet than having to run them on-premises. And so that continues to sort of underscore the value of the cloud as well.

[Kevin Liu:]

Great. And just one last one for me, regarding the acquisition of FTZ, wondering if you can help us out with any sort of incremental revenue or expenses that you would anticipate on a quarterly basis?

[Anton Chilton:]

Yes, Kevin. As I said, we did expect to have any material impact with either the AN acquisition or the FTZ. And we are really incorporating those into the fabric of the company. And obviously, longer term, we certainly expect to see significant growth as we start to take those solutions into the rest of the QAD installed base. And also, as they now become more integral part of our overall offering, that puts the overall offering that much more competitive. So that’s really where most of the impact is going to be felt.

[Kevin Liu:]

Thanks. Thanks for taking the questions.

[Anton Chilton:]

Sure. Of course. Thank you.

[Operator:]

And our next question will come from Matthew Galinko with Sidoti. Please go ahead.

[Matthew Galinko:]

Hey, good afternoon. Thanks for taking my questions. Can you touch on how much of the pipeline is in sectors affected by chip shortages and other kind of unusual challenges?

[Anton Chilton:]

Yes, difficult one to answer. I’d say a small fraction of it is directly related to that. I’d say it’s certainly in the automotive sector, making an impact for short-term sales opportunity conversations as they wrestle with those supply chain issues that they have. But conversely, it’s also another event that demonstrates the fragility of global supply networks, like the grounding of the Ever Given, like the big freeze in Texas and that kind of stuff all affected that. And so all of these things just sort of mount together to drive customers to be more interested in those solutions. How much of them are directly impacted by any one of them, it’s kind of very difficult for us to gauge.

[Matthew Galinko:]

Got it. Alright. And then with respect to the acquisitions, do you have a – or I guess, is there a bias towards driving conversions through any of these sort of smaller deals? Or are they primarily targeting customer pipeline? Or do you not think of it in that way?

[Anton Chilton:]

So I think the opportunity is in a couple of spots. So first of all, probably three, so first of all, it does – it’s another offering that we have, we can go to existing both cloud and on-premises customers, and that might be – if it’s an on-premises customer, that might be the catalyst that gets them into the QAD cloud. And then for existing QAD cloud customers, it’s certainly an expansion opportunity for us there. And then the third area is as we get new customers on to one of those best-of-breed applications, that’s a land and expand opportunity for us to go and continue to push the rest of the QAD portfolio. So we look at sort of all three of those areas as real good opportunity for us going forward.

[Matthew Galinko:]

Got it. Maybe if you don’t mind me to take a couple more, but in terms of the FTZ acquisition, how long do you expect it takes to get operationalized and up and running to that cross-sell opportunity and bring it to your portfolio of existing customers?

[Anton Chilton:]

Sure. I think it’s very, very quick. We’ve already worked with them in the past, taking advantage of their capabilities. It’s not something that’s technically complex to integrate. And so we’re expecting to hit the ground running and pretty much our capabilities are where they need to be today. A little bit of work to do, but not much, so pretty much in real time.

[Matthew Galinko:]

Got it. And then last question for me is in terms of the new partners that you discussed, I think there were 15 you announced this quarter. How quickly does it take to get them up and running and having an impact?

[Anton Chilton:]

Yes. So if we split them out into sort of those focused on selling and distribution versus professional services, the professional services ones, a little bit longer to get them up to speed in terms of the – excuse me, configuration of the application. So they know our space, they know the requirements, if you like, on the business model side, but then learning to configure those requirements in QAD is what takes the time. And that’s typically sort of 3 to 9 months just depending on the size of the partner. And then the distributors and the sales agent side of it, they can start selling much sooner than that and can be supported by the ecosystem of partners around them. So they are sort of more in the 3 to 6 months to really get momentum going.

[Matthew Galinko:]

Great. Thank you.

[Anton Chilton:]

You are welcome.

[Operator:]

And this will conclude the question-and-answer session. I’d like to turn the conference back over to Anton Chilton for any closing remarks.

[Anton Chilton:]

Okay. Well, thanks, everyone, for joining us today. That concludes the call. And we look forward to updating you in August with the results of our fiscal ‘22 second quarter.

[Operator:]

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect your lines at this time.