QAD Inc.
Q1 2021 Earnings Call Transcript

Published: 28 May 2020

[Operator:]

Good afternoon and welcome to the QAD Financial Results for First Quarter of Fiscal Year 2021 Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note 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'd 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. Now I'll turn the call over to our CEO, Anton Chilton.

[Anton Chilton:]

Thank you, Kara. Good afternoon and thank you for joining today's call to discuss QAD's fiscal '21 first quarter results. Joining me on the call are Pam Lopker, our President; and Daniel Lender, Chief Financial Officer. Following on from the good momentum with which we finished last year, we saw a good acceleration of our subscription growth this quarter, hitting guidance on a constant currency basis and up 22% compared to the same period last year. This growth driven by a strong competitive position means recurring revenues now accounts for 77% of our total business. From around mid-March, the world change dramatically as increasing numbers of countries responded to the global pandemic with shelter-in-place, stay-at-home and lockdown orders coming into force. I have to say, I'm incredibly proud of the way in which the QAD team responded. Our priorities were firstly to safeguard the health and wellbeing of our employees, our customers and their respective families and communities. Secondly, we wanted to ensure complete continuity of service for our cloud customers and those with implementation and upgrade projects in progress. I'm pleased to say that we've achieved those goals, while switching almost overnight to remote working with no interruption or dip in support or service levels. Work on automation and digital transformation also came to the fore through this period as we change our operating model, exemplified by the adoption of our upgraded methodology for performing remote professional services work for customers, who both embraced the opportunity and gave the experience great feedback. This continuity in project work combined with the effects of improvements initiatives started last year, saw a healthy growth in professional services margins of 5% compared with a negative 5% in the first quarter of last year. That result combined with an increased focus on expense management through this period of uncertainty helps us drive significant improvements in bottom line performance compared to last year's first quarter. While the effects of the COVID-19 pandemic in the short-to-medium term remain uncertain, our business is in good shape, and we're confident we remain well positioned to achieve our long-term strategic targets. I'll turn it over to Daniel to discuss the detail of the financial results.

[Daniel Lender:]

Thank you, Anton. On a constant currency basis, both subscription and maintenance revenue came in as expected. Subscription margins showed a 3 percentage point improvement over the prior year. Even in a challenging environment, our ability to deliver professional services business remotely enabled us to support our customers projects and post 5% margins. Licenses were most affected by the current environment, as we saw existing customers not needing to add users. The expense control actions we implemented were successful and resulted in improvement or bottom-line profitability compared with last year. Currency had a 2 million negative impact on total revenue, which compared to last year's first quarter, and a 1.5 million negative impact when compared with the fourth quarter of fiscal 2020, which we use for forecasting purposes. During the quarter and as a result of the crisis created by COVID-19 pandemics, there was a material movement in currency exchanges that were not anticipated and were not incorporated into our forecast. Total revenue for the first quarter of FY '21 was 74.1 million and compared to the same quarter last year declined 2 million as a result of currency movements, and 1.9 million resulting from anticipated declines in professional services, maintenance and licensed revenue, partially offset in gains with subscription revenue. Subscription revenue grew 24% on a constant currency basis to 30.8 million and accounted for 41% of our business for the fiscal '21 first quarter. The currency movements that we experienced mid-quarter negatively affected subscription revenue by 500,000. On a rolling 12-month basis, subscription billings grew by 18% with a three year CAGR of 25%. We signed 13 cloud deals in the quarter, 5 of which were conversions, and 8 of which were new customers. That compares to 15 deals in the same quarter last year. Maintenance revenue was 26.4 million and compare with the same quarter last year declined 800,000 as a result of currency movements within an anticipated 2.6 million decline relating mainly to cloud conversions and our historical attrition rate which remains consistent with prior periods. In addition, lower ongoing sales of licenses are no longer offsetting attrition rates. Professional services revenue totaled 15.7 million, compared with 18.4 million for last year's first quarter. We're pleased to see that revenue was consistent with a prior sequential quarter despite the 400,000 negative effects from currency movements. QAD's ongoing digital transformation and enhanced implementation methodology that had already been designed around remote delivery enable our business to remain in good footing. Services margin was 5%, up from 2% in the fiscal '20 fourth quarter and a negative 5% for the year ago period. Compared to this time last year, there was a 126% reduction in the professional services organization, as we continue our strategy of expanding our partner network and improve our ability to deliver services remotely. License revenue for the fiscal '21 first quarter equaled 1.2 million compared with 4.5 million a year ago. Given COVID-19, most customers do not add new users as I mentioned before, which impact the license sales during the quarter. And we expect license sales to remain at low levels for the foreseeable future as we continue to focus our sales efforts on the cloud. Total revenue by vertical for the fiscal '21 first quarter was high-tech and industrial 36%, automotive 33%, consumer products and food and beverage 16% and life sciences another 15%. By geography, total revenue was North America 50%, EMEA 30%, Asia-Pacific 13% and Latin America 7%. Our gross margin for the first quarter of fiscal '21 was 56% compared with 53% last year, principally driven by improvements in subscription and professional services margin. Sales and marketing expense was $18.6 million or 25% of total revenue versus $20.9 million or 27% of total revenue for the last year's first quarter. The decrease mainly related to reduce travel, lower severance and lower bonuses and commissions. R&D expense was $14 million for both periods, as a percentage of total revenue R&D expense was 19% for this year's first quarter, and 18% for last year. G&A expense amounted to $10 million or 13% of total revenue for the first quarter of fiscal '21 compared with $9.4 million, or 12% of total revenue for the first quarter of fiscal '20. The increase primarily resulted from higher accounts receivable reserves related to the adoption of a new accounting standard that requires us to consider the current and forecasted economic environment. Stock compensation expense totaled $2.4 million for the fiscal '21 first quarter and $2.3 million last year. This brings our GAAP pre-tax income to 600,000 compared with a GAAP press release loss of $2.5 million last year. Non-GAAP pre-tax income was $3.3 million versus approximately breakeven a year ago. We ended the first quarter with approximately $140 million in cash equivalents compared with $137 million at the end of fiscal '20. Cash flow from operations for fiscal '21 first quarter totaled of $10.9 million compared with $14.2 million a year ago. Our accounts receivable was $46.6 million at April 30th versus $49 million this time last year. Our data center have standing using the count back method for 66 days for the fiscal '21 April quarter, compared with 65 days from the same quarter last year. As a result of COVID-19, we have implemented additional monitoring over accounts receivable. To-date, we have not experienced any significant impact to credit quality or terms and our accounts receivable have remained healthy. In special circumstances and as we deem appropriate, we did provide some accommodations relating to billing cycles or payment terms to certain customers in order to assist them in navigating through this period. Our short-term deferred revenue balance at April 30th was $102.3 million versus $104.5 million a year ago, including a $3.1 million negative impact from currency movements. Deferred revenue balances by category include $41.3 million of deferred subscription versus $33.3 million, $58.4 million of deferred maintenance versus $68.4 million, $2.5 million of deferred professional fees versus $2 million and $100,000 of deferred license another versus $800,000. Our maintenance contracts are billed annually while subscription contracts continue to build either annually or quarterly. Our business outlook incorporate the effects of currency fluctuations experienced during this first fiscal quarter and assume foreign exchange rates for the remainder of the quarter. And consistent with a guidance provider for the fiscal '21 first quarter, QAD is providing guidance for the subscription and maintenance revenue for the quarter ahead as follows. Subscription revenue of 31 million representing employed 4% growth on a constant currency basis to the same quarter last year, and maintenance revenue of 26 million. With that, I'll turn the call back to you, Anton.

[Anton Chilton:]

Thank you, Daniel. So with the difficulties presented in the macro environment by the COVID-19 pandemic. We have seen sales cycles extend somewhat and a little more caution in terms of closing on behalf of our customers and prospects. But with that said, we did close 30 new cloud deals in the quarter demonstrating that sales activity is continuing although bookings in the quarter represented about 70% of last year's now. Our competitive strengths continue to attract new customers, and we were very pleased to welcome 8 of them to the QAD cloud. That saw an increase in the ratio of new customers to conversions and the overall cloud deal mix for this quarter, but we continue to expect the 50-50 deal next to extend into the medium and long-term. The continued improvements in our cloud margins are in line with our plans and are as a result of our ongoing efforts to drive efficiency through automation and process improvements. As Daniel highlighted, we expect these improvements to continue over the medium term driving incremental efficiency gains for 1% to 2% per annum. Looking at the quarter geographically, sales activity was at reasonable levels in North America, EMEA and Latin America when taking into account the current circumstances. However, APAC sales activities were more heavily impacted given that China was effectively locked down through the first two months of the quarter. In our divisions businesses, we also saw cloud momentum continue to build with steady growth in our subscription revenue when compared to the first quarter of FY '20. We do expect that as we emerge from the current situation, a focus on reducing supply chain risk and increasing complexities in cross border trade will have a favorable effect QAD's demand and supply chain planning and our global trade and transportation execution businesses. As discussed on our last call, around mid-March, we were starting to see some slowdown in professional services projects and timeframes extending beyond original plans. However, as I mentioned in the opening, it's been pleasing to see some customers adopt the remote working methodology that we've developed some time ago. This kept momentum going across many projects and helped drive the healthy improvement in our professional services margin. That said, we remain cautious about the short-term effect on professional services revenues, especially as we look to the second half of the year. I also mentioned on the last call, we're taking advantage of any whitespace and professional services to accelerate development in the use of digital transformation to support the automation many aspects of our implementation methodology, and this will help shorten project timeline and reduce customer effort in the near future. The design of our services delivery organization that manages our cloud operations, with its combination of a diverse geographical spread and the ability for 100% of our personnel to work remotely, has allowed us to provide uninterrupted service for our cloud customers and deliver ongoing support for global customer base. We've seen no different service levels, all service quality throughout the entire period. Our COVID-19 response management team has coordinated a consistent and global response has helped ensure the health and well being of our employees, customers, their respective families and the communities in which we operate. We've also managed our expense base with a close eye, and as a result, we've delivered material improvements in bottom-line performance over the same period last year. Our focus has also allowed us to maintain the investments we've made in our global workforce, and particularly in the areas of sales and marketing where we have gained good traction coming into this year. Our focus will remain on continuing to protect that investment as we develop our pipeline in line with our strategic goals. With all the uncertainty in the current climate, we've seen a slightly more cautious approach with customers taking a little more time to move forward with sales opportunities. From a vertical market perspective, it's interesting to see in almost all sectors are mixed picture with some companies faring well and demonstrating a high degree of resilience while others are impacted. Now pipeline remains strong however, and indeed is at record levels and has grown over 26% when compared to the same time in our prior first quarter. With that backdrop, and with 77% of our business now based on recurring revenue, we feel we remain in a solid position and have reinforced the good platform's stability I talked about on our last call. With our pipeline growth, we feel cautiously optimistic about our medium-term sales prospects. We know our competitive positioning remains strong and the need for next generation solutions is only reinforced by the current situation. I'll now head over to Pam for detail on our cloud bookings.

[Pam Lopker:]

Great, thanks Anton. In Q1, as people have mentioned, we have 13 new cloud bookings, 5 from conversions to the cloud and 8 net new customers. From cloud activity perspective, except for Asia-Pacific who was affected by the earliest by the pandemic, all regions performed as expected. From a vertical standpoint, life science and CP food and beverage were comparatively strong as compared to automotive and electronics industrials. We received a sizable order from the Tier 1 automotive supplier in Brazil. With that, I'd like to talk a bit about localization requirements. The complexity of local government requirements in Brazil are very significant, and in our opinions provide the most challenges for companies to comply with. The complexity comes from the multiple local tax regulations that company operate in various Brazilian states and municipalities needed to address. The requirements around government registration of electronic invoicing and the various digital reporting of financial transactions and statements, they are very tight controlled by the government to ensure they're collecting the full taxes they deserve. While Brazil represents an extreme example, we have seen a rapid increase in government regulations around the world with countries such as India, Italy, Portugal and many others adding processes and reporting requirements similar and that can be somewhat different to Brazil. QAD supports these requirements for 55 countries in our base product, which we continue to update and add additional countries on an ongoing basis, so native support allows our customers to run their global businesses in the cloud in a centralized fashion, but they also need for heavy customizations or add-on third-party products. We believe these capabilities further differentiate QAD's cloud offerings from our competitors and enhance our value proposition to our existing customers to convert to the cloud as well as for new customers to rely on to QAD for supporting their global operations. Our ability to deliver adaptive ERP cloud solutions for our global manufacturing customers, enabling agile business processes with local country requirements is unprecedented levels of speed as providing new capabilities to both existing and new customers. Thank you, back to you, Anton.

[Anton Chilton:]

Thank you, Pam. So looking forward, as I stated earlier, we still feel confident about our ability to meet the long-term goals, Daniel outlined in on prior calls. Disruption and change are the new normal for global manufacturers and this current situation serves to highlight the need to be able to respond in near real-time to sudden changes in demand in the supply base and in supply chains globally. Indeed, on that point, I'd like to take a moment to highlight the fact that many of our customers were able to make rapid switches to business operations and models in all parts of the world. More importantly, they were able to either switch or supplement existing product lines in a real-time rapid response to the current situation to provide much needed critical supply to the frontline workers in the fight against COVID-19, as these examples we'll illustrate. We have a customer in the distilling industry in the Netherlands that rapidly adapt to this business to begin producing hand sanitizer, helping lessen the effects of the shortage of supply there. We have a customer in Australia added a whole new production line brought in additional workers and started producing personal protective equipment within a matter of weeks, and we saw a very similar response from a customer in the UK, who responded to a request for help in making a vital component in life-saving facials needed by the UK National Health Service. We've also seen many of our automotive suppliers producing masks and other vital equipment. We're very proud of what they've been able to achieve with a rapid response to the pandemic in close to real-time and how they've reacted and adapted to help communities globally. It's such a difficult time. As we emerge from this crisis, we know that manufacturers who want to thrive will have to be agile in the extreme and ready to adapt in real-time to change disruption and turbulence. Our next generation adaptive solutions, ERP in the enterprise platform are exactly what businesses needs to support that real-time and rapid response to those changes. We believe, we remain exceptionally well positioned against our major global competitors, and we'll continue to grow market share as more and more new customers are attracted to the QAD cloud and the trend of convergence continues. The pandemic has over material increased risk and uncertainty for many of our customers and increased fluidity in their businesses. This uncertainty is making it difficult for us to predict the effect on our sales and professional services projects throughout this year. However, as I said a few times our long range plan and the underlying fundamentals on which has been built remained sound, but the timeframe of which we achieve them likely extend as a result of the current situation. In summary, prudence remains our watchword over the coming months. We've done well to this point, but we're not relaxing our vigilance. We continue to focus on the priorities and health and well being of all in addition to supporting our customers through this difficult time. The cost control measures, we put in place are proven to be effective and will remain in place to see us through the coming months. We have a strong balance sheet and a good cash position. As we emerge from this crisis, we stand ready to aggressively focus on growing our cloud business. Operator, we're ready to take questions from analysts.

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Bhavan Suri of William Blair. Please go ahead.

[Bhavan Suri:]

I wanted to first touch and usually my questions don't directly involve numbers, but you obviously had acceleration on constant currency basis. Q1, you've guided to acceleration on the subscription line in constant currency of the Q2. As you think about the rest of the year and I know you're not giving guidance, but is that sort of a trajectory we're expecting to see? How are you feeling? Because given sort of the deals that have played out and the limitations you've done, the layering in the subscription revenue should drive that sort of views. I'd love to just get some thoughts on how you guys are thinking about what that, how the subscription line plays out in the rest of the year given you've booked a lot of that revenue earlier? So just -- again, not projecting new deals and lot of potentials and how that plays out?

[Daniel Lender:]

This is Dan, Bhavan. Thanks for your question. With regards to our revenue recognition with relating to deals that we booked, we typically start recognizing revenue fairly quickly. So, the deals that we booked towards the end of the last year, we already started recognizing revenue for those and the deals that we booked into one that's starting to drive the additional growth on a constant currency basis that we're seeing for Q2. So really the rest of the year is highly dependent on the current environment and how well and how rapidly we're able to close the larger funnel than Anton referred to. So, clearly, the opportunities there for us to continue our growth, but the environment is obviously quite challenging and timing of closing of those deals is certainly more difficult. So, as Anton said, we remain question cautiously optimistic over the medium term.

[Bhavan Suri:]

Got it. That's helpful. And then, maybe for Anton, as you look at your business, you talked about sort of pressures in Asia-Pac largely due to China, but maybe on the vertical side, I'd love to understand where you're seeing the cloud adoption from a vertical perspective. Is it broad based? Obviously, the healthcare guys and a lot of your biotech customers were early to adopt cloud and some of the small biotech guys never wanted anything on premise, but I'd also love to understand sort of, as the customers had a few months adjust more of the potential impact. Just where is the appetite for the basic cloud solutions from a vertical perspective? And is there any discrepancy in that vertical mix? Thank you.

[Anton Chilton:]

Thanks Bhavan. Yes, I'd say, we've seen just from an effect perspective, it's a real mixed picture across all the verticals. So, if you take life sciences for example, if you're in the business of supplies for elective surgery then you probably struggling right now. If you're doing anything that provides PPE or anything along those lines then you're going well. And that kind of different mixes is going across the entire vertical segment base. Although, automotive is hurting a little bit more than some of the others. From a cloud adoption perspective, we've seen that across the board. So, it continues to be attractive to life sciences companies. We've got -- we make it very easy for those companies to get validated in their environment with a lot of certification around that, but I think this current situation also just highlights the robustness and the resilience of having your systems with QAD cloud, where we're taking care of them. You don't have to worry about your staff and who's operating in and so on, so forth. So, I'd say, notwithstanding what Daniel said about the timing of these deals, the funnel continues to grow and it grows kind of proportionally, equally across all of those different verticals.

[Bhavan Suri:]

Got it. And if I might squeeze one in quickly one last one for me. You've talked about the partners, and sort of the shift your partners. I'd love to understand, how is that playing out vis-à-vis expectations? Did that slow down a little bit to the environment? Or actually seeing the partners step up given the environment and say, hey, we're seeing a slowdown in other work and this has been an area we start adding to training, maybe even starting conversations with customers, maybe starting building RFPs for approximately be 4 to 6 months out? Just love to understand how to partner channel and that investment is playing out? Thank you.

[Anton Chilton:]

Yes, sure. So quite a few range of activities across that pond of community. So, we're certainly in conversation with a number of potentially new partners that will be coming on board over the coming months. Of course, those conversations can continue in the current context. With existing partners, we've been taking the opportunity to make sure they're skilled up with our adaptive ERP and the latest version of that. We're starting to drive out certifications through them now as well so the picking up that. And so, yes, I think they're seeing a very similar thing like we are with many projects continue, but some are slowing down, some uncertainty about the second half of the year. But there's still plenty of activity going, and we are taking advantage of that whitespace to do some of those training and certification programs and so on.

[Operator:]

Our next question comes from Zach Cummins of B. Riley FBR. Please go ahead.

[Zach Cummins:]

When it comes to retention rates, I was just curious if there's any particular concern across your verticals as you look across the customer base in terms of retaining customers in a challenging environment.

[Daniel Lender:]

So far our experience has been very consistent with what we've seen in past quarters. Are we more vigilant in terms of what's happening across our customer base with regards to our customers, financial well being as forth? Absolutely, but we are a critical system to their businesses. So generally speaking, what we have seen in this environment so far and in prior situations where we've experienced some significant downturn, the attrition rates really don't vary that much, is usually on there under extreme circumstances, where companies will take a different course.

[Zach Cummins:]

Understood. That's helpful. And then in terms of your mix of the cloud funnel, have you seen an uptick at least in the near term, with conversions with many customers maybe potentially considering the cloud, given the disruption they've seen to their business over the past couple of months?

[Daniel Lender:]

I would say it's not hugely significant at this stage. I think the conversations are happening, but I think people are focused on immediate stability, but there's definitely more interest. And to that point, we've been running a series of webinars, obviously, it's hard to get out in front of customers right now and probably unwise to try and do so. So, we've been running a whole series of webinars globally, and we've seen record attendance at those. And we've got a lot of interest in follow-up afterwards. So, I think we are expecting to see that interest continue to mount and then as we emerge from this situation, I think that will help boost the pipeline, which is already growing pretty well even further.

[Zach Cummins:]

And in terms of the 2Q guidance, I really appreciate the recurring revenue outlook, but similar to Q1, can you give us a sense of percentage that recurring revenue should account for total revenue or how you're thinking about that?

[Daniel Lender:]

Yes. I mean, it shouldn't be all that different from what we saw in Q1. I think that, we do expect our professional services business to go on and I think we've shown the ability to be able to deliver our professional services on a remote basis. We have to be a quite a bit more on our toes with regards to some of these because customers priorities are changing more rapidly than normal. So we need to be a little bit faster there. And licenses I think are a little bit harder to predict, although we're not at this point in time, we don't expect those two account for much over revenue overall.

[Zach Cummins:]

And then final question for me, in terms of your approach to expenses, how should we think about your areas of investment versus somebody varies that you're focusing on for cost savings here in the next couple of quarters?

[Daniel Lender:]

So, as I said, earlier, I think if we, as you know, we've put a lot of investment and effort and time into our sales and marketing organization over the past sort of 18 months or so. And, we're very keen, obviously to protect that. We've seen that good pipeline growth as an indicator that that investment was starting to pay off, and we saw the momentum coming into this year. So our focus on expense management is really making sure that we protect that investment. And so, it's things like travel is obviously being helped by the fact that no one hardly can travel. So that's a big dented and then we've taken some other actions in other areas of the business that discretionary spend and purchases and so on. And that's allowing us to protect that investment in that workforce that we don't.

[Operator:]

Our next question comes from Kevin Liu of K. Liu & Co. Please go ahead.

[Kevin Liu:]

First question here just on professional services. I think last quarter, there was an expectation that maybe you'd see some referrals given the current environment. What's been your experience so far? Has most customers been willing to kind of remote implementations? And then maybe talk a little bit about what's outside you have as a result of any sort of delays in projects?

[Anton Chilton:]

Yes. So, we were cautious at the outset and we've been pleased to see actually that a good portion of our customers have continued. And actually, we've gotten great feedback on the remote working model, and how effective it's been and how helpful it's been for customers that were critical stages of projects. That said, we have seen a few that have delight. And those are the different reasons sometimes it's a business reason, or places closed down. We've had for example, in Europe some customers had to delay, because workers councils couldn't agree how to get workers back into the factory, but the business still wanted to do the project. And so it's a little bit of a mixed picture at that end. But our utilization is held really well and that's helped us drive that good performance in margin. But as we said, there's a lot of fluidity in customers businesses right now and these things can change fairly rapidly. So, we are cautious about the second half of the year and we continue to keep a very, very close eye on what's happening there.

[Kevin Liu:]

And I know in Q1 period, you guys have more kind of new cloud customer wins more than conversation. Are you expecting that to change much as we go into the next few quarters, just given that it should be easier to engage with existing customers? Are you still seeing plenty of appetite from kind of new prospects?

[Daniel Lender:]

No, I think, this particular quarter, we didn't quite get a 50-50 balance. I mean, I think over the medium to long-term, we expect to continue to see that that balance and there's plenty of opportunity inside of our installed base. So, we're very focused on continuing the conversions, but clearly a significant portion of our funnel going forwards is for new customers as well. So, I think overall, that 50-50 mix is what we kind of expect to see in the foreseeable future.

[Kevin Liu:]

And then just on the sales and marketing line, obviously, a good job with cost controls there, with it being down significantly, sequentially year-over-year. Curious how much of that was reflective of just controlled on discretionary items and just inability to travel versus other factors like headcount reduction or incentive comp?

[Daniel Lender:]

Fortunately, we really didn't have to do any sort of headcount reductions or anything along those lines. We were able to manage a lot of the reductions through tightly monitoring a lot of discretionary spend. Obviously, given the lower level of activity from a sales perspective as a result of COVID, the amount of variable compensation across the Company came down accordingly. So that we do have a pay-for-performance type of model in place, so that definitely helped there also. So, it's mainly driven by those factors rather than any actual cuts. We do think maintaining -- our employee is really important is very expensive to go through reductions of workforce. It's very expensive to hire people and then having been trained and be effective afterwards. So, we believe we're in a very good position. Obviously, things deteriorate significantly. We have options available to what we can do. But at the moment, our plan is to not make any short term decisions that would materially impact our future prospects.

[Kevin Liu:]

Got it, and just lastly for me, Daniel. Could you talk a little bit about kind of the Q2 subscription revenue guidance? In particular, curious how much of an incremental headwind of FX is on a sequential basis? And then, if you've seen anything along the lines of customers requesting reduced -- more discounts or anything of that like that would impact the sequential growth of the subscription revenues?

[Daniel Lender:]

Yes, so with regards to foreign exchange, what we saw in q1 was a $500,000 effect roughly in terms of headwind. That really impacted about half the quarter. So, we're expecting about double that for Q2 from a from a headwind standpoint. With regard to reduction of revenue, we're not expecting any significant amount there. We have been, as I mentioned earlier, flexible with customers who truly need some help during this period of time. It's mainly around cash flows. So in certain situations, as I mentioned, we've given them slightly longer payment terms. In other situations, maybe we split some of the invoicing to rather than invoicing them on an annual basis. We've done quarterly invoicing and so forth. So those are mainly the impacts from that standpoint that we're seeing.

[Operator:]

Our last question will come from is Ishfaque Faruk of Sidoti & Co. Please go ahead.

[Ishfaque Faruk:]

A couple of questions from me. And Daniel, you touched on this just last on Kevin's question and that was on the customer. Like you mentioned that you're extending terms to some of the customers who might face some issues. But do you expect maybe some of the AR to maybe not be collectible at some point in the future? Or do you think that is not the issue that you guys are going to face?

[Daniel Lender:]

As I mentioned during my prepared remarks, we have instituted additional monitoring to our accounts receivable. So, we are monitoring through lots of different areas. We have not seen a deterioration of credit quality and so forth. I did say that we have increased our reserves and that's mainly due to a change in accounting methodology, that now as the new standard requires us to look at the economic outlook also. So generally speaking, we feel good about the overall health of our receivables. And from an overall standpoint, as I mentioned, our DSOs were up one day versus last year. So, in terms of timing and people, paying their bills on time, they are -- that's proceeding as normal as well. But obviously, with the current environment, we are keeping a very, very close eye on that.

[Ishfaque Faruk:]

Got it. Got it. That's very helpful. Okay. And switching over to the verticals. Dan, you briefly touched on that life sciences and CPG are doing very well. Can you comment maybe a little bit more from a geographic standpoint? I know China opened up as well as some of the other countries. Any commentary regarding maybe which geographies are doing well with respect to verticals?

[Daniel Lender:]

Yes, so maybe I'll jump in there, Ishfaque. So, China's obviously further along the journey than many other parts of the world. And certainly from our own perspective, we're seeing activity starts to pick up there. But I think it's going to be a little while we re-gather momentum there, if you like and start to see sales increasing there again. So, but we are out and I know, I'm approving travel in China, so I know what's going on and we're visiting customers there. Interestingly, we're seeing in other parts of the world now, businesses start to ramp up, so we monitor sort of transaction volumes across some of our key cloud customers. And certainly, they flagged that they were reopening plants in North America, for example, a few weeks ago and those transaction volumes have been steadily ramping up, and they were close to be back at let say pre-COVID levels within the next couple of months, I would say. So, it's a mixed picture right now in terms of weather activities coming back. It's not isolated to one country or geography. And a lot of it depends on the actual business and the industry that the customer itself is into.

[Ishfaque Faruk:]

Got it. And any color with respect to which vertical is doing well?

[Daniel Lender:]

As I said earlier, I think we've got a mixed picture in many. So again, if you just take life sciences, we've got some customers that have increased volumes in a growing. They're doing well in the current circumstances, but we've got others that are serving sectors of life sciences that are maybe more depressed right now because people aren't going to hospital unless they absolutely have to for example. So, if you've supplying syringes and all kinds of things and so on that just helping with elective surgery or elective treatment, then those businesses are suffering a bit. And I say, it's similar when you look inside each vertical segment, we see some that are doing well and consumer packaged goods for example, some that are not doing so well. And similarly, true on the industrial side, the one area where there are less bright spots, I would say, is probably automotive, where nobody's driving at the moment and hardly anybody buying cost. So, that's certainly having an effect.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Anton Chilton, CEO, for any closing remarks.

[Anton Chilton:]

Thank you. Thanks for listening in, everybody, to today's call, and we look forward to updating you with our Q2 results in August.

[Pam Lopker:]

Thanks everybody.

[Operator:]

The conference is now concluded. Thank you for attending today's presentation and you may now disconnect.