QAD Inc.
Q3 2021 Earnings Call Transcript

Published: 24 Nov 2020

[Operator:]

Good day and welcome to the QAD Financial Results for Third Quarter of Fiscal Year 2021. All participants will be in a listen-only mode. Please note that this event is being recorded. I would now like to turn the conference over to Kara Bellamy. Please go ahead, ma’am.

[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 analyses. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated.

[Anton Chilton:]

Thank you, Kara and good afternoon, everyone and thank you for joining today’s call to discuss QAD’s fiscal ‘21 third quarter results. Joining me on the call are Pam Lopker, our President; and Daniel Lender, Chief Financial Officer. As we continue to march on our cloud transformation journey, I am delighted to report third quarter with good results across all of our strategic focus areas. This is especially pleasing in the context of the current business climate and the ongoing uncertainty related to the pandemic. Beating guidance across our current revenue lines, with 24% growth in subscription over the same quarter last year were particular highlights, and when combined with a marked improvement in earnings underpinned solid performance across the board. Our strong competitive position helped our sales team deliver another good bookings result with sales up over 50% by deal value when compared to the prior year quarter. The investments made in sales and marketing continued to bear fruit as does the focus on improving margins in both the professional services and cloud businesses. These initiatives, together with prudent expense management policies in this continued climate of uncertainty helped build on a solid bottom line performance we have seen so far through this year. While the effects of the COVID-19 pandemic carry on driving uncertainty over the short to medium term future, our strategies have kept the business in good shape, and we continue to make good progress towards our long-term strategic goals. I will now turn it over to Daniel to discuss the details of the financial results.

[Daniel Lender:]

Well, thank you, Anton. We were very pleased with our strong third quarter results, especially in light of the pandemic. Subscription and maintenance revenue came in ahead of our expectations even without the currency tailwinds we experienced with our performance driven mainly by bookings early in the quarter. Pre-tax profitability improved significantly from both the prior year and prior sequential quarter as subscription revenue grew and we remained focused on continued cost control. Subscription margins improved 3 percentage points from last year to 68%, while professional services margin remained positive at 7%, driven mostly by our strategy of building and utilizing our partner network.

[Anton Chilton:]

Thank you, Daniel. So with the ongoing challenges presented in the macro environment, a higher degree of uncertainty on some of our sales cycle remains. Nonetheless, we had a good sales quarter in terms of cloud bookings. You might remember on our last call, I said we were setup for a strong finish to the year and would focus on bringing forward deals into our third quarter and we certainly had some success in doing that. Indeed, those efforts helped us achieve that 50% increase over our fiscal ‘20 third quarter I mentioned in the opening remarks. We saw a good representation of most of our key vertical markets in the cloud sales mix and Pam will be providing some more color on that shortly. At the headline level, our competitive strengths do continue to attract new customers to the QAD Cloud and that support the broadly 50

[Pam Lopker:]

Thanks, Anton. Q3 as you heard was an excellent growth quarter for QAD Cloud, with 22 new cloud bookings, 13 from conversions and 9 net new customers. While this quarter was more heavily weighted towards conversion, we believe we will continue to hold the 50

[Anton Chilton:]

Alright. Thank you, Pam. Okay. So, looking to the future, we remain confident about our long-term goals. And indeed, we feel we took another good step towards them with our results, strong sales performance, the improvements in the bottom line driven by our strategic focus on cloud margins, professional services margins and the ongoing prudent management of operational expenses. From a product and services perspective, we remain committed to delivering cloud solutions to global manufacturers that support their needs to deal with change, uncertainty and disruption on a continuous basis. And to that point, on September 22, we held our virtual fourth stream event called QAD Tomorrow in recognition of the challenges global manufacturers face in being prepared for and ready to deal with whatever it is tomorrow throws at them. We are excited to have well over 2,000 registrations from customers and prospective customers alike. And during the event, we launched our diagnostic tool that helps manufacturing enterprises assess where they are on a maturity scale of readiness for adapting to change and on innovating for continued future success. We have seen a significant number of attendees apply this online diagnostic to their own situations and this is leading to a growing number of conversations about how QAD and our solutions can help them on the journey to being what we call an adaptive manufacturing enterprise. With recent COVID-19 cases increasing and consequent lockdowns driving more short-term uncertainty from many of our customers, it remains difficult for us to predict the exact effect on our sales in professional services projects for the remainder of this year. However, as things stand right now, with our strong pipeline and with global manufacturing PMI climbing to 53 since our last call, we do feel we remain in good shape for driving a solid finish to the year. In summary, we continue to monitor the key business trends in new business sales, cloud conversions and maintenance renewals with existing customers. With some encouraging news around vaccine availability brightening the outlook for the medium term, the continuing rise in COVID cases in many parts of the world sees our short-term priorities remain consistent. The health and well-being of all, supporting our customers and driving sales activity remain our top priorities. This prudent approach to managing the business has proven to be effective throughout this year and will remain in place to see us through our fourth quarter and at least the early part of next year. We are encouraged by this quarter’s results in the progress we have made towards our long-term goals. Operator, we are ready to take questions from analysts please.

[Operator:]

Thank you. And our first question will come from Bhavan Suri with William Blair. Please go ahead.

[Bhavan Suri:]

Hey, everybody, congrats. Can you hear me okay?

[Anton Chilton:]

Yes.

[Pam Lopker:]

Yes.

[Bhavan Suri:]

Great, great. Yes, really, really nice job both on the quarter and then on obviously the pipeline. I guess I want to start off on the pipeline, and I will leave this a little open ended, Anton, maybe for you and for Pam, sort of take it whatever direction you want. But the way the pipeline growth of whatever, 20% plus great, the doubling of the overall pipeline is awesome. I guess what’s driving that more than doubling? Obviously, you have added sales resources, but I’d love to understand even things like S4/HANA end-of-life, like what are you seeing that’s driving the funnel growing so much? And then I would love to understand like, are you comfortable with conversion rate? Do you think you should think about expanding or extending sort of conversion cycles or are you seeing a shrinkage of that potentially, given as people are now saying, okay, we have got light at the end of the tunnel. So, a couple of questions in there, but I’d just love to understand sort of how – what’s driving the pipeline and sort of how you think about the pipeline converting?

[Anton Chilton:]

Yes, absolutely and thanks for your comments, Bhavan. Yes, so I would say it’s a combination of things that are driving the increase in the funnel. As we call out over the last 18 months or so, we made some pretty significant investments in our marketing organization on our lead generation engine. And of course, the majority of that messaging is built around next generation ERP, the need that manufacturers have to be able to respond quickly, deploy quickly, and then manage the system in a dynamic environment and be able to change and update it and update business models as their business changes throughout the lifecycle of the ERP, and I think more and more people are hearing that message. I think that message is helped by the SAP situation we have discussed before, still the intent of end-of-life on ECC 6. There is no migration path to S4/HANA. To our knowledge, there is still no large global manufacturing company running on S4/HANA across the board. And so, I think that’s giving them strong headwinds. And then of course there was the most recent announcements around some of the challenges they have gotten, the headwinds they faced in terms of technology platforms and all the technology and getting those converted. So, I think that’s added a bit more fuel to the fire. Coming back to thoughts around conversions and sales cycles and lengthening or shortening, we were all fairly optimistic given the momentum we saw in Q3 and pulling some of those deals earlier that, that could continue. And I think the fundamentals were there to support that, accept that, these latest cases spiking in Europe and in the U.S. have the potential, I think, to dampen some of that enthusiasm with some of our customers and lead them to maybe delay. So, probably from us to predict when the world is going to get back to normal, but we see that situation of uncertainty continuing at least till there is broad availability of the vaccine, which is probably sometime middle of next year towards the end of next year. So, but in the meantime, we will keep trying to push that, we will keep trying to push the message. What we do see is more and more customers not waiting for COVID to end, but saying, hey, we just got to work with this and around this right now. And so, that’s helping some sales cycles, too. But for others, they are still showing some signs of caution.

[Pam Lopker:]

I think our platform really plays well, the ability to have a full ERP system for manufacturers, but then flexibility to extend and extend it in a way that doesn’t allows you to sell or receive updates and your extensions go with it. So extensions versus customization versus SAP, who really says, you have to adopt our standard processes and there can be no changes to that. I think I like our message and I think it plays well.

[Bhavan Suri:]

Yes, no, no, that’s really helpful. And I think obviously the spike and the logic of what people might delay makes sense. I guess, the flipside a little bit is given the global presence and the manufacturing base as you think about the U.S. China related tensions, it’s really early, but obviously, we have now got potentially a transition happening, the election, potentially a lighter stamp on imported goods. Do you feel hey, are you seeing any impact that’s so early, I don’t know if you are, but I’d love to hear that, but do you feel it could have a change with manufacturers and how they view their growth trajectories especially in Asia changing and how that might sort of potentially impact timeline and the reacceleration of subscription growth? I guess, are you seeing and then I guess even if you are not, do you think that could act like a tailwind late 2021 into 2022?

[Anton Chilton:]

Right. Thanks, Bhavan. It’s a real difficult one to call it, I would say just our observation of the market is that we are not seeing behaviors change significantly, but we are hearing more questions about U.S. companies in China and the future of U.S. China relations. We would hope that that outlook has brightened somewhat, but we observed that the Chinese government weren’t the first in line to give Biden the call to say congratulations. So, hopefully, it looks more optimistic. I would say what drives even more optimism there for the medium term and talk about what that is in the minute is, I think it’s in both countries’ interest relations are solid, there is a lot of U.S. interest in China. We know that through our customer base. And of course, there is a lot of interest from them from an economic perspective over here. So, I think it’s in everybody’s interest to work that out and make the best of it, so hopefully more optimistic than we were. Timing, I say medium term, yes, I think it’s going to take time to work through and we don’t know what level of prioritization the next administration is going to give to that versus other things. So we will see how that goes.

[Bhavan Suri:]

Yes, it’s a tough question. One quick follow-up here, just about the partners do you know, as you have added sort of the new executives in the channel and help building that. I’d love to get a sense of its first 90 days, you touched on a little bit, but I would love to see if you have seen these channels start to drive any deal activity, so obviously, in these cases, you bring them into deals, you provide sort of the professional services, accessibility and deals to them. But have you seen any of the firms, the SI firms start to drive the initial deal stuff or is that still on the comp? Thank you.

[Anton Chilton:]

Thanks, Bhavan. Yes, I would say on its first 90 days, so obviously had some involvement on our systems integration partner network, although we have hadn’t primarily focus on the plans for our sales agent and distribution channels around that, that comes oftentimes with services capability. Yes, so we cover both of those. So right now, what we have got is his initial plans that are laid out in terms of growth he has been working with each of our regional heads to get that plan to a level of granularity through next year. And we are in that cycle right now of reviewing and evaluating each of those plans, but our intention is of course to drive a material improvement in sales return from the channel. Back to your question on the systems integrators, we have had some spots of where they have introduced us to deals and so on, but that is by far not the norm at this point of time. So that is an area that we will continue to focus on, especially with some of the larger ones and we are in conversations with some potential partners right now, where I think that could be more the case that their model is leading us to business rather than we are offloading business to them, but that’s something that we are working towards in the future.

[Bhavan Suri:]

Got it. Super helpful. Thanks, guys and congratulations. That was a really solid quarter.

[Anton Chilton:]

Great. Thanks, Bhavan.

[Operator:]

Our next question will come from Steven Chang with Stifel. Please go ahead.

[Steven Chang:]

Hi, thanks for taking my question and congrats again, on the great quarter. I was just wondering like what degree will you see maybe a reinvestment of recent OpEx savings, especially stemming from the current macro backdrop, I know you touched a bit on you said potential future opportunities that makes that extend efficiencies, but maybe perhaps you could expand on that? And then also in that vein, should we expect any of that potential shift spend shift to kind of remain for the longer term or take a more permanent change, especially if you said before the T&E levels will be lowered in the future? Thank you.

[Anton Chilton:]

Yes, sure. I will start and then I will ask Daniel to flesh that out a bit more. But yes, certainly, I think we have learned a lot through the pandemic about how we can operate the business more efficiently than we did in the past from in relation to things like travel expenditure, our use of virtual conferencing both externally and internally has of course, like everyone else ramped up. And then we are also looking at use of offices and so on. So, Daniel, do you want to provide a bit more?

[Daniel Lender:]

Yes. I think that in the short-term, I think we will see as business and general activities go back to what we used to call normal, I think what’s going to happen is we will see some level of increase with regards to the travel, but travel is not going to return to the levels where we were things were before, I think, we as a company and our customers as well have, we have all learned how to be much more effective using a lot of the remote tools. So, we have been able to drive sale cycles. We have been able to drive a number of services, projects and so forth without the need to do all that travel. With regards to the facilities that’s another area that we think that over the long run, we will experience some savings as well, those cannot be implemented and won’t take effect right away, because you need – those both need to be timed with when leases come for expiration or the ability to reduce some space. We don’t believe we are going to be in a situation where everybody operates remotely as you may have seen some companies talk about that. I think it’s likely going to be a mix, where there will be some use of office space, but not to the degree that is being used today. So, I think there is a number – there is also in terms of how do we reach customers, how much of that activity is happening via using web tools and so forth versus actual events. One thing that I would add that is not directly related to expenses is that on the services side that we have always been known to be able to deliver our solutions at much faster than the competition and get our customers to get value significantly faster. With some of the remote deployment, that actually increases the speed of deployment of the application, because now you are not wasting time with having consultants travel during the week, but you can actually have people being what we have been productive working on the engagement on a 5 days a week basis. So that will also help our overall ability to drive more cloud deployments in a faster fashion.

[Steven Chang:]

Okay, great. That’s very helpful. Thanks again.

[Anton Chilton:]

Sure.

[Operator:]

And our last question will come from Kevin Liu with K. Liu & Company. Please go ahead.

[Kevin Liu:]

Hi, good afternoon. First question here, just in terms of the 50% growth in the deal that you saw this quarter, I was wondering if you could talk a little bit more about just how much of that might have been pent up demand from earlier in the pandemic as folks paused versus as you guys mentioned being able to pull in more of the deals this quarter? And to that latter point just are there any specific levers that you guys are able to pull to drive those deals across the finish line or is it more so just kind of your customers moving along their own timelines?

[Anton Chilton:]

Right. Thanks, Kevin. Yes, I’d say, it’s a mixed picture. If you think about we have talked our Q2 bookings were at similar levels to last year’s Q2, which was a good year or good quarter, I should say. We have focused on pulling deals out of Q4 into Q3 to help this year and we were successful in some regard with that. And yes, that was about really switching that messaging from while we are waiting for the pandemic to end to – well, you could be waiting for a long time to let’s go and drive some value now and some customers responded to that. On the other side balancing that, we did see some customers that actually as locked downs initiated in Europe and so on, delayed some of those decisions. And we hope to be able to pull them back into Q4 or early in Q1 next year, but it really is that mixed picture. So, I’d say it really depends on the company’s specific circumstances, what they are making, who they are selling it to, what our supply chain looks like, as to whether they are willing to go faster, or they want to go a little bit slower, but it seems to have evened itself out at least during our third quarter.

[Kevin Liu:]

Understood. And so we talked a little bit about some of the expansions within your install base doing pretty well this quarter, are there any specific kind of modules your customer side is gravitating towards us in response to what’s going on in the broader macro or is it kind of across the board there?

[Anton Chilton:]

No, we are seeing a few spots. So, Pam mentioned in her commentary, our quality management system and we are seeing an increasing level of interest in that. And that’s an area that we feel pretty optimistic about for the future in terms of good headroom for growth there. And then the other side of that as with all the activity we see in supply chains and that’s both, you know, with individual suppliers and – but also disruption in supply chains. Some of that was caused by COVID that was built on the back of some of the disruptions we saw around trade and tariffs and so on. And so if people are acutely aware now of the need to be able to proactively manage that and deal with all of that and deal with almost real-time changes when it comes to tariffs and customs and so on. And so that’s driving that increased level of interest we see in our global trade and transportation execution module as well as our demand and supply chain planning modules. So I would say those are probably the three highlights. Of course, we continue to push and sell the others, but those are three that contemporary times of putting in sharp relief for customers and prospects.

[Kevin Liu:]

Great. And just to follow-up on some of the other questions on the operating expense side earlier, with some of the areas where you have identified savings that could perhaps be more permanent post-COVID. Do you feel like that’s going to enable you to either reach your long-term target model goals in a faster timeframe or perhaps get some larger levels over and above what you guys put out earlier this year?

[Daniel Lender:]

Yes, no, I mean, I think if anything it’s we have accelerated a bit this year in terms of where we are in terms of our long-term goals. So, the baseline that we have this year is higher than what we had originally planned. Where I did point in time, we haven’t gotten to the degree of reevaluating that local model that we published. So, those targets remain in place. Obviously, as you know, the situation develops we do see some additional operating efficiencies that we can implement we will for sure be updating that model.

[Kevin Liu:]

Well, congrats from me as well and good luck as you close out your fiscal year.

[Anton Chilton:]

Great. Thanks, Kevin.

[Operator:]

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

[Anton Chilton:]

Thank you very much and thank you to everybody for joining us today. We look forward to seeing you in the new year and hopefully it’s a better year from many perspectives and we announce our fourth quarter and full year results then. Thank you very much.

[Operator:]

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.