QAD Inc.
Q3 2010 Earnings Call Transcript

Published: 25 Nov 2009

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the QAD fiscal 2010 third quarter financial results conference call. At this time all phone lines are in a listen-only mode. Later we will conduct a question-and-answer session, with instructions given at that time. (Operator Instructions) With that, I would now like to turn the conference over to your opening speaker for today, John Neale. Please go ahead.

[John Neale:]

Hello everyone and welcome to today’s call. I’m John Neale, QAD’s Vice President and Treasurer. Earlier this afternoon, we issued a press release announcing QAD’s financial results for the fiscal 2010 third quarter ended October 31, 2009. The press release and associated financial statements are available through the Investor Relations section on our website at www.qad.com. Additionally, please be advised this call is being webcast live on our website. Before I begin, I need to ensure that everyone on today’s call understands that our discussions might contain forward-looking statements that are based on certain expectations and analysis as of November 24, 2009. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated. QAD takes no obligation to revise or update as forward-looking statements to reflect events or circumstances after the date of this call. For a complete description of risks and uncertainties, please refer to QAD’s 10-K and 10-Q filings with the Securities and Exchange Commission. Now, I’d like to turn the call over to Karl Lopker, QAD’s Chief Executive Officer.

[Karl Lopker:]

Good afternoon and thank you for joining us to discuss our third quarter results. With me today is Daniel Lender, Chief Financial Officer; and Pam Lopker, President. Our third quarter results came in above our guidance. We’re pleased to report that we’re able to manage expenses to produce a reasonable profit on a 17% revenue decline from last year. We don’t think we are yet out of the woods, but we are seeing some daylight. Daniel will give you the numbers for the quarter and I’ll discuss the details. Daniel.

[Daniel Lender:]

Thank you, Karl. The improved economic environment and its impact on our industry verticals helped our focus sales efforts achieve sequential revenue growth. Total revenue for the fiscal 2010 third quarter was $66.2 million, nearly 10% increase from the prior second quarter. This compares with total revenue of $67.8 million last year. License revenue totaled $8.4 million, compared with $13.1 million in the third quarter of last year. Maintenance and other revenue was $33.8 million in the third quarter of fiscal 2010, up from $32.7 million in the third quarter of fiscal ‘09 and up from $32.1 million in preceding second fiscal quarter. Current quarter maintenance revenues benefited by approximately $500,000 of prior period delayed renewals, which were secured during the current quarter. Services revenue was $14.1 million in the 2010 fiscal third quarter versus $22 million in the third quarter of 2009, which included a large customer engagement in that quarter. In addition, the lower services revenue year-over-year relates in part to lower license revenue over the last few quarter and its impact on implementations, as well as slower customer spending due to the economy. However, we have effectively managed our capacity and utilization throughout the revenue decline and we’ll continue to monitor these metrics. On a sequential basis, services revenues was up 12%, including approximately $800,000 of revenue that was recognized this quarter from work performed in prior quarters that met collection criteria or milestones in the third quarter. On a vertical market basis, automotive represents at approximately 25% of total revenue. Consumer product in foot and beverage was 23%. High-tech and industrial totaled 39% and life sciences and other was a remaining 13%. During the quarter, we received orders from 15 customers representing more than $500,000 each in combined license, maintenance and services billing, including $6 million, exceeding $1 million. Gross margin improved to 60% in the third quarter of fiscal 2010, compared with 54% in the same quarter of last year due primarily to changes in our revenue mix. Sales and marketing expense decreased 32% to $12.2 million in the fiscal 2010 third quarter and was relatively flat compared to the preceding quarter. The year-over-year improvement relates to the various cost cutting measures we implemented as we manage through the economic downturn. We are continuing to monitor spending in sales and marketing as well as full aspects of our business and are working to insure that expenses levels are measurement with current and expected revenue streams. R&D expenses decline in the third quarter of fiscal 2010 to $8.7 million from $10.8 million in the third quarter of last year and $9.3 million in Q2 of this year. General and administrative cost decline to $7.1 million, compared with $8.3 million one year ago a $9 million in the preceding quarter. Professional fees for the quarter were down 500,000 from last quarter and there was no significant bad debt expense during this quarter versus $1.1 million in the prior quarter. Total operating expenses in the third quarter of fiscal 2010 equaled $28.1 million or 50% of total revenue, compared with $37.1 million or 55% of total revenue in the fiscal 2009 third quarter and 61% of total revenue last quarter. Operating income in the fiscal 2010 third quarter was $5.6 million including $1.2 million in stock compensation expense, compared with an operating loss of 533,000 including $1.3 million in stock compensation expenses in the similar period of last year. Total operating expenses in the current third quarter included severance expense of approximately 900,000 versus $1.5 million in the prior quarter and about 435,000 in the same quarter and the similar period last year. Other income was 322,000 in the third quarter of 2010 versus 37,000 in the third quarter of 2009 mainly due to foreign currency movement. Net income for the third quarter of fiscal 2010 was $4.8 million or $0.15 for fully diluted share compare to a net loss of $1.8 million or $0.06 per share last year and a net loss of $1.4 million $0.04, $0.05 per share last quarter. Stock compensation expense, net of tax was $0.03 per share in the third quarter of fiscal 2010, the same as the previous quarter and the third quarter of fiscal 2009. Foreign currency positively impacted revenues by approximately $1 million a negatively impact a cost by the same amount, resulting in a negotiable impact to operating income. I’ll also quickly review our year-to-date results. Total revenues for the first nine months of the year were $162.5 million compared with $2043 million in the first nine months of last year. License revenue for the year-to-date period was $21.3 million versus $36.4 million in the same period of last year. Maintenances and other revenue total $98.7 million compared with $101.3 million in the fiscal 2009 year-to-date period. The decline and maintenance revenue related to the impact of foreign exchange, as our maintenance renewal rates continue to be strong. Services revenue equaled $42.5 million versus $66.3 million in the same period of last year. Net income for the fiscal 2010 nine month period was 664,000 or $0.02 per fully diluted share versus a net loss of $4 million or $0.13 per share last year. Stock compensation expenses equaled $0.08 per share and $0.10 per share respectively in the first nine months of fiscal 2010 and 2009. We further reduce capital expenditure this quarter, coming in at less than 200,000 this quarter compared with $1.9 million last year as we continued to preserve cash by strategically deploying capital where most necessary. Year-to-date, capital expenditures were 645,000 versus $4.8 million in the first nine months of last year. Cash flow provided by operations from the third quarter of fiscal 2010 was $3.3 million compared with $2.5 million in the third quarter of last fiscal year. For the first nine months of fiscal 2010, cash flow provided by operations was $15.6 million compared with $9.6 million in the first nine months of last year. Cash and equivalents grew to $43.7 million at October 31, 2009 compared with $31.5 million at January 31. Days sales outstanding using the Countback Method was 58 days in the third quarter of 2010 compare with 68 days in last year’s third quarter and 73 days last quarter. Our improvement in DSO is due to a higher collection as a percent of billings when compared to the third quarter of fiscal 2009. As we reported last quarter, we successfully completed a one-time Stock Option and Stock Appreciation Right Exchange Program. No additional charge will be incurred as a result of the exchange. For the fiscal 2010 fourth quarter, the company currently expects total revenue of approximately $57 million in profit of about $0.13 per fully diluted share. For the fiscal 2010 full year, the company currently expects total revenue of approximately $220 million and a profit of about $0.15 per fully diluted share. Back to you, Karl.

[Karl Lopker:]

Okay, thanks, Daniel. Last quarter we reported that while we felt the economy wasn’t yet picking up in manufacturing. It was becoming more stable and that our customers were able to start planning for the recovery. We believe that, this is now definitely the case. While our indicators are not flushing goal, they are becoming more positive. Our license revenue declined quite a bit year-over-year, reflecting the economic issues facing manufacturing industry customers. However, we do believe that we’ve seen the worst of the decline in licenses. We are looking for license growth, once manufacturers become more confident in the economy and capital asset purchases pick up. We are watching purchasing manager’s indexes and our own pipeline to see when this will happen. Maintenance held strong due to our focus on customer satisfaction and getting renewals done on time. We also saw the benefit of some increases in maintenance pricing. In the services area, our revenue declined in line with licenses, knowing that this would happen due to declining license revenue, we focused on retaining as many consultants as possible by reducing subcontractors, as we start to grow again, we’ll focus on more on project management and using subcontractors to provide resources. We reduced our employee headcount 17% from one year ago in line with our decrease in revenue; however, we were able to reduce costs by an even larger percentage due to a number of other initiatives including temporary payroll reduction programs, the reduction of subcontractors and tight management of other expenses. In our vertical markets, industrial products look the quarter, automotive is beginning to show some activity and life sciences remain stable to positive. We’ve been putting more focus into providing solutions to our life sciences customers, who’ve been less affected by the economy. On a geographic basis, Europe had a better quarter than the Americas and Asia-Pacific is getting better pre-recession levels of activity. We get exceptionally well in collecting our receivables and controlling capital expenditures, thus increasing our cash position and proving that we can manage our cash in a downturn. In the On Demand area, we signed a few new customers for our application suite, although there were fewer wins than in the second quarter. Overall, our On Demand business is up around 25% year-to-date and although the revenue numbers are still modest we’re looking for steady increases as demand continues to pick up. On the development side we made our semi annual release of QAD Enterprise Applications. I’ll let Pam comment on what was in the release. Pam.

[Pam Lopker:]

Thank you, Karl. In September, we released QAD 2009.1 as we continued to add significant usability and functional enhancements. We had major updates in functionality and usability this quarter. Customer Relationship Management, services QAD module around visual scheduling for field engineers and mobile PDA support and enterprise Asset Manager and order and product configurator whereas modules that we released major updates to for this quarter. I would like to briefly update you on a couple of our early successes and the customer facing areas of service and support and the configurator. With sales of $600 million, FEI is the leading diversified scientific instrument company focused on Nanotechnology usages. FEI was an early adapter to our 2009 pipeline service and support module and went live in October in Europe and North America with the rest of the world going live over the next month and/or two, so this month and December as well. FEI’s goal is to achieve high customer satisfaction and strong technical support as an important part of its value proposition. FEI has over 8,000 systems installed worldwide and a field support team of over 400 engineers, so very large field service organizations. Prior to implementing QAD 2009, 0.1 service and support with mobile field service capabilities. FEI used different homegrown methods to collect and process service data. Business processes had some variations across the globe and required users to enter the same information and multiple systems. With the implementation of QAD’s SSM module, FEI expect to see significant improvement in facility to track field’s inventory, speed to services customer and base overall process sufficiency. FEI’s Vice President of Worldwide services, James Federman, as you several service system in the past of both high tech and biotech companies and had this to say about QAD’s capabilities. QAD offers a world class service and support product suite that enables us to manage our service organization with transparency and efficiency contributing to high levels of customer satisfaction. We can now grow our services revenues without necessarily adding workforce at the same rate while further improving our service quality. For the configurator, I choose an early adopter customer, ADC Crown. ADC Crown is the name used for ADC Telecommunications in Europe, Middle East, Africa and Asia Pacific. ADC Crown, Asia Pacific has committed to a QAD’s strategy and is upgrading to the newest release and many sites that was already using QAD and then implementing us in new replacement sites. Bryce Nichols who sees R&D Manager at ADC Crown had this to say

[Karl Lopker:]

Okay, thanks Pam. Overall our outlook is still cautiously optimistic as it was at the end of last quarter. Going into Q4, our pipeline is roughly the same as it has been for the last three quarters. It is not showing the normal Q4 increase. The good news is that although we’ve been closing the same number of license transactions each quarter, we’ve generated more license revenue, indicating a larger deal size. We expect this trend to continue, making it possible to meet our revenue goals without an increase in the number of license transactions. Our manufacturing customers are usually the last to recover in a downturn and we believe this will be the case in this recovery, but we are ready to start growing again with our customers. That finishes us the report for the quarter and operator, can you give the instructions for questions?

[Operator:]

(Operator Instructions) Your first question comes from Mark Schappel - Benchmark.

[Mark Schappel:]

Starting on the maintenance revenue, Daniel, could you just address or review the $500,000 benefit on the maintenance revenue line that you mentioned early in your prepared remarks?

[Daniel Lender:]

We mentioned in a couple of previous quarters that our renewals have been strong, but we have been experiencing some delays in certain accounts were extended negotiations happened. As a result of that, we had a bit of a bigger backlog that we normally did and we closed or we were able to secure some additional renewals that actually dated back on that quarter or two and as a result of that there was some additional, what I would call catch up revenue that occurred in Q3 amounting to roughly $500,000 of expert revenue so to speak, that was recognized in the quarter.

[Mark Schappel:]

With respect to the catch up revenue, does this have anything to do with those three customers of yours that went into bankruptcy last quarter or this is…?

[Daniel Lender:]

Yes, some of it does.

[Mark Schappel:]

Then I guess, Karl, this is a question for you. With respect to the relatively new enterprise financial Apps, I believe the company had a goal of getting 20 customers live by year end. I was wondering how you’re doing as far as whether you were still on track to achieve that goal?

[Karl Lopker:]

Do you want to catch up, Pam? How much we’re on track for enterprise financial customers?

[Pam Lopker:]

On our enterprise financial customers, I think we have about 10 live customers now. We have another 10 or 12 in the implementation phase and we had two very large customers go live in the last month. So I think we’re feeling good about it. Our customers are happy. We’re just moving through that transition.

[Mark Schappel:]

With respect to the large deals in the quarter, were any of these significant mega deals like two plus million or so?

[Karl Lopker:]

No. I mean, we did not have any deals that were over $1 million, from a license perspective, Mark.

[Operator:]

Your final question comes from Joe - Cowen & Co.

[Joe:]

This is Joe for Peter here. So I just wanted to get some clarification on how much FX affected the maintenance line?

[Karl Lopker:]

For the quarter, the effect was negligible, only about 100,000. On a year-to-date basis, which I assume that’s what you’re more interested was about a bit over $3 million negative effect, almost $3.5 million downward effect.

[Joe:]

Then for this quarter, it was positive 100 K effect?

[Karl Lopker:]

For this quarter it was positive 100 K.

[Joe:]

Then of the three companies that customers that went bankrupt, you’d mentioned that one of them had gone to cash accounting. How much revenue is expected from that customer for the remainder of the year?

[Karl Lopker:]

I don’t have the specific number, but it’s relatively small. There will be some revenue that will be recognized on the maintenance line as the maintenance contract has been done. There was some impact on the services line as well related to that particular and a few other customers as I mentioned earlier and on a run rate basis it should be about 300 K a quarter what we would expect.

[Operator:]

Speakers allowing a few moments for response time, we have no additional questions in our queue. Please continue.

[Karl Lopker:]

Okay. Let me summarize what you’ve heard today. We are seeing improvements in the indicators for manufacturing and the attitude in our customer base is improving. However, we’re still waiting for the numbers to show a healthy improvement. We’re confident they’re well positioned to take advantage of the coming recovery. Thank you for your attendance. We’ll update you again in March with our year end results. Goodbye and Happy Thanksgiving to our North American investors.

[Operator:]

Ladies and Gentlemen, today’s conference call is being made available for replay starting today at 4 pm in the Pacific Time zone and running until Wednesday, December 2. You can access our service by dialing 800-475-6701 or internationally at 320-365-3844 and at the voice prompt enter today’s access code of 117697. That does conclude our conference call for today. Thank you for your participation. You may now disconnect.