QAD Inc.
Q4 2008 Earnings Call Transcript

Published: 13 Mar 2008

[Operator:]

Welcome to QAD's fiscal 2008 fourth -quarter financial results call. At this time, all participants are in a listen-only mode, and later we will conduct a question-and-answer session, with instructions being given at that time. (Operator Instructions). As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Aileen Osborn. Please go ahead.

[Aileen Osborn:]

Hello, everyone. This is Aileen Osborn, QAD's Vice President in charge of Investor Relations. Earlier today, we issued a press release announcing QAD's financial results for the fiscal 2008 fourth and full year ended January 31st, 2008. The press release and associated financial statements are available on the Investor Relations section of our website www.qad.com. Additionally, please be advised that this call is being webcast live at our website. Before I begin, I want to ensure that everyone on today's call understands that our discussion today might contain forward-looking statements that are based on certain expectations and analysis as of today, March 13, 2008. 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 any forward-looking statements to reflect events or circumstances after the date of this conference call. For a complete description of risks and uncertainties, please refer to QAD's January 31, 2007, 10-K filing. Now, I would like to turn the call over to Karl Lopker, QAD's Chief Executive Officer.

[Karl Lopker:]

Well, good afternoon, and thank you for joining us to discuss our fourth -quarter results. With me today is Daniel Lender, Chief Financial Officer, and Pam Lopker, President. We are pleased to report another record in revenue for the quarter and the year. We continued to experience good performance in each of the major revenue categories, regions, and vertical markets. Daniel will give you the numbers for the quarter, and then I will discuss the details. Pam will be available for questions. Daniel?

[Daniel Lender:]

Well, thank you very much, Karl. Revenue in the fiscal 2008 fourth quarter was above our earlier outlook, with year-over-year growth in all of our business lines. License revenue grew 14%, maintenance and other revenue grew 7%, and services revenue increased 24%. These increases were the result of continued improvements and execution, as well as contributions from the businesses we acquired during the last fiscal year. During the fourth quarter of fiscal 2008 total revenue was up 13% to $75.3 million, compared with $66.5 million in last year’s fourth quarter. Revenue also increased 13% sequentially, from $66.6 million in the third quarter of fiscal '08, primarily as a result of normal fourth quarter seasonality, as well as improvements in license sales. In the fiscal 2008 fourth quarter, we received orders from 38 customers, representing more than $500,000 each, by license, maintenance, and services billing. Of these orders, 13 exceeded $1 million, six exceeded $2 million, and two exceeded $4 million. License revenue for the fourth quarter of fiscal 2008 grew to $22.4 million, versus $19.7 million in the same period last year. Maintenance and other revenue increased 7% to $33.1 million, compared with $30.9 million in the year ago quarter. Services revenue grew 24%, increasing to $19.8 million in fiscal '08 fourth quarter, compared with $15.9 million in last years fourth quarter. Fiscal 2008 fourth quarter gross margin was 59%, compared with 61% in the prior year period, and slightly up from 58% in the third quarter of fiscal '08. These changes in gross margin primarily relate to the mix of revenue in each of those periods. Total operating expenses in the fiscal 2008 fourth quarter were $39.5 million, or 52% of total revenue, compared with $35.4 million, or 53% of total revenue, in fourth quarter of last year. Sales and marketing costs increased 19% to $19.9 million from last year's fourth quarter, mostly due to higher commission and sales agent fees associated with our higher revenue. R&D expense of $10.7 million was 7% higher than in prior year fourth quarter, primarily related to higher professional fees and unfavorable foreign exchange. G&A expense of $8.7 million was roughly equal to that in the fourth quarter of fiscal '07. Operating income in the fiscal 2008 fourth quarter was $4.7 million, versus $5.2 million in the same period of last year. Fiscal 2008 fourth quarter operating income was impacted by higher sales and services variable costs, including increased commission rates due to accelerators associated with our higher revenue levels, and some orders booked but not recognized during the year. Unfavorable currency movements also impacted fiscal 2008 fourth quarter operating income across all expense line items. Other expense for the most recent quarter totaled approximately $96,000, compared with other income of approximately $600,000 in the fourth quarter of fiscal '07, reflecting unfavorable foreign exchange. Net income for the fiscal 2008 fourth quarter totaled $5.2 million, or $0.16 per diluted share, compared with net income of $3.8 million, or $0.12 per diluted share, in the same period last year. Net income in the fourth quarter of fiscal 2008 included a tax benefit of about $600,000. In the fourth quarter of fiscal '08, pre-tax stock compensation expense was $1.8 million, or $0.04 per diluted share, compared with almost $6 million, or $0.03 per diluted share, in last year’s fourth quarter. For the full year fiscal 2008, total revenue grew 12% to $252.7 million, from $235.6 million in fiscal '07. The acquired products contributed approximately $13.8 million to our total revenue in fiscal 2008, and approximately $3.2 million in the prior year. We'll no longer be reporting the contribution from acquired products, as we now own those products for a full year. Fiscal 2008 operating income was $5.6 million, compared with $8.1 million of fiscal '07. Operating income decreased due to the factors I discussed earlier. Our tax rate [had at least three items] for fiscal '08 of 6%, as higher-than-anticipated proportion of taxable income was generated in non-US entities, which have lower tax rates. This change of mix in taxable income, combined with specific price that we took in the fourth quarter, resulted in a lower tax rate for the year. Fiscal 2008 net income was $5.4 million, or $0.17 per diluted share, compared with $7.3 million, or $0.22 per diluted share, in fiscal '07. In fiscal '08, pre-tax stock compensation expense was $6.2 million, or $0.13 per diluted share net of tax, compared with $5.5 million, or $0.12 per diluted share net impact in fiscal '07. I'll briefly discuss our balance sheet before ending with our business outlook. Cash and equivalents were $45.6 million at January 31, 2008, compared with $56.8 million on January 31, 2007, including restricted cash. The reduction in cash balance includes approximately $18.7 million in stock repurchases, and $3.2 million in dividend payment, offset by just cash generated by operations. Deferred revenue was $89.3 million at January 31 2008, compared with $77.1 million in the prior year. The increase was due to higher annual maintenance billing, in addition to increased deferred licenses and services. Day sales outstanding for the fourth quarter of fiscal '08, using the count-back method, was 58 days, versus 56 days in last year's fourth quarter. Cash flow provided by operations for the fiscal 2008 fourth quarter was $4.6 million, versus $7.9 million in the prior-year quarter. For the full year, cash flow provided by operations was $15.3 million compared with $18.9 million in fiscal '07. During the fourth quarter of fiscal '08, we purchased approximately 510,000 shares of QAD common stock at an average price of $8.83 per share, including transaction cost for a total price of $4.5 million. In fiscal '08, we purchased total of approximately 2.2 million shares at an average price of $8.37. Let me now provide our outlook for the first quarter of fiscal '09, as well as the full year. QAD anticipates revenue between $53 million and $55 million, and earning per share of about breakeven with the quarter ending April 30 2008. This earnings estimate includes pre-tax stock compensation expense of $0.03 per diluted share net of tax. For the full year in fiscal '09, we expect revenues between $275 million and $285 million, and earnings in the range of $0.22 to $0.35 per diluted share. These ranges of earnings include pretax stock compensation expense of $0.14 per diluted share net of tax. Our business outlook for both first quarter of fiscal '09 and the full year assumes an effective tax rate of 36%. With that, I will turn the call the back to you, Karl.

[Karl Lopker:]

Okay, thanks Daniel. We are continuing to gain momentum for the new products we built and acquired over the past couple of years. We are especially gaining traction from our transportation management and enterprise asset management modules, in line with the discussion we have had on previous calls. These products appeal to larger companies whose investments are not being as affected by the weak economy. Revenue from on-demand product continues to increase, with the volume coming more from modules that we host rather than full ERP systems. For example, the number of customers and our trading partners using supply visualization has doubled in the past year. We also closed on-demand ERP deals in the fourth quarter. That revenue won't be recognized until the service is delivered in the next fiscal year. An increase in on-demand orders, where the selling effort occurs before the revenues is recognized, means that the reported profit can appear low in the period the order is taken. This is a trend that we will continue to see in the next couple of years, as on-demand orders increase. Our revenue from on-demand products is around 5% of total revenue. So the effect on profitability is not yet that significant. In services, we are happy with our growth, although our margin suffered a bit in Q4 due to training and the holidays. We are expecting that services will continue to grow, but not quite at the same pace we saw last year. We now have a better geographic balance of services personnel around the world, due to the headcount increase in North America during the past year. This puts us in better position to provide a greater portion of the services for multinational rollouts. On the product side, we're starting to roll out a new financials package for multinational companies. We call this new package Enterprise Financials, and it’s built upon a services oriented architecture. We are finishing the early adapter phase now, and expect that later this year Enterprise Financials will become the standard financials package that we ship to customers. However, customers will have a choice of which financial package to use for some time in to the future. On a geographical basis, all regions contributed to year-to-date license and total revenue growth. And there was no significant change in the vertical or revenue mix. Total headcount was flat year-over-year, although headcount did increase significantly in services. We also increased the number of direct and indirect sales people by 8% this past quarter, and this additional headcount should help our performance in the first quarter relative to last year. Due to strong execution of the end of the fourth quarter, our overall funnel is down 10% or 15% from last year, although the short term funnel is about at the same level. I would like to note that our weak results in the first quarter of last year were due more to reorganization in the sales force than the size of our funnel. Indeed we made up the first quarter shortfall later in the year, so comparing the size of last years funnel to this year may be misleading. Before I finish, just a few words on the economy. While we've seen that our results in the past have been affected by downturns in the economy, this just does not seem to be a factor just yet. We're watching closely to see the course of the economy in the coming months and its effect on global manufacturing. Well that finishes our report for the quarter. Operator can you please give the instructions for questions.

[Operator:]

Thank you. (Operator Instructions). Our first question will come from the line of Peter Goldmacher of Cowen & Co.

[Peter Goldmacher:]

Hi guys. Can you give us bit of an update on the move to on-demand? Some of your products are going on-demand, and what you are seeing as far as uptake in backlog?

[Pam Lopker:]

I guess I'll take that, Peter. This is Pam. Our two main areas of on-demand is our collaborative product, which we have actually had for a few years, almost five, but it's got to a slow start, and, as Karl said, increasing quite well this year. We're getting some very large roll outs, and recently had a very large automotive company doing the global role out of it, and we're integrating those to QAD application site, as well as non-QAD including like SAP and some old JDE type sites. So, I think that, overall, and we're also getting a very strong interest in building quite a funnel for enterprise level on-demand product. We added two new customers in that area in fourth quarter, and as Karl mentioned, we didn't recognize any revenue for that, because it will be recognized probably over the contract, monthly over the contract period. So we are seeing quite a bit of demand versus getting the funnel. I think, people are feeling much more comfortable with on-demand applications than they were a few years ago, so we do see that as a good growth driver.

[Peter Goldmacher:]

Thank you, just following up on Karl's comments on the economy, if you were to see signs of weakness, early signs of weakness, what would they look like?

[Karl Lopker:]

Well, they'll definitely show up in our funnels, we'd look at the leads that we have coming in and the total size of the funnel, and we look where that is in the world, and we look where that is in our verticals, and that's one thing that we definitely watch.

[Peter Goldmacher:]

So it’s just new leads coming into the funnel, it’s not necessarily certain leads staying in the funnel longer, or that’s where you think you see it first?

[Karl Lopker:]

No, the leads cannot stay in the funnel longer, and that would have to adjust our thinking also, but over the past, say five years, that number has not varied very much, a little bit quarter-to-quarter but hasn’t really varied. Of course, you might say we haven’t really had the recession in the last five years either, so.

[Peter Goldmacher:]

Right

[Karl Lopker:]

So you know that’s the number that we would watch, although we're not expecting it to change too much.

[Peter Goldmacher:]

Okay, great, thank you

[Operator:]

Thank you. (Operator Instructions) I will go to the line of Mark Schappel of Benchmark. Please go ahead.

[Mark Schappel:]

Hi, good evening, Karl. To start off with, would one of you just clarify your comments on your sales funnel, especially with respect to the short-term versus the long-term funnel?

[Karl Lopker:]

We actually divide the sales funnel under two pieces, one is does it look if it’s going to close in the next quarter, and then what is the total value of the funnel, and right now the total value of the funnel is down somewhat from last year, but for the next quarter, it looks about the same as last year. And that was similar to what actually happened last quarter. In fact, the total funnel was down, but the fourth quarter funnel looked better, and it turned out that it was better. So that’s a good leading indicator for us.

[Mark Schappel:]

Okay thanks. And with respect to the large deal business, it looks like it was particularly strong this quarter, and I was wondering if there is anything that you think contributed to that with respect to certain verticals?

[Karl Lopker:]

I think one thing that contributes to it is that we have more services capacity that we can use to help new implementations and rollouts, and the faster we do the rollouts the more that the customers then buy additional users for even greater roll outs And, in fact, I think that is happening in larger deals this year.

[Mark Schappel:]

Okay. And then, Daniel, one for you, what was the impact of foreign exchange in the top-line of this quarter?

[Daniel Lender:]

Foreign exchange, Mark, typically we have about 30% to 35% of our revenue that is impacted by foreign exchange. The majority of that is in services.

[Mark Schappel:]

Okay. You don't have the actual number of what that contributed to the top-line?

[Daniel Lender:]

Well, it depends up to what quarter that number is being compared to. So, as I said it’s roughly 30% to 35% of revenue, currently it is foreign currency dependent.

[Mark Schappel:]

Thanks.

[Daniel Lender:]

Sure.

[Operator:]

(Operator Instructions) Presenters, there is no one else in queue at this time. I'll turn it back to you for closing remark?

[Karl Lopker:]

Okay, just let's just wait for another five seconds or so.

[Operator:]

And no one is on queue sir.

[Karl Lopker:]

Okay. Well, thank you everyone for your attendance. We look forward to updating you again in May after the end of our first quarter. Talk to you then, good bye.

[Operator:]

Thank you. And ladies and gentlemen, this conference will be available for replay after 4 pm Pacific Time today through March 28 at midnight. You may access the AT&T teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code of 906646. International participants may dial 320-365-3844. That does conclude your conference for today. Thank you for your participation and for using the AT&T Executive Teleconference service. You may now disconnect.