QAD Inc.
Q1 2009 Earnings Call Transcript

Published: 30 May 2008

[Operator:]

Welcome everyone to the QAD fiscal 2009 first quarter financial results conference call. (Operator Instructions) I will now turn the conference over to our host Eileen Osborn.

[Eileen Osborn:]

This is Eileen Osborn, QID’s Vice President of Finance in charge of investor relations. Earlier today we issues a press release announcing QAD’s financial results for fiscal 2009 first quarter ended January 30, 2008. The press release and associated financial statements are available on the investor relations section of our website at www.qad.com. Additionally, please be advised that this call is being webcast live at our website. Before we begin, I want to assure 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 today, May 29, 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 10-K filings for the period ending January 31, 2008. Now I would 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 first quarter’s results. With me today is Daniel Lender, Chief Financial Officer and Pamela Lopker, President. We’re pleased to report another record first quarter revenue. We continue to experience good performance in each of the major revenue categories, regions, and vertical markets; however licensed revenue and profitability were not quite where we wanted them to be. Daniel will give you the numbers for the quarter and then I will discuss the details. Pam is going to be available for questions.

[Daniel Lender:]

In the first quarter of fiscal 2009 we realized double-digit revenue growth, mainly due to the wider footprint across our offerings aided by movement in foreign currency. Total revenue was up 18% in the first quarter of fiscal 2009 to $67 million, compared with $57 million last year. Total foreign currency benefit was approximately $3 million. During the quarter we received orders from 19 customers for representing more than $500,000 each in combined license, maintenance, and services billings. Of these, four exceeded $1 million and one exceeded $2 million. License revenue in the first quarter of fiscal 2009 increased 18% to $12 million, versus $10 million in the same period last year. Maintenance and other revenue grew 10% to $34 million from $31 million. Services revenue rose 34% to $21 million, from $15 million in the prior year period. Cost of revenue was $30 million, or 45% of revenue in the first quarter of fiscal 2009, compared with $25 million or 44% in the same period last year. The increase in expense was due to the change in revenue mix and approximately $2 million in favorable currency movement. Gross margin was 65% of revenue in the first quarter of fiscal ’09, compared with 56% of revenue in the first quarter of fiscal ’08. The year-over-year change in gross margin primarily resulted from the mix of revenue in each quarter. Total expenses in the fiscal 2009 first quarter were $38 million or 57% of total revenue, compared with $35 million or 62% of total revenue in the same period of last year. Slightly more than half of the increase in total operating expenses was attributable to the impact of foreign currency which affected all expense categories. Total operating expenses also increased due to the higher personnel costs related primarily to a sales and marketing headcount increase of 8% including the personnel hired as a result of the FullTilt asset acquisition. We expect to continue our sales investment while also taking measures to manage costs and improve profitability. Operating loss in the fiscal 2009 first quarter was $1 million, including an overall negative foreign currency impact of $700,000 versus $3 million in the same period last year. Other expense for the most recent quarter totaled $273,000 when compared with other income of 4342,000, in the first quarter of fiscal ’08 reflecting favorable foreign exchange fluctuations and a reduction in interest income. Net loss for the fiscal 2009 first quarter totaled $730,000 or $0.02 per share compared with a net loss of $2 million or $0.06 per share in the same period last year. In the first quarter of fiscal ’09, pretax stock compensation expense was $1.6 million or $0.04 per diluted share net of tax, compared with $1.5 million or $0.03 per diluted share net of tax in last years first quarter. Looking at our balance sheet, cash and cash equivalents at April 30 remain unchanged from $46 million at January 31, 2008. During the quarter we purchased approximately 264,000 shares of our common stock at an average price of $8.42 per share including transaction costs, for a total expenditure of about $2 million. The $1 million shares stock repurchase program has been completed. Day sales outstanding for the first quarter of fiscal ’09 using the count back method were 90 days, versus 92 days in last years first quarter. Cash flow provided by operations for the fiscal 2009 first quarter was $8 million versus $ 2 million in the prior year quarter. Now for our second quarter and full year outlook, QAD expects revenue between $67 and $70 million and a slight loss to break even for the fiscal 2009 second quarter ending July 31, 2008. This estimate includes stock compensation expense of $0.03 per diluted share net of tax. For the full year we now expect revenue between $280 million and $290 million and earnings in the range of $0.18 to $0.26 per diluted share. This estimate includes stock compensation expense of $0.14 per diluted share net of tax. Our revised guidance takes into account our first quarter performance, a quarter one acquisition, and the impact of the movement of foreign exchange rates to current levels. Our business outlook for both the second quarter of fiscal ’09 and full year, assumes an effective tax rate of 35%. Now I’ll turn the call back to you, Karl.

[Karl Lopker:]

In looking at our revenue for the quarter, licenses, although up considerably from last years weak result, were not as strong as we would have liked. This is at least partly due to the strong sales success we had in our record fourth quarter; however, there weren’t enough opportunities in our sales fund to support a larger license number in the first quarter. The number of license transactions was up slightly, while our sales headcount increased by 8%. There was a lengthening in the sales cycles which we believe is due to the slower economy. Services continue to show strong growth. This is aided by somewhat higher subcontracting than we had planned. Subcontracts were below our margin than our rep business, but it allows us to flex our work force more easily to meet the customer demand. Having noted this, our profitability in services did improve from last quarter. Maintenance continues to grow due to strong renewal rate. In order to increase our maintenance revenue a bit more, we are planning a maintenance price increase for renewals in the next 12 to 18 months. We’ve gotten out of a maintenance price increase in the last eight years due to efficiencies we’ve been able to generate and help desk support and the use of lower wage resources, but now the lower labor costs in lower wage countries is picking up and we’re feeling the effect of a weak US currency. We feel an increase at this time is appropriate. We also added a number of On Demand customers, mainly in the Supply Digital Vision which is still picking up steam. Our sales funnel remained at the same level it has last quarter. On a geographical basis, all regions contributed to the quarter’s license and total revenue growth. In the vertical numbers there was a bit more strength in automotive than the other verticals which were flat with the previous year. During the quarter we acquired FullTilt, a company that specializes in product information management and master data management. Their annual revenue before that acquisition was approximately $3 million. Total headcount was up around 6% year-over-year, mainly in sales services, and sales and includes about 20 people from the acquisition of FullTilt. On the product side we’re continuing to experience positive response from our new QAD Enterprise Applications 2008. In QAD 2008 we are introducing our new enterprise financials as we have talked about before. The earlier adopted program is going well. Customers on maintenance are entitled to upgrade to the QAD 2008, so the product itself is not going to drive a lot of license revenue in our user base; however, the advanced features make our financials much more attractive to larger multi national prospects and they have been showing quite a bit of interest. In June we’ll again be posting our annual Explore Customer Conference and this is going to be held in Orlando from June 9 to 12. Our focus will be on our new products including QAD 2008. Overall, we’re quite positive about our position in the market and we’ll be putting additional efforts into increasing our profitability. That finishes our report for the quarter.

[Operator:]

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

[Mark Schappel:]

Daniel, was there any FullTilt revenue in the quarter?

[Daniel Lender:]

No, Mark.

[Mark Schappel:]

Karl, just to dig a little bit deeper in the On Demand products. I believe on the last conference call you mentioned that the on demand products were somewhere in the neighborhood of about 5% of total revenue. Is it fair to assume that that number is pretty consistent with what you saw this quarter?

[Karl Lopker:]

Yes.

[Mark Schappel:]

I know it’s difficult to predict the future, but could you give us a sense of where you see the on demand revenue settling in as a percentage of revenue say two to three years down the road?

[Pam Lopker:]

I did some forecasting on that and we do seem to be holding our ramp up. We don’t expect an overnight ramp up on, On Demand, we’d expect it to really build over a five-year period, and in that five-year period I think we’ve modeled that it would end up being 20% to 30% of our revenue. That’s hard to predict, but that’s what we see and we so far are tracking to let our ramp look what we predicted.

[Karl Lopker:]

Thank you everyone for your attendance and we’ll update you again in August after the end of our second quarter of FY ’09.