QAD Inc.
Q1 2014 Earnings Call Transcript

Published: 30 May 2013

[Operator:]

Ladies and gentlemen, good afternoon. Thank you for standing by, and welcome to the QAD Fiscal 2014 First Quarter Financial Results Conference Call. [Operator Instructions] And as a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Senior Vice President of Finance and Treasurer, Mr. John Neale. Please go ahead.

[John Neale:]

Hello, everyone, and welcome to today's call. I'm John Neale, QAD's Senior Vice President and Treasurer. Earlier this afternoon, we issued a press release announcing QAD's financial results for the fiscal 2014 first quarter ended April 30, 2013. The press release and associated financial statements are available through the Investor Relations section on our website at qad.com. Additionally, please be advised that this call is being webcast live on our website. Before I begin, I need to ensure that everybody on today's call understands that our discussions might 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 takes 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. Now I'd like to turn the call over to Karl Lopker, QAD's Chief Executive Officer.

[Karl F. Lopker:]

Okay. Well, good afternoon, and thank you for joining us to discuss our first quarter results. I apologize for the slight delay. Pam and I are in separate locations in Europe, meeting with customers and prospects and we had a few connections problems. Daniel Lender, Chief Financial Officer, is in Santa Barbara. In our first quarter, we're able to close more On Demand orders than anticipated, but fewer traditional perpetual license orders. On Demand bookings generally don't create any revenue in the quarter of the booking, but we do incur additional sales cost. We also experienced a higher than expected amount of revenue deferrals. Services bookings were strong for the second quarter in a row due to upgrades, rollouts and process improvement projects. As a result of these On Demand bookings and services bookings as opposed to license sales, we've recorded less revenue and thus less operating profit than guidance. However, these On Demand and services bookings increased our backlog for the future. So Daniel, why don't you give the numbers and I'll discuss the details.

[Daniel Lender:]

Thank you, Karl. Total revenue was $61.9 million for the first quarter of fiscal 2014, compared with $63.7 million last year. As noted in our press release distributed on May 14, revenue came in short of our forecast. Our top line results were also impacted by the timing of revenue recognition due to software accounting rules, as well as higher than expected amount of On Demand transactions versus license transactions. As you know, On Demand bookings generally do not produce revenue in the quarter in which they're booked. DynaSys and Cebos, which we acquired in the last fiscal year, contributed $2 million to revenue for the fiscal 2014 first quarter. Foreign currency had a negative impact to revenue of approximately $600,000, partially offset by a positive impact to operating expenses of approximately $500,000 when comparing to the prior year first quarter. License revenue totaled $6.2 million versus $7.8 million for last year's first fiscal quarter. We closed 3 license deals during the quarter, valued at approximately $900,000 and which were deferred for accounting purposes and not recognized. We expect to recognize this revenue over the next 3 years. The deferral were primarily due to the lack of VSOE of fair value for these multi-element deals. Maintenance and other revenue rose to $35.2 million from $34.5 million a year ago. Professional services revenue were $16.5 million versus $18.1 million last year. During the first fiscal quarter of last year, we recognized $1.3 million of revenue related to one customer for which the expenses had been recorded in prior quarters. This quarter, we deferred services revenue related to 2 customers, totaling approximately $600,000, for which expenses were recorded in the current quarter, thus impacting margin. Due to the nature of large multiple-element transactions, services revenue tends to fluctuate from the effect of ratable recognition and achievement of milestones, while cost is related to these engagements are expensed as incurred. We expect to continue to experience some fluctuations in both services revenue and margin on a quarterly basis. Subscription revenue, which includes our On Demand deployment option, grew to $4 million, up from $3.2 million last year. Looking at total revenue by vertical, high tech and industrial represented 34%; automotive, 28%; consumer products and food and beverage, 22%; and Life Sciences, 14%. While total revenue by geography, North America represented 43%; EMEA, 32%; Asia Pacific 19%; and Latin America, 6%. Gross profit was $33.3 million or 54% of total revenue for the first quarter of fiscal '14, compared with $37.1 million or 58% of total revenue last year. The reduction in gross profit related mainly to our professional services margin. Sales and marketing expenses totaled $15.1 million or 26% of revenue versus $15.5 million or 24% of revenue during the first quarter of last year. The increase in sales and marketing expense resulted primarily from an additional $900,000 of expenses related to DynaSys and Cebos. R&D expense was $10.8 million or 18% of revenue for Q1 of 2014, compared with $9.5 million or 15% of revenue last year. Expenses related to DynaSys and Cebos added $700,000, as well as last year's R&D expense included joint development revenue of $600,000. General and administrative expense was relatively consistent and totaled $7.9 million or 13% of revenue versus $8.1 million, also 13% of revenue last year. This brings total operating expenses to $35 million for the fiscal 2014 first quarter compared with $33.1 million a year ago. Total operating expenses as a percentage of revenue equaled 57% for the first quarter of fiscal '14, compared to 52% last year. Equity compensation expense totaled $900,000 for the first quarter of fiscal '14, versus $1 million a year ago. Included in cost of revenue and expenses was a total of $3.3 million related to DynaSys and Cebos. Operating loss amounted to $1.7 million compared with operating income of $4 million for the last year's first fiscal quarter. Other income was $167,000 versus other expense of $569,000 last year. The change reflected foreign exchange gains, primarily related to the euro, offset by expense related to fair market value changes of the interest rate swap associated with the mortgage on our headquarters. Net loss for the quarter was $1.3 million or $0.08 per Class A and $0.07 per Class B share. Net income for last year's first quarter was $1.8 million or $0.12 per diluted Class A share and $0.10 per diluted Class B share. Our tax rate for the first quarter was approximately 19% due to the effect of discrete items offsetting the tax benefit resulting from this GAAP loss. For the full year, we expect a tax rate of approximately 40%. However, we do expect the income tax rate for the second fiscal quarter to be higher. Cash flow provided by operations was $12.3 million for the first quarter of 2014 versus $5.1 million for the same period last year. The increase primarily reflected higher cash collections in this year's first quarter and can be observed in the accounts receivable balance at the end of the current quarter versus the prior year ending balance. We ended the fiscal 2014 first quarter with a cash equivalent balance of $73.8 million, up from $65 million at the end of fiscal 2013. During the first quarter, QAD repurchased 45,000 Class A shares at an average price of $13.34 per share, and 8,000 Class B shares at an average price of $12.02 per share for a total expenditure of $700,000. These purchases concluded the previously authorized 1 million shares Stock Repurchase Program. Accounts receivable equaled $43.3 million, down from $72.6 million at the end of fiscal 2013. The decrease reflects the usual seasonal decline and strong cash collections. Our deferred revenue balance was $92.7 million, and included in this balance is $77.7 million of deferred maintenance, $6 million of deferred subscription, $5.5 million of deferred license, and $3.1 million of deferred professional services. At the end of fiscal 2013, our deferred revenue balance totaled $101.2 million. The decline in the balance from the end of fiscal 2013 reflects the normal seasonality of this account. Days sales outstanding using the count back method was 59 days for the first quarter of fiscal 2014, and 62 days for the first quarter of fiscal 2013. The quality of our receivables remains good. Our business outlook for the fiscal '14 second quarter calls for total revenue of approximately $64 million, and earnings of approximately breakeven. That concludes my remarks. Karl, back to you.

[Karl F. Lopker:]

Okay. Thanks, Daniel. As both Daniel and I pointed out, On Demand bookings were very good in the first quarter, as we signed 11 new customers or divisions, even better than the first -- entire first half of last year. We like the fact that many customers are choosing On Demand over perpetual licenses, but this does hurt revenue in the short run, but produces significantly more revenue in the long run. The funnel for On Demand continues to look good, although we don't expect the same level of bookings in the second quarter. In the services area, we've been concentrating on getting customers to upgrade their systems and the strategy is working well. This will ensure that the customer continue to receive value from their maintenance. We don't believe that the economic conditions had either a positive or negative effect upon our results this quarter compared to last quarter, which was negatively affected. We're encouraged by the continued positive growth in North America manufacturing and the slowing rate of the decline in the euro zone. China's slowdown does concern us somewhat, and we are watching it. Regional and vertical results were generally in line with recent history. And full-time headcount was down slightly from last quarter. Now let me see if Pam's on the line to give us some more details on the On Demand activity and our Explore User Conference. Pam, are you there?

[Pamela M. Lopker:]

Sure. I'm here, Karl. As both Daniel and Karl said, Q1 was a very strong quarter for On Demand bookings. We closed deals across multiple regions and multiple vertical markets. I want to give you now a few highlights of the new customers that we secured in Q1. First of all, a leading U.K.-based $6 billion paper and plastic packaging company, with operations across Europe, including over 20 manufacturing sites. They selected QAD On Demand for rollout across their entire enterprise. In addition, we saw good activity with Japanese companies with overseas operations. A couple examples here was a multibillion Japanese chemical equipment company with deployment in Vietnam, as well as the new site for a Japanese multibillion automotive car manufacturer in Brazil. We also secured 2 new wins for startup life science companies in the U.S., as well as a new global Chinese-owned auto parts supplier with initial sites in North America. So as you can see, very global, very diversed vertical capabilities really playing on our multinational and global deployment. With most of our new multisite companies during rollout, we see increase of On Demand revenue as well. So they're buying On Demand licenses for our 1 site at a time as they rollout, so it give us a good continuing annuity quarter-to-quarter and increased On Demand revenue capability. Now for an update on Explore. Explore 2013 was held in San Antonio, Texas, May 6 to 9, we had 652 more partners attendant from 20 countries around the world. We did a couple of surveys that were kind of fun, and we saw an overall positive outlook on the economy, very much different than the last few years at Explore where people are quite pessimistic. And we also did a survey, given all of the press on Android taking over the iPhone, and we can report that most people, greater than 50% of the people in the audience are actually using the iPhone, and we still have some laggards with the BlackBerry. So certainly, the iPhone was the biggest smartphone usage in our customer base. We did 56 hours of breakout and the ones that got the most excellent remarks and ratings were Business Process Management, demand and supply chain planning, quality management and as well as On Demand in general. All presentations are online at explorer.qad.com. So feel free to go ahead and look at those and we invite you all to joining us next year in New Orleans, which I'm sure, will be a great time. Thanks, Karl. Back to you.

[Karl F. Lopker:]

Okay. Thanks, Pam. Well, our current outlook remains cautious, although we are encouraged by the On Demand activity and actually the feedback from our customer conference. Our total sales funnel is up the balance 5% from last year at this time, and On Demand ERP remains about 25% of the total funnel. On the balance sheet, the cash continues to look good and is being recharged after our stock buybacks, dividends and acquisitions from last year. Now as usual, we'll take questions from the analysts. Operator, can you please give the instructions?

[Operator:]

[Operator Instructions] Our first question today comes from the line of Matthew Paul representing Sidoti & Company.

[Matthew Paul:]

I must have jumped on a little bit late in this, I was wondering if you could provide the color on the decrease to your gross margin in the quarter?

[Daniel Lender:]

Matthew, it's Daniel. Yes, the decrease in gross margin mainly relates to our services revenue. As I mentioned during the prepared remarks, we did have some revenue deferrals on the services side during the quarter, and we do take -- the expenses are recorded in the actual quarter, so that was a negative impact to services revenue. So the comparison on a quarterly basis is mainly attributable to a -- to the professional services revenue category.

[Operator:]

And there are no further questions at this time. I will now turn the call back over to Mr. Lopker for concluding remarks.

[Karl F. Lopker:]

Okay. Well, that was quick. Well, thanks for your attendance and your question. We'll update you again in August with our second quarter results. Bye for now.

[Operator:]

Ladies and gentlemen, that does conclude our conference for today. We thank you for your participation and using the AT&T Executive TeleConference service. You may now disconnect.