QAD Inc.
Q1 2016 Earnings Call Transcript

Published: 29 May 2015

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the QAD Fiscal 2016 First Quarter Financial Results Call. At this time, all lines are in a listen-only mode. Later, there will be an opportunity for your questions and instructions will be given at that time. [Operator Instructions] And as a reminder, this conference is being recorded. I’ll now turn the conference over to John Neale, Senior Vice President of Finance and Treasurer. Please go ahead sir.

[John Neale:]

Hello, everybody, and welcome to today’s call. I’m John Neale, QAD’s Senior Vice President and Treasurer. Earlier today we issued a press release announcing QAD’s financial results for the fiscal 2016 first quarter ended April 30, 2015. The press release and associated financial statements are available through the Investor Relation 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 understands that our discussion 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 undertakes 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. Please also note that during this call we will be disclosing non-GAAP net income and non-GAAP earnings per diluted share which are non-GAAP financial measures as defined by SEC Regulation G. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures are included in today’s press release which is posted on the Company’s Web site. Now I’d 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 first quarter results. Pam Lopker, President; and Daniel Lender, Chief Financial Officer, join me on the call. For the first quarter, we are able to meet our guidance for revenue and earnings even though the U.S. economy in the first quarter was a bit more challenging than we expected. We kept up our growth and cloud app subscriptions and added a number of new customers. Cloud continues to be a major focus for QAD. We also added to our cash position due to the exercise of the underwriter's option for the January public offering and cash flow from operations. Daniel will give you the numbers and I will discuss the details. Daniel?

[Daniel Lender:]

Thank you, Karl. Total revenue of 69.3 million was in line with our guidance and compared with 68.5 million from last year's first quarter. Diluted earnings per share improved to $0.03 per Class A and $0.02 per Class B share versus loss of $0.01 per Class A and 0 per Class B last year. Foreign exchange negatively impacted our first quarter results even more than we anticipated. Our performance significantly improved with total revenue rising nearly 10% versus the same period last year on a constant currency basis. Overall, currency had an adverse impact on total revenue of 5.4 million, offset by positive impact to expenses of 4.2 million. This resulted in a negative impact to operating income of 1.2 million. Subscription revenue was up 52% to 9.4 million compared with 6.2 million last year, as we continue to see success in our cloud offering. North America continue to deliver the majority of our subscription revenue with EMEA gaining momentum. The increase this period includes a one-time recognition of approximately 900,000 related to a Latin America implementation where we had previously deferred revenue until the implementation and rollout of the users was completed and we received confirmation from the customers that the complex local requirement were being met by the service offering. Excluding the one-time recognition growth would have been 38%. Foreign currency had a negative $200,000 impact on subsection revenue, on a constant currency basis and excluding the one-time recognition growth would have been 41%. License revenue grew to 6.9 million, up from 6.7 million last year, despite a negative foreign currency impact of approximately 600,000. License revenue grew 12% on a constant currency basis. During the fiscal 2016 first quarter, we closed five license deals greater than 300,000 including two greater than 500,000. In last year’s first quarter, we closed two license deals greater than 300,000 with none greater than 500,000. Maintenance and other revenue was 33.4 million compared with 36.1 million a year-ago. Foreign currency translation adversely affected maintenance revenue by approximately 2.7 million versus prior year. On a constant currency basis, maintenance revenue was consistent year-over-year. Professional services revenue was 19.6 million for both periods. On a constant currency basis services revenue would have increased by approximately 1.8 million, however, foreign exchange offset this growth. Looking at total revenue by vertical, high tech and industrial represented 33%, automotive 30%, consumer products and food and beverage 22% and life sciences 15%. And by geography, North America was 44%, EMEA 31%, Asia-Pacific 17% and Latin America 8%. Gross profit for the fiscal 2016 first quarter was 37.2 million or 54% of total revenue consistent with fiscal 2015 first quarter. Total cost of revenue rose mainly as a result of additional headcount in our cloud and services businesses, partially offset by a foreign currency benefit of 2.1 million. Our subscription margin this quarter was impacted favorably by the one-time recognition of subscription revenue, I spoke about earlier. Sales and marketing expenses totaled 17.1 million or 25% of total revenue versus 16.5 million or 24% of total revenue from last year’s first quarter. The increase primarily related to personnel expenses with additions to headcount and high travel. This increase was partially offset by favorable foreign exchange movement. R&D expense for the first quarter was 10.7 or 16% of total revenue, compared with 11.2 million or 17% of total revenue last year. General and administrative expense was 8.4 million or 12% of total revenue versus 8.9 million or 13% of total revenue for the last year’s first quarter. Both R&D and G&A expenses benefited from foreign currency movement. On a constant currency basis, these expenses were consistent for this quarter versus the prior year quarter. Total operating expenses were 36.4 million or 53% of revenue, compared with 36.8 million or 54% of revenue last year. Total operating expenses benefited by 2 million from currency fluctuation. Equity compensation expense was 1.3 million for the fiscal 2016 first quarter, compared with 876,000 for last year’s first quarter. The increase related primarily to the impact of the growth equity stock price on the value of stock rents to our employees. Operating income improved 760,000, up from 298,000 from the last year’s first fiscal quarter. Other expense was negligible for the first quarter fiscal ’16, compared with 350,000 last year. The change from the prior year quarter included a 300,000 favorable impact related to the fair value of the interest rate swaps associated with the mortgage of our headquarters. This brings net income to 549,000 or $0.03 per diluted Class A share and $0.02 per diluted Class B share, compared with the net loss for the last year’s first quarter of 76,000 or $0.01 per Class A share and $0.00 per Class B share. Our tax rate for the first quarter of fiscal 2016 was 27%, we continue to anticipate the tax rate of approximately 27% for fiscal 2016. Non-GAAP net income which we define as net income excluding stock-based compensation, amortization of purchase intangible assets, gain and loss adjustments on the company’s interest rate swaps and certain income tax adjustments, and which is described in greater detail in the press release we issued earlier today was 1.6 million or $0.09 per diluted Class A share and $0.07 per diluted Class B share. For last year’s first quarter, non-GAAP net income was 899,000 or $0.06 per diluted class A share and $0.05 per diluted Class B share. Moving onto the balance sheet. We ended the quarter with cash and equivalents of 130.9 million, up from 120.5 million at January 31. Cash flow provided by operations was 4.3 million for the first quarter of fiscal ’16 versus 3.2 million for the prior year first quarter. As a reminder, the underwriter’s option related to our secondary offering was exercised in full year in the current year resulting in the issuance of an additional 450,000 QAD shares and receipt of the net proceeds of 8.4 million. Accounts receivable evolved 51.2 million consistent with the first quarter of last year. Days sales outstanding using the count back method was 73 days for the first quarter of fiscal 2016, compared with 65 days last year. The increase was primarily in our North America region due to larger deal signed in last year’s fourth quarter. The quality of our receivables remains healthy. Our deferred revenue balance continues to grow as a result of strong recurring revenue. Including our maintenance business and cloud offering. Our deferred revenue balance at April 30, 2015 was 91.4 million, including 75.7 million of deferred maintenance. On a constant currency basis, converting at the prior year exchange rates, the deferred maintenance revenue balance would have been 5.8 million higher, 11.6 million of deferred subscriptions, 1 million of deferred license and 2.6 million of deferred professional services. Generally maintenance contracts are built annually and subscription contracts are built quarterly. Our deferred revenue balance was 97.3 million at this time last year, including 81.8 million of deferred maintenance, 8.1 million of deferred subscriptions, 3 million of deferred license and 4.4 million of deferred professional services. Moving to the guidance, please be aware that in calculating the tax effect including in our non-GAAP business outlook we have adopted the use of a long-term planning rate of 25% in order to better provide consistency across internal reporting period by eliminating the effects of nonrecurring and period specific items. Today we're providing second-quarter guidance and reiterating our full year GAAP EPS guidance. When we like to provide our guidance we inadvertently added back turn expense and arriving at our non-GAAP number. Today's non-GAAP guidance has been amended to properly reflect the appropriate non-GAAP adjustments. Our business outlook for the second quarter fiscal 2016 includes total revenue of approximately 70 million and subscription revenue of approximately 8.8 million. We expect additional stock compensation expense in the second quarter related to our annual stock gains of approximately 1.1 million for a total stock compensation expense of 2.4 million. We anticipate GAAP earnings per A and B share of approximately breakeven and non-GAAP earnings per diluted share of approximately $0.11 per diluted Class A share and $0.09 per diluted Class B share. For the full-year, we now expect total revenue of approximately 295 million including approximately 37.5 million of subscription revenue, GAAP earnings per share of approximately $0.49 per diluted Class A share and $0.41 per diluted Class B share. And we expect stock compensation expense for the full-year of approximately 7.6 million. For the full year we expect non-GAAP earnings per share of approximately $0.84 per diluted Class A share and $0.70 per diluted Class B share. Now, I’ll turn things back to you Karl.

[Karl Lopker:]

Okay, thanks Daniel. Licenses were up over the previous year as customers continue to buy on-premise new users and new modules. Cloud app subscriptions continue to grow, although not as fast as we would like, mostly due to the timing of larger deals and the deal mix. Our deal mix was more towards new customers rather than customers converting from on-premise. New customers tend to generate less subscription revenue in the short run as they normally start with a smaller number of users before ramping up to full deployment. We added 12 new cloud customer sites in the quarter. The drop in maintenance revenue was due almost exclusively to the strength of the dollar and some from previous cloud conversions. Renewal rates are consistent with past experience. Our services capacity and billable days increased 10% over the previous first quarter although services revenue remained the same due to currency. Our total sales funnel is up around 12% from last year this time with cloud apps representing around 50% of the opportunity. The majority of our funnel for cloud apps is still for conversion from on-premise. Our revenue mix by region was in line with historical averages and our vertical performance was also in line with historical averages. Full-time employee headcount at 1,640 was up around 3% from last year, mostly due to increases in our cloud operations group, North American services and global sales. Now I’ll turn the call over to Pam for a closer look at our cloud activity, or Explorer customer conference and our new user experience offering. Pam?

[Pam Lopker:]

Great, thanks, Karl. As Karl mentioned, we had 12 new wins in Q1. Two were conversions and 10 were new customers with seven of those are [indiscernible]. So really a good number of new customers for the cloud this year. I want to give you a little bit of color. First, we had a new customer win. That was a pilot site for a medical device division of a very large $90 billion healthcare services company. The pilot may lead to more sites in the future based on a successful go-live. Second, I would like to mention a cloud conversion win in a pharmaceutical manufacturing company in India, that significant because India tends to be a little bit cheap and but they are willing to stand on cloud but this company obviously saw the benefit of the QAD cloud. And we believe that QAD cloud is a compelling offering for life science companies due to our experience in managing a qualified environment, supporting our customers in their needs to get an FDA certification in the U.S. I would also like to mention our first cloud win in Argentina. The win was by an Argentina's site of $1 billion plus global industrial coding company. Argentina represents the seventh Latin American country where QAD cloud is now deployed. Next, I would like to talk a little bit about Explorer. We held our global user conference in Washington DC on May 03, 2016, we have 750 attendees. The events focus on our customer success and the role we play in helping them to overcome operational challenges. Key presentations included cloud, upgrade and our new user experience which has been delivered in our Channel Islands project. The Channel Islands provides the web-based device independent user experience that is personalize to the activity of the individual user to increase efficiency, simplifying task completion and providing insight to decisions. The first release of Channel Islands is available now for cloud customers and will be available next year for on-premise customers. The focus is on role-based dashboard and the sales order experience. The Web UI enable to user to access the QAD enterprise application anywhere, anytime and on any device with the modem browser, enabling the user experience while creating a more efficient interface our primary motivation for this evolving design. I’d also like to mention a bit about our explore customer survey, so I post to them survey 97% the attendees indicated that they would recommend their company attend explore in the future, which we believe is a testament to the value they have received at the conference. 35% of the attendee survey they have potential projects to move to the cloud, while 15% of the customers attending are already running QAD cloud ERP. Greater than 50% of the customer attendee’s surveys reported potential projects in areas where we need and deliver added value including quality management demand and supply chain planning, automation solutions, link, EDI and business intelligence. Our next year’s conference will be held in Chicago on May 2nd to 5th. Back to you, Karl.

[Karl Lopker:]

Okay, thanks Pam. Well, the global manufacturing economy continues to grow as define by the global purchasing managers index. Growth in the U.S. as well as somewhat, but the Eurozone seems to be picking up. China is contracting slightly, the environment looks positive for QAD to continue to keep up the pace we’ve seen in the past. Although currency, we’ll continue to create a difficult year-over-year comparisons during this fiscal year. As usual, now we’ll take questions. Operator, can you give the instructions?

[Operator:]

Certainly. [Operator Instructions] And our first question will come from Bhavan Suri with William Blair. Please go ahead.

[Bhavan Suri:]

Thanks for taking my question guys and nice job on the subscription growth. I know it was probably a little lighter than your internal plan but still in constant currency nicely up. Just a question on that, you wish the existing base will probably expecting or migrating more the cloud. Why do you think that is, why do you think that there is sort of lagging that adoption?

[Daniel Lender:]

A lot of people are interest in fact more and more manufactures are interested, however, manufactures generally laggards when it comes to software or moving onto any new thing. So I think our manufacturing customers are no different than other manufacturing companies. But we’re looking for the catalyst to gets them to move. And so that might be, well certainly a merger acquisition causes them to move or they have all the hardware that’s falling over or if they are doing an upgrade. So we’re very knowledgeable about upgrades and how that can lead to the cloud. But a lot of time they can put that off it’s something that they don’t necessarily need to do right now.

[Bhavan Suri:]

Do you think the Web UI, one of the conferences are so much interest on the Web UI and obviously that’s going to available cloud first. Do you think that ends up being a driver over the next 6 to 12 months?

[Pam Lopker:]

This is in Australia up until yesterday actually and our user group meeting in there in Australia. And I did see a lot of interest in that, I think that is going to be a motivating catalyst, because people are trying to reach out to their employees wherever they are including at home and having an inexpensive quick access. So I do think that Web UI capability could be this catalyst is particular as we only provided in the cloud to start with.

[Bhavan Suri:]

And then one quick one, maybe for Daniel, the gross margin in the subscription line picked up really nicely ahead of where you have been expecting. A

[Daniel Lender:]

This quarter's gross margin was impacted by the one-time subscription recognition that I mentioned during my talk. So it looks unusually high. If you recall earlier I mentioned that we will be experiencing some ups and downs, in terms of any one quarter, either due to some more recognition of revenue or some investment that is done in the particular quarter. Q4 it was a bit down, if you remember, Q1 is certainly up. So we expect that for the remainder of the year on an average basis where we are going to be solely making improvements to what we may have ended up last year. So this quarter is a bit of an anomaly on a percentage basis given that one-time recognition of revenue.

[Operator:]

Our next question comes from Brad Rebeck with Stifel, go ahead please.

[Brad Rebeck:]

Could you maybe walk through the guide down on the revenue from -- I guess last quarter 302 to 295 and what's driving that?

[Daniel Lender:]

Yes Brad, there's a couple of things that are driving that one. One of it is foreign exchange. When we issued guidance, at the time the average rates that we had been experiencing up to that period were suggesting a dollar that was not as strong as we experienced the rest of the period. The revenue is accounted for on an average basis, not on the last day of trading number. So currency is part of that reason. Also, from a subscription basis, Karl mentioned the fact that the mix of customers that we saw in the first quarter into the cloud has been more new customers versus conversions. New customers tend to start smaller and they deploy into additional sites, that's when we get the additional revenue uptick. So as a result of that the subscription revenue on a run rate basis at the end of the year is also a bit lower. So those are the two main things that are driving it.

[Brad Rebeck:]

Okay, so what was the Euro exchange rate that the 302 is predicated on? And what's the 295? Because when you guided in on March ’12, the Euro was $1.06. Today it is $1.10. It actually strengthened. So that should actually be in a net positive. So maybe you can help us understand what you were using then and what you are using now, so you know going forward what to look for?

[Daniel Lender:]

Yes, so back in March ’12, the average so far for the year was about $1.12. So it had gone up and down for that first period. And then as we ended the quarter the last month plus of the quarter was at about $1.08. Therefore we have taken some of these assumptions based on what we saw on an average basis for the quarter and extrapolate that bit out for the remaining of the year.

[Brad Rebeck:]

So, just to be clear, you are using $1.08 right now for the 302 -- I am sorry, for the 295?

[Daniel Lender:]

It's closer to $1.10 or so.

[Brad Rebeck:]

Okay, so you're using the current exchange rate of $1.10?

[Daniel Lender:]

About -- yes.

[Operator:]

We are going back to Richard Davis with Canaccord, please go ahead.

[Unidentified Analyst:]

This is DJ in line for Richard. So when you're winning these new cloud deals, maybe you could talk about who you are competing with, whether they are competitive. And then are you seeing the legacy ERP guys, the Epicor enforce was about getting more aggressive with the cloud in manufacturing, kind of any update along those lines will be helpful?

[Pam Lopker:]

We did so many life science deals this quarter and Eurozone, I hate to say we have no competition but we always see everybody. So certainly I know, we competed against SAP this quarter, we competed against Oracle this quarter. We are trying to think if we have competed against in for not that I can think of this last quarter. So there are so many net new customers with the in the cloud this quarter therefore competition that it does seem that it was mostly on the SAP side.

[Unidentified Analyst:]

And then maybe one on the numbers services margins. I mean you guys get over quarter of revenues from services and that’s kind of high-single-digit gross margin business. Are there are initiatives in place that number can go higher where can it go and I guess what do you’re doing to kind of managed services gross margins?

[Karl Lopker:]

Well, we look at services as an adjunct to our licenses and cloud sales. I don’t think that the services margins are going to change that much from the high single-digits.

[Unidentified Analyst:]

Okay. Got it. And so we’ll see continue leverage I guess more in the subscription in the maintenance funds?

[Karl Lopker:]

Yes. We spent a lot of time right now, we’re spending a lot of time trying to other great customer, so they continue on the maintenance.

[Operator:]

Our next question comes from Mark Schappel with Benchmark. Go ahead please.

[Mark Schappel:]

Daniel starting with you, I just want if you could clarify your comments or maybe just repeat your comments in your prepared remarks regarding the $900,000 implementation on the America and what impact that had?

[Daniel Lender:]

Yes. So the subscription revenue was impacted possibly by about 900,000 related to recognition of subscription related to a customer in Latin America, where they have been going through the implementation. So once the implementation was finished and the users will rolled out and we’ll receive confirmation from the customer that we had met all the very complex local requirements that they needed. We were able to recognize revenue on the subscription side that we have been getting paid for but just we were unable to do the actual revenue recognition for that piece. So in another words the quarter was positively impacted by about that amount from that one customer.

[Mark Schappel:]

And then Karl on the two-customer conversions the cloud during the quarter, do they happen come from the automotive vertical?

[Pam Lopker:]

I’m looking at now one of them was, let me see a life science company, the other one was actually a food and beverage company.

[Mark Schappel:]

And then on the sales headcount front. For the balance of the year, you still plan to grow the number of the quarter carriers out there?

[Karl Lopker:]

Well, we added about four quarter carriers from the previous year, we’ll probably have one or two more for the balance of the year.

[Mark Schappel:]

Finally Pam, with respect to the new [indiscernible] coming I guess HTML5 or you guys are going to be releasing it. Any new update there, anything you need talk about?

[Pam Lopker:]

No, we’ve got some fairly customers, we’re working with, we need to get them trained and going forward. But I do think that it’s looking good and the customers that seen that we have nobody live on by the customers seen as our cloud excited about it.

[Operator:]

And our next question will come from Stan Berenshteyn with Sidoti & Company. Please go ahead.

[Stan Berenshteyn:]

Just want to follow-up on life sciences. It seems like life sciences probably the smallest revenue vertical, but it continues to come from a larger percentage of cloud growth. My question is do you expect any changes in the industry verticals that will contribute to cloud growth over the next couple of years or do you think that will still be heavily weighted by the life science contribution?

[Pam Lopker:]

Well, certainly we have all of our verticals represented in the cloud with the two most active in auto. And I think auto because of the global nature of auto is very attractive and we have some quite large customers in the cloud with auto. The life science companies in general, it tend that there is a large number of them we have a couple of bigger companies. But in general they are intend to be smaller companies so that their numbers are bigger. But also they tend to be often time pre-revenue or just starting to ramp up and they can grow quite quickly, but they can also go out of business. So we have such a compelling offering let them that it’s really an attractive market.

[Stan Berenshteyn:]

And just as a follow-up. Do you see any differences in speed across the different verticals in terms of conversions? So obviously life sciences are smaller they have been top with faster than maybe your automotive companies?

[Pam Lopker:]

Tend to convert to the cloud first or how long it takes them to convert?

[Stan Berenshteyn:]

How long it takes to convert?

[Pam Lopker:]

What we offer this lifts and shift capability to get them to convert faster. So we’ll lift and shift as long as there on a fairly recent release. We’ll lift and shift them and then convert them in the cloud to get rid of that lag and time to convert. So I don’t think that makes a big difference on timing a conversion, because we’ve already gotten them to the cloud on other release before we convert.

[Operator:]

Thank you. And Mr. Lopker, I’ll now turn the conference back to your for closing remarks.

[Karl Lopker:]

Okay. Well, thank you everyone for your attendance and your questions. We’ll update you again in August with our second quarter results. Good bye for now.

[Operator:]

Thank you. And ladies and gentlemen that does conclude our conference for today. Thank you for your participation and choosing AT&T Executive Teleconference. You may now disconnect.