Q4 2021 QAD Inc Earnings Call
I'm delighted to report another set of good results across the board.
Growth in subscription of 24% when compared to the same quarter last year improvement in our subscription gross margin for 70% moving.
Moving professional services margin to 11% I'm moving up our overall margins for 62% were particularly pleasing to see.
Those improvements compounded on the performance in prior quarters drove a substantial increase in earnings for the full year.
While our annual cloud bookings were at 87% of last year, given the context of the macro level, we feel our sales performance for the year was strong and we posted our second highest cloud sales result on record.
Right at the close of the year, we were delighted to announce the acquisition of allocation network.
Best of breed provider or supplier management solutions based out of Munich in Germany.
<unk> addition to our integrated supply management capabilities, which I'll talk more about later.
And one of the most difficult and challenging is we've ever seen keeping sales momentum going driving our sales pipeline to record levels, delivering implementation and upgrade projects remotely and making margin improvements across the board was impressive and I'm exceptionally proud of what the QAD team has managed to deliver.
I'll now turn it over to Daniel to discuss the details of the financial results.
Thank you Anton our solid fourth quarter results rounded out a successful year in spite of the challenging environment.
Subscription and maintenance revenue came in ahead of our expectations in part due to currency tailwind.
Pre tax profitability grew substantially from last year's fourth quarter and from a fiscal 'twenty, one third quarter as a result of our initiatives to expand margins and continued focus on cost controls.
Subscription margins improved another three percentage points from the same quarter last year to 70% and.
And professional services margin improved nine percentage points to 11% driven by our ability to deliver remote implementations our focus on managing white space.
And the ongoing strategy of building and utilizing our partner network.
Currency had an approximate $1 5 million positive impact on total revenue compared with last year's fourth quarter.
And $1 2 million positive effect compared with the third quarter of fiscal 2021.
Profitability was favorably impacted by 300000 versus prior quarter, but there was a negligible impact versus prior year.
Due to fluctuating currency during the year there was a positive impact to total revenue in the fourth quarter, but a negative $1 2 million impact for the full year revenue, including a 300000 negative impact on subscription revenue.
Total revenue for the fiscal 'twenty, one fourth quarter grew to $83 million from $78 6 million last year.
As a result of higher subscription revenue, partially offset by lower professional services maintenance and license revenue.
For the full year total revenue was $308 million versus $311 million.
Recurring revenue accounted for 78% of total revenue for our fiscal year.
Subscription revenue growth continued to accelerate improving 24% to $35 5 million.
Subscription revenue now accounts for 43% over full business up seven percentage points from last year's fourth quarter.
Currency movements positively impacted subscription revenue by 400000 compared with both the prior year in the prior sequential quarter for.
For the year subscription revenue increased by 22%.
I will now review our annual cloud metrics.
FY 'twenty, one annual bookings were 87% over the prior year bookings.
While the first three quarters of fiscal 'twenty, one we're on par with the prior year, we were not expecting to match our fourth quarter bookings from last year as those were exceptionally strong.
The level of new customer deal affected bookings, although we talked about it earlier in the year sales cycles for new customers were impacted the most during the pandemic and as a result, those cycles were lengthened.
New cloud deals for fiscal 'twenty, one where 95 include.
Including 48 from new customers and 47 from conversions and.
In comparison, the prior year, including 119, new cloud deals.
New cloud deals for the fourth quarter were <unk> 32 versus 37 in the prior year, new customers were <unk> 14 versus 'twenty and conversions 18 versus 17.
Subscription billings grew by 18% for the fiscal year with a three year CAGR of 21%.
Our short term deferred revenue balance included $56 3 million of deferred subscription.
Versus $45 7 million in the prior year, an increase of 23%.
Annual subscription revenue grew to more than $131 million.
Our net dollar retention rate, which we calculated by comparing the revenue of each customer from a year ago to the revenue of the same customer in the current year was 105% for the fiscal 'twenty one as.
As we expected and discussed earlier in the year the rate of add on sales to existing customers slowdown due to the pandemic.
Retention rate continues to be in excess of 95%.
Maintenance revenue was $27 2 million for the fiscal 'twenty, one fourth quarter and $1 6 million declined from last year.
<unk> related mainly to cancellations and client conversions.
Our maintenance retention rate remains in excess of 90%.
However, I remind you that because some of our customers were and continue to be impacted by the pandemic. We did see some increase in maintenance cancellations or maintenance revenue reductions, particularly.
Particularly early in the pandemic for.
For the full year maintenance revenue declined 9%.
Professional services revenue totaled $15 1 million versus $15 9 million for last year's fourth quarter.
And was up slightly on a sequential basis.
For the full year professional services revenue declined 15%.
This revenue decline was planned and consistent with our focus on building, our partner network and improving and sustaining margins.
Our services margins were stable throughout the year, reaching a high of 11% for the fourth quarter and 7% for the year.
License revenue for the fiscal 'twenty, one fourth quarter was $5 2 million versus $5 3 million in last year's fourth quarter with sales, primarily coming from existing customers purchasing new seats or modules.
For the full year license revenue declined 33%.
With our sales efforts focus on the cloud, we do not expect a meaningful increase in year over year license revenue in the foreseeable future.
Total revenue by vertical for the fiscal 'twenty, one fourth quarter.
For the automotive, 28% high Tech and industrial 37%.
Life Sciences, and other 18% and consumer products and food and beverage 17%.
By geography total revenue was fairly consistent to last year with North America at 48%.
At 31% Asia Pacific, 13%, and Latin America, 8%.
Gross margin for the fourth quarter of fiscal 'twenty, one improved to 62% up from 58% last year, primarily driven by improved subscription and professional services margins.
Sales and marketing expenses totaled $18 4 million or 22% of total revenue versus $21 3 million or 27% of total revenue for last years fourth quarter a.
A majority of the decline was due to reduced travel and bonus expense.
R&D expense equaled $14 7 million compared with $13 2 million for last year's fourth quarter the.
The increase in R&D expense, mostly related to higher personnel expense due to higher head count.
As a percentage of total revenue R&D increased to 18% from 17% for last year's fourth quarter.
G&A expense was $11 million for the fiscal 'twenty, one fourth quarter compared with $10 4 million for last year's fourth quarter. The increase in G&A expense, primarily was due to higher stock compensation and professional fees.
As a percentage of total revenue G&A expense declined to 13% from 14% from last year's fourth quarter.
Stock compensation expense totaled $4 1 million for fiscal 'twenty, one fourth quarter and $3 million last year. The increase was partly related to higher PSU achievement.
This brings operating income to $7 3 million compared with 350000 last year.
For the quarter GAAP pre tax income grew to $5 9 million from 800000, a year ago and non-GAAP pretax income was $10 1 million compared to $3 8 million last year.
For the full year GAAP pretax income was $10 8 million compared with $3 $6 million GAAP pretax loss for last year and non-GAAP pre tax income growth to $25 5 million from $8 4 million a year ago.
We incurred a tax benefit of $2 3 million in the fourth quarter of fiscal 'twenty, one we reversed our valuation allowance for our German subsidiary during the quarter as a result of the acquisition of allocation network, providing us with the ability to use existing nols to offset taxes owed.
We ended the year with approximately $143 million in cash and equivalents compared with $137 million at the end of fiscal 'twenty are.
Our cash balance remains very strong even after the completion of the allocation network acquisition in the quarter.
Cash flow from operations for fiscal 'twenty, one totaled $32 9 million compared with $17 million last year, the increase directly related to our improved profitability.
Accounts receivable was $82 6 million as of January 31, 2021 versus $81 million at the same time last year.
Day sales outstanding using the Countback method was 47 days for the fiscal 'twenty, one fourth quarter versus 45 days for the prior year quarter.
Our short term deferred revenue balance on January 31 was $125 7 million for.
Versus $118 4 million a year ago.
Now I will provide an update on guidance for next year.
As a result of COVID-19, we implemented a number of cost saving initiatives that resulted in significantly reduced travel expense the cancellation of in person customer events and reductions in discretionary spending throughout fiscal 2021.
As the global economy to emerge from the pandemic, we do expect to see travel and customer related events to pick back up but not to the historical levels.
We and our customers have adapted quite effectively to engaging remotely during sales cycles and implementations of our solutions.
We will continue to monitor the cost containment measures, we put in place during the pandemic focusing on improved profitability going forward.
Given the stabilization of the environment, we are reinstating our prior practice of providing both quarterly and yearly guidance.
For the first quarter of fiscal 'twenty, two we expect subscription revenue of $36 5 million maintenance revenue of $26 million breakeven operating income, including stock based compensation expense of $3 7 million.
For the full fiscal 2022 year, we expect subscription revenue of 160 million maintenance revenue of $102 million and operating income of $12 million, including stock based compensation expense of $17 million.
In addition to our first quarter guidance.
We have also updated our five year strategic targets and have posted them on our website.
Our long term model calls for 27% to 30% three year CAGR in subscription revenues.
Subscription margin improvement to between 70 and 72%.
Improvement in total gross margin to between 61% 63%.
Efficiency gains in sales and marketing expense to between 18% and 20% of total revenue.
R&D expense to between 14 and 15% of total revenue.
G&A expense of between 9% and 10% of total revenue and this will result in adjusted EBITDA of between 20 and 22% of total revenue.
And we assume a long term tax rate of approximately 25%.
Now I'd like to turn the call back to you Anthony.
Alright, Thank you Daniel.
So you might remember from our last call. We reported success in our goal of pulling forward cloud deals from a fourth quarter into our third quarter.
That success combined with longer sales cycles for new customer deals related to the ongoing challenges in the macro environment men are fourth quarter bookings as we expected came in lower than prior year.
Nevertheless, given the exceptional strength of the prior year quarter and in the current context, we consider it a strong sales performance for the year and as I said earlier allowed us to post the second highest ever cloud bookings result.
Still a few such sub segments in those vehicles that are having a tough time for those tend to be companies, serving the travel and hospitality industries Pam as usual besides some more color on some of those details shortly.
A good indicator on the continued recovery is a lessening of pressure from negatively impacted customers on maintenance renewals through the last quarter and retention rates are still above 90%.
From a geographic perspective, North America continued with good sales performance and had a solid quarter in cloud bookings.
Our EMEA region posted good sales too, especially in light of the Lockdowns, which occurred in many parts of that region midway through the quarter.
Asia Pacific and Latin America had quiet quarters in this low patient business activity in China was still a pattern.
<unk> on the last call. It remains unclear whether this is as a result of COVID-19, or trade relations between the U S and China or some combination of the true and we continue to monitor the situation on the ground very closely.
Our precision in dialysis divisions finished the year strongly both in terms of sales and a growing pipeline for FY 'twenty to <unk>.
The pandemic continues to highlight the importance of logistics and supply and demand chain planning.
While our overall results and sales was strong we nevertheless maintained our vigilant focus on management of expenses across the entire business.
This continuous effort helped us improve our profitability, yet again and as highlighted opportunities to extend efficiencies in our business post the pandemic.
As discussed in prior calls we do not anticipate for Richard Enterprise spend levels in travel and also see opportunities to reduce our office footprint over time.
With cloud margins improved yet again, reaching 70% up 3% over the same quarter last year, we've hit our stated target and done so ahead of plan.
The professional services side of the business continued the long run of positive margin results, which improved again to 11%.
We also saw an increase in activity over the earlier part of the year and we are particularly busy in Europe through the holiday period.
Our focus remains on working closely with our partner community and continuing to drive improvements to our bottom line.
Looking at future opportunities, our competitive strengths continue to attract new customers to the QAD cloud and while the number of new cloud customers closed in the quarter was not as high as the prior year due to long sales cycles. As a result of the pandemic new customers are strongly represented in our sales funnel.
I was delighted as I said earlier to announce at the end of the year our acquisition of allocation network based in Munich, Germany.
With our customer portfolio across a broad range of verticals, including companies like BMW Rosa, adding a vice plough, Samsung Siemens and folks bogging. This best of breed provider of supply management solutions really rounds out our capabilities in this area and its hugely complementary to existing solutions portfolio.
The pandemic and its effect on supply networks is putting shop relief the need for manufacturers to have robust integrated supplier management capabilities.
With the addition of allocation network, we're excited about our prospects in this space globally and also to now have a much stronger direct footprint in Germany.
Our sales pipeline continues to develop strongly with our weighted pipeline at the present time up 33% when compared to the same time last year.
Unweighted pipeline value is now more than double what it was this time last year, increasing by almost 110%.
Both weighted and unweighted pipelines are again at new record levels, indicating a healthy medium to long term sales outlook as a result.
One is also really pleasing is that within those increases on new customer pipeline has grown by 90% continuing to demonstrate the value of the investments we've made in lead generation and the new business area.
With the vaccine rollout programs now underway in most major economies and with the global manufacturing PMI of $53, two and output now having risen for the eighth straight month, we're increasingly bullish about the medium to long term prospects for the business.
We finished our fiscal 'twenty, one very strongly and given all the indicators we feel good about fiscal 'twenty, two and our long term targets.
I'll now hand over to Pam for more detail and color on our cloud customers.
Thanks, Pam time, Q4, I think good growth quarter, particularly cloud 32, new cloud bookings.
From conversions.
Teen from net new customers, while the quarter was more heavily weighted towards comparisons. We believe me we will continue to haul the 50 50 between conversions and net new bookings that hopefully.
Historically at least for the next few quarters.
Pilot activity perspective, all regions contributed to Q4 bookings with North America, and Europe, performing exceptionally well.
In Q4, all verticals, providing booking lab revenue with industrial electronics led the way followed by honestly by lifestyle.
Given we are reviewing our year end I thought I would take a bit of time to talk about our cloud customer base.
Several years ago industry analyst Tavis.
Most manufacturing and as enterprises, especially larger one would not consider moving their ERP to the cloud.
Operations are emission credit call and need to be.
Often times 20 or vice versa.
Well, we agreed with the mission critical requirements. We also felt that due to the global nature of manufacturing enterprises must companies for either Ronnie and internal private cloud are considering moving John.
So moving to the QAD cloud would be a logical step we believe our success has proven us right now.
Looking at our customers no customer represents more than 10% of our cloud revenue, while many customers are increasing their spend with us due to the overall growth and addition of new customers. We expect this will continue into the future, let's know customers scaling.
Forward, representing more than 10% of our cloud revenue.
Our top 25 revenue customers represent all of our verticals with auto Moda, followed by life science and industrial the largest percentage by accounts.
Average company revenue.
Top 25 customers is 12 1 billion per year certainly these are large global companies.
The small smallest 50 customers also represent all of our calls with them.
Life science being the largest percentage by accounts F 35%.
Many of these life science companies are in the pre products stage.
The average company revenue for RF.
I'll ask 50 customers is $22 million per year heavily weighted by these life science companies, many with zero or very little revenue.
Manny from vaccine company.
Grant from insurance or government entities as manufacturers grow they tend to growth globally opening manufacturing sales and distribution center and more and more locations and countries.
Global companies have complex requirements, including support of local laws business organizational design joint venture integration security shared services and ease of M&A and divestitures, all of which QAD handled very <unk>.
Well in our cloud offerings.
The only constant is change and the pace of change is accelerating.
In talking with prospects and customers, we highlight the decreased longevity of companies on the S&P 500.
The key point here is this is no longer a criteria for survival and in fact, maybe a liability.
These companies are often hard to move and to Austin legacy ERP holds them back for <unk>.
Every large company that falls off the S&P 500, and as they place with a smaller company that is growing.
Well there is a liability to being bad smaller companies face other challenges that would be a mistake for thanks for take smaller means simpler smaller companies need to compete against the larger company competitors and a complex global marketplace.
Cross similar supply chain, but with less resources.
This makes the need to efficiently manage their business more and more credit call going from one to two site is comparatively more challenging things online from 50 sites to 60 sites. Likewise, the same is true for going global their first acquisition the first divestiture.
<unk> New line of business is comparatively more challenging than subsequent one these are all areas that QAD and help those customers then have lots of established services engagements in that area.
Some doing something for the first time in a global environment not only requires the capabilities of lion share businesses that have done it before but that also requires a greater level of process and system flexibility with our solid focus on manufacturing QAD.
We can deliver the EBIT capability to both large and smaller companies without the complexity and systems alone more than often.
Becomes overwhelming.
Well me and limited growth.
I think we have proven that by looking at our success in our customer base, that's very small and very very large companies using QAD cloud back to you.
Anton.
Alright, Thanks Pam.
Alright, so looking for the future we're growing increasingly confident about our long term goals and have taken another solid step towards them with our fourth quarter and full fiscal year results.
Last year, we did set out our long term goals, putting a heavy emphasis on cloud growth, while improving bottom line performance and it's pleasing to see our investments and efforts in those areas continue to pay off.
Our pipeline growth, especially in the context of the pandemic demonstrates that our lead generation strategy has legs and reinforces the growing attraction events price cloud solutions for manufacturers on a global scale.
From a product from professional services perspective, we remain committed to delivering enterprise cloud solutions to global manufacturers to support their needs to deal with change uncertainty and disruption on a continuous basis.
Our acquisition of allocation network underpins that commitment.
Following on from the success of our virtual for extreme event QAD Tomorrow last September and our launch of the adaptive manufacturing enterprise vision, we will be hosting our second event in may focus specifically on the challenges global manufacturers face in today's complex supply chain.
As the disruption brought about by the pandemic and issues such as the recent global shortage and chips for <unk>.
While COVID-19 cases, spike sorry case spikes continue to occur in various parts of the world short term uncertainty does remain a lingering but diminishing factor.
We remain vigilant of course and continue to keep a close eye on the key business trends in new business sales cloud conversions from renewals with existing customers.
But as things stand right now with about eight months of growth in global manufacturing and a strong pipeline, we feel increasingly positive about the year ahead and in good shape to drive another year of concrete progress towards our goals.
Operator, we're ready to take questions from analysts.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys and to withdraw your question. Please press Star then two and at this time, we'll pause momentarily to assemble our roster.
And the first question will come from both voluntary with William Blair. Please go ahead.
And are you on mute.
Just checking.
Moving to Brad.
Chuck why don't we move to the next question.
Got it excellent. Thank you and then we'll get them back a lot back on net.
Great. Thanks, very much and thanks for all that color on the cloud really helpful.
As you listen to your five year target of 227 net 30%.
Subscription or cloud CAGR.
Should we think about the acceleration there from where we are today is that going to be a combination.
Conversions and new customers or do you see it skewing, one way versus the sort of 50%.
50, we've seen historically.
Alright, Thanks, Brad.
<unk>.
For the short to medium term, we do expect that sort of 50 50 mix by deal count to continue.
So over time, we will.
We've converted more and more of our existing customer base and so.
Medium term so lets say.
18 months two years out we should start to see a bigger skew towards the new customers.
And that's what we'd expect to see.
That's why we've been investing in lead generation around new business to make sure that that pipeline is really strong by the time, we get to that point that we need it to be.
So yes, that's the plan.
Okay and on that latter point Anton have you seen the complexion of confirm conversions begin to change at all over the last several years, obviously you've been at this very successfully for a long time I'm. Just wondering if customers today that are moving look different meaningfully than those that moved three for five years ago.
Yes, I think so I think there is.
A few things there I'd say, Brad so first of all.
Cloud.
It really took off first of all in North America that was followed by EMEA and then more laterally by Asia Pacific and Latin America.
And so there's still I would say momentum is really strong in North America continues to be so.
And so from that perspective, we might be closer to the top of the S curve, if you like them.
In other parts of the world, but there's still a long runway there.
And then EMEA comes a bit behind that and so on so yes, we think.
Moving forward.
Pandemic is also underpinned I think the.
The benefits of having those systems in the cloud you don't have an ITT and that needs to look at it you worry about data center staff availability and all that stuff's taken care.
<unk> for you and then you think about security complications and those continue to Mount shop, and become more complex and having someone else deal with that I think is.
A real benefit for those customers too and of course finally, just recognizing that they can then focus on their business of running their business and adapting to all this change and supply chain disruptions zone.
You put all those together I would say there's momentum building there.
Which encourages more and more of the existing base to consider moving to the cloud for the foreseeable future.
That's great thanks very much.
Thanks, Brad.
The next question will come from Bob <unk> with William Blair. Please go ahead.
Hey, guys Thats range again can you hear me.
Yes.
And John Daniel Pam. Thank you, so I actually wanted to touch a little bit on the large deal activity from the sustainability.
For large deal activity you had great strength from guys sorry.
From a signing larger deal like what is the driver there I'd love that.
We've talked about cross sell and we've talked about.
The adaptive ERP like what is right for the larger labs.
And then how should we think about the ability for women how was the ability to keep volume.
Going forward.
Yes, thanks prevent so.
So I'd say first of all.
Certainly global manufacturers recognize the challenge of working in today's world.
With the speed of change adapting business models zone.
I'd say.
Older generation ERP is not really help them.
Move systems, a pace with business model changes and certainly with QAD adaptive ERP they get that opportunity.
So that's one driver.
The other is when competitively many global manufacturers have always considered SAP.
In the past as a first choice.
With the activity at.
For the launch of vessel Hunter, if he is ago no migration path towards a full re implementation.
Candid look for alternatives and viable alternatives in QAD on a global scale is one of the very few of those and so we've definitely had some success there.
That is compounded by.
For the realization that the economics and the time to benefit of choosing QAD solution over a larger competitive like S&P.
Orders of magnitude better so.
Ability to roll out much more quickly get that time to benefit and subsequently keep that application up to date is all driving that and.
A lot of those customers that Pam talked about made decisions for the reasons I've just spoken about and many of those that were on our <unk> strategy you have a long term goal of replacing.
Their <unk> footprint with QAD and will continue to drive that so we feel like we've got a lot of runway in that space, both with new customers looking for an alternative and existing customers to continue to drive out into new divisions and expand the QAD footprint.
I think that's really helpful. I think the question is that the banks for co Op, Inc.
Like where where do you think the SAP the forced migration ends up being a tailwind Ludwig talk levels.
Douglas on earnings calls.
It will be I was hoping John was force migration.
And it's been a tailwind from how do we quantify that tailwind for you in Pam talked about that scene has seen a shift.
Help us think for what I mean, not a one for a quarter or year over the next three to five years. What do you think that plays out ads for the cloud growth for the business for new logos.
Yes, I think it's going to be a significant portion of our growth.
Don't want to give you a percentage at this point, but I think for two range.
John.
I could Scott Daniel staring at me very intensely right now I'm sure.
All right.
[laughter].
So yes, I think a couple of things that are going to drive that right. So first of all just building on the back of our existing success and then getting that story out there and then.
More and more of the manufacturers that are maybe today postponing that decision to move from ACC, six and thinking and planning about what they do everyday that goes by.
For the existing system is all the more customization more issues with it and so I think we will see this double whammy in our favour of.
More and more success more and more awareness of what QAD can do.
And then on a burning platform, if you like and the need to get off all the systems as times goes.
<unk> goes by.
I appreciate the candor.
Ultimately, we think about this cloud transition that you guys are well positioned I think both tailwind to interest again and I. Appreciate you youre not willing to give color on the 200 bps of it's renewables.
It's something as you guys go forward with thoughtful for all of us to get color on thanks for Canada I. Appreciate it. Thank you for taking my questions.
Thanks Pam.
Okay.
Again, if you have a question. Please press Star then one our next question will come from Kevin Liu with K <unk> Company. Please go ahead.
Hi, good afternoon, and congrats on the strong finish to the year.
First question I had here for you was just in terms of sales cycles have you seen those start to return back to kind of the cadence that you saw pre COVID-19 or is there still some hesitation out there amongst your customer base to pursue some larger transformational deals.
Yes, thanks, Kevin.
Certainly as we talked about in the fourth quarter.
I think particularly on exclusively but particularly given.
A few case spikes in a number of countries in Europe.
So some hesitation and therefore, some lengthening of sales cycles.
Good news is those are lengthened rather than completely curtailed.
And so I think there's still good opportunity there.
If we look geographically first of all that I would say business activity has been strongest in North America and the desire to keep transactions moving has been strongest.
And so.
The effect is diminishing more quickly in North America, followed by Europe, and then Asia Pac and Latin America, which.
It seems to be growing at a slightly slower pace.
But we have seen increased levels of activity in the Asia Pacific region.
Over the last couple of months and so we take that as a positive sign that that's starting to catch up now too.
If you look them vertically.
There is good activity across all of our vertical markets with the exception of some narrow sub segments within each of those I talked about those earlier sort of anybody that serving the transportation or certain elements of the transportation industry or certain elements of the hospitality industry day might be struggling we expect that to continue for some time until really the whole vaccine.
Program was substantially.
<unk> on a global basis, but outside of that yes, we see a lot of positive momentum.
Got it and just maybe related somewhat to the prior question on SAP, but just.
Wanted to talk a little bit more about the doubling in kind of the unweighted pipeline.
From the drivers around that is that really just kind of that force migration, that's driving a lot more interest or you know as the pandemic.
Folks to look a lot more.
Net of digital transformation across the board.
And then more specifically to the organization given the size of the pipeline and where you're still what youre still seeing in terms of sales cycles. How are you feeling about the size of your go to market organization and whether you should be investing more aggressively.
Across the year.
Great. Okay. So a few questions and so we think about sort of pipeline growth, it's really a combination of factors. So.
As we talked about a few minutes ago.
More and more customers are encouraged by the benefits of cloud and so existing customers make up a good portion of that pipeline.
Thinking about moving from their on premise security environment to the cloud.
A good portion of our lead generation focus that we invested in over the last sort of 18 months two years.
<unk> has been around new business and so I think we're seeing just a combination there of the fact that we are out and we're putting real effort into finding leads and opportunities together with some of the examples you use so the pandemic has really highlighted a whole range of reasons why cloud in cloud ERP and <unk>.
John will make sense for manufacturers.
Fly chain disruption, so a lot of interest in our supply chain products today.
Things like demand supply chain planning global trade and transportation execution.
Playa management as part of that.
Thats, all fueling that sort of thing as well.
It's really a combination of all those factors coming together to help.
Health net increase.
In terms of go to market model.
Pretty comfortable with where we're at I think we made statements last year that we were investing in that.
Seeing those investments start to pay off so we now see a more proportional response to growth.
In terms of scaling up the organization versus getting sort of investing ahead of the curve so to speak so.
From a ratio perspective, we do foresee becoming more efficient over.
Over the next couple of years and that's baked into those long term targets that Daniel talked about earlier.
Okay, and just lastly on the acquisition of allocation network.
Any insight you can provide in terms of just the expected contribution to either total or recurring revenue for this year and then anything you can offer from their growth or margin profile historically.
Yes, Kevin So with regards to acquisition network, we're incorporating them straight into the <unk>.
Our overall results were not going to be reporting on them on a separate basis and actually <unk>.
Significant leverage.
Significant reasonable why we acquired them it because.
We believe that many of our customers on a global basis will be in the need for it to a lot of that product is going to be actually sold <unk>.
Directly.
Our sales force around the world.
They will continue or is that some of the.
Some of.
People that are now QAD employees from from acquisition net quarter, They will continue to sell.
Mainly inside of Germany inside of their existing contacts and install base.
Ed.
Are not making a material.
Impact to the P&L.
Up or down so.
There is really.
No impact there.
Understood. Thanks for taking the question.
Thanks.
The next question will come from Bob <unk> with William Blair. Please go ahead.
Hey, guys.
Bill and Decker here actually I wanted to just touch on too.
The partner investments that you guys have focused on here and kind of the updated long term targets Navy.
Really early stage from a partner perspective.
But it's been a key kind of focus and investment area.
How should we be thinking about.
Partners kind of layering in contributing more meaningfully to growth maybe not not here in in.
In calendar 'twenty, one, but as we look kind of in that three to five year kind of type of timeframe.
Yes, thanks for that so.
Relatively early days for us from the focus right now has been putting that foundational layer in place.
Making sure that we have.
<unk>.
The processes and systems in place to support the acquisition of the on boarding of partners.
And growing and scaling that and to that point actually we have.
Got into agreements with for New partners in Latin America over the last few months, which is really pleasing to see.
In terms of the effect on the business and material contribution to growth.
I don't think youll see that until sort of midway through next year.
Got to get them on boarded gotta get them trained up.
Them with lead generation and building their pipelines, but.
Yes.
Got that baked into our plans and as I say sort of 18 months out or so we should start to see that flow through.
Great. Thanks, guys.
Okay.
Thank you. The next question will come from Matthew <unk> with Sidoti. Please go ahead.
Hey, good afternoon. Thank you for taking my questions.
Can you comment on the sensitivity of the full year maintenance and subscription guidance against your pipeline of conversion activity.
Yes from from.
From a guidance guidance perspective, I mean some of.
Some of that will be coming from from conversions.
One one statistic that Anton Didnt mention is we've now reached about a quarter our installed base or.
Or 25% have converted.
From a perpetual environment to the cloud.
So there is still a significant amount.
<unk> for us.
So for this year I think we're still likely youre going to be counting on about a 50 50.
Mix.
So there is there is some sensitivity to that but also as Anton mentioned there has been a significant growth to our new cloud customer pipeline, so quite a bit of that growth as well will be coming from that.
Got it.
Thank you Kevin.
Yes, no that was helpful and then.
I think you touched on some traditional business.
<unk> expenses may be starting to return and maybe now it's around business development I'm not quite sure I might have missed the details about that but I think you said it wasn't returned to historical levels can you just go back over that and just kind of specifically, what's coming back in for the limitations and sort of what are the downs on and what the new normal looks like.
Coming from a practical perspective, and how that sort of flows into the P&L. Thanks.
Yes sure there is.
We do expect some travel to to return.
Obviously, the timing of that.
We will be dependent on.
How quickly we in the United States.
Everywhere around the world.
Get out of the pandemic.
We believe most of the travel for us during this fiscal year.
Will stem from sales activities some of the new customer sales that we talked about earlier.
The lengthening of the sales cycles to a degree is.
Is hinging upon the fact that it's hard to meet with new customers in a face to face basis for some some level of travel is always helpful. When it comes to <unk>.
Getting those deals in place so we do expect to see some there.
And so the the sales and marketing expense.
We'll see.
An increase there but again.
We have and our customers have learned how to.
Conduct a lot of these meetings have before needed to be face to face in some cases with large groups of people, meaning relocation face to face.
Doing those remotely so on a more long term basis, we don't believe that the level of travel will be returning to prior levels.
The other area, where we will see some increase in travel will be with some of the implementations are there still some pieces of the implementations that sometimes are easier to conduct on site.
A lot of our travel that happens on implementations is actually rebuild back to the customer.
So you won't necessarily see that affecting directly the bottom line the rest of the business travel.
Around the other areas, we still expect that it will be quite minimal.
But.
I think that.
This year, we will definitely see some of that increase.
Alright, thank you.
Great. Thank you.
This concludes our question and answer session I would like to turn the conference back over to Anton Chilton for any closing remarks. Please go ahead Sir.
Well. Thank you for joining today everybody that concludes our call. We're looking forward to updating you in may with the results of our fiscal 2020 to first quarter.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
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Thank you.
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Good day and welcome to the QAD financial results for fourth quarter fiscal year 2021 conference call. All participants will be in a listen only mode should you need assistance. Please signal conference specialist by pressing the star can you followed by zero. After today's presentation there'll be an opportunity to ask questions to ask a question you May press.
Star then one on your Touchtone phone.
With your all your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Kara Bellamy. Please go ahead ma'am.
Hello, everyone and welcome to today's call before we begin I'd like to ensure that everybody understands that our discussion may contain forward looking statements that are based on certain expectations and analyses.
Such forward looking statements are subject to risks and uncertainties.
Could cause actual results to differ materially from those anticipated.
<unk> 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 discussing non-GAAP pretax income, which is a non-GAAP financial measure as defined by SEC regulation G.
A reconciliation of this non-GAAP financial measure for the most directly comparable GAAP measure is included in today's press release, which is posted on the company's website.
Now I'll turn the call over to our CEO Anton Chilton.
Thank you Kara.
Good afternoon, everyone and thank you for joining today's call to discuss Qad's fiscal 'twenty, one fourth quarter and financial year results.
Joining me on the call Pam Blocker, <unk>, President and Daniel lender Chief Financial Officer.
Building on the momentum carried over from our third quarter I'm delighted to report another set of good results across the board.
Our growth in subscription of 24% when compared to the same quarter last year improvement in our subscription gross margin for 70%.
Moving professional services margin to 11% and moving up our overall margin to 62% were particularly pleasing to see.
Those improvements compounded on the performance in prior quarters drove a substantial increase in earnings for the full year.
While our annual cloud bookings were at 87% of last year, given the context of the macro level, we feel our sales performance for the year was strong and we posted our second highest cloud sales result on record.
Prior to the close of the year, we were delighted to announce the acquisition of allocation network.
Best of breed provider of supply management solutions based out of Munich in Germany are.
A great addition to our integrated supply management capabilities, which I'll talk more about later.
And one of the most difficult and challenging as we've ever seen keeping sales momentum going driving our sales pipeline to record levels, delivering implementation and upgrade projects remotely and making margin improvements across the board was impressive and I'm exceptionally proud of what the QAD team has managed to deliver.
I'll now turn it over to Daniel to discuss the details of the financial results.
Well, thank you Anton our solid fourth quarter results rounded out a successful year in spite of the challenging environment subscription and maintenance revenue came in ahead of our expectations in part due to currency tailwind.
Pre tax profitability grew substantially from last year's fourth quarter and from the fiscal 'twenty, one third quarter as a result of our initiatives to expand margins and continued focus on cost controls.
Subscription margins improved another three percentage points from the same quarter last year to 70%.
And professional services margin improved nine percentage points to 11% driven by our ability to deliver remote implementations our focus on managing white space.
And the ongoing strategy of building and utilizing our partner network.
Currency had an approximate $1 5 million positive effect of total revenue compared with last year's fourth quarter.
And $1 2 million positive effect compared with the third quarter of fiscal 2021.
Profitability was favorably impacted by 300000 versus prior quarter, but there was a negligible impact versus prior year.
Due to fluctuating currency during the year there was a positive impact to total revenue in the fourth quarter, but a negative $1 2 million impact for the full year revenue, including a 300000 negative impact on subscription revenue.
Total revenue for the fiscal 'twenty, one fourth quarter grew to $83 million from $78 6 million last year.
As a result of higher subscription revenue, partially offset by lower professional services maintenance and license revenue.
For the for year total revenue was $308 million versus $311 million.
Recurring revenue accounted for 78% of total revenue for our fiscal year.
Subscription revenue growth continued to accelerate improving 24% to $35 5 million.
Subscription revenue now accounts for 43% or for business up seven percentage points from last year's fourth quarter.
Currency movements positively impacted subscription revenue by 400000 compared with both the prior year and the prior sequential quarter for.
For the year subscription revenue increased by 22%.
I'll now review our annual cloud metrics.
FY 'twenty, one annual bookings were 87% of the prior year bookings.
While the first three quarters of fiscal 'twenty, one we're on part with the prior year, we were not expecting to match our fourth quarter bookings from last year as those were exceptionally strong.
The level of new customer deal affected bookings as we talked about it earlier in the year sales cycle for new customers were impacted the most during the pandemic and as a result, those cycles were lengthened.
New cloud deals for fiscal 'twenty, one where 95%.
Including 48 from new customers and 47 from convergence.
In comparison, the prior year, including 119, new cloud deals new.
New cloud deals for the fourth quarter were <unk> 32 versus <unk> 37 in the prior year, new customers were <unk> 14 versus <unk> 20, and conversions 18 versus 17.
Subscription billings grew by 18% for the fiscal year with a three year CAGR of 21%.
Our short term deferred revenue balance included $56 3 million of deferred subscription versus $45 7 million in the prior year, an increase of 23%.
Annual subscription revenue grew to more than $131 million.
Our net dollar retention rate, which we calculated by comparing the revenue of each customer from a year ago to the revenue of the same customer in the current year was 105% for the fiscal 'twenty one.
As we expected and discussed earlier in the year the rate of add on sales to existing customers slowdown due to the pandemic.
Retention rate continues to be in excess of 95%.
Maintenance revenue was $27 $2 million for the fiscal 'twenty, one fourth quarter and $1 6 million declined from last year.
Mainly two cancellations and client conversions.
Our maintenance retention rate remains in excess of 90%.
However, I remind you that because some of our customers were and continue to be impacted by the pandemic. We did see some increase in maintenance cancellations or maintenance revenue reductions, particularly early in the pandemic.
For the full year maintenance revenue declined 9%.
Professional services revenue totaled $15 1 million versus $15 9 million for last year's fourth quarter.
Up slightly on a sequential basis.
For the full year professional services revenue declined 15%. This revenue decline was planned and consistent with our focus on building, our partner network and improving and sustaining margins.
Our services margins were stable throughout the year, reaching a high of 11% for the fourth quarter and 7% for the year.
License revenue for the fiscal 'twenty, one fourth quarter was $5 2 million versus $5 3 million in last year's fourth quarter with sales, primarily coming from existing customers purchasing new seats or modules.
For the full year license revenue declined 33%.
With our sales efforts focus on the cloud, we do not expect a meaningful increase in year over year license revenue in the foreseeable future.
Total revenue by vertical for the fiscal 'twenty, one fourth quarter was automotive, 28% high Tech and industrial 37% life.
Life Sciences, and other 18% and consumer products and food and beverage 17%.
By geography total revenue was fairly consistent to last year with North America at 48%.
At 31% Asia Pacific, 13%, and Latin America, 8%.
Gross margin for the fourth quarter of fiscal 'twenty, one improved to 62% up from 58% last year, primarily driven by improved subscription and professional services margins.
Sales and marketing expenses totaled $18 4 million or 22% of total revenue versus $21 3 million or 27% of total revenue for last year's fourth quarter <unk>.
The majority of the decline was due to reduced travel and bonus expense.
R&D expense equaled $14 7 million compared with $13 2 million for last year's fourth quarter the.
The increase in R&D expense, mostly related to higher personnel expense due to higher head count.
As a percentage of total revenue R&D increased to 18% from 17% for last year's fourth quarter.
G&A expense was $11 million for the fiscal 'twenty, one fourth quarter compared with $10 4 million for last year's fourth quarter. The increase in G&A expense, primarily was due to higher stock compensation and professional fees.
As a percentage of total revenue G&A expense declined to 13% from 14% from last year's fourth quarter.
Stock compensation expense totaled $4 1 million for the fiscal 'twenty, one fourth quarter and $3 million last year. The increase was partly related to higher PSU achievement.
This brings operating income to $7 3 million compared with 350000 last year.
For the quarter GAAP pre tax income grew to $5 9 million from 800000, a year ago. Our non-GAAP pretax income was $10 1 million compared to $3 $8 million last year.
For the full year GAAP pretax income was $10 8 million compared with $3 $6 million GAAP pretax loss for last year and non.
Non-GAAP pretax income rose to $25 5 million from $8 $4 million a year ago.
We incurred a tax benefit of $2 3 million in the fourth quarter of fiscal 'twenty, one we reversed our valuation allowance for our German subsidiary during the quarter as a result of the acquisition of allocation network, providing us with the ability to use existing nols to offset taxes out.
We ended the year with approximately $143 million in cash and equivalents compared with $137 million at the end of fiscal 'twenty.
Our cash balance remains very strong even after the completion of the allocation network acquisition in the quarter.
Cash flow from operations for fiscal 'twenty, one totaled $32 9 million compared with $17 million last year, the increase directly related to our improved profitability.
Accounts receivable was $82 6 million as of January 31, 2021 versus $81 million at the same time last year.
Day sales outstanding using the Countback method was 47 days for the fiscal 'twenty, one fourth quarter versus 45 days for the prior year quarter.
Our short term deferred revenue balance on January 31 was $125 7 million versus $118 4 million a year ago.
Now I'll provide an update on guidance for next year.
As a result of COVID-19, we implemented a number of cost saving initiatives that resulted in significantly reduced travel expense the cancellation of in person customer events and reductions in discretionary spending throughout fiscal 2021.
As the global economies emerge from the pandemic, we do expect to see travel and customer related events to pick back up but not to the historical levels.
We and our customers have adapted quite effectively to engaging remotely during sales cycles and implementations of our solutions.
We will continue to monitor the cost containment measures, we put in place during the pandemic focusing on improved profitability going forward.
Given the stabilization of the environment, we are reinstating our prior practice of providing both quarterly and yearly guidance.
For the first quarter of fiscal 'twenty, two we expect subscription revenue of $36 5 million maintenance revenue of $26 million breakeven operating income, including stock based compensation expense of $3 7 million.
For the for fiscal 2022 year, we expect subscription revenue of 160 million maintenance revenue of $102 million.
Operating income of $12 million, including stock based compensation expense of $17 million.
In addition to our first quarter guidance. We have also updated our five year strategic targets and have posted them on our website.
Our long term model calls for 27% to 30% three year CAGR in subscription revenues.
Subscription margin improvement to between 70 and 72%.
Improvement in total growth margin to between 61 and 63%.
Efficiency gains in sales and marketing expense to between 18% and 20% of total revenue.
R&D expense to between 14% and 15% of total revenue.
G&A expense of between 9% and 10% of total revenue and this will result in adjusted EBITDA of between 20 and 22% of total revenue.
And we assume a long term tax rate of approximately 25%.
Now I'd like to turn the call back to <unk> alright, Thank you Daniel.
So you might remember from our last call. We reported success in our goal of pulling forward cloud deals from a fourth quarter into our third quarter.
That success combined with a longer sales cycles for new customer deals related to the ongoing challenges in the macro environment, our fourth quarter bookings as we expected came in lower than prior year.
Nevertheless, given the exceptional strength of the prior year quarter and in the current context, we consider it a strong sales performance for the year and as I said earlier allowed us to post the second highest ever cloud bookings results.
Consistent with our third quarter, we saw a representation of each of our key vertical markets and the cloud sales mix and it was good to see healthy levels of activity in all our focus verticals.
There are still a few sub segments in those vehicles that are having a tough time for those tend to be companies, serving the travel and hospitality industries.
As usual besides for more color on some of those details shortly.
A good indicator on the continued recovery is a lessening of pressure from negatively impacted customers on maintenance renewals through the last quarter, our retention rates are still above 90%.
From a geographic perspective, North America continued with good sales performance and had a solid quarter in cloud bookings, our EMEA region posted good sales too, especially in light of the Lockdowns, which occurred in many parts of that region midway through the quarter.
Asia Pacific and Latin America had quiet quarters, and the slow pace of business activity in China was still a pattern.
As discussed on the last call. It remains unclear whether this is as a result of COVID-19 or trade relations between the U S and China or some combination of the true and we continue to monitor the situation on the ground very closely.
Our precision <unk> Division finished the year strongly both in terms of sales and a growing pipeline for FY 'twenty two.
The pandemic continues to highlight the importance of logistics and supply and demand chain planning.
While our overall results and sales was strong we nevertheless maintained our vigilant focus on management of expenses across the entire business.
This continuous effort helped us improve our profitability, yet again and as highlighted opportunities to extend deficiencies in our business post the pandemic.
As discussed in prior calls we do not anticipate for return to prior spend levels and travel and also see opportunities to reduce our office footprint over time.
With cloud margins improved yet again, reaching 70% up 3% over the same quarter last year, we've hit our stated target and done so ahead of plan.
For professional services side of the business continued the long run of positive margin results, which improved again to 11%.
We also saw an increase in activity over the early part of the year and were particularly busy in Europe through the holiday period.
Our focus remains on working closely with the partner community and continuing to drive improvements to our bottom line.
Looking at future opportunities, our competitive strengths continue to attract new customers to the QAD cloud and while the number of new cloud customers closed in the quarter was not as high as the prior year due to long sales cycles. As a result of the pandemic new customers are strongly represented in our sales funnel.
I was delighted as I said earlier to announce at the end of the year our acquisition of allocation network based in Munich, Germany.
With our customer portfolio across a broad range of verticals, including companies like BMW Plaza, adding a vice plough, Samsung Siemens and folks bogging. This best of breed provider of supply management solutions really rounds out our capabilities in this area and its hugely complementary to our existing solutions portfolio.
The pandemic and its effect on supply networks has put in sharp relief the need for manufacturers to have robust integrated supplier management capabilities.
With the addition of allocation network, we're excited about our prospects in this space globally and also to now have a much stronger direct footprint in Germany.
Our sales pipeline continues to develop strongly with our weighted pipeline at the present time up 33% when compared to the same time last year.
Unweighted pipeline value is now more than double what it was this time last year, increasing by almost 110%.
Both weighted and unweighted pipelines are again at new record levels, indicating a healthy medium to long term sales outlook as a result.
What is also really pleasing is that within those increases on new customer pipeline has grown by 90% continuing to demonstrate the value of the investments we've made in lead generation and the new business area.
With the vaccine rollout programs now underway in most major economies and with the global manufacturing PMI of $53, two and output now having risen for the eight straight months, we're increasingly bullish about the medium to long term prospects for the business.
We finished our fiscal 'twenty, one very strongly and given all the indicators we feel good about fiscal 'twenty, two and our long term targets.
I'll now hand over to Pam for more detail and color on our cloud customers.
Thanks, Anton Q4 was a stellar growth quarter productivity day cloud 32, new cloud bookings came from conversions.
Teen from net new customers, while the quarter was more heavily weighted towards comparison, we believe we will continue to hold the 50 50 between conversions and net new bookings.
We've seen historically at least for the next few quarters from that.
Pilot activity perspective, all regions contributed to Q4 bookings with North America, and Europe, performing exceptionally well.
In Q4, our verticals, providing booking last revenue with industrial electronics led the way followed by honestly by lifestyle.
Given we are reviewing our year end I thought I would take a bit of time to talk about our cloud customer base.
Several years ago industry analyst told us that most manufacturing and as enterprises, especially larger one with non.
Not consider moving their ERP to the cloud.
Operations are mission critical and need to be.
Oftentimes 'twenty for Hi, Scott.
Well, we agree with the mission critical requirements. We also felt that due to the global nature of manufacturing enterprises, most companies for either Ronnie and an internal private cloud are considering moving John.
So moving to the QAD cloud would be a logical step we believe our success has proven us right now.
Looking at our customers no customer represents more than 10% of our cloud revenue.
Many customers are increasing their spend with that day.
Moving to the overall growth and addition of new customers. We expect this will continue into the future, let's know customers representing more than 10% of our cloud revenue.
Our top 25 revenue customers represent all of our further calls with automotive that followed by life Science and index trail the largest percentage by count.
The average company revenue.
Top 25 customers, there's $12 billion per year.
Our large global companies.
The small smallest 50 customers also represent all of our calls with life science being the largest percentage by accounts F. 35%. Many of these life science companies are in the pre cirrhotic stage.
The average company revenue for us.
I'll ask 50 customers is $22 million per year heavily weighted by these life science companies, many with zero or very low.
All revenue.
Manny from vaccine company.
For us from insurance or government entities as manufacturers grout, they tend to growth globally opening manufacturing sales and distribution center and relying more on locations and countries.
Global companies have complex requirements, including support of local laws business organization also signed joint venture integration security share services and is M&A and divestitures, all of which QAD handle Berry.
Well in our cloud offerings.
The only constant is change and the pace of change is accelerating.
In talking with prospects and customers, we highlight the decrease longevity of companies on the S&P 500, the key point here.
It is no longer a criteria for survival and in fact, maybe a liability.
Net companies are often hard to move and to Austin legacy ERP hold them back for <unk>.
Every large company that falls off the S&P five timeframe. It is a place with a smaller company that is growing.
Well there is a liability to be bid smaller companies face other challenges it would be a mistake for thanks for take smaller means simpler smaller companies need to compete against the larger comparative company competitors.
Complex global marketplace.
Cross similar supply chain bottlenecks lap resources, yes makes the need to efficiently manage their business more and more credit call going from one to two site is comparatively more challenging things online from 55% to 60 sites.
Clay sustaining that's true for going global.
Acquisition, the first divestiture the first new line of business is comparatively more challenging than subsequent one. These are all areas that QAD and help those customers then have lots of established services engagements in that area.
<unk> doing something for the first time in a global environment not only requires the capabilities of lion share businesses that have done it before.
Requires a greater level of process and system flexibility low fares.
So I'll focus on manufacturing QAD, Inc, and deliver the EBIT capabilities to both large and smaller companies without the complexity and systems alone more than often becomes overwhelming.
Overwhelming and limit growth.
I think we have proven that by looking at our success in our customer base, but it's very small and very very large companies using QAD com that for you.
Anton.
Alright, Thanks Pam.
Alright, so looking for the future we're growing increasingly confident about our long term goals and have taken another solid step towards them with our fourth quarter and full fiscal year results.
Last year, we did set out our long term goals, putting a heavy emphasis on cloud growth, while improving bottom line performance and it's pleasing to see our investments and efforts in those areas continue to pay off.
Our pipeline growth, especially in the context of the pandemic demonstrates that our lead generation strategy has legs and reinforces the growing attraction events price cloud solutions for manufacturers on a global scale.
From a product from professional services perspective, we remain committed to delivering enterprise cloud solutions to global manufacturers to support their needs to deal with change uncertainty and disruption on a continuous basis, our acquisition of allocation network underpins that commitment.
Following on from the success of our virtual for extreme event QAD Tomorrow last September and our launch of the adaptive manufacturing enterprise vision, we will be hosting our second event in may focus specifically on the challenges global manufacturers face in today's complex supply chain.
As the disruption brought about by the pandemic and issues such as the recent global shortage in chips silicon not potato has demonstrated manufacturers' need real time visibility and agility across their entire networks and instead of individual suppliers, that's exactly what the event we'll focus on.
While COVID-19 cases, spike sorry case spikes continue to occur in various parts of the world short term uncertainty does remain a lingering but diminishing factor.
We remain vigilant of course and continue to keep a close eye on the key business trends in new business sales cloud conversions and renewals with existing customers.
But as things stand right now without eight months of growth in global manufacturing and a strong pipeline, we feel increasingly positive about the year ahead and in good shape to drive another year of concrete progress towards our goals.
Operator, we're ready to take questions from analysts.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys and to withdraw. Your question. Please press Star then two and at this time, we will pause momentarily to assemble our roster.
Andy first question will come from Bhavan, Suri with William Blair. Please go ahead.
And are you on mute.
Just checking.
Okay.
Brad.
Chuck why don't we all hope for the next question.
Excellent. Thank you and then we'll get them back up back on next.
Okay. Our next question will come from Brad Reback with Stifel. Please go ahead.
Great. Thanks, very much and thanks for all that color on the cloud really helpful.
As you look at your five year target to 27% to 30%.
Subscription or cloud CAGR.
Should we think about the acceleration there from where we are today is that going to be a combination.
Conversions and new customers or do you see it skewing, one way versus the sort of 50%.
50, we've seen historically.
Alright, Thanks, Brad.
<unk>.
For the short to medium term, we do expect that sort of 50 50 mix by deal count to continue.
Over time, we will.
We've converted more and more of our existing customer base.
So.
Medium term, so lets say 80.
Months, two years out we should start to see a bigger skew towards the new customers.
And that's what we'd expect to see and that's why we've been investing in lead generation around new business to make sure that that pipeline is really strong by the time, we get to that point that we need it to be.
Yes, that's the plan.
Okay and on that latter point Anton have you seen the complexion of confirmed conversions begin to change at all over the last several years, obviously you've been at this very successfully for a long time I'm. Just wondering if customers today that are moving look different meaningfully than those that move three for five years ago.
Yes, I think so I think there is a.
<unk> things there I'd say, Brad so first of all.
Cloud.
It really took off first of all in North America that was followed by EMEA and then more laterally by Asia Pacific and Latin America.
And so theres still I'd say momentum is really strong in North America and continues to be so.
And so from that perspective, we might be closer to the top of the S curve if he likes.
In other parts of the world, but there's still a long runway there.
And then EMEA comes a bit behind that and so on so.
Yes, we think.
Moving forward.
The pandemic has also underpinned I think the.
The benefits of having those systems in the cloud you don't have an ITT and in these forecasts.
Data center staff availability and all that stuff's taken care.
For you and then you think about security complications and those continue to Mount shop, and become more complex and having someone else deal with that I think is.
A real benefit for those customers too and of course finally, just recognizing that they can then focus on their business of running their business and adapting to all this change in supply chain disruption and so on share.
You put all those together I would say there is momentum building there.
Which encourages more and more of the existing base to consider moving to the cloud for the foreseeable future.
That's great thanks very much.
Thanks, Brett.
The next question will come from Bob <unk> with William Blair. Please go ahead.
Hey, guys, let's try this again can you hear me.
Yes.
And then Daniel Pam. Thank you so I actually wanted to touch a little bit on the large deal activity from the sustainability.
<unk> in the U S.
Strength from guys sorry.
From a customer signing large deals.
What was the driver there I'd love that we.
We've talked about cross sell and we've talked about.
For the adaptive ERP like what is driving that for the larger labs.
Spans and then how should we think about the ability to total net how is your ability to keep volume going forward.
Yes, thanks for that.
So I'd say first of all.
Certainly global manufacturers recognize the challenge of working in today's world.
With the speed of change adapting business model and so on and say.
Older generation ERP is not really help them.
Move systems, a pace with business model changes and certainly with QAD adaptive ERP they get that opportunity.
So that's one driver.
The other is competitively many global manufacturers have always considered SAP.
In the past as a first choice.
With the activity.
The launch of <unk> for 100, or a few years ago, no migration path towards a full re implementation.
There's a candid look for alternatives and viable alternatives in QAD on a global scale is one of the very few of those and so we've definitely had some success there.
That is compounded by the realization that the economics and the time to benefit of choosing QAD solution over a larger competitive like S&P.
Orders of magnitude better so the ability to roll out much more quickly get that time to benefit.
Subsequently keep that application up to date is all driving that and.
A lot of those customers that Pam talked about made decisions for the reasons I've just spoken about and many of those that were on a solid strategy to have a long term goal of replacing.
Their <unk>.
Footprint with QAD, and we will continue to drive that so we feel like we've got a lot of runway in that space, both with new customers looking for an alternative and existing customers to continue to drive out into new divisions and expand the QAD footprint.
Hello, Andrew.
Really helpful. I think a question for that.
Thanks for a follow up.
Okay.
Where do you think the S&P force.
Cash and ends up being a tailwind like we've talked about for some and be ours and from an earnings calls, but it will be something that is force migration into AMR.
And it's been a tailwind and how do we quantify that tailwind for you in Pam has talked about it seem has seen a shift.
Help us think through what that may not have gone for a quarter or year over the next three to five years. What do you think that plays out as for the cloud growth for the business for new logos.
Yeah, I think it's going to be a significant portion of our growth.
You don't want to give you a percentage at this point, but.
I think for <unk> I mean, you could Anton.
I could Daniel staring at me very intensely right now I'm sure.
[laughter].
So yes, I think a couple of things that are going to drive that right. So first of all just building on the back of our existing success and then getting that story out there and then.
More and more of the manufacturers that are maybe today postponing that decision to move from ACC, six and thinking and planning about what they do every day that goes by that's a year.
<unk> system as older more customization more issues with it and so I think we will see this double whammy in our favor of <unk>.
More and more success more and more awareness of what QAD can do.
Then the Sun a burning platform, if you like and the need to get off all of the systems as times goes time goes by.
I appreciate your candor.
Ultimately, we think about this cloud transition that you guys are well positioned.
Think there's tailwind they are interesting and I appreciate you youre not willing to give color on the 200 bps of turnarounds.
It's something as you guys.
<unk> thoughtful for all of us get color on thanks for Canada I appreciate it. Thank you for taking my questions.
Thanks Kara.
Okay.
Again, if you have a question. Please press Star then one our next question will come from Kevin Liu with K <unk> Company. Please go ahead.
Hi, good afternoon, and congrats on the strong finish to the year.
First question I had here for you was just in terms of sales cycles have you seen those start to return back to kind of the cadence that you saw pre COVID-19.
Is there still some hesitation out there amongst your customer base.
Pursue some larger transformational deals.
Yes, thanks, Kevin.
As we talked about in the fourth quarter.
I think particularly on exclusively but particularly given.
Few case spikes.
A number of countries in Europe, we saw some hesitation and therefore, some lengthening of sales cycles.
The good news is those are lengthened rather than completely curtailed.
And so I think there's still good opportunity there.
If we look geographically first of all then I would say business activity has been strongest in North America and the desire to keep transactions moving has been strongest.
So.
The effect is diminishing more quickly in North America, followed by Europe.
Then Asia Pac and Latin America, which.
It seems to be growing at a slightly slower pace.
But we have seen increased levels of activity in the Asia Pacific region.
Over the last couple of months and so we take that as a positive sign that they are starting to catch up now too.
If you look them vertically.
There is good activity across all of our vertical markets with the exception of some narrow sub segments within each of those I talked about those earlier sort of anybody that serving the transportation or certain elements of the transportation industry for certain elements of the hospitality industry day might be struggling and we expect that to continue for some time until really the whole vaccine <unk>.
Graham is substantially complete on a global basis, but outside of that yes, we see a lot of positive momentum.
Got it and just maybe related somewhat to the part of your question on SAP.
I just wanted you to talk a little bit more about the doubling in kind of the unweighted pipeline. What are some of the drivers around that is that really just kind of net force migration, that's driving a lot more interest or.
Okay.
Counted for.
Look a lot more kind of digital transformation across the board.
And then more specifically to the organization given the size of the pipeline and where you're still what youre still seeing in terms of sales cycles. How are you feeling about the size of your go to market organization, whether you should be investing more aggressively.
Our cost per year.
Great. Okay. So a few questions and so we think about source of pipeline growth, it's really a combination of factors. So.
As we talked about a few minutes ago.
More and more customers are encouraged by the benefits of cloud and so existing customers make up a good portion of that pipeline.
Thinking about moving from their on premise security environment to the cloud.
A good portion of our lead generation focus that we invested in over the last sort of 18 months two years.
Has been around new business and so I think we're seeing just a combination there of the fact that we are out and we're putting real effort into finding leads and opportunities together with some of the examples you use so the pandemic has really highlighted a whole range of reasons why cloud cloud ERP and <unk>.
General makes sense for manufacturers.
Apply chain disruption so a lot of interest in our supply chain products today.
Things like demand supply chain planning global trade and transportation execution.
Client management as part of that.
That's all fueling that sort of thing as well.
So it's really a combination of all those factors coming together.
<unk> helped that increase.
In terms of go to market model, we're pretty comfortable with where we're at I think we made statements last year that we were investing in that we're seeing those investments start to pay off so we now see a more proportional response to growth.
In terms of scaling up the organization versus getting sort of investing ahead of the curve so to speak so.
From a ratio perspective, we do foresee becoming more efficient.
For the next couple of years and that's baked into those long term targets that Daniel talked about earlier.
Okay.
<unk>.
Acquisition of allocation network.
Any insight you can provide in terms of just the expected contribution to either total or recurring revenue for this year and then anything you can offer from their growth and margin profile historically.
Yes, Kevin So with regards to acquisition network, we're incorporating them straight into the.
Our overall results were not going to be reporting on them on a separate basis and actually.
Significant leverage and significant reason why we acquired them is because.
We believe that many of our customers on a global basis will be in the need for it. So a lot of that product is going to be actually sold.
Directly.
By our sales force around the world.
They will continue or.
Some of the debt.
The people that are now QAD employees from from acquisition net forward they will continue to sell.
Mainly inside of Germany inside of their existing contact and install base.
They are not making any material.
Impact to the P&L.
Up or down so.
There is really.
No impact there.
Understood. Thanks for taking the question.
Thanks.
The next question will come from Pavan <unk> with William Blair. Please go ahead.
Hey, guys.
John Decker here actually I wanted to just touch on too.
From the partner investments that you guys have focused on here and kind of the updated long term targets maybe.
Really early stage from a partner perspective.
But it's been a key kind of focus and investment area.
How should we be thinking about.
Partners kind of layering in and contributing more meaningfully to growth maybe not not here in calendar 'twenty, one, but as we look kind of in that three to five year kind of type of timeframe.
Yes, thanks for that so as.
As you say relatively early days for us from the focus right now has been putting that foundational layer in place.
Making sure that we have the.
The processes and systems in place to support the acquisition of the acquisition the Onboarding of partners.
And growing and scaling that and to that point actually we have.
Got into agreements with for New partners in Latin America over the last few months, which is really pleasing to see.
In terms of the effect on the business and material contribution to growth.
I don't think youll see that until sort of midway through next year.
We've got to get them on boarded gotta get them trained up helped them with lead generation and building their pipelines, but yes.
We've got that baked into our plans and as I say sort of 18 months out or so we should start to see that flow through.
Great. Thanks, guys.
Okay.
Thank you. The next question will come from Matthew <unk> with Sidoti. Please go ahead.
Hey, good afternoon, thanks for taking my questions.
Can you comment on the sensitivity of the full year maintenance and subscription guidance against your pipeline of conversion activity.
Yes.
Our GAAP guidance perspective, I mean some of.
Some of that.
We will be coming from from conversions.
One one statistic that Anton didn't mention is we.
We've now reached about a quarter or installed base or.
Or 25% have converted.
From a perpetual environment to the cloud.
So there's still significant.
Amount.
Out there for us.
So for this year I think we're still likely youre going to be counting on about a 50 50.
Mix.
So there is there is some sensitivity to that but also as Anton mentioned there has been a significant growth to our new cloud customer pipeline, so quite a bit of that growth as well will be coming from that.
Got it.
Yes.
Yes, no that was helpful and then.
I think you touched on some traditional business travel expenses may be starting to return maybe Dallas around business development I'm not quite sure I might have missed the details about that but I think you said it wasn't returned to historical levels can you just go back over that and just kind of specifically, what's coming back and for the limitations and sort of what are the bounds.
John.
What's the new normal looks like kind of from a practical perspective, and how that sort of flows into the P&L. Thanks.
Yes sure there is.
We do expect some travel to to return.
Obviously, the timing of that.
We'll be dependent on.
How quickly we in the United States.
Everywhere around the world.
Get out of the pandemic.
Hmm.
We believe most of the travel for us during this fiscal year.
Will stem from sales activities.
Of the new customer sales that we talked about earlier.
The lengthening of the sales cycles to a degree.
<unk>.
Is hinging upon the fact that it's hard to meet with new customers in a face to face basis for some some level of travel is always helpful. When it comes to <unk>.
Getting those deals in place so we do expect to see some there.
And so the the sales and marketing expense.
We'll see.
An increase there but again.
We have and our customers have learned how to.
Conduct a lot of these meetings had before needed to be face to face in some cases with large groups of people, meaning relocation face to face.
Doing dose remotely so on a more long term basis, we don't believe that the level of travel will be returning to prior levels.
The other area, where we will see some increase in travel will be with some of the implementations are there still some pieces of the implementations that sometimes are easier to conduct on site.
A lot of our travel that happens on implementation is actually rebuild back to the customer.
So you won't necessarily see that affecting directly the bottom line the rest of business travel.
Around the other areas, we still expect that it will be quite minimal.
But.
I think that this year, we will definitely see some of that increase.
Alright, thank you.
Great. Thank you.
This concludes our question and answer session I would like to turn the conference back over to Anton Chilton for any closing remarks. Please go ahead Sir.
Well. Thank you for joining today everybody that concludes our call. We're looking forward to updating you in may with the results of our fiscal 2020 to first quarter.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.