Q1 2022 QAD Inc Earnings Call
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Good day and welcome to the QAD financial results for first quarter fiscal year 2022, all participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then 1. Please note that this event is being recorded I would now like to turn the conference over to Carol Bellamy Chief Accounting Officer. Please go ahead.
Hello, everyone and welcome to today's call.
4 we began 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 that 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 to 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 and good afternoon, everyone and thank you for joining today's call to discuss Qad's fiscal 'twenty to first quarter results. Joining me on the call as usual are Pam <unk>, our president and Daniel lender Chief Financial Officer.
Our March towards a published long term golf continues with another set of solid results growth in subscription revenue of 19% when compared to the same quarter last year, but a slightly ahead of guidance for the quarter.
Similarly improvements in subscription and professional services margins over last year's Q1 contributed to another good performance from a bottomline perspective, and put US ahead of our guided profitability number.
We're also pleased to have achieved our highest first quarter bookings ever with growth over 50% from last year's numbers, giving us a good head start to our financial year.
We were also excited to welcome foreign trade zone, our latest acquisition to QAD in early April.
T Z is very well known for their expertise in this space, having the team in the solution integrated into our global trade and transportation execution portfolio will help customers simplify duty management and improve transportation execution and trade compliance at the same time.
In line with our strategy to grow our partner ecosystem, We signed 15, new channel partners in the quarter.
With those partners focused on cloud sales or supporting our professional services capability. This represents a significant step in our strategic vision and expands.
Our ecosystem around the world.
In summary growth across all revenue lines improved profitability and a strong cloud bookings performance made for another good quarter I'll now turn it over to Daniel to discuss the details of the financial results well. Thank you Anton we're very pleased with our first quarter results, which exceeded expectations and were strong across the board.
<unk> margins improved to 67% from 60, 66% for the same quarter last year.
<unk> would have been more meaningful except that in the quarter, we started expensing the amortization relating to our recent acquisitions.
And there was an additional impact of 1% expense related to 1 time technology purchases.
Going forward, we expect amortization of approximately 450000 per quarter in the subscription cost of revenue line.
Professional services margin improved 5 percentage points to 10% due to our ongoing ability to deliver remote implementations improved utilization and the ongoing strategy of building and using our partner network.
Currency had an approximate $2.8 million positive impact on total revenue compared with last years first quarter.
But negligible impact compared with the fourth quarter of fiscal 2021.
Our bottom line was positively impacted by about 700000 versus the prior year quarter.
But also negligible on a day.
Question on basis.
Total revenue for the fiscal 'twenty, 2 first quarter grew to $83 million from $74.1 million last year, primarily as a result of higher subscription license and services revenue.
Subscription revenue grew 19% to $36.7 million and now accounts for 44% of our total business up 3 percentage points from last fiscal years first quarter.
Currency movements positively impacted subscription revenue by about $950000 compared with the prior year I had almost no impact compared with the prior sequential quarter.
We have closed 33, new cloud deals for fiscal 'twenty, 2 first quarter, including 23 from new customers and 10 from conversions.
In last year's first quarter, we closed 14, new cloud deals, including 9 new customers in 5 from conversions.
And compared to the same quarter on a pre pandemic basis, 2 years ago, we closed over 50% more deals.
Subscription billings grew by 20% for the fiscal 'twenty to first quarter.
With a 3 year CAGR of 22%.
Our short term deferred revenue balance included $54.7 million of deferred subscription versus $46.8 million in the prior year, an increase of 17%.
Maintenance revenue was $26.6 billion for the fiscal 'twenty, 2 first quarter versus $26.4 million a year ago.
On a performance basis maintenance revenue declined 4% year over year.
Relating mainly to cloud conversions, our maintenance retention rates have returned to historical pre pandemic levels and remained in excess of 90%.
Yeah.
Professional services revenue totaled $16.6 million versus $15.7 million for last year's first quarter and $15.1 million on a sequential basis.
As I mentioned earlier, our services margins grew to 10% for the first quarter, a 500 basis point increase from last year.
License revenue for the fiscal 'twenty, 2 first quarter was $3.1 million versus $1.2 million in last year's first quarter with sales primarily coming from existing customers.
You're seeing new seats or modules.
With our sales efforts continuing on the cloud, we do not expect meaningful changes in a year over year license revenue for the foreseeable future.
Total revenue by vertical for the fiscal 'twenty first quarter was high tech and industrial 36% automotive, 30% life Sciences, another 18% and consumer products and food and beverage 16%.
By geography, North America was 47%.
EMEA, 35% Asia Pacific 12, and Latin America, 6%.
Gross margin for the first quarter of fiscal 'twenty, 2 improved to 59% up from 56% last year, primarily due to improved subscription and professional services margins.
Sales and marketing expenses totaled $19.6 million or 24% of total revenue versus $18.6 million or 25% of total revenue for last year's first quarter.
Currency accounted for 600000 of the increase and the remainder related primarily to higher personnel costs.
R&D expense equal to $15.6 million compared with $14 million a year ago.
Currency accounted for 500000 of the increase with the remainder due to higher personnel expenses related to higher head count.
As a percentage of total revenue.
D with 19% for both quarters.
G&A expense was $12.6 million for the fiscal 'twenty first quarter compared with $10 million for last year's first quarter. The increase in G&A expense was due primarily to higher personnel expenses stock compensation.
Legal fees, mostly related to an IP infringement case that is now mostly concluded.
And transaction costs related to the acquisition.
As a percentage of total revenue G&A was 15% for the fiscal 'twenty, 2 first quarter compared with 13% last year.
Stock compensation expense totaled $3.6 million for the fiscal 'twenty, 2 first quarter and $2.4 million last year.
The increase as anticipated was related to higher PSU achievement.
This brings operating income to about 750000 compared with net operating loss of about 950000 last year.
For the first quarter of fiscal 'twenty to GAAP pre tax income was about 450000 compared with about 600000 a year ago.
Our non-GAAP pre tax income was $4.6 million compared with $3.3 million last year.
We recognized a tax benefit of $1.4 million for the current year first quarter compared with tax expenses of 1 million for last year's first quarter with the swing related primarily to a change in valuation allowances.
Okay.
We ended the quarter with approximately $153 million in cash and equivalents compared with approximately $143 million at the end of fiscal 'twenty 1.
The growth in our cash balances is inclusive of a net $9.5 million paid to the FTC acquisition in Q1.
Yeah.
Cash flow from operations for the fiscal 'twenty, 2 first quarter totaled $22.1 million compared with $10.9 million last year.
Accounts receivable was $44.9 million on April 32021 versus $46.6 million at the same time last year.
Our day sales outstanding using the count back method was 48 days for the fiscal 'twenty, 2 first quarter versus 56 days for the prior year quarter.
And our short term deferred revenue balance at April 30 was $116.9 million versus $102.3 million a year ago.
I'll finish up with our guidance for the second quarter of fiscal 'twenty..2 we expect subscription revenue of $38.5 million maintenance revenue of 26 million and operating income of $1 million, including stock based compensation expense of $5 million.
For the full fiscal 'twenty 2 year, we continue to expect subscription revenue of 160 million maintenance revenue of $102 million on operating income of $12 million, including stock based compensation expense of $17 million with that I'll turn the call back to you Anton Thank.
Thank you Daniel.
On the sales front, you might recall that we've talked in the past about our efforts to grow lead generation capability in the context of new customers. We've also discussed how these efforts have contributed to the growth of our sales pipeline over the past few quarters.
I am very happy to report in this quarter as Daniel said, we welcome 23, new customers to the QAD cloud demonstrating that our work in this area is paying off.
Alongside them with a tank conversions that Daniel mentioned of our on premises customers for 33 deals in the quarter, which is 135% increase of customer count over the same period last year and a record number of new cloud customers for the quarter.
Okay.
We continue to see a good representation of each of our key vertical markets in the cloud sales mix with industrial electronics, leading the charge slightly ahead of the automotive sector.
That said, we know a good proportion of supplies and automotive are feeling the ongoing effects of the global Microchip shortage, we discussed in our last call.
With the pandemic lingering in some parts of the world and travel and entertainment in the very early stages of recovery. There are still a few sub segments in those vehicles that are having a tough time.
With global manufacturing PMI at a 10 year high the vast majority have a positive outlook.
From a geographic perspective, North America, and our EMEA regions had another set.
For the quarter.
Low the picture is still a low mixed inside of Europe with countries in various states of lockdown and vaccine distribution.
In Asia Pacific were starting to see more activity in China, and Australia and that contributed to an improvement in cloud sales over recent quarters, while Latin America had another quiet period.
All 3 of our divisions allocation dinosaurs, and precision had strong quarters, reflecting the interest and demand for supply chain of supply management solutions in the market.
The pandemic and recent events such as the grounding of the ever given ship in the Suez Canal and the global Microchip shortage underlying the need for visibility across supply chains globally, and the ability to make intelligent decisions about how to respond to what can often be unforeseen and unexpected events.
We believe demand will continue to be strong going forward as manufacturers look to add resilience into their supply networks.
Coming off the good momentum of last year, we maintained our focus on management of expenses across the entire business.
This ongoing drive to improve profitability and yet again, we beat guidance and saw a significant improvement in operating profit compared to the same period last year.
While our cloud margins improved over the same quarter last year, we did see the effect of some onetime software purchases. In addition to the amortization of acquisition expense Daniel referred to.
Net going forward, we do expect to continue margin improvements in line with our stated goals.
The professional services side of the business remains busy with implementation projects and with all our model now nicely balanced between partners and our direct consulting work force. The long run of positive margins was maintained and saw a good improvement over last year's Q1.
Following on from the acquisition of allocation network in the World class supplier management capabilities, they bring which we discussed on our last call we announced in April the acquisition of foreign trade zone further enhancing our portfolio of solutions to help customers manage the intricacies of today's supply networks and navigate the complexities of judy's custom fees and taxes.
While effectively managing and reducing associated costs.
Recent events have really highlighted both the dependency on the fragility of supply chains and networks with the recent additions of allocation network and FTC. We're excited about our prospects to accelerate business growth in this part of the portfolio.
Our competitive strength in manufacturing operations and supply chain management together with the growing momentum in global manufacturing markets have continued to attract to attract new customers to the QAD cloud.
And I'd like to highlight a couple of cloud deals from the quarter that also serve to illustrate the interest and supply chain planning and management solutions.
So the first is a global automotive supplier that selected our demand and supply chain planning solution moving them to a single unified platform globally for supply chain planning and which will support a global integrated business planning process as they move away from the current situation of a combination of disparate legacy applications.
In the life Sciences sector, a global leader in the supply of dental products and services to the global Dentistry marketplace chose our global trade and transportation execution solution with a primary objective to empower dental professionals to give quality of life back to their patients. It is critical for them to have a distribution network of global warehouses and carriers to ensure that they remain <unk>.
While meeting customer expectations.
Al GTT application was seen as the best solution to address that global transport management vision, and all that carry needs across EMEA Asia Pacific and North America.
Our sales pipeline continues to develop strongly with our weighted pipeline at the present time up 21% when compared to the same time last year, while our unlike to pipeline value increased by 65%.
Both weighted and unweighted pipelines continue to be at new record levels and as the first quarter results demonstrated we're seeing that momentum in lead generation and new business translates into deals.
I'll now hand over to Pam for some detail on that allocation network acquisition and what it means for our supplier management capabilities.
Great. Thanks, Anton It's also a wonderful to see all the new customers in Q1, 2 day, we'd like to talk about 2 acquisitions, we announced recently.
With our acquisition philosophy acquisition sales to help me.
Higher requirements that customers are requesting and help with our competitive positioning.
He has a very strong supply chain execution and quality offering that was missing in the front end area of sourcing allocation network provides a strong operating in this area, including generating RF queues, facilitating supplier response to sourcing events, including Akshay.
Analyzing comparing in recommending to player bids onboarding supplier contracts.
Supplier Onboarding with the acquisition of allocation network QAD is able to complete our supply side supply chain.
Providing this single play with a manufacturer and supplier.
Managed and collaboration and interaction, which now includes the player management sourcing options supplier quality demand and delivery as well as invoicing allocation.
Allocation network is in Munich, Germany based company with a strong German customer base.
Enquiring and December 2020, we have already made for new sales and of course all of these sales are in the cloud.
Our most recent acquisition.
<unk> a recognized leader in foreign trade zone software consulting and contract operations FTC Corp is headquartered in mobile, Alabama and has implemented all implemented over a thousand trained some projects primarily in the United States.
TC implementations enables companies to realize significant savings on customers custom duty fees and taxes, combining FTC with QAD precision global trade and transportation execution division's portfolio of capabilities strengthens our competitive offering.
And provides the ability to expand FTC globally.
We see many synergies and the cross selling and installed bases and have been building a funnel and expand the QAD precision FTC solution to free trade zones around the world.
They are so focused on manufacturing QAD, Inc, and continuing to develop higher and deliver the needed capabilities to both large and smaller companies and a rapid and efficient manner that enables companies to accelerate that growth back.
Back to you Anton.
Thank you Pam thanks for that color.
Okay. So looking to the future we remain confident about our long term goals and are again taken another solid step towards them with our first quarter results.
Our pipeline growth and new customer wins in the quarter continued to demonstrate the attractiveness are of our entire cloud solution portfolio aimed at solving challenges faced in today's world by global manufacturers of company's operating complex supplier networks.
Following on from the success of our virtual Thoughtstream event QAD Tomorrow last September.
We hosted the second edition of the event just last week focus specifically on the challenges of managing today's complex supply chain and supply networks.
The event had record registration in attendance globally and has already generated significant interest in our supply chain offerings.
While COVID-19 continues to drive uncertainty in several countries around the world, we do see growth in manufacturing activity with that global PMI level at a 10 year high as reported earlier.
However, we remain vigilant and continue to keep a close eye on the key business trends and new business sales cloud conversions and renewals with existing customers.
But as things stand right now with a manufacturing economy buzzing and a strong pipeline, we feel increasingly positive about the year ahead and as reported on our last call. We remain in good shape to drive another year of progress towards our published goals.
Operator, we are ready to take questions from analysts.
We will now begin the question and answer session.
Ask a question you May press Star then 1 on your touch 10 firm.
If youre using a speakerphone please pick up your handset before pressing the keys.
So withdraw your question. Please press Star then 2.
And at this time, we will pause momentarily to assemble the roster.
Our first question today will come from <unk> <unk> with William Blair. Please go ahead.
Great. Thank you and thanks for taking my question.
And congrats on those new customer wins, I guess just to start there and John.
Pam.
Are you seeing some of the events that we discussed kind of the shortages the Suez Canal et cetera, driving those are with these kind of even earlier than that and they just sort of closed as you work them through the pipeline I just like to understand sort of how are we seeing sales cycles shortened because some of these effects and I think you've talked about sort of the need for transparency et cetera, playing out.
A little early to see those.
The pipelines into deal.
Yes, I would say both on the majority of those.
Yes.
Caused by those recent events, but I think those did serve as catalysts to sort of underpin the value the solutions, bringing did help them get.
Get them closed for sure.
That said I do believe going forward.
We've seen a growth in our funnel of opportunities around automat supply chain planning forecasting and logistics solutions and so we do think that each time something like this happens it just adds more fuel to that fire in terms of the value of visibility and unused using digital technologies to manage that visibility in responses to that too.
Gotcha Gotcha.
Unweighted pipeline for a second.
You've now had several quarters of that number the year over year growth has been pretty pretty spectacular right and I understand stuff will fall out of the pipeline.
But if you look at the number of new customer wins look at sales cycles, improving maybe demand environment is improving.
And you look at the guidance, which seems really conservative it doesn't feel like Youre accounting for a massive close rate just help me reconcile some of those things because I think youre being conservative guidance, but I'd love to understand sort of how youre thinking about that guy visa b the wins, the conversions, which obviously youre bigger dollar amounts.
Bryan Bryan, 20% on a weighted basis of 60, 70% weighted maintenance just put that altogether for me a little clear low maybe Daniel my much chime in here.
Sure.
So.
As you recall, we issued we issued our guidance for the year Daniel.
A little over a month ago and.
So I think that the first quarter results give us.
Good confidence with regards to gross numbers obviously.
As the year progresses, along we'll reevaluate whether we need to.
We need to adjust that.
Maybe maybe it took you to if needed.
Now.
It is.
Coming off of Covid.
Which elongated a number of of sales cycles during that time so.
We are we are seeing.
Are those now starting to to convert and to start to shorten again, but.
We're still being.
Cognizant of the fact that the world isn't yet back to normal.
And we need to.
Take all of that.
Into account.
We want to make sure that.
We can meet the expectations that we that we set out there.
Gotcha Gotcha I might squeeze 1 last 1 for me.
Ill jump back in queue on the partners. So obviously professional services was strong you've seen margins come back.
Really like the move of adding partners.
Help us think through how that plays out.
Again, not only this year, but as you over the next 24 months well, how do you envision that playing out over the next 24 months.
Is.
In terms of how much youre going to allocate the partners and what they're going to bring in.
And how much you might sort of try and keep yourselves in terms of training implementation education et cetera.
Yes, sure so yes.
Yes.
The medium to long term strategy for that is that.
Professional services and our ability to get implementation is done really quickly when compared to the larger competition remains a critical differentiator for us. So we always want to make sure that we've got enough capacity directly to be able to properly influenced that and work in partnership with our partners to manage that as well.
So there will be that balance and so we think we've hit the good sort of critical mass point to be able to do that and hence why we're seeing the expansion of partners around the world, We do expect to grow our direct consulting.
Capabilities over time, but at a much lower rate than the rest of the company is growing and that's really just to maintain that competitive edge. So.
In short what you should expect to see us.
<unk> expansion of the use of partners as the over the role.
Professional services for QAD.
Gross.
But a more modest growth around our direct workforce for that.
As our partners take on more of the lion's share of that work.
Fair enough fair enough. Thanks for taking my question and thanks for the candor.
Andrew I appreciate it.
Thanks Pam.
And once again, if you'd like to ask a question. Please press Star then 1.
Our next question will come from Kevin Liu with K <unk> Company. Please go ahead.
Hi, good afternoon, and nice start to the fiscal year here.
First question for me is just can you talk a little bit more about what the pipeline of conversion opportunities looks like.
Seeing customers more interested in that or is really a lot of the organizations focus more on driving as many new deals as possible.
So no I think over the longer term, we still see a lot of interest in conversions and from the.
The on premise space.
This quarter just happened to be a skew in that.
The new business side of it but I think we're still calling as we have been consistently.
The last couple of years now that we expect the mix to be roughly 50, 50, new customers to converting customers into the cloud.
Of course that will tail off at some point as we've eroded into that maintenance base more but for now we're expecting to see that continue.
Of course.
For that ratio to hold new business has to grow as well and so we do expect to see more and more new customers coming onboard but at the St. John will see the conversions continue to grow to for the foreseeable future.
Understood and just as it relates to the competitors and then obviously <unk> talked a lot about pushing and making a bigger push to get their customer base into the cloud wondering how youre seeing that impact your sales cycles are you seeing more opportunities come into the funnel.
Or is there more that any sort of pricing pressure or anything of that nature.
Kind of out there as you're.
Talking to folks.
Yes, I think.
Our supply chain capabilities.
Obviously, attracting interest and that's good in the sense that those solutions can stand alone as well as be integrated with our core outpaced system.
So that allows us to shorten up some of those sales cycles compared to any LP.
And so we're seeing growing demand in that sector.
That's good at the same time, though we are seeing in the competitive landscape.
Large global manufacturers that have.
Are all using.
<unk> been using in the past SAP for example, still face that that challenge of.
The question of.
Another re implementation of SAP, <unk> Hana or seek for an alternative that's perhaps.
A faster rollout and more nimble and agile once its in and we represent that and so a good portion of our funnel is represented by that type of opportunity too.
And then I do think that both what's happened in the supply chain over the last sort of 12 months or so.
We will continue to add fuel to.
That side of the business as well as the pandemic underlying that having those solutions in the cloud you applications running in the cloud.
As a much safer bet, then having to run them on premises and so that continues to sort of underscore the value of the cloud as well.
Great and just 1 last 1 for me regarding the acquisition of FTC wondering if you can help us out with any sort of incremental revenue or expenses that you didn't anticipate on a quarterly basis.
Yes, Kevin said, we did expect to have any material impact.
With either the a and AA.
Acquisition of the FTC and we are really incorporating those into the fabric.
Of the company.
And.
Obviously longer term, we certainly expect to see significant growth as we start to take those solutions into the rest of the.
QAD installed base and.
And also as they as they.
Become more integral part of our overall offering that puts the overall offering that much more competitive.
That's really where most of the impact.
It's going to be felt.
Alright, thanks for taking the question.
Sure of course, thank you.
And our next question will come from Matthew <unk> with Sidoti. Please go ahead.
Yes.
Hey, good afternoon. Thanks for taking my questions can you touch on how much of the pipeline.
It's been factored the factored by chip shortages than others.
Unusual challenges.
Yes difficult 1 to answer I would say.
Small fraction of it is directly related to that.
I would say it certainly in the automotive sector, making an impact for.
Short term sales opportunity conversations as they wrestle with.
Those supply chain issues that they have.
But Conversely, it's also.
Another event.
<unk> demonstrates the fragility of Glu.
Global supply networks like the grounding of the ever given like the big freeze in Texas and that kind of stuff all affected data. So all of these things just sort of Mount together to drive customers to be more interested in those solutions how much of them are directly impacted by any 1 of them, it's very difficult for us to gauge.
Got it.
Alright, and then.
With respect to the acquisitions.
Do you have a.
I guess is there a bias towards.
Driving.
Our conversions through any of these sort of smaller deals or are they primarily targeting customer pipeline or do you think of it.
In that way.
So I think the opportunities in a couple of spots. So first of all probably 3 so first of all it does it's another offering that we have that can we go we can go to existing both cloud and on premises customers and that might be if it's an on premises customer that might be the catalyst that gets them into the QAD cloud.
And then for existing QAD cloud customers. It certainly an expansion opportunity for US there and then the third area is as we get new customers on to 1 of those best of breed applications, that's a land and expand opportunity for us to go and continue to push the rest of the QAD portfolio so well.
We look at sort of all 3 of those areas is real good opportunity for us going forward.
Okay.
Maybe if you don't mind.
But in terms of the <unk> acquisition, how long do you expect it takes to get operationalized in an up and running.
To that cross sell opportunity and bring it to your portfolio of existing customers.
Sure I think it's very very quick.
We already worked with them in the past.
An advantage of the capabilities it's not.
Its not something thats technically technically complex to integrate.
And so we are.
We are expecting to hit the ground running.
Pretty much all capabilities are where they need to be today.
A little bit of work to do but not much so pretty much in real time.
Got it and then last question for me is in terms of the new.
Partners that you discussed I think there were 15, you announced this quarter on how quickly does it take to get them up and running and then I'm going to impact.
Yes, so if we split them out into sort of those focused on selling and distribution versus professional services.
The professional services ones.
A little bit longer to get them up to speed in terms of the.
Excuse me kit configuration of the application so they know space they know.
The requirements if you like.
The business model side, but then learning too.
Configure those requirements in QAD is what takes the time and Thats typically sort of 3 to 9 months, depending on the size of the partner.
And then the distributors and sales agents side of it.
They can start selling much sooner than that and can be supported by the ecosystem of partners around them.
Sort of more in the 3 to 6 months to really get.
<unk> going.
Great. Thank you.
Welcome.
And this will conclude the question and answer session I would like to turn the conference back over to al.
And so on tuition for any closing remarks.
Okay, well, thanks, everyone for joining us today that concludes the call and we look forward to updating you in August with the results of our fiscal 'twenty 2 second quarter.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.
Okay.
So if I can come back on the.
Okay.
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John.
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John.
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John.
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John.
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