QAD Reports Fiscal 2018 Second Quarter Financial Results

QAD Inc. (NASDAQ: QADA) (NASDAQ: QADB), a leading provider of enterprise software and services designed for global manufacturing companies, today reported financial results for the fiscal 2018 second quarter and first six months ended July 31, 2017.

Fiscal 2018 Second Quarter Financial Results

Total revenue for the fiscal 2018 second quarter improved to $76.0 million, from $69.8 million for the fiscal 2017 second quarter. Subscription revenue, representing 23 percent of total revenue, grew 41 percent year-over-year and 39 percent on a trailing 12-month basis.

Additional fiscal 2018 second quarter financial results, versus the fiscal 2017 second quarter, include:
  • Subscription revenue of $17.4 million, compared with $12.3 million. Trailing 12-month subscription revenue of $61.1 million, versus $44.1 million.
  • License revenue of $6.7 million, versus $6.4 million.
  • Professional services revenue of $19.8 million, compared with $17.8 million.
  • Maintenance and other revenue of $32.0 million, versus $33.3 million.
  • Gross profit of $39.3 million, or 52 percent of total revenue, compared with $37.0 million, or 53 percent of total revenue. Subscription gross margin grew to 57 percent, compared with 45 percent.
  • Total operating expenses of $38.7 million, or 51 percent of total revenue, compared with $37.0 million, or 53 percent of total revenue.
  • Operating income of $543,000, including $2.6 million in stock compensation expense, versus an operating loss of $38,000, including $2.1 million in stock compensation expense.
  • GAAP pre-tax loss of $329,000, versus GAAP pre-tax income of $393,000. The fiscal 2018 period included $1.2 million of other expense primarily related to foreign currency losses, compared with other income of $433,000 for the fiscal 2017 period.
  • Non-GAAP pre-tax income of $2.5 million, versus $3.0 million.
  • GAAP net loss of $1.2 million, or $0.06 per Class A share and $0.05 per Class B share, compared with GAAP net income of $968,000, or $0.05 per diluted Class A share and $0.04 per diluted Class B share.

"Our cloud business continued to expand and now accounts for nearly one quarter of QAD's revenue," said Karl Lopker, Chief Executive Officer. "We are particularly pleased by the efficiencies we are gaining in cloud operations that are helping drive subscription margin expansion."

For the first six months of fiscal 2018, total revenue was $147.3 million, versus $135.2 million for the first six months of fiscal 2017. GAAP net loss was $3.7 million, or $0.20 per Class A share and $0.17 per Class B share, for the fiscal 2018 year-to-date period, versus a GAAP net loss of $1.8 million, or $0.10 per Class A share and $0.08 per Class B share, for the same period last year. Non-GAAP pre-tax income was $2.7 million for the fiscal 2018 year-to-date period, compared with $1.1 million for the same period last year.

QAD's cash and equivalents balance was $149.2 million at July 31, 2017, up from $145.1 million at January 31, 2017. Cash provided by operations was $7.6 million for the first six months of fiscal 2018, compared with $2.0 million for the same period last year, mainly resulting from strong cash collections.

Fiscal 2018 Second Quarter Operational Highlights:
  • Received orders from 21 customers representing more than $500,000 each in combined license, subscription, maintenance and professional services billings, including seven orders exceeding $1.0 million;
  • Received license or cloud orders from companies across QAD's six vertical markets, including: Adient Limited, Amcor Limited, Argon Medical Devices, Cascade Engineering, Erwin Hymer Group, Invacare Corporation, Lush Manufacturing, Ltd., Omron Corporation, Renolit AG, Solvay SA, Sunrise Medical GmbH & Co and Yanfeng Visteon;
  • Released QAD DSCP 2017, the newest version of the company's demand and supply chain planning suite, further enhancing its comprehensiveness and usability;
  • Released QAD TMS 2017, the newest version of the company's integrated transportation management suite, further improving its functionality and adding new modules;
  • Received a positive reaction from industry analysts on the announcement of QAD's new Enterprise Platform; and
  • Announced that 80 percent of the top 20 global automotive suppliers use QAD according to a recent report from Automotive News.

Business Outlook

For the fiscal 2018 year, QAD now expects:
  • Total revenue of $292 to $296 million, including $68 to $70 million of subscription revenue.
  • GAAP pre-tax loss of $1 million to pre-tax income of $1 million.
  • Non-GAAP pre-tax income of $8 million to $11 million.

For the third quarter of fiscal 2018, QAD expects:
  • Total revenue of $73 to $75 million, including $17.4 million of subscription revenue.
  • GAAP pre-tax income of about breakeven.
  • Non-GAAP pre-tax income of $2.1 million to $2.8 million.

The following is a reconciliation of GAAP pre-tax income to non-GAAP pre-tax income for the fiscal 2018 third quarter and full year guidance:
QAD Inc.
Reconciliation of GAAP to Non-GAAP Forward-Looking Guidance Measures
(in thousands)
(unaudited)
           
Three Months Ended Twelve Months Ended
October 31, 2017 January 31, 2018
Low High Low High
Non-GAAP pre-tax income reconciliation
 
GAAP (loss) income before income taxes $ (250 ) $ 250 $ (1,000 ) $ 1,000
Add back
Stock-based compensation expense 2,200 2,400 8,200 9,200
Amortization of purchased intangible assets 165 165 841 841
Change in fair value of interest rate swap   -     -   -     -
Non-GAAP income before income taxes $ 2,115   $ 2,815 $ 8,041   $ 11,041
 
Cash taxes $ 800 $ 900 $ 3,200 $ 3,600
 
Weighted average basic shares outstanding
Class A 15,800 16,200 15,900 16,300
Class B 3,200 3,300 3,200 3,300
 
Weighted average diluted shares outstanding
Class A 17,000 17,400 17,000 17,400
Class B 3,300 3,400 3,300 3,400
 

Calculation of Earnings per Share (EPS)

EPS is reported based on the company's dual-class share structure, and includes a calculation for both Class A and Class B shares. Since Class A shares have rights to 120% of dividends paid on Class B shares, net income is apportioned so that earnings per share attributable to a Class A share are 120% of earnings per share attributable to a Class B share.

Fiscal 2018 Second Quarter Financial Results Conference Call

When: Thursday, August 24, 2017 Time: 2:00 p.m. PT (5:00 p.m. ET) Phone: 800-230-1059 (domestic); 612-234-9959 (international) Replay: Accessible through midnight August 31, 2017; 800-475-6701 (domestic); 320-365-3844 (international); access code 425431 Webcast: Accessible at  www.qad.com; archive available for approximately one year

Note about Non-GAAP Financial Measures

QAD has disclosed non-GAAP adjusted EBITDA, non-GAAP adjusted EBITDA margins and non-GAAP pre-tax income in this press release for the fiscal 2018 second quarter and six-month period. These are non-GAAP financial measures as defined by SEC Regulation G. QAD defines the non-GAAP measures as follows:
  • Non-GAAP adjusted EBITDA - EBITDA is GAAP net income before net interest expense, income tax expense, depreciation and amortization. Non-GAAP adjusted EBITDA is EBITDA less stock-based compensation expense and the change in the fair value of the interest rate swap.
  • Non-GAAP adjusted EBITDA margins - Calculated by dividing non-GAAP adjusted EBITDA by total revenue.
  • Non-GAAP pre-tax income - GAAP income before income taxes not including the effects of stock-based compensation expense, amortization of purchased intangible assets and the change in fair value of the interest rate swap.
  • Cash taxes - Cash taxes are defined as GAAP total tax expense excluding changes in reserves for unrecognized tax benefits.

QAD's management uses non-GAAP measures internally to evaluate the business and believes that presenting non-GAAP measures provides useful information to investors regarding the company's underlying business trends and performance of the company's ongoing operations as well as useful metrics for monitoring the company's performance and evaluating it against industry peers. The non-GAAP financial measures presented should be used in addition to, and in conjunction with, results presented in accordance with GAAP, and should not be relied upon to the exclusion of GAAP financial measures. Management strongly encourages investors to review the company's consolidated financial statements in their entirety and to not rely on any single financial measure in evaluating the company. Tables providing a reconciliation of the non-GAAP measures to their most comparable GAAP measures are included at the end of this press release.

QAD non-GAAP measures reflect adjustments based on the following items:

Stock-based compensation expense: The company has excluded the effect of stock-based compensation expense from its non-GAAP adjusted EBITDA and non-GAAP pre-tax income calculations. Although stock-based compensation expense is calculated in accordance with current GAAP and constitutes an ongoing and recurring expense, such expense is excluded from non-GAAP results because it is not an expense which generally requires cash settlement by QAD, and therefore is not used by the company to assess the profitability of its operations. The company also believes the exclusion of stock-based compensation expense provides a more useful comparison of its operating results to the operating results of its peers.

Amortization of purchased intangible assets: The company amortizes purchased intangible assets in connection with its acquisitions. QAD has excluded the effect of amortization of purchased intangible assets, which include purchased technology, customer relationships, trade names and other intangible assets, from its non-GAAP pre-tax income calculation, because doing so makes internal comparisons to the company's historical operating results more consistent. In addition, the company believes excluding amortization of purchased intangible assets provides a more useful comparison of its operating results to the operating results of its peers.

Change in fair value of the interest rate swap: The company entered into an interest rate swap to mitigate its exposure to the variability of one-month LIBOR for its floating rate debt related to the mortgage of its headquarters. QAD has excluded the gain/loss adjustments to record the interest rate swap at fair value from its non-GAAP adjusted EBITDA and non-GAAP pre-tax income calculations. The company believes that these fluctuations are not indicative of its operational costs or meaningful in evaluating comparative period results because the company currently has no intention of exiting the debt agreement early; and therefore over the life of the debt the sum of the fair value adjustments will be $0.

About QAD - The Effective Enterprise

QAD Inc. (Nasdaq:QADA) (Nasdaq:QADB) is a leading provider of enterprise software and services designed for global manufacturing companies. For more than 35 years, QAD has provided global manufacturing companies with QAD Enterprise Applications, an enterprise resource planning (ERP) system that supports operational requirements, including financials, manufacturing, demand and supply chain planning, customer management, business intelligence and business process management. QAD Enterprise Applications is offered in flexible deployment models in the cloud, on-premise or in a blended environment. With QAD, customers and partners in the automotive, consumer products, food and beverage, high technology, industrial products and life sciences industries can better align daily operations with their strategic goals to meet their vision of becoming more Effective Enterprises.

For more information about QAD, call +1 805-566-6000, visit  www.qad.com.

"QAD" is a registered trademark of QAD Inc. All other products or company names herein may be trademarks of their respective owners.

Note to Investors: This press release contains certain forward-looking statements made under the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, including, but not limited to, statements regarding projections of revenue, income and loss, capital expenditures, plans and objectives of management regarding the company's business, future economic performance or any of the assumptions underlying or relating to any of the foregoing. Forward-looking statements are based on the company's current expectations. Words such as "expects," "believes," "anticipates," "could," "will likely result," "estimates," "intends," "may," "projects," "should," "would," "might," "plan" and variations of these words and similar expressions are intended to identify these forward-looking statements. A number of risks and uncertainties could cause actual results to differ materially from those in the forward-looking statements. These risks include, but are not limited to: risks associated with our cloud service offerings, such as defects and disruptions in our services, our ability to properly manage our cloud service offerings, our reliance on third-party hosting and other service providers, and our exposure to liability and loss from security breaches; demand for the company's products, including cloud service, licenses, services and maintenance; pressure to make concessions on our pricing and changes in our pricing models; protection of our intellectual property; dependence on third-party suppliers and other third-party relationships, such as sales, services and marketing channels; changes in our revenue, earnings, operating expenses and margins; the reliability of our financial forecasts and estimates of the costs and benefits of transactions; the ability to leverage changes in technology; defects in our software products and services; third party opinions about the company; competition in our industry; the ability to recruit and retain key personnel; delays in sales; timely and effective integration of newly acquired businesses; economic conditions in our vertical markets and worldwide; exchange rate fluctuations; and the global political environment. For a more detailed description of the risk factors associated with the company and factors that may affect our forward-looking statements, please refer to the company's latest Annual Report on Form 10-K and, in particular, the section entitled "Risk Factors" therein, and in other periodic reports the company files with the Securities and Exchange Commission thereafter. Management does not undertake to update these forward-looking statements except as required by law.
 
QAD Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
           
 
Three Months Ended

July 31,
Six Months Ended

July 31,
2017 2016 2017 2016
Revenue:
Subscription fees $ 17,420 $ 12,317 $ 32,763 $ 23,809
License fees 6,743 6,416 12,008 10,363
Maintenance and other 31,971 33,266 63,877 66,102
Professional services   19,824     17,779     38,692     34,901  
Total revenue 75,958 69,778 147,340 135,175
Cost of revenue:
Subscription 7,428 6,740 15,148 12,940
License 828 765 1,513 1,490
Maintenance and other 7,840 7,742 15,534 15,511
Professional services   20,598     17,557     39,365     35,001  
Total cost of revenue   36,694     32,804     71,560     64,942  
Gross profit   39,264     36,974     75,780     70,233  
Operating expenses:
Sales and marketing 17,697 17,294 35,284 34,232
Research and development 11,689 11,069 23,221 22,212
General and administrative 9,224 8,483 17,817 16,489
Amortization of intangibles from acquisitions   111     166     274     331  
Total operating expenses   38,721     37,012     76,596     73,264  
Operating income (loss)   543     (38 )   (816 )   (3,031 )
Other (income) expense:
Interest income (493 ) (159 ) (661 ) (331 )
Interest expense 157 161 313 335
Other (income) expense, net   1,208     (433 )   1,812     437  
Total other (income) expense, net   872     (431 )   1,464     441  
(Loss) income before income taxes (329 ) 393 (2,280 ) (3,472 )
Income tax expense (benefit)   832     (575 )   1,452     (1,648 )
Net (loss) income $ (1,161 ) $ 968   $ (3,732 ) $ (1,824 )
 
Diluted net (loss) income per share
Class A $ (0.06 ) $ 0.05 $ (0.20 ) $ (0.10 )
Class B $ (0.05 ) $ 0.04 $ (0.17 ) $ (0.08 )
 
Diluted Weighted Shares
Class A 15,914 16,280 15,863 15,644
Class B 3,212 3,275 3,211 3,205
 
QAD Inc.
Condensed Consolidated Balance Sheets
(in thousands)
(unaudited)
     
 
July 31, January 31,
2017 2017
Assets
Current assets:
Cash and equivalents $ 149,202 $ 145,082
Accounts receivable, net 42,397 69,441
Other current assets   14,500     15,351  
Total current assets 206,099 229,874
 
Property and equipment, net 30,520 30,872
Capitalized software costs, net 800 732
Goodwill 10,872 10,558
Long-term deferred tax assets, net 7,286 6,166
Other assets, net   1,961     2,688  
 
Total assets $ 257,538   $ 280,890  
 
 
Liabilities and stockholders' equity
Current liabilities:
Current portion of long-term debt $ 456 $ 446
Accounts payable and other current liabilities 39,579 44,952
Deferred revenue   89,661     104,125  
Total current liabilities 129,696 149,523
 
Long-term debt 13,540 13,767
Other liabilities 4,672 4,914
 
Stockholders' equity:
Common stock 20 20
Additional paid-in capital 196,950 197,594
Treasury stock (12,947 ) (15,170 )
Accumulated deficit (67,534 ) (61,127 )
Accumulated other comprehensive loss   (6,859 )   (8,631 )
Total stockholders' equity   109,630     112,686  
 
Total liabilities and stockholders' equity $ 257,538   $ 280,890  
 
QAD Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
     
 
Six Months Ended
July 31,
2017 2016
 
Net cash provided by operating activities $ 7,638   $ 2,020  
 
Cash flows from investing activities:
Purchase of property and equipment (1,571 ) (1,682 )
Capitalized software costs   (480 )   (62 )
Net cash used in investing activities   (2,051 )   (1,744 )
 
Cash flows from financing activities:
Repayments of debt (222 ) (233 )
Tax payments, net of proceeds, related to stock awards (2,781 ) (1,584 )
Cash dividends paid   (2,675 )   (2,642 )
Net cash used in financing activities   (5,678 )   (4,459 )
 
Effect of exchange rates on cash and equivalents   4,211     1,160  
Net increase (decrease) in cash and equivalents 4,120 (3,023 )
Cash and equivalents at beginning of period   145,082     137,731  
Cash and equivalents at end of period $ 149,202   $ 134,708  
 
QAD Inc.
Reconciliation of GAAP to Non-GAAP Financial Measures
(in thousands)
(unaudited)
           
 
Three Months Ended

July 31,
  Six Months Ended

July 31,
2017 2016 2017 2016
 
Total revenue $ 75,958 $ 69,778 $ 147,340 $ 135,175
 
Net (loss) income (1,161 ) 968 (3,732 ) (1,824 )
Add back:
Net interest (income) expense (336 ) 2 (348 ) 4
Depreciation 1,139 1,092 2,243 2,136
Amortization 307 432 723 862
Income tax expense (benefit)   832     (575 )   1,452     (1,648 )
EBITDA $ 781   $ 1,919   $ 338   $ (470 )
Add back:
Stock-based compensation expense 2,592 2,093 4,360 3,701
Change in fair value of interest rate swap   16     181     3     212  
Adjusted EBITDA $ 3,389   $ 4,193   $ 4,701   $ 3,443  
Adjusted EBITDA margin 4 % 6 % 3 % 3 %
 
 
 
Non-GAAP pre-tax income reconciliation
 
(Loss) income before income taxes $ (329 ) $ 393 $ (2,280 ) $ (3,472 )
Add back
Stock-based compensation expense 2,592 2,093 4,360 3,701
Amortization of purchased intangible assets 225 345 567 690
Change in fair value of interest rate swap   16     181     3     212  
Non-GAAP income before income taxes $ 2,504   $ 3,012   $ 2,650   $ 1,131  
 
Cash taxes $ 849 $ 525 $ 1,497 $ 1,165

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