QAD Continues to Wade Through Red Ink

QAD Continues to Wade Through Red Ink
P.J. Jakovljevic - September 25, 2000

Event Summary

In August, QAD Inc., one of the leading ERP vendors, reported revenue of $53.2 million for the second quarter ended July 31, 2000, up 3% from revenue of $51.6 million in the first quarter of fiscal year 2001. However, the second quarter revenue performance compares unfavorably to $58.3 million for the same period last year (See Figure 1). Excluding a $3.2 million valuation allowance for US deferred tax assets, the second quarter net loss was $5.7 million, or $0.17 per diluted share, a 36% improvement over the first quarter fiscal year 2001 net loss of $8.8 million, or $0.26 per diluted share. This compares to a net loss of $2.8 million, or $0.09 per diluted share, for the second quarter of fiscal year 2000, excluding the prior year restructuring charge of $1.2 million. Including the valuation allowance, the net loss for the second quarter was $8.8 million, or $0.26 per diluted share.

Figure 1.

Operating expenses were slightly lower than both the first quarter of this fiscal year and the second quarter of fiscal year 2000, excluding a $1.2 million prior year restructuring charge. Operating expenses for the first six months were 6% lower than the comparable period last year. These improvements relate to continued cost containment measures. Unfortunately, R&D expenses ramain high considering the relatively low revenues from licenses.

"Although we were disappointed by the total revenue for the quarter, we were pleased to achieve sequential growth on licenses from the previous quarter," said Karl Lopker, QAD's Chief Executive Officer. "Our customers are shifting their focus from dealing with the Y2K problem to now planning and developing coherent e-business strategies. We believe this shift has caused an e-business 'pause' and is delaying purchasing decisions on both the traditional enterprise systems and the advanced e-business solutions that we offer."

QAD also announced several initiatives to strengthen operating and financial performance and enhance shareholder value by sharpening the focus of its e-business and business intelligence solutions for multinational customers, while maintaining its presence in local markets.

"We have resolved to achieve leadership in e-business and manufacturing solutions for multinational manufacturers," said Lopker. "This is a market in which QAD supplies best-in-class software, translated and localized for manufacturing companies operating anywhere in the world. These customers are committed to solving supply chain problems through e-business, which fits very well with our QAD eQ offering. This is a logical leveraging of QAD's leadership and competencies. We have a commitment to achieve sustained profitability, and we believe that the increased projected revenues from QAD eQ, combined with the cost savings initiatives we are implementing, should help us achieve that goal. We are increasing our investment in products, services and sales efforts for multinational customers because we believe those companies have much to gain by investing in our e-business solutions, and will be early adopters of solutions like QAD eQ."

This quarter QAD made some important strides on its efforts to gain a leadership role in the e-business marketplace. To that end, it has incorporated technologies required for manufacturing exchanges to QAD eQ 2.1, to be released later this quarter. These technologies are 1) Thin Browser Client using HTML, 2) Secured Transactions using HTTP, 3) IBM WebSphere Components for Extendibility, 4) Support for DB/2 and Oracle Database, and 5) New Application server platforms such as RS/6000, HP UNIX, SUN Solaris, NT Servers and IBM AS/400.

Market Impact

The declining license revenue and hefty losses of 1999 seem to be continuing through 2000, just as the market started to believe that QAD has successfully curbed R&D expenses and completed the delivery of its eQ product, and that it was finally in for an easier time. The prolonged and exorbitantly expensive development of eQ has seriously affected the Company's recent financial performance. In 1999, QAD also introduced the fully Internet-enabled release of MFG/PRO v. 9.0 and strengthened its global service organization. Throughout 2000, it has continued to invest in the new initiatives mentioned at the end of the previous paragraph while it has been feeling a notable decline in both license and total revenue.

On a more positive side, we believe there are valid reasons to expect a better future for QAD. The first is the company's well-established leading global position in Small-to-Medium Enterprises (SME) and divisions of large global manufacturing companies, where it has a large loyal customer base and a dispersed global network of offices and indirect channels. Second, QAD is very competitive in speed and ease of global multi-site implementation due to its global service and support capabilities. It has also exhibited a possibly unique tight vertical and vertical sub-segment focus within certain industries (e.g., with solutions for the after-market, OEMs, and suppliers segments within the automotive industry). Finally, QAD has long incorporated concepts of e-collaboration and Supply Chain Management (SCM), and interconnectivity with other vendors' products. We favorably regard the company's recent e-business moves, which are in sync with the market trends. We also agree with QAD's plans for significantly enhancing its core ERP product functionality and platform support footprint.

Nevertheless, the company faces the challenge of delivering its very ambitious undertakings as planned and creating greater market recognition and new sales for eQ both within and outside of its current MFG/PRO customer base. The company will have to give serious thought to how to best utilize its current sales and marketing resources to sell its two major product lines, MFG/PRO and eQ, while keeping total expenses in check. Further, it is rather puzzling why QAD has not yet officially announced its plans regarding Customer Relationship Management (CRM) or a more articulated ASP strategy.

User Recommendations

We generally recommend including QAD in a long list of an enterprise application selection to mid-market and low-end Tier 1 manufacturing and distribution companies (with $50M-$2B in revenue), based on its sharp vertical focus and outstanding global service and support. We recommend including QAD in a short list in any selection within the following industries: Automotive, Electronics, Food & Beverage, and Medical Devices.

Current and potential users may want to inquire about the company's plans regarding Internet marketplaces in their respective industries. Which specific market places does (or will) QAD connect with, what methodology does (or will) the company prescribe to are some of the necessary inquiries in that regard. Furthermore, companies outside of above-mentioned industries may benefit from evaluating eQ on a stand-alone basis for their e-business needs and leverage that information against other vendors in the selection.

However, any organization evaluating QAD products should exercise moderate caution and consider existing functionality only, until the Company regains consistently profitable financial performance. Given the fact that eQ is a new product, rigorous reference checking is also recommended. As for the new added functionality through partnerships, users are advised to ask for firm assurances on the availability and future upgrades timeframes, and more detailed scope of combined product functionality. Also, make sure that QAD offers a single contract and help desk for all disparate components of its product offerings.

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