QAD Finally Breaks The Red Ink Streak, But…

QAD Finally Breaks The Red Ink Streak, But
P.J. Jakovljevic - April 6, 2001

Event Summary

On March 13, QAD Inc. (NASDAQ: QADI), a provider of enterprise applications for manufacturing and distributing organizations, reported revenue of $59.2 million for the fourth quarter ended January 31, 2001, a 16.4% decline compared with $70.9 million for the fourth quarter of fiscal year 2000 (See Figure 1). However, QAD claims that its year-ago revenue figure was embellished by $12.1 million in license revenue from a single customer, which was a part of the largest single contract in the company's history.

Figure 1.

The Q4 2001 was the only profitable quarter in the year. Net income was $2.4 million, compared to the fourth quarter of fiscal 2000, when the QAD reported net income of $2.1 million. Still, this is mainly attributable to curbing operating expenses that were 16% lower than a year ago and that merely reflect the effectiveness of the cost containment programs the company implemented during fiscal year 2001. But the annual results remain depressing (See Figure 2). Total revenue for the fiscal year ended January 31, 2001, was $214.1 million, a 10.5% decrease compared to $239.3 million for fiscal 2000. Including restructuring charges and tax adjustments the company reported net losses $25.4 million and $16.3 million for fiscal years 2001 and 2000, respectively.

Figure 2.

"Our positive results this past quarter reflect our customers' desire for improved productivity through increased efficiency of their enterprise and supply chain systems enabled by vendors they know and trust," said Karl Lopker, QAD chief executive officer. "We also benefited from the refocused efforts of our employees on growth and profitability after a series of cost reducing actions in the third quarter."

On even more positive note, major highlights during the quarter include:

  • Generated positive cash flow from operations in the fourth quarter and the full fiscal year of approximately $5 million and $12 million, respectively.

  • Increased gross margin to 58% in the fourth quarter from 51% in the prior quarter, due to a higher mix of license sales and a greater percentage of internally developed software in QAD's revenue mix.

  • Five major multinational companies—including AT&T Wireless, FCI, and Firmenich—have successfully piloted QAD eQ, the company's new e-business software.

Market Impact

This is a mixed blessing while QAD finally stemmed the tide of loses, the steeply declining license revenue remains worrisome, as the company has been trying hard to deliver products that would keep up with ever increasing market requirements. Throughout 2000, it has continued to invest in the new initiatives to target the collaborative e-business realm with the latest release of its flagship ERP product MFG/PRO (eB) in September 2000 and QAD eQ e-Commerce applications beyond traditional ERP functionality based on IBM's WebSphere e-commerce application suite.

QAD had no choice but to extend its foothold in its large, predominantly mid-market client base and to fill the gaps and/or diversify its product offering. The combination of MFG/PRO, eQ, and embedded point solutions from its premier partners (IBM, Adexa, Robocom, Access Productique, etc.) might provide QAD with a product set also suitable for larger, multinational corporations. We also endorse the company's strategy of enhancing MFG/PRO and continued emphasis on integrating MFG/PRO components with other back-office systems. The company has also incorporated Internet architecture into MFG/PRO in order to connect it with eQ. The openness and interconnectivity are one of the most important tenets of competitiveness within the enterprise applications market in the new Internet economy, and QAD has long grasped it.

We believe the company has articulated an e-commerce vision that should have an appeal to its mid-market users. The company has inevitably shifted its focus from being a leading ERP vendor dedicated to the industrial mid-market to fully leveraging the Internet in the applications it provides to manufacturers, distributors and trading exchanges (for more information, see QAD Explores e-Business While Not Abandoning ERP). QAD offers eQ, which, although in the immaturity stage, can be viable for focused areas such as direct materials procurement and/or replenishment and sales order fulfillment. It is a series of applications with support for XML messaging, Java, HTML, and no client software downloading. QAD eQ is devised to support private Internet exchanges that are connected to multiple sites, run on diverse ERP systems, and accommodate a rules-based order management functionality.

Nevertheless, the company faces the challenge of executing new product introductions throughout 2001 concurrently with its cost-cutting initiative. While the acceptance of its new products has been satisfactory within its existing customers, QAD still has to create greater market recognition and additional revenue from beyond its current MFG/PRO customer base. The bad publicity due to its financial difficulties certainly does not help in that regard. One cannot help feeling sympathy for the company with a noble vision and ideas, which often match or exceed those of its bigger competitors, that are hampered by resource constraints.

Further, in addition to its dwindling assets and stock holders equity situation, QAD's timid strategy regarding a CRM offering, which currently consists only of the 3rd-party product configuration and sales force automation (SFA) modules (for more information, see Access Commerce Spices Up North American CRM Fray) and ASP partnerships could in the future be detrimental.

Last but not least, QAD's reliance on a number of partnerships to deliver extended-ERP functionality may not be the preferable option for its target market medium sized manufacturing organizations that still prefer a single source provider and single data model and solution architecture. Thus, QAD may find itself in a conundrum similar to J.D. Edwards' one (for more information, see J.D.Edwards Saved By SCM, Narrowly, And Only For Now).

User Recommendations

While the dark clouds remain hanging over QAD, we believe it will see better days in the future. The company has broadened its product lines and seems to have responded to recent market trends. Time only can tell how well it will target the right e-business issues for the manufacturing and distribution mid-market within its industries of focus (automotive, consumer products, electronics, food & beverage, industrial products, and medical devices) and demonstrate benefits to the prospect or customer, and how it will reverse the shrinking revenue trend.

More comprehensive recommendations for both current and potential QAD's users can be found in QAD's Costly eTransition Continues and QAD Explores E-Business While Not Abandoning ERP.


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