QAD Pulling Through, Patiently But Passionately

Event Summary

In these days of gloom, when most of the news is about rapid mergers and acquisitions of distressed vendors or alternatively about headcount and/or cost reductions-based profits of those enterprise applications vendors that are lucky to even report profits amid dwindling revenues, it is refreshing to hear good news coming from a vendor that has (seemingly) forever eluded profits, particularly when the recent success is largely based on a new revenue stream.

On August 20, QAD Inc. (NASDAQ: QADI), a global provider of collaborative enterprise applications for manufacturing and distributing organizations, reported upbeat financial results for the fiscal 2004 second quarter and six-month period ended July 31, 2003. For Q2 2004, revenue increased 24% to $56.0 million from $45.3 million in the same period last year, while license revenue rose whopping 41% to $15.8 million, compared with $11.2 million in Q2 2003 (see Figure 1). Maintenance and other revenue increased 9% over a year ago to $28.9 million, reflecting the impact of new licenses in addition to strong maintenance renewals. The service revenue grew 48% over the comparable prior year period to $11.4 million, due primarily to the TRW ISCS acquisition completed in November 2002. Net income for Q2 2004 was $1.9 million, whereas in Q2 2003, the company's reported net loss was a hefty $4.0 million. QAD's cash and equivalents balance at July 31, 2003 was $43.5 million, while for Q2 2004, cash flow provided by operations was $1.2 million, continuing the momentum of positive annual operating cash flow.

Figure 1

The improved financial performance has not come without astute moves with regard to product functionality enhancements. These moves include:

  • A partnership with Johnson Controls (NYSE:JCI) to develop a next-generation Just-In-Time (JIT) Sequencing software module for MFG/PRO

  • Announcement of Kanban Visualization, which enhances QAD's existing Supply Visualization (SV) solution

  • More than two dozen important new functions and enhancements to MFG/PRO eB2, specifically designed in collaboration with QAD's manufacturing customers to help address their specific needs

  • Announcement of healthy sales momentum in Asia, with MFG/PRO suite becoming a platform of choice for automotive manufacturers in China to automate business operations and collaborate with partners worldwide

This is Part One of a six-part note.

Parts Two will present the Company Background.

Parts Three and Four will discuss the Market Impact.

Part Five will cover Challenges and

Part Six will make User Recommendations.

Partnership With Johnson Controls

Most recently, in July, QAD and Johnson Controls (NYSE: JCI), a global leader in automotive systems and facility management and control, announced at the European Automotive News Congress conference that they have entered into a partnership whereby the companies will collaborate to develop a next-generation Just-In-Time (JIT) Sequencing software module for MFG/PRO, QAD's flagship enterprise resource planning (ERP) software.

Through this partnership, QAD should gain software components developed by Johnson Controls that incorporate more than 10 years of Johnson Controls knowledge and expertise on JIT Sequencing, and this approach should allow QAD to take advantage of its strong partnership with Johnson Controls to reduce the time-to-market for this functionality and improve the software product design using best-of-breed knowledge and advice from Johnson Controls. The QAD Just-In-Time Sequencing module for MFG/PRO is planned to be available before the end of 2003.

On its hand, Johnson Controls has standardized its worldwide manufacturing operations on QAD MFG/PRO, and through this partnership will work with QAD to define and develop the requirements for JIT Sequencing. It plans to deploy this critical functionality in its plants throughout Europe and North America.

Over the last 18 years, Johnson Controls has focused its processes not only on providing high levels of customer delivery and quality, but also on developing highly collaborative OEM (original equipment manufacturers) supply relationships. To that end, Just-In-Time Sequencing is designed for automotive suppliers seeking to respond to the increased market pressures placed on them by the automotive original OEMs whose mission is to increase flexibility in the assembly and configuration of cars and trucks while reducing the overall lead time required to deliver a vehicle to the final customer. This "Build-to-Order" concept requires that key, custom-built vehicle components be produced and delivered in the exact sequence to vehicles moving down the OEM's assembly line.

Success for a supplier in Just-In-Time Sequencing lies in providing this configuration and delivery capability while at the same time maintaining control over production and inventory carrying costs. Consequently, using the QAD JIT Sequencing module, OEM demand requirements will be communicated via assembly broadcast signals directly to the supplier's production planning and scheduling system, which should permit the manufacture and delivery of "customized" products to be performed. Finally, the JIT Sequencing module should provide "extended" sequencing capabilities so that suppliers further down the supply chain can also provide their products using "Build-to-Order" concepts.

Kanban Visualization

As for new generally available products, in May, during its annual user conference Explore 2003, QAD announced Kanban Visualization, which enhances QAD's existing Supply Visualization (SV) solution with immediate insight into kanban status.

For manufacturers using kanban production methods and seeking greater supply chain efficiency, QAD Supply Visualization with Kanban Visualization should improve vendor-managed inventory (VMI) initiatives by providing streamlined kanban management. QAD Supply Visualization extracts inventory and procurement data from manufacturers' ERP systems and stores it securely on, QAD's hosted exchange where authorized suppliers can access the information and initiate the replenishment process. By providing secure, near real-time insight into this data, the application should enable automotive, consumer products, medical, industrial and electronics manufacturers to better synchronize inventory with demand.

Kanban Visualization enhances inventory management for companies that use the kanban production model, since it presents the status and quantity of kanbans graphically so that suppliers can see when stock needs replenishing, enabling them to print kanban cards immediately, instead of waiting for the customer to send a copy. Its open Application Programming Interface (API) supposedly integrates with manufacturers' existing enterprise systems. Kanban Visualization also will alert managers and suppliers to relevant inventory changes, for example, via e-mail, so that they can act quickly and ensure efficient replenishment.

As QAD delivers new features and functions that address real-world manufacturing needs, it also claims that customer adoption of QAD Supply Visualization has nearly tripled and customer sites deployed have increased six-fold, while the number of facilities slated for implementation has grown ten-fold in the past year. Concurrent with customer adoption, nearly 400 suppliers have embraced the software to monitor and act on changes in inventory levels, purchase orders, schedules and schedule releases.

MFG/PRO eB2 Functions and Enhancements

Earlier, in March, QAD announced that customer adoption of MFG/PRO eB2, the company's Web-enabled latest release of suite of enterprise applications, is occurring at a more rapid rate than any prior release of MFG/PRO. More than 230 customers have reportedly bought or upgraded to MFG/PRO eB2 in the first 150 days of its availability. Released September 2002, MFG/PRO eB2 incorporates more than two dozen important new functions and enhancements specifically designed in collaboration with QAD's manufacturing customers to help address their specific needs. New application functions address lean manufacturing for greater responsiveness to customers; efficient collaboration; service/support management (SSM) for more customized service contracts; streamlined international financials and profitability analysis; and a desktop interface that provides even greater ease of use and minimizes user training.

To maximize its interoperability with legacy systems and minimize cost of ownership, the MFG/PRO eB2 suite is built on an open, standards-based architecture including Open Applications Group Integration Specification (OAGIS) messaging conventions, Business Object Documents (BODs) and eXtensible Markup Language (XML). QAD industry user groups specified additional features to address manufacturers' real-world needs and various production environments in the automotive, food & beverage, consumer packaged goods (CPG), medical devices, industrial products, and electronics sectors. Customer participation in tailoring QAD products is one area the vendor takes very seriously, since it has a development group for each of its six verticals made out of 10 prominent QAD users, who prioritize future development for each vertical.

China Sales Momemtum

At about the same time, QAD announced its healthy sales momentum in Asia, with MFG/PRO suite becoming a platform of choice for automotive manufacturers in China to automate business operations and collaborate with partners worldwide. As a result, QAD believes it is well-positioned to capitalize on continued growth in the emerging regional market.

Since opening offices in Shanghai nearly a decade ago, QAD now reportedly serves 300 customers in China including leading automotive, electronics and consumer products manufacturers. Sixteen of the world's top 25 automotive manufacturers depend on QAD's advanced technology to manage their business and operations, and in China 53 automotive joint ventures and customers such as Ford, Daewoo, Lear, TRW, Delphi, Visteon, Hyundai and Eaton have chosen QAD's MFG/PRO suite. Global electronics producers such as Applica, Lucent, Mitsubishi and Philips, and consumer products manufacturers including Avon, Coca-Cola and Sara Lee rely on the QAD platform for manufacturing enterprise operations as well.

The automotive industry has witnessed explosive growth in China as foreign manufacturers seek to profit from favorable economic conditions and the lower cost of operating there. According to the China Association of Automobile Manufacturers, domestic output of motor vehicles between January and November 2002 jumped 36% from production in 2001. The association reported sales of China-made automobiles also rose by more than 36% in the same period, due in large part to the increase in new products launched by local manufacturers, especially Sino-foreign joint ventures. The surge in activity has jump-started competition, too, putting pressure on Chinese manufacturers to upgrade their ERP systems to function on par with their foreign partners and new entrants to the market. Many of these companies are choosing QAD applications to create a foundation for consistent operations and communication across multiple locations, new and old plants, and different manufacturing models.

To support customers and continued growth in the region, QAD has established alliances for technology and implementation. QAD is one of IBM's preferred software providers for Japanese customers with manufacturing operations in China, and has been selected by IBM as a key solution provider in the automotive vertical. QAD has partnered with hardware providers Hewlett-Packard (HP) and Sun Microsystems in the region as well. Distribution partners include Atos Origin, SCS, Softspeed, eSun, TSnT, and Dalian Hualu. QAD is also expanding its staffing as its customer base grows, to ensure a higher quality direct support for its software.

This concludes Part One of a six-part note.

Part Two presents the Company Background.

Parts Three and Four will discuss the Market Impact.

Part Five will cover Challenges and

Part Six will make User Recommendations.

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