QAD’s Costly eTransition Continues

QAD’s Costly eTransition Continues
P.J. Jakovljevic - January 5, 2001

Event Summary

In December, QAD (NASDAQ: QADI), a provider of enterprise applications for manufacturers and distributors, announced the availability of optimized services and industry-standard connectors with QAD/Connects A2A (application-to-application) - a packaged integration solution that integrates QAD applications with legacy systems and ERP from multiple vendors like SAP and Oracle. QAD claims its new modeling and delivery services, combined with connectors based on industry standards, offer manufacturers fast, effective and supportable integration across the enterprise, creating a solid foundation for e-business.

The enhanced QAD/Connects A2A solution includes a range of industry-standard application programming interface (API) connectors or gateways for all major application areas, including accounts receivable, accounts payable, sales orders, inventory, and general ledger. These connectors support the Open Applications Group (OAGIS) and XML messaging standards, which may benefit in flexibility and adaptability to changing business requirements. QAD will also provide A2A delivery services and on-going support. QAD/Connects A2A features the Viewlocity AMTrix integration broker and standard connectors to SAP, Oracle, and other ERP systems to complete the connection. QAD touts it can also work with other integration vendors depending on the needs of the customer.

With the Q/LinQ connectivity engine, QAD/Connects A2A solutions offer a messaging system for information exchange between QAD and other ERP/legacy applications, delivering message and error handling, registry functions, publishing, processing, mapping, and communications.

"With the release of these industry-standard connectors as part of the QAD/Connects A2A solution, QAD can help its customers quickly become capable players in the Internet economy while minimizing the cost of implementation and on-going support," said QAD Founder and President Pam Lopker. "We can now help our customers model the best path toward integrating their applications for e-business, and deliver effective solutions in a matter of weeks - versus the many months required by wholly customized solutions."

However, the company's financial performance continues to deteriorate. On November 28, QAD reported declining revenue of $50.0 million for the third quarter ended October 31, compared with revenue of $56.7 million for the same period last year. Including the restructuring charges, the net loss for the third quarter of fiscal year 2001 was $10.2 million, compared to net loss of $4.5 million a year ago (See Figure 1). Excluding restructuring charges, operating expenses for the third quarter of fiscal year 2001 were 9% lower than the previous quarter and 11% lower than the third quarter of fiscal year 2000. The restructuring plan is expected to result in savings of approximately $20 million on an annualized basis, some of which were realized in the third quarter.

Figure 1.

"We are pleased with the progress we have made in reducing our cost structure in the third quarter and producing operating results in line with our expectations. Our top line revenue was affected by both the focus on cost reduction and the strength of the U.S. dollar," said Karl Lopker, QAD chief executive officer. "QAD eQ - the company's new e-business application for Sell-Side, Buy-Side, and Replenishment - saw increased market acceptance in the third quarter with another significant sale to a large multinational corporation. We are also excited about our newest release of MFG/PRO, named eB for e-business, which we shipped in Q3."

The major event during the quarter was the successful launch of QAD MFG/PRO eB, an industry-specific e-business software suite that, inter alia, offers a Net User Interface and a Kanban management application to help companies move toward a demand-driven e-business manufacturing model.

Market Impact

The declining license revenue and hefty losses have been the main theme through 2000, as the company has been trying hard to keep up with ever increasing market requirements. Throughout 2000, it has continued to invest in the new initiatives mentioned in the previous section while it has been feeling a notable decline in both license and total revenue.

QAD had no choice but to extend its foothold in its large client base and to fill the gaps and/or diversify its product offering. We also endorse the company's plans of enhancing its core ERP product, MFG/PRO (although in a somewhat tacit manner, given the fact that e-business is currently all the rage), and continued emphasis on integrating MFG/PRO components with other back-office systems. 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 e-business suite, 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.

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 above-mentioned product, A2A, which promotes interconnectivity, might help in that regard though. Further, in addition to its eroding financial situation, QAD's timid strategy regarding Customer Relationship Management (CRM) offering and ASP partnerships could in the future be detrimental.

User Recommendations

QAD's customers should certainly consider the new product offering, but should avoid selecting it without looking at what the other vendors have to offer. We encourage users to familiarize themselves with the company's ambitious new product offerings and their availability, at least to better leverage their negotiating position with other vendors involved in a particular selection exercise.

As for potential users, 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, Consumer Products, 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 a consistently profitable financial performance. Given the fact that the products (eQ, A2A, MFG/PRO eB) have only been released recently, rigorous reference checking and focused pre-sales software demonstrations are also recommended.

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