Will QAD Finally Get The Break (-Even)?

Will QAD Finally Get The Break(-Even)?
P.J. Jakovljevic - June 18, 2001

Event Summary

On May 30, QAD Inc. (NASDAQ:QADI), a provider of enterprise applications for manufacturing and distributing organizations, reported revenue of $51.3 million for the first quarter of fiscal 2002 ended April 30, 2001, almost flat compared with $51.6 million a year ago (See Figure 1). The license revenue of $15.1 million was also flat compared to a year ago. The net loss of $1.7 million, however, declined significantly compared with a net loss of $8.8 million in the first quarter of fiscal year 2001. The company attributes it to achieving a higher gross margin of 56% in Q1 2002, compared to 49% in Q1 2001. This improvement was primarily due to a more favorable mix of revenue from internally developed product, thereby reducing royalties payable to third parties.

Figure 1.

In addition, the company's previously announced cost containment and restructuring programs contributed significantly to the year-over-year improvement in financial performance, with operating expenses for the first quarter coming in 13% lower than year-ago levels.

"While QAD, along with other software vendors, has been affected by the current slowdown in corporate IT spending, we nevertheless achieved stable revenue in what is seasonally a soft quarter," said Karl Lopker, QAD's chief executive officer. "We were also pleased that we generated positive cash flow of approximately $7 million from operations in the quarter, reflecting the health and efficiency of our business model in such a challenging business environment. Though our near-term outlook remains cautious, we are enthusiastic about our longer-term prospects based on the company's product positioning and substantial installed base. At last week's 10th annual Explore users' conference in San Antonio, we received positive feedback on all QAD applications: MFG/PRO eB, our enterprise product suite; QAD eQ, our private enterprise exchange product; and QAD Supply Visualization, our collaborative manufacturing product."

Customers witnessed a live on-stage demonstration of QAD eQ 3.0, QAD Supply Visualization and MFG/PRO eB. The demonstration was conducted live over the Internet presenting how all the products fit together in a seamless environment to help manufacturing companies improve their productivity. At Explore, QAD also unveiled its private enterprise exchange strategy, which helps manufacturers efficiently drive collaborative commerce across the value chain. Private enterprise exchanges could give manufacturers the ability to automate supply purchases and collaborate in real time with trusted suppliers without opening up sensitive information to unwanted eyes. While many exchange strategies focus on indirect procurement, the company cites that QAD eQ acts as the order hub for Sell-Side, Buy-Side and Replenishment applications.

Other major accomplishments during the quarter include:

  • General release of QAD Supply Visualization.

  • General release of QAD eB Desktop, a new HTML user interface for MFG/PRO eB and MFG/PRO 9.0 product releases.

  • General release of QAD eQ 3.0.

Market Impact

While there is no reason for a great exuberance, there may be a reason for cautious contentment. The array of hefty losses seems to have been stemmed. The flat license revenue in an economic downturn compared to fact that other mid-market ERP vendors lost market share, combined with an aggressive offensive from bigger vendors looks pleasing. Even more, the company has concurrently delivered products that should keep it abreast with ever increasing market requirements. During the last two years, QAD has heavily invested in the new initiatives to target the collaborative e-Business sphere with the above mentioned product releases.

QAD has thereby created a notable e-Business vision that might appeal primarily to its mid-market user base. The company has shifted its focus from being a mere ERP vendor dedicated to the industrial mid-market to fully leveraging the Internet in the applications it provides to manufacturers and to distributors to link their back-office systems to those of their business partners via private trading exchanges.

QAD eQ product, although in the immaturity stage, can be viable for some focused areas such as direct materials procurement and/or replenishment and sales order fulfillment. The eQ module contains four applications: Commerce Relationship Management, Sell-Side, Buy-Side, and Replenishment. This software provides the backbone to allow a manufacturer to establish a private trading exchange among its suppliers and/or customers, with support for XML messaging, Java, HTML, and no need for a client side of the software. QAD eQ is also 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.

QAD Supply Visualization (SV), on the other hand, is a hosted application that can be accessed via the new QAD MFGx.net manufacturing exchange through browser and password only. The SV module comes pre-integrated with the most recent versions of MFG/PRO, namely eB and 9.0 releases. It is devised to provide real-time visibility of inventory and order status to users through QAD's Poller software. From MFGx.net, users that are not necessarily the MFG/PRO users can download the software, which updates the system at certain time intervals by replicating data from the QAD MFG/PRO database and uploading it to SV.

The openness and interconnectivity mantra of QAD's entire offering are generally commendable, although they yet have to be demonstrated 'en masse' in practice.

While its new e-Business modules have proved to be well received by its existing MFG/PRO customer base, QAD still has to create greater market recognition and additional revenue from beyond it. The bad publicity due to its financial difficulties that has long been the impediment in that regard might be alleviated soon. The combination of MFG/PRO, eQ, SV, and embedded point solutions from its premier partners (IBM, Adexa, Robocom, Access Commerce, etc.) might provide QAD with a product set also suitable for larger, multinational corporations. Although 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.

The conundrum, for penetrating the higher-end of the market though, could also lie in the fact that MFG/PRO is not at the forefront of natively provided ERP functionality, particularly in terms of multi-national financials/consolidation, project accounting/management, HR/payroll, etc. Without these in hand, it is a tall order for any vendor to penetrate the corporate management level competing against likes of Oracle, SAP and PeopleSoft.

The production management remains MFG/PRO's strongest module, and, therefore, QAD has often been implemented only in manufacturing divisions of large global organizations that use a Tier 1 ERP product for corporate financials and/or HR applications. There is thus even a challenge of fending off the bigger vendors' attempt to sway the corporate executives to implement their system corporate wide (or, at least, in as many divisions as possible) given that these vendors might emulate QAD's deep manufacturing functionality over a period of time.

User Recommendations

While the dark clouds over QAD seem to scattered recently, the overcast future still remains. The company has broadened its product lines and seems to keep abreast of recent market trends though. Time only will tell how well it will target the manufacturing and distribution mid-market within its industries of focus (automotive, consumer products, electronics, food & beverage, industrial products, and medical devices) and demonstrate collaboration and private exchanges participations' benefits to the prospect or customer, and even possibly expand beyond it. QAD MFG/PRO users should position eQ and SV central to their e-Business strategies although being informed about competitive products cannot hurt. Non-QAD users may benefit from evaluating eQ and SV products for their collaborative needs.

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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