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.