QAD Inc.: The Art of Vertical Focus

Vendor Genesis

QAD Inc., headquartered in Carpinteria, CA, is a global provider of e-business enabled enterprise resource planning (ERP) and supply chain management (SCM) software and services to multinational companies of all sizes, with a special focus on the mid-market. QAD is the tenth-ranked ERP vendor with $193 million in revenues for the fiscal year ended January 31, 1999. The Company was founded in 1979 when its founder Pamela Meyer Lopker was offered a contract to write manufacturing software for a sandal-making company in California, run at that time by Carl Lopker, the current QAD CEO and Pamela's husband. After initial success with its first project, QAD began customizing its product for other California companies, working exclusively with HP computers.

The Company grew steadily throughout the 1980s and 1990s, expanding internationally and making its product compatible with more operating systems. In 1995, QAD became one of the first ISO 9002 certified ERP vendors. In 1996, the Company became part owner of Integral Datentechnik AG, a German data management system maker. In the same year, QAD commercially released its flagship open systems ERP application named MFG/PRO. The software was devised to control all main business functions, from inventory and planning to purchasing and finance for highly regulated industries, like food & beverage and medical. In 1998, the Company formed an R&D site in Ireland to help develop eQ (formerly On/Q), its global supply chain management software. The initial eQ module, Advanced Planning and Scheduling (APS), was released in 1998. Another eQ module, Collaborative Order Management, was released in 1999. Another product enhancement is the QAD/Connects architecture, which is both an open architecture concept and a set of the following connectivity tools: Q/LinQ, which provides a standard framework for data import/export between MFG/PRO and eQ components and other ERP systems, an EDI Commerce tool, and Network User Interface (NetUI) for the Java platform. The last piece of the QAD product suite is Qwizard software, which is intended to reduce MFG/PRO implementation and rollout training to employees. It includes a business modeler tool, customizable implementation tools, interactive learning tools, and tools to design and customize the visual interface of MFG/PRO software.

QAD sells and supports its products through its 20 offices and 30 indirect sales organizations located throughout the world. By fiscal year end 1999, the Company had more than 4,000 customer sites in over 80 countries, and derived approximately 62% of its revenue from the international market outside of North America. QAD went public in 1987 and currently trades on NASDAQ.

Vendor Strengths

• The Company has a well-established global position in Small-to-Medium Enterprises (SME) and lower-end top-tier segments of the ERP market, with a large loyal customer base and dispersed global network of offices and indirect channels.

• QAD is very competitive in speed and ease of global multi-site implementation (very often in less than 6 months duration per site) and its global service and support capabilities (the Company was one of the first ERP vendors to be ISO 9002 certified in 1995). Moreover, MFG/PRO has a very strong vertical functionality focus, and has a deep focus on vertical sub-segments (See QAD Inc. - Product Information).

• QAD was one of the first mid-market ERP vendors to incorporate the concepts of e-Commerce, Supply Chain Management, Customer Relationship Management, and integration with other vendors' products (the Company was one of the first vendors to adhere to Open Architecture Group standards). This provides QAD a 'one-stop shop' capability and a sustained source of both new licenses and service and support revenue streams in the future.
  
  

• Although the Company keeps abreast of the latest developments, it tries not to alienate its more conservative customers with abrupt new technology introductions. A good example is its new thin Java client called Net UI, which supports both a graphical user interface (GUI) and the character-based interface that is still overwhelmingly popular with plant-level users.

Vendor Challenges

• The Company's financial position has eroded significantly over the last 18 months due to the combined effects of decreased license revenue and excessive R&D costs (26% of total revenue) for its eQ system (see Fig. 1 & 2 - QAD Inc. - Annual & Quarterly Results Chart). QAD's available cash resources of less than $16 million are significantly diminished compared to $70 million at the end of the fiscal 1998, while its market capitalization of approximately $100 million is only half of its annual revenue.

• Dependence on Progress Software's continued viability makes QAD's product development future rather vulnerable. Moreover, a lack of support for the AS/400 platform deprives the Company from a significant ERP mid-market opportunity.

• Management's attempt to capture Tier 1 ERP market share based on eQ's rich multi-national logistics functionality was not successful, and it distracted the Company from strong mid-market sales execution. Furthermore, QAD's precipitous fiscal 1999 restructuring, when 15% of personnel was laid off and a great part of the R&D personnel were transferred to service and support roles, will take at least another 12 months for the Company to achieve its desired effectiveness.

Vendor Predictions

• Fiscal 2000 will prove to be very challenging for QAD. We predict minor revenue growth (maximum 15%) with a break-even net income as the most optimistic scenario (20% probability).

• We believe that QAD is an unlikely candidate for acquisition by a competitor within the next 2 years due to its broad functional scope and recent restructuring activities (30% probability). We also believe that QAD will remain among the Top 10 ERP vendors within the next 3 years (60% probability).

• More than 80% of new QAD customers within the next 4 years will be companies with less than $500 million in revenues (70% probability). At the same time, we believe more than 70% of existing users will opt for Net UI (65% probability).
  
  

• QAD's service and support revenue will contribute more than 60% of its total revenue within the next 4 fiscal years (60% probability), based on the Company's readiness to integrate its products with other 3rd party products. Within the same period of time, we believe eQ products will contribute 20% of QAD's license revenue (60% probability).

Vendor Recommendations

• QAD should further penetrate the Small-to-Medium Enterprises (SME) market segment in the following ways:
  
  

  • Expand business in its existing customer base, by upgrading older versions of software and by offering new extended ERP modules and enterprise applications.
    
    

  • Further expand into the SME market by leveraging and enforcing both its direct sales and its indirect channel network. Consider application outsourcing to make QAD attractive to smaller, resource constrained smaller enterprises.

• Selectively target the Tier 1 ERP market, preferably through an alliance with a Tier 1 ERP vendor that would benefit from QAD's strong vertical functionality in specific proposal situations.

• Conduct further ongoing cost and organization scrutiny and identify opportunities for further cost reduction and organizational improvement. Sales & Marketing and General & Administrative costs as a percentage of net sales are at an exorbitant 60%, compared to the industry average of 37%, while the sales revenue per S&MA employee and service revenue per service employee are one of the lowest in the industry, respectively (See Fig. 3 & 4).

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-$1.2B in revenue), based on its broad product portfolio and outstanding global service and support.

• QAD should be included on a short list in any selection within the following industries: Automotive, Electronics, Food & Beverage, and Medical. However, any organization evaluating QAD products should exercise moderate caution and consider existing functionality only, until the company regains consistently profitable financial performance.