QAD Reports Fiscal 2020 Second Quarter and Year-To-Date Financial Results

SANTA BARBARA, Calif., Aug. 21, 2019 /PRNewswire/ -- QAD Inc. (Nasdaq: QADA) (Nasdaq: QADB), a leading provider of flexible, cloud-based enterprise software and services for global manufacturing companies, today reported financial results for the fiscal 2020 second quarter and first six months ended July 31, 2019.

Fiscal 2020 Second Quarter Financial Highlights:

Total revenue for the fiscal 2020 second quarter was $76.4 million, compared with $84.5 million for the fiscal 2019 second quarter. The revenue decline was primarily related to an $8.6 million reduction in professional services. Currency had a negative $1.4 million impact on total revenue compared with the prior year quarter, and a negative $400,000 impact compared with the prior sequential quarter. Subscription revenue grew 15 percent (17 percent on a constant currency basis) from the same period last year, and was 34 percent of total revenue for the fiscal 2020 second quarter, a seven-percentage point increase over last year's second quarter.

Additional fiscal 2020 second quarter financial highlights, versus the same period last year, include:

    --  Subscription revenue of $25.9 million, up from $22.4 million. Currency
        had a $277,000 negative impact.
    --  Subscription gross margin of 62 percent, versus 63 percent.
    --  License revenue of $3.5 million, compared with $5.6 million. Currency
        had a negligible impact.
    --  Professional services revenue of $17.4 million, versus $26.0 million.
        Currency had a $513,000 negative impact.
    --  Maintenance and other revenue of $29.6 million, compared with $30.6
        million. Currency had a $529,000 negative impact.
    --  GAAP pre-tax loss of $3.4 million, versus GAAP pre-tax income of $2.6
        million.
    --  Non-GAAP pre-tax income of $43,000, compared with $5.9 million.
    --  Income tax expense of $9.9 million, versus income tax expense of $1.5
        million. Current period income tax expense includes a non-cash
        accounting adjustment of $10 million attributed to the placement of a
        valuation allowance mainly relating to the company's Ireland deferred
        tax assets. Recent losses generated in connection with the company's
        continued transition to, and investment in, a cloud model, required a
        valuation allowance be placed on certain tax assets for accounting
        purposes. As cloud revenue continues to grow, the company believes
        profitability will increase over the long-term and its deferred tax
        assets will ultimately be realized.
    --  GAAP net loss of $13.3 million, or $(0.69) per Class A share and $(0.57)
        per Class B share, versus GAAP net income of $1.1 million, or $0.05 per
        diluted Class A and diluted Class B share.

"The first six months of the year have produced the highest levels of subscription bookings in our history. Our investments in sales and marketing are starting to produce higher deal volumes, and are increasing our competitive wins. We expect this will translate into acceleration of our growth in the cloud," said Anton Chilton, Chief Executive Officer at QAD. "To drive efficiency and better serve our customers, we have brought forward our plans to expand our services and partner ecosystems, which will increase our reach and reduce reliance by our customers on QAD's global professional services organization."

Fiscal 2020 Six-Month Financial Results:

Total revenue for the first half of fiscal 2020 was $154.4 million, compared with $170.7 million for the same period last year. Currency had a negative impact on total revenue of $4.7 million. Subscription revenue grew 16 percent to $51.2 million for the fiscal 2020 year-to-date period, compared with $44.0 million for the fiscal 2019 year-to-date period. GAAP pre-tax loss was $5.9 million for the first six months of fiscal 2020, compared with GAAP pre-tax income of $5.2 million for the first six months of fiscal 2019. GAAP net loss was $16.5 million, or $0.86 per Class A share and $0.71 per Class B share, for the fiscal 2020 first half, versus GAAP net income of $2.5 million, or $0.12 per diluted Class A share and $0.11 per diluted Class B share, for the same period last year. Non-GAAP pre-tax income was breakeven, compared with $10.5 million last year.

QAD's cash and equivalents balance at July 31, 2019 was $141.8 million, versus $139.4 million at January 31, 2019. Cash provided by operations for the first six months of fiscal 2020 was $14.2 million, compared with $9.1 million one year ago.

Fiscal 2020 Second Quarter Operational Highlights:

    --  Closed 24 new cloud deals;
    --  Received orders from 22 customers representing more than $500,000 each
        in combined license, subscription, maintenance and professional services
        billings, including seven orders exceeding $1 million;
    --  Received license or cloud orders from companies across QAD's six
        vertical markets, including: Adient Limited, CCL Industries Inc.,
        Chengdu Aerospace, Dubo Electricitee, GKN Plc, Mitek Industries Inc.,
        Musculoskeletal Transplant, Nepon Inc., Rivian Automotive, Inc., SNOP,
        Tower Automotive and TS Tech Co., LTD;
    --  Received several awards and recognitions, including QAD DynaSys being
        named as a Challenger in Gartner, Inc.'s May 2019 Magic Quadrant for
        Sales and Operations Planning Systems of Differentiation; and QAD India
        winning best Innovative Employee Development Practice of the Year by HR
        Infotech Association, an influential Human Resources organization in
        India;
    --  Expanded or entered into several new partnerships, including Strategic
        Information Group for the sale and service of QAD ERP applications in
        the Republic of Ireland and Northern Ireland;
    --  Launched QAD China Cloud via a partnership with Alibaba to provide QAD
        Adaptive ERP to its China based customers on the AliCloud; and
    --  Released QAD Precision's benchmarking tool, giving customers additional
        insight and analysis into their global trade and transportation
        operations.

Business Outlook:

With our customer's priority of converting to the cloud prior to upgrading their systems, QAD now expects professional services revenue to be flat for the second half of the year, compared with the first half. In addition, the effect of the manufacturing economy slowdown on the company's license business, predominantly generated from existing customers, is reducing license revenue expectations for the remainder of the year. While subscription bookings are at record levels, both in number and value, the timing of the deals has had an impact on full year subscription revenue expectations. Therefore, guidance is being updated to reflect these changes.

For the fiscal 2020 third quarter, QAD expects:

    --  Total revenue of $78 to $79 million, including $27.5 to $28.0 million of
        subscription revenue.
    --  GAAP pre-tax income of breakeven to a GAAP pre-tax loss of $1 million.
    --  Non-GAAP pre-tax income of $2.2 to $3.4 million.

For the fiscal 2020 full year, QAD now expects:

    --  Total revenue of $313 to $318 million, including $108 to $109 million of
        subscription revenue.
    --  GAAP pre-tax loss of $4 to $5 million.
    --  Non-GAAP pre-tax income of $6.7 to $8.7 million.

The following is a forward-looking reconciliation of GAAP pre-tax income to non-GAAP pre-tax income for the fiscal 2020 third quarter and full year:


                                                                            
            
              QAD Inc.


                                                
            
            Reconciliation of GAAP to Non-GAAP Forward-Looking Guidance Measures


                                                                         
            
              (in thousands)


                                                                           
            
              (unaudited)




                                            Three Months Ended                                             Twelve Months Ended


                                             October 31, 2019                                              January 31, 2020



                                                    Low                                                    High                               Low  High



      Non-GAAP pre-tax income
       reconciliation




      GAAP (loss) income before income
       taxes                                                   $
            (1,000)                                                                          $
        (5,000)                 (4,000)



     Add back


                              Stock-based
                               compensation
                               expense                   3,100                                                          3,300                      11,400                     12,400


                              Amortization
                               of purchased
                               intangible
                               assets                       75                                                             75                         300                        300


      Non-GAAP income before income taxes                        $
            2,175                                                    $
       3,375               $
         6,700            $
          8,700





      Non-GAAP income tax expense on non-
       GAAP earnings                                               $
            750                                                      $
       900               $
         3,100            $
          3,500




      Weighted average basic shares
       outstanding


                              Class A                                         16,800                                                        17,000                     16,500                   16,900


                              Class B                                          3,300                                                         3,400                      3,300                    3,400




      Weighted average diluted shares
       outstanding


                              Class A                                         17,600                                                        18,000                     17,300                   17,700


                              Class B                                          3,400                                                         3,500                      3,400                    3,500

Calculation of Earnings per Share (EPS)

EPS is reported based on the company's dual-class share structure, and includes a calculation for both Class A and Class B shares. Since Class A shares have rights to 120% of dividends paid on Class B shares, net income is apportioned so that earnings per share attributable to a Class A share are 120% of earnings per share attributable to a Class B share.

Fiscal 2020 Second Quarter Financial Results Conference Call

When: Wednesday, August 21, 2019
Time: 2:00 p.m. PT (5:00 p.m. ET)
Phone: 800-230-1074 (domestic); 612-332-0530 (international)
Replay: Accessible through midnight August 28, 2019; 800-475-6701 (domestic); 320-365-3844 (international); passcode 470288
Webcast: Accessible at www.qad.com; archive available for approximately one year

Note about Non-GAAP Financial Measures

QAD has disclosed non-GAAP adjusted EBITDA, non-GAAP adjusted EBITDA margins, non-GAAP pre-tax income and non-GAAP income tax expense on non-GAAP earnings in this press release for the second quarter and first six months of fiscal 2020. These are non-GAAP financial measures as defined by SEC Regulation G. QAD defines the non-GAAP measures as follows:

    --  Non-GAAP adjusted EBITDA - EBITDA is GAAP net income before net interest
        expense, income tax expense, depreciation and amortization. Non-GAAP
        adjusted EBITDA is EBITDA less stock-based compensation expense and the
        change in the fair value of the interest rate swap.
    --  Non-GAAP adjusted EBITDA margins - Calculated by dividing non-GAAP
        adjusted EBITDA by total revenue.
    --  Non-GAAP pre-tax income - GAAP income before income taxes not including
        the effects of stock-based compensation expense, amortization of
        purchased intangible assets and the change in fair value of the interest
        rate swap.
    --  Non-GAAP income tax expense on non-GAAP earnings - Defined as GAAP tax
        expense excluding discrete items such as return to provision
        adjustments, stock based compensation, rate change impacts, new
        valuation allowances on new positions and changes in reserves for
        unrecognized tax benefits.

QAD's management uses non-GAAP measures internally to evaluate the business and believes that presenting non-GAAP measures provides useful information to investors regarding the company's underlying business trends and performance of the company's ongoing operations as well as useful metrics for monitoring the company's performance and evaluating it against industry peers. The non-GAAP financial measures presented should be used in addition to, and in conjunction with, results presented in accordance with GAAP, and should not be relied upon to the exclusion of GAAP financial measures. Management strongly encourages investors to review the company's consolidated financial statements in their entirety and to not rely on any single financial measure in evaluating the company.

Tables providing a reconciliation of the non-GAAP measures to their most comparable GAAP measures are included at the end of this press release.

QAD non-GAAP measures reflect adjustments based on the following items:

Stock-based compensation expense: The company has excluded the effect of stock-based compensation expense from its non-GAAP adjusted EBITDA and non-GAAP pre-tax income calculations. Although stock-based compensation expense is calculated in accordance with current GAAP and constitutes an ongoing and recurring expense, such expense is excluded from non-GAAP results because it is not an expense which generally requires cash settlement by QAD, and therefore is not used by the company to assess the profitability of its operations. The company also believes the exclusion of stock-based compensation expense provides a more useful comparison of its operating results to the operating results of its peers.

Amortization of purchased intangible assets: The company amortizes purchased intangible assets in connection with its acquisitions. QAD has excluded the effect of amortization of purchased intangible assets, which include purchased technology and customer relationships, from its non-GAAP pre-tax income calculation, because doing so makes internal comparisons to the company's historical operating results more consistent. In addition, the company believes excluding amortization of purchased intangible assets provides a more useful comparison of its operating results to the operating results of its peers.

Change in fair value of the interest rate swap: The company entered into an interest rate swap to mitigate its exposure to the variability of one-month LIBOR for its floating rate debt related to the mortgage of its headquarters. QAD has excluded the gain/loss adjustments to record the interest rate swap at fair value from its non-GAAP adjusted EBITDA and non-GAAP pre-tax income calculations. The company believes that these fluctuations are not indicative of its operational costs or meaningful in evaluating comparative period results because the company currently has no intention of exiting the debt agreement early; and therefore over the life of the debt the sum of the fair value adjustments will be $0.

Non-GAAP income tax on non-GAAP earnings: The company discloses non-GAAP income tax on non-GAAP earnings in order to provide a reader with the ability to calculate non-GAAP earnings per share. The company's estimate of non-GAAP income tax expense excludes the tax effect of stock-based compensation and other discrete items. The company believes it is appropriate to exclude discrete items from its non-GAAP income tax expense on non-GAAP earnings calculation because the company's non-GAAP pre-tax income excludes the effect of stock-based compensation; and discrete items are unpredictable and generally are not recognized until incurred.

About QAD - The Effective Enterprise

QAD Inc. (Nasdaq: QADA) (Nasdaq: QADB) is a leading provider of flexible, cloud-based enterprise software and services for global manufacturing companies. QAD Adaptive ERP for manufacturing supports operational requirements in the areas of financials, customer management, supply chain, manufacturing, service and support, analytics, business process management and integration. QAD's portfolio includes related solutions for quality management software, supply chain management software, transportation management software and B2B interoperability. Since 1979, QAD solutions have enabled customers in the automotive, consumer products, food and beverage, high tech, industrial manufacturing and life sciences industries to better align operations with their strategic goals to become Effective Enterprises.

To learn more, visit www.qad.com or call +1 805-566-6000.

"QAD" is a registered trademark of QAD Inc. All other products or company names herein may be trademarks of their respective owners.

Note to Investors: This press release contains certain forward-looking statements made under the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, including, but not limited to, statements regarding projections of revenue, income and loss, capital expenditures, plans and objectives of management regarding the company's business, future economic performance or any of the assumptions underlying or relating to any of the foregoing. Forward-looking statements are based on the company's current expectations. Words such as "expects," "believes," "anticipates," "could," "will likely result," "estimates," "intends," "may," "projects," "should," "would," "might," "plan" and variations of these words and similar expressions are intended to identify these forward-looking statements. A number of risks and uncertainties could cause actual results to differ materially from those in the forward-looking statements. These risks include, but are not limited to: risks associated with our cloud service offerings, such as defects and disruptions in our services, our ability to properly manage our cloud service offerings, our reliance on third-party hosting and other service providers, and our exposure to liability and loss from security breaches; demand for the company's products, including cloud service, licenses, services and maintenance; pressure to make concessions on our pricing and changes in our pricing models; protection of our intellectual property; dependence on third-party suppliers and other third-party relationships, such as sales, services and marketing channels; changes in our revenue, earnings, operating expenses and margins; the reliability of our financial forecasts and estimates of the costs and benefits of transactions; the ability to leverage changes in technology; defects in our software products and services; third party opinions about the company; competition in our industry; the ability to recruit and retain key personnel; delays in sales; timely and effective integration of newly acquired businesses; economic conditions in our vertical markets and worldwide; exchange rate fluctuations; and the global political environment. For a more detailed description of the risk factors associated with the company and factors that may affect our forward-looking statements, please refer to the company's latest Annual Report on Form 10-K and, in particular, the section entitled "Risk Factors" therein, and in other periodic reports the company files with the Securities and Exchange Commission thereafter. Management does not undertake to update these forward-looking statements except as required by law.



     
                For More Information, Contact:



     Kara Bellamy                          
         Laurie Berman



     Chief Accounting Officer              
         PondelWilkinson Inc.



     805.566.6100                          
         310.279.5980


                   investor@qad.com         
         
                lberman@pondel.com

(financial tables follow)


                                                                                 
              
                QAD Inc.


                                                   
        
                Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income


                                                                  
              
                (in thousands, except per share data)


                                                                               
              
                (unaudited)




                                                            Three Months Ended                                                     Six Months Ended
                                                     July 31,                                                   July 31,



                                                                          2019                                 2018                                  2019 2018




     Revenue:


                         Subscription                                                 $
              25,888                              $
              22,439           $
           51,194    $
         43,950


                         License                                                                   3,516                                           5,561                     7,982           11,827


                         Maintenance and
                          other                                                                   29,586                                          30,574                    59,485           62,057


                         Professional
                          services                                                                17,388                                          25,969                    35,752           52,899



              
              Total revenue                                                            76,378                                          84,543                   154,413          170,733



     Cost of revenue:


                         Subscription                                                              9,903                                           8,334                    19,320           16,562


                         License                                                                     554                                             574                     1,145            1,238


                         Maintenance and
                          other                                                                    7,459                                           7,774                    15,062           15,639


                         Professional
                          services                                                                18,116                                          23,754                    37,439           48,064



                         Total cost of revenue                                                    36,032                                          40,436                    72,966           81,503




     Gross profit                                                                             40,346                                          44,107                    81,447           89,230




     Operating expenses:


                         Sales and
                          marketing                                                               20,191                                          19,502                    41,082           39,448


                         Research and
                          development                                                             13,870                                          13,513                    27,857           27,519


                         General and
                          administrative                                                          10,392                                           9,366                    19,810           18,728


                         Amortization of
                          intangibles
                          from
                          acquisitions                                                                66                                                                      133                -


                         Total operating expenses                                                 44,519                                          42,381                    88,882           85,695




     Operating (loss) income                                                                 (4,173)                                          1,726                   (7,435)           3,535




     Other (income) expense:


                         Interest income                                                           (789)                                          (743)                  (1,513)         (1,267)


                         Interest
                          expense                                                                    148                                             154                       301              311


                         Other (income),
                          net                                                                      (154)                                          (269)                    (326)           (673)



                         Total other (income), net                                                 (795)                                          (858)                  (1,538)         (1,629)



      (Loss) income before income taxes                                                       (3,378)                                          2,584                   (5,897)           5,164


                         Income tax
                          expense                                                                  9,872                                           1,471                    10,587            2,654




     Net (loss) income                                                          $
              (13,250)                              $
              1,113           $
         (16,484)     $
        2,510






     Net (loss) income                                                          $
              (13,250)                              $
              1,113           $
         (16,484)     $
        2,510


                         Other
                          comprehensive
                          income, net of
                          tax:


                         Foreign
                          currency
                          translation
                          adjustments                                                                298                                           (326)                       35            (836)


      Total comprehensive (loss) income                                          $
              (12,952)                                $
              787           $
         (16,449)     $
        1,674





      Diluted (loss) income per share


                         Class A                                                      $
              (0.69)                               $
              0.05           $
           (0.86)     $
         0.12


                         Class B                                                      $
              (0.57)                               $
              0.05           $
           (0.71)     $
         0.11





     Diluted Weighted Shares


                         Class A                                                                  16,465                                          17,927                    16,417           17,886


                         Class B                                                                   3,264                                           3,434                     3,264            3,425


                                                                  
        
                QAD Inc.


                                                             
     
          Condensed Consolidated Balance Sheets


                                                               
        
                (in thousands)


                                                                 
        
                (unaudited)




                                                                        July 31,                            January 31,


                                                                            2019                                    2019




     
                Assets



       Current assets:


                                  Cash and
                                   equivalents                                          $
              141,768              $
          139,413


                                  Short-term
                                   investments                                                        1,200                        1,200


                                  Accounts
                                   receivable, net                                                   41,495                       81,577


                                  Other current
                                   assets                                                            23,411                       22,150



                       
              Total current assets                                              207,874                      244,340





       Property and equipment, net                                                               29,446                       29,621



       Lease right-of-use assets, net                                                            18,195



       Capitalized software costs, net                                                            1,720                        1,598



       Goodwill                                                                                   12,379                       12,423



       Long-term deferred tax assets, net                                                         6,571                       16,172



       Other assets, net                                                                         12,202                       13,020





                                  Total assets                                          $
              288,387              $
          317,174







                   Liabilities and stockholders' equity



       Current liabilities:


                                  Current portion of
                                   long-term debt                                           $
              492                 $
           487


                                  Lease liabilities                                                   4,855                            -


                                  Accounts payable
                                   and other current
                                   liabilities                                                       40,318                       50,250


                                  Deferred revenue                                                   94,399                      115,253



                                  Total current liabilities                                         140,064                      165,990





       Long-term debt                                                                            12,589                       12,836



       Long-term lease liabilities                                                               14,059



       Other liabilities                                                                          5,815                        5,101





       Stockholders' equity:


                                  Common stock                                                           20                           20


                                  Additional paid-
                                   in capital                                                       196,312                      196,723


                                  Treasury stock                                                    (4,943)                     (7,350)


                                  Accumulated
                                   deficit                                                         (67,903)                    (48,485)


                                  Accumulated other
                                   comprehensive
                                   loss                                                             (7,626)                     (7,661)



                                  Total stockholders' equity                                        115,860                      133,247





                                  Total liabilities
                                   and stockholders'
                                   equity                                               $
              288,387              $
          317,174


                                         
              
                QAD Inc.


                       
              
              Condensed Consolidated Statements of Cash Flows


                                      
              
                (in thousands)


                                       
              
                (unaudited)




                                                                                                        Six Months Ended


                                                                                                        July 31,



                                                                                 2019                    2018





     Net cash provided by
      operating activities                                                               $
        14,178                    $
          9,146

                                                                                                                                  ---



     Cash flows from investing
      activities:


                                           Purchase of property and
                                            equipment                                           (3,707)                         (2,004)


                                           Acquisition of businesses, net
                                            of cash acquired                                                                      (450)


                                           Capitalized software costs                             (534)                           (536)


     Net cash used in investing
      activities                                                                             (4,241)                         (2,990)





     Cash flows from financing
      activities:


                                  
            Repayments of debt                                     (253)                           (234)


                                           Tax payments related to stock
                                            awards                                              (3,496)                         (8,576)


                                  
            Cash dividends paid                                  (2,761)                         (2,731)


     Net cash used in financing
      activities                                                                             (6,510)                        (11,541)





     Effect of exchange rates on cash
      and equivalents                                                                        (1,072)                         (2,110)



                                           Net increase (decrease) in cash
                                            and equivalents                                       2,355                          (7,495)


                                           Cash and equivalents at
                                            beginning of period                                 139,413                          147,023


                                           Cash and equivalents at end of
                                            period                                        $
        141,768                  $
          139,528


                                                                                 
              
                QAD Inc.


                                                                     
          
          Reconciliation of GAAP to Non-GAAP Financial Measures


                                                                              
              
                (in thousands)


                                                                                
              
                (unaudited)






                                                                                                       Three Months Ended                             Six Months Ended
                                                                                                 July 31,                                      July 31,



                                                                                       2019                                2018                  2019                  2018






     Total revenue                                                                           $
              76,378                         $
      84,543                         $
           154,413    $
       170,733





     Net (loss) income                                                                                 (13,250)                             1,113                                 (16,484)          2,510



     Add back:


                                        
      Net interest income                                                (641)                             (589)                                 (1,212)          (956)


                                        
      Depreciation                                                       1,276                              1,188                                    2,603           2,388


                                        
      Amortization                                                         300                                146                                      574             305


                                        
      Income tax expense                                                 9,872                              1,471                                   10,587           2,654



     EBITDA                                                                                 $
              (2,443)                         $
      3,329                         $
           (3,932)     $
       6,901




     Add back:


                                           Stock-based compensation expense                                   3,188                              3,364                                    5,492           5,470


                                           Change in fair value of interest
                                            rate swap                                                           160                               (35)                                     251           (152)



     Adjusted EBITDA                                                                            $
              905                          $
      6,658                           $
           1,811     $
       12,219




     Adjusted EBITDA margin                                                                                  1%                                8%                                      1%             7%








      Non-GAAP pre-tax income (loss)
       reconciliation




      (Loss) income before income taxes                                                      $
              (3,378)                         $
      2,584                         $
           (5,897)     $
       5,164



     Add back


                                           Stock-based compensation expense                                   3,188                              3,364                                    5,492           5,470


                                           Amortization of purchased
                                            intangible assets                                                    73                                                                        147               -


                                           Change in fair value of interest
                                            rate swap                                                           160                               (35)                                     251           (152)


      Non-GAAP income (loss) before income
       taxes                                                                                      $
              43                          $
      5,913                             $
           (7)    $
       10,482





      Non-GAAP income tax expense on non-
       GAAP earnings                                                                           $
              1,074                          $
      1,622                           $
           1,657      $
       2,734

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SOURCE QAD Inc.