Q3 '20 Earnings Preview

QAD (QADA) reports fiscal Q3 ’20 results on Tuesday, November 26. With the Institute for Supply Management’s Purchasing Managers Index (PMI) contracting in each month of QAD’s fiscal quarter and commentary from other reporting companies this past earnings season pointing to a soft spending environment in the automotive and manufacturing sectors, our expectations for any significant upside are tempered to say the least. Nonetheless, we believe that QAD’s reset of FY ’20 expectations following its fiscal Q2 results set an appropriate bar for the remainder of the year. We therefore expect the company to deliver Q3 results consistent with our projections, which are largely in line with consensus and within management’s guidance. Regarding the outlook, we surmise management may narrow its previously provided ranges for revenue and pre-tax income but anticipate Q4 guidance will fall within striking distance of our estimates and consensus. Our price target remains $51.00, reflecting a FY ’21 EV/Sales multiple of 2.5x.

We estimate Q3 revenue, adjusted EBITDA, and non-GAAP EPS of $78.5 million, $3.3 million, and $0.08, respectively, consistent with Street expectations for $78.4 million in revenue, $3.7 million in adjusted EBITDA, and $0.08 in non-GAAP EPS. Management’s guidance includes revenue of $78.0-$79.0 million, including $27.5-$28.0 million in subscription fees, and implies non-GAAP EPS of $0.07-$0.12. From a modeling standpoint, the step-up in subscription fees on a sequential basis and the magnitude of license fees forecasted in the quarter pose the primary sources of risk relative to expectations. Regarding the former, management previously noted that cloud bookings outpaced internal expectations in Q2 and highlighted a 37% increase in the funnel, leaving us comfortable with the prospects for subscription growth to rebound in Q3 and accelerate further in Q4 and beyond. As for the latter, license growth continues to face headwinds from increasing customer adoption of QAD’s cloud-based platform as well as the aforementioned macro impact on the manufacturing sector, which has limited expansion with existing on-premise customers thus far in FY ’20. Given that our estimates for both Q3 and Q4 reflect ongoing declines in license revenue, albeit at a lower rate than in 1H ’20, we think these factors have been adequately accounted for in our model. As such, we believe the upcoming print and guide should hold few surprises, providing a stable foundation from which both the business and the stock can trend higher in the coming quarters.

Our report with model and disclosures is available here.