QAD Q3 '21 Earnings Preview
QAD (QADA) reports fiscal Q3 ’21 results after the market closes on Tuesday, November 24. Our estimates are generally in line with consensus, reflecting flattish sequential growth on the top line and a downtick in margins due to increased spending on sales and marketing. Given a backdrop in which manufacturing activity and sentiment exhibited further improvement and restrictions on travel and in-person events remained in effect, we expect QAD to meet Street expectations and see potential for more meaningful upside on the bottom line. With only one quarter remaining in the current fiscal year and no end in sight to the COVID-19 pandemic, we assume management will again provide near-term guidance for recurring revenue only. We remain comfortable with our projections in this regard and thus maintain our $51.00 price target, which represents a FY ’22 EV/Sales multiple of 3.0x.
Exhibit I: Our Estimates and Consensus
Our Q3 projections include revenue, adjusted EBITDA and non-GAAP EPS of $73.6 million, $5.2 million and $0.13, respectively. Although our estimates are modestly below consensus, we have no real concerns regarding QAD’s ability to achieve Street expectations. Underlying our revenue assumptions are license fees of just $1.3 million and professional services of $13.8 million, and our projections for subscription and maintenance revenue effectively mirror management’s guidance for $32.5 million and $26.0 million, respectively. We model a sequential decline in gross margin due to a lower mix of license revenue, and we assume operating expenses rebound from the depressed levels in Q2. That said, limitations on travel and marketing events likely kept a lid on spending, creating potential for another beat on the bottom line.
Looking to Q4, the recovery in the manufacturing sector appears to be picking up steam, which combined with the company’s strong pipeline entering 2H bodes well for further improvement in results exiting the year. That said, we surmise a resurgence in COVID-19 cases will again limit management’s guidance to subscription and maintenance revenue for the quarter, which we expect to be consistent with our estimates of $34.1 million and $25.2 million, respectively. While the pandemic has been a headwind to growth throughout FY ’21, we believe the disruption will ultimately accelerate digital transformation initiatives. Of note, SAP has signaled its ambition to move “many thousands” of its over 30,000 classic ERP customers and 12,000 on-premise S/4HANA customers to the cloud in the next few years. In our view, this provides ample displacement opportunity for QAD in FY ’22 and beyond.
Our report with model and disclosures is available here.