QAD Reports Solid Q1 Performance Amidst Pandemic
Despite disruption from the COVID-19 outbreak during the latter half of its fiscal Q1, QAD (QADA) turned in a solid start to FY ‘21. Revenue was slightly ahead of Street expectations and just shy of our estimate despite a significant intra-quarter headwind from FX. Both subscription and services gross margin outpaced our assumptions with the latter particularly surprising as we had anticipated a slight loss due to customers delaying engagements at the outset of the pandemic. Instead, management noted that many customers have embraced the company’s methodology for performing services remotely, resulting in solid utilization and positive contribution margin in Q1. Expenses were also well controlled, contributing to significant upside in QAD’s reported adjusted EBITDA and non-GAAP EPS relative to both consensus and our estimates. As for bookings, the number of cloud deals closed declined Y/Y but we were encouraged by the 8% increase in calculated subscription billings, which was above our 5% projection. Considering the strong finish to the prior year and a global pandemic to start this year, we were pleased to see any growth at this juncture. Moreover, management indicated that the pipeline has increased 26% Y/Y, which we believe bodes well for QAD’s ability to return to its targeted 25%-30% subscription CAGR as the global economy returns to some semblance of normalcy.
Of course, the duration and economic impact of the COVID-19 pandemic remains unknown, so management again limited its guidance to anticipated subscription and maintenance revenue in the current quarter. Guidance for both fell just short of our projections due to the ongoing FX headwinds that reared in Q1. Additionally, management expressed caution regarding potential services activity in 2H ’21, suggesting muted expectations for new or larger project opportunities to be booked in the near-term. We therefore cut our top line estimates for this year and next after incorporating the FX impact on recurring revenue and reducing our forecasts for license and services to reflect a more conservative recovery scenario than we had previously modeled. For FY ’21, much of the impact to the bottom line was more than offset by the upside realized in Q1 as well as lower operating expenses assumed for the remainder of the year. However, our adjusted EBITDA and non-GAAP EPS estimates decline in FY ’22 as we expect discretionary expenses to ramp faster than revenue as the business environment returns to normal. On the whole, the revisions to our model failed to move the needle from a valuation perspective, and we maintain our $51.00 price target, which continues to represent an unchanged FY ’21 EV/Sales multiple of 3x. We believe our target multiple reflects an appropriate discount to SaaS peers give the company’s current growth and margin profile while leaving ample room for expansion should QAD progress towards its long-term targets for 25%-30% subscription revenue growth and a low to mid-teens operating margin.
Total revenue of $74.1 million (-5.0% Y/Y) was slightly ahead of the Street’s $73.9 million and just shy of our $74.5 million estimate. Per management, FX fluctuations reduced revenue by $1.5 million relative to rates in effect when Q1 guidance for recurring revenue was provided. Subscription fees of $30.8 million (+21.6% Y/Y) were approximately in line with guidance and our estimate of $31.0 million despite a $0.5 million hit from FX with growth accelerating on a sequential basis. In Q1, QAD closed 13 cloud deals, comprised of five conversions and eight new customers, down from 16 in the year-ago period. Maintenance revenue of $26.4 million (-11.7% Y/Y) was modestly below guidance and our estimate of $27.0 million due to a $0.8 million headwind from FX. Professional services revenue totaled $15.7 million (-14.3% Y/Y), above our $15.0 million estimate as delayed projects had less of an impact than we anticipated, while License fees of $1.2 million (-72.7% Y/Y) were short of our $1.5 million estimate.
Gross margin exceeded our estimate by 200 basis points driven by strong subscription and services gross margins. Subscription gross margin of 66.4% compared favorably with our 65.6% assumption as incremental costs were lower than we anticipated. Despite delays in some engagements, a number of customers were willing to move forward with projects delivered remotely, resulting in solid utilization and a 5.2% professional services gross margin versus our assumption for a (6.0)% margin. As for operating expenses, both R&D and G&A expenses were generally consistent with our model while sales and marketing came in much lower due to limited spending on discretionary items and lower variable compensation. Reflecting these factors, adjusted EBITDA of $4.6 million and non-GAAP EPS of $0.12 were well ahead of Street expectations for $0.3 million and $(0.06), respectively, and our estimates of $(0.8) million and $(0.14).
Due to the ongoing uncertainty arising from the COVID-19 pandemic, management again provided limited guidance for Q2. Guidance includes subscription and maintenance revenues of $31.0 million and $26.0 million, respectively, which were short of our estimates of $32.3 million and $26.3 million. The lower outlook primarily reflects the impact of foreign currency fluctuations.
Our revenue estimates for this year and next decline to $296.0 million (-4.7% Y/Y) and $309.5 million (+4.6% Y/Y), respectively, due to the impact of recent FX fluctuations on our recurring revenue projections as well as more conservative assumptions for license and services revenue. While the top line reduction was more than offset by lower operating expense forecasts for the remainder of FY ’21, we expect spending on travel and other discretionary items to ramp at a faster pace than revenue in FY ’22. As such, our out-year estimates for adjusted EBITDA and non-GAAP EPS decline to $9.0 million and $(0.01), respectively.
Our report with model and disclosures is available here.