Resurgence in North America Drives Strong Q2 Results
QAD (QADA) reported strong fiscal Q2 ’21 results, exceeding Street expectations top to bottom. After effectively managing through the outset of the COVID-19 pandemic in the prior quarter, QAD delivered strong sequential growth in both license and cloud bookings with the latter essentially matching year ago levels in both the number and value of deals closed. Management attributed the solid sales performance to strong execution in North America, which more than offset some lingering softness in China. Also encouraging, nearly half of cloud bookings arose from the automotive vertical despite ongoing headwinds affecting the industry. Tight cost controls also remained in effect, resulting in another quarter in which both adjusted EBITDA and non-GAAP EPS came in considerably better than our estimates and consensus. Looking forward, QAD’s weighted pipeline is up 27% Y/Y with the overall funnel at record levels and 48% higher than this time last year. As such, management is cautiously optimistic that the company is poised to exit the year on a high note. Still, with no greater clarity into the potential economic fallout from the COVID-19 crisis, management again restricted its outlook to anticipated subscription and maintenance revenue in the current quarter. On a positive note, guidance for the subscription revenue was generally consistent with our estimate, while expectations for maintenance outpaced our prior projection.
Although we fine-tuned some assumptions around mix, our revenue forecasts remain virtually unchanged for this year and next. However, the higher mix of recurring revenue reflected in our updated model provides a lift to our gross margin assumptions, which combined with our expectations for spending to remain constrained for the foreseeable future yields a more meaningful increase in our adjusted EBITDA and non-GAAP EPS estimates. Overall, we remain impressed by QAD’s resiliency amidst challenging conditions. Between the company’s performance in Q2 and indications that growth is returning to the manufacturing sector, we are more optimistic that QAD’s march towards its targeted 25%-30% subscription revenue growth rate and a low to mid-teens operating margin may not be unduly prolonged by the pandemic. We maintain our $51.00 price target, which continues to represent an EV/Sales multiple of 3x but now rolled forward to our FY ’22 projections.
Exhibit I: Reported Results Versus Expectations
Total revenue of $74.1 million (-3.0% Y/Y) was slightly ahead of the Street’s $73.1 million and in line with our estimate. Subscription revenue of $31.1 million (+20.0% Y/Y) was consistent with guidance for $31.0 million and just shy of our $31.5 million projection. In Q2, QAD closed 22 cloud deals split evenly between new customers and conversions. Per management, the dollar value of cloud bookings was on par with year ago levels, and the number of transactions was also relatively flat from the 24 deals secured last year. Maintenance revenue of $26.5 million (-10.5% Y/Y) was slightly above guidance for $26.0 million and our estimate of $25.6 million. Professional services revenue of $13.5 million (-22.4% Y/Y) fell short of our $15.8 million estimate due to project delays, while license fees of $3.0 million (-13.5% Y/Y) exceeded our estimate of $1.3 million as expiring licenses at one customer prompted a large transaction in the quarter.
Gross margin exceeded our estimate by 300 basis points driven by a higher mix of license and maintenance revenue. Both research and development and sales and marketing expenses compared favorably with our assumptions as the former benefited from a payroll tax credit in Europe and the latter reflected limited spending on travel and marketing events. As a result, adjusted EBITDA of $6.2 million and non-GAAP EPS of $0.20 easily exceeded our estimates of $3.7 million and $0.07, respectively, and also beat consensus of $3.3 million and $0.08.
Due to the ongoing uncertainty arising from the COVID-19 pandemic, management again provided limited guidance for Q3. Guidance includes subscription and maintenance revenue of $32.5 million and $26.0 million, respectively, versus our estimates of $32.7 million and $24.5 million.
Exhibit II: Estimate Revisions
Our revenue estimates remain intact for this year and next, although we fine-tuned our assumptions for recurring versus non-recurring revenue. The increase in our recurring revenue estimates coupled with lower operating expense projections across our forecast horizon drove a sizeable increase in our profitability expectations for FY ’21 and FY ’22. We note that our FY ’22 estimates for adjusted EBITDA and non-GAAP EPS continue to reflect a gradual return to more normal levels of spending on travel and marketing, resulting in the Y/Y decline in those metrics.
Our report with model and disclosures is available here.