Solid End to FY '21 Paves Way for Accelerating Growth and Margin Expansion
QAD’s (QADA) fiscal Q4 ’21 results exceeded our estimates and consensus as an unexpected rebound in license sales and a tailwind from currency fluctuations fueled a return to positive top line growth a quarter ahead of our expectations. Both subscription and services margins reached new highs, and operating expenses were again tightly controlled amid the ongoing pandemic. As such, the revenue upside largely flowed through to the bottom line, resulting in a substantial beat even after adjusting for a one-time tax benefit.
Cloud bookings for the year amounted to 87% of prior year levels. Per management, the pull forward of several deals into Q3, which was highlighted last quarter, coupled with a challenging year-ago comparison precipitated an anticipated decline in cloud bookings in Q4. Cloud bookings through Q3 had been on par with prior year levels. Net dollar retention was 105% for the year, down from 108% in FY ’20 as the pandemic impacted the rate of add-on sales to existing customers. Sales cycles to new customers also remained elongated due to the pandemic, although management highlighted solid sales performances in North America and EMEA as well as strong contribution from QAD’s Precision and DynaSys divisions to finish the year. Signs of recovery across verticals and geographies combined with further acceleration in the growth of both the weighted and unweighted pipelines, which are up 33% Y/Y and 110% Y/Y, respectively, bode well for a good FY ’22 and leave management increasingly bullish on the company’s mid- to long-term prospects.
Near-term, the stabilization in the environment prompted management to reinstate its prior practice of providing both quarterly and annual guidance. For Q1, guidance for both subscription and maintenance revenue was consistent with our expectations while operating income was forecast slightly below our estimate. For FY ’22, management’s outlook for subscription and maintenance revenue was ahead of our prior projections, and guidance for operating income compared favorably as well. Interestingly, QAD also updated its long-term target model, which was first published around this time last year. In the current iteration, management raised the low-end of its anticipated three-year CAGR in subscription revenue from 25%-30% to 27%-30% and boosted its margin expansion goals, which now include an adjusted EBITDA margin of 20%-22% within five years. After considering both guidance for FY ’22 and the revised long-term targets, we raise our estimates for this year and next. Our price target also moves higher from $68.00 to $75.00 as we roll forward the same EV/Sales multiple of 4x we used previously to our FY ’23 projections. In our view, QAD remains poised to outperform expectations in the near-term while driving meaningful improvements in growth and margin expansion during the ensuing years.
Exhibit I: Reported Results Versus Expectations
Total revenue of $83.0 million (+5.6% Y/Y) surpassed our estimate of $77.6 million and consensus of $78.2 million. All revenue line items exceeded our expectations with the upside relative to our estimate primarily driven by higher than anticipated license revenue, which totaled $5.2 million (-1.6% Y/Y) versus our forecast of $1.8 million. Subscription revenue of $35.5 million (+24.0% Y/Y) was slightly ahead of management’s $35.0 million guidance and our $35.3 million estimate. QAD closed 32 cloud deals in Q4, comprised of 18 conversions and 14 new customers. Similar to last quarter, both North America and EMEA performed well, slightly offset by ongoing sluggishness in the Asia Pacific and Latin America regions. Maintenance revenue of $27.2 million (-5.4% Y/Y) was ahead of management’s $26.0 million guidance and our $26.3 million estimate, and professional services revenue of $15.1 million (-5.2% Y/Y) also came in ahead of our $14.3 million estimate.
Both subscription gross margin and professional services gross margin also outpaced our expectations, reaching new quarterly highs of 70.3% and 11.1%, respectively. Combined with the unexpected contribution from license revenue, the consolidated gross margin of 62.1% was 260 basis points above our assumption. Sales and marketing expenses also compared favorably with our estimate and helped offset higher G&A expenses. Both adjusted EBITDA of $11.6 million and non-GAAP EPS of $0.59 beat our estimates of $7.4 million and $0.23, respectively, and comfortably exceeded Street expectations for $7.2 million and $0.21. A one-time tax benefit accounted for $0.15 of the non-GAAP EPS upside relative to our forecast. QAD exited Q4 with cash and investments of $142.5 million and outstanding debt of $12.4 million.
Turning to the outlook, management’s Q1 guidance calls for subscription revenue of $36.5 million, maintenance revenue of $26.0 million and operating income of breakeven versus our projections of $36.8 million, $25.5 million and $1.9 million, respectively. For FY ’22, management’s guidance for subscription revenue of $160.0 million, maintenance revenue of $102.0 million and operating income of $12.0 million compared favorably with our estimates of $159.3 million, $99.4 million and $11.8 million, respectively.
Exhibit II: Estimate Revisions
We raise our revenue estimates for this year and next, primarily reflecting higher estimates for subscription and maintenance revenues. We also increase our subscription gross margin assumptions, which combined with the uptick in revenue and only a slight increase in our operating expense estimates yields a more meaningful increase in both our adjusted EBITDA and non-GAAP EPS estimates.
Our report with model and disclosures is available here.