Reports Strong Fiscal Q1 '22 Results
QAD (QADA) reported fiscal Q1 ’22 results ahead of our estimates and consensus. The strong performance was highlighted by a substantial increase in new customer wins and the highest Q1 bookings ever. Per management, new cloud bookings increased over 50% Y/Y with the number of transactions also up over 50% relative to pre-pandemic levels. Maintenance renewal rates have also returned to pre-pandemic norms above 90%, and both license and professional services revenue were also well above our forecasts. Perhaps the only knock on the quarter was that more of the upside did not flow through to the bottom line as operating expenses ran higher than anticipated. In this regard, management indicated that QAD incurred some non-recurring expenses related to a patent infringement case that has largely concluded. Regardless, both adjusted EBITDA and non-GAAP EPS beat our estimates and consensus with the latter well in excess of our forecast due to an income tax benefit recorded for the quarter.
As for the current environment, management stated that with global PMIs sitting at ten-year highs, the outlook is increasingly favorable. While sales cycles in the automotive vertical remain impacted somewhat by the microchip shortage, the barrage of supply chain disruptions has also created greater awareness and interest in QAD’s solutions. Both the weighted and unweighted pipeline remain at record levels, up 21% Y/Y and 65% Y/Y, respectively. For Q2, management’s guidance for recurring revenue was in line with our prior projections, although the expected mix of subscription revenue was a shade lower and contribution from support a tad higher. As for operating income, guidance for Q2 was lower than our estimate but we note that amortization expense related to the company’s recent acquisitions accounts for much of the variance, so the delta is relatively insignificant on a non-GAAP basis. Moreover, management reaffirmed its prior FY ’22 guidance for subscription revenue, maintenance revenue and operating income, which given the incremental amortization and non-recurring expenses incurred in Q1, implies an uplift to prior profitability expectations on a non-GAAP basis.
All told, we raise our revenue projections for this year and next, primarily reflecting higher levels of license and services revenue. Our forecast for recurring subscription and maintenance revenue also rises, albeit to a lesser degree. Worth noting, we now anticipate a return to double-digit top line growth this year as opposed to next year. As we also increase our estimates for operating expenses, however, our adjusted EBITDA estimates remain virtually unchanged for both FY ’22 and FY ’23. We note that our non-GAAP EPS estimates move higher for this year due to a lower tax provision than we previously modeled. Commensurate with the increase in our growth expectations, we raise our price target from $75.00 to $77.00, representing an unchanged FY ’23 EV/Sales multiple of 4x.
Exhibit I: Reported Results Versus Expectations
Total revenue of $83.0 million (+11.9% Y/Y) was above our estimate of $78.7 million and consensus of $78.9 million. All revenue line items outpaced our projections with most of the variance attributable to higher license and professional services revenue. Subscription revenue of $36.7 million (+19.2% Y/Y) was modestly above management’s guidance and our estimate of $36.5 million. Maintenance revenue of $26.6 million (+0.6% Y/Y) was also ahead of management’s guidance and our estimate of $26.0 million. In Q1, QAD closed 33 cloud deals, including 23 with new customers and 10 from conversions. Consistent with the past two quarters, both North America and EMEA produced solid bookings while Asia Pacific and Latin America were relatively quiet. Activity appears to be picking up in China and Australia, however, and management sounds more optimistic regarding the broader demand environment.
Gross margin was ahead of our assumption, primarily due to better than anticipated contribution margins from professional services. However, operating expenses were higher than we modeled across all categories, and the variance was particularly notable in G&A. Management attributed the elevated expenses to the concluding phase of an IP infringement case, which combined with the acquisition of Foreign-Trade Zone in April drove some spending in the quarter that should not recur going forward. Nonetheless, both adjusted EBITDA of $6.2 million and non-GAAP EPS of $0.28 topped our estimates of $5.8 million and $0.15, respectively, and exceeded Street expectations for $5.0 million and $0.12. We note that a tax benefit accounted for most of the upside in earnings relative to our forecast, and on an apples-to-apples basis, non-GAAP EPS would have beat our estimate by $0.02. QAD generated $21.6 million in free cash flow during the quarter and exited Q1 with cash and investments of $153.1 million and outstanding debt of $12.2 million.
Looking forward, management’s Q2 guidance calls for subscription revenue of $38.5 million and maintenance revenue of $26.0 million, which in aggregate was in line with our estimates of $38.8 million and $25.8 million. Guidance for operating income of $1.0 million was short of our $1.7 million projection but approximately $0.4 million of the delta is attributable to non-cash amortization expense. For FY ’22, management reiterated its prior guidance for subscription revenue of $160.0 million, maintenance revenue of $102.0 million and operating income of $12.0 million.
Exhibit II: Estimate Revisions
We raise our revenue estimates for this year and next, primarily reflecting higher estimates for license and services revenue. The increases were largely offset by higher assumptions for operating expenses, leaving our adjusted EBITDA estimates virtually unchanged. We note that our non-GAAP EPS estimates increase for FY ’22 and FY ’23 due to a lower assumed tax provision.
Our model with report and disclosures is available here.