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Edited Transcript of QADA earnings conference call or presentation 20-Mar-19 9:00pm GMT

Q4 2019 QAD Inc Earnings Call

SANTA BARBARA Mar 25, 2019 (Thomson StreetEvents) -- Edited Transcript of QAD Inc earnings conference call or presentation Wednesday, March 20, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Anton Chilton

QAD Inc. - CEO, Joint Interim COO & Director

* Daniel Lender

QAD Inc. - Joint Interim COO, CFO, Executive VP & Corporate Secretary

* Kara L. Bellamy

QAD Inc. - CAO, Corporate Controller & Senior VP

* Pamela M. Lopker

QAD Inc. - Founder, President & Director

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Conference Call Participants

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* Bhavanmit Singh Suri

William Blair & Company L.L.C., Research Division - Partner & Co-Group Head of Technology, Media and Communications

* Brad Robert Reback

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst

* Zachary Cummins

B. Riley FBR, Inc., Research Division - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Welcome to the QAD Fiscal 2019 Fourth Quarter Financial Results Call. (Operator Instructions) And as a reminder, the conference is being recorded. I'll now turn the conference over to Chief Accounting Officer, Kara Bellamy. Please go ahead.

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Kara L. Bellamy, QAD Inc. - CAO, Corporate Controller & Senior VP [2]

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Hello, everybody, and welcome to today's call. Before we begin, I'd like to ensure that everybody understands that our discussion may contain forward-looking statements that are based on certain expectations and analyses. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated. QAD undertakes no obligation to revise or update these forward-looking statements to reflect events or circumstances after the date of this call. For a complete description of these risks and uncertainties, please refer to QAD's 10-K and 10-Q filings with the Securities and Exchange Commission.

Please also note that during this call, we will be discussing non-GAAP pretax income, which is a non-GAAP financial measure as defined by SEC Regulation G. A reconciliation of this non-GAAP financial measure to the most directly comparable GAAP measure is included in today's press release, which is posted on the company's website.

Now I'd like to turn the call over to our new CEO, Anton Chilton.

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Anton Chilton, QAD Inc. - CEO, Joint Interim COO & Director [3]

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Thank you, Kara. Good afternoon, and thank you for joining today's call to discuss QAD's fiscal '19 fourth quarter and full year results. Joining me on the call are Pam Lopker, our President; and Daniel Lender, Chief Financial Officer.

As you may know, this is my first call as CEO following the very sad loss last year of Karl Lopker. However, I must say that there's been a very smooth transition in our top management team following the leadership change. The experience and continuity of our executive team has allowed us to continue the effective drive of our business and our operations.

I'll now turn it over to Daniel to discuss the financial results.

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Daniel Lender, QAD Inc. - Joint Interim COO, CFO, Executive VP & Corporate Secretary [4]

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Thank you, Anton. Total revenue and pretax profit exceeded expectations due to higher license revenue. Subscription revenue was on target with guidance. For the fourth quarter, currency had a negative $2.1 million impact to revenue compared with last year, and the impact to our bottom line was negligible. Know that my comments about revenue growth are given on a constant currency basis unless otherwise noted.

Fourth quarter revenue was $82.7 million compared with $80.8 million in the prior year and on a constant currency basis, increased 5%. Subscription revenue grew 24% and was 29% of our business. Subscription margins for the quarter was 63%, up from 60% a year ago. In Q4, we added 23 customers to the cloud, with 11 of those being conversions and 12 brand new. For the year, total revenue increased 9% to $333 million, driven by growth in subscription and professional services. Subscription revenue grew 32% to $91.9 million, up from $69.6 million last year. Subscriptions margins for the year improved by 7 percentage points, from 56% to 63%, significantly exceeding our expectations. We will endeavor to continue to improve in this area by 1% to 2% per year, but we expect to see some variability as further investments may be required.

Maintenance and other revenues were down about 4%, both from last year's fourth quarter and on a full year basis. The decline was driven mostly by conversions to the cloud and the shift of our business from on-premises to Software-as-a-Service. We expect this trend to continue.

Professional services revenue was $19.1 million compared with $22.1 million from last year's fourth quarter. The prior year included a large multisite global implementation project. As previously discussed, the implementation that paused last quarter resumed during the fourth quarter and is expected to finish later in Q1. Services margins were close to breakeven for the quarter, and as expected, we achieved a small profit in this business for the full year.

In fiscal '20, we expect services revenue to decline about 10%, with weaker revenue in the first half of the year mainly due to our EMEA business. The completion of the large implementation combined with [0] large services projects closed in fiscal 2019 have resulted in a lower services backlog. We expect margins to be at about 5% loss in the first quarter and breakeven for the year.

License revenue for fiscal '19 was flat to last year and grew 30% in the fourth quarter compared with the prior year as our existing on-premises customers continue to buy additional licenses to support the growth in their businesses. In the fourth quarter, we closed 10 license deals greater than $200,000 and 1 greater than $1 million.

Total revenue by vertical for the fourth quarter was: automotive, 34%; high tech and industrial, 35%; consumer products and food and beverage, 17%; and life sciences, 14%.

By geography, total revenue was: North America, 48%; EMEA, 31%; Asia Pacific, 15%; and Latin America, 6%. Gross margin for the year improved to 53% from 51% mainly due to the productivity gains we achieved in our cloud business.

Our sales and marketing expense totaled $20.3 million versus $22.4 million last year due to a decline in commission expense, partly due to the adoption of ASC 606, offset by higher personnel costs. As a percentage of revenue, sales and marketing expense was 25% in the FY '19 period and 28% last year.

R&D expense was $13.3 million for the 2019 fourth quarter versus $12.3 million last year. The increase was primarily driven by higher personnel costs and higher subcontractors supporting both the completion of Channel Islands and the development of advanced technologies. R&D expense was 16% of total revenue for the fiscal '19 fourth quarter and 15% last year.

General and administrative expense was $8.4 million or 10% of total revenue compared with $8.8 million or 11% of total revenue last year. The decrease related to lower stock compensation and bonuses. Stock compensation expense was $2.5 million for the fiscal '19 fourth quarter and $2.3 million for last year. For the year, stock compensation expense was $10.1 million versus $8.9 million.

Our GAAP pretax income was $3.2 million compared with a GAAP pretax loss of $3 million for last year's fourth quarter. And for the year, our pretax income was $11.9 million versus a pretax loss of $4.2 million last year. Non-GAAP pretax income was $6 million versus a loss of $927,000 a year ago. For the year, non-GAAP pretax income totaled $22.2 million for fiscal 2019 compared with $5.2 million 1 year ago.

GAAP net income totaled $4.9 million or $0.24 per diluted A share and $0.21 per diluted B share compared with GAAP net loss of $5.2 million or $0.28 per Class A share and $0.23 per Class B share last year. And for the year, GAAP net income was $10.4 million or $0.50 per Class A and $0.44 per diluted Class B versus a net loss of $9.1 million or $0.49 per Class A and $0.41 per Class B share last year.

We recorded income tax expense of $1.5 million for the year versus $4.9 million last year. In the prior year, we accrued $2 million of tax expense related to the U.S. tax reform onetime mandatory repatriation. The calculation was an estimate in the prior year, and through further utilization of foreign tax credits, the final calculation of $700,000 resulted in QAD recording a tax benefit of $1.3 million in fiscal '19. For fiscal 2020, we expect tax expense of approximately $3 million.

We ended the year with $139.4 million in cash and equivalents compared with $147 million at the end of fiscal 2018. Our cash flow from operations improved to $19 million for fiscal '19 compared with $10.4 million last year, reflecting the continued growth in subscription revenue and improved margins.

Our accounts receivable was $81.6 million compared with $83.5 million at the end of fiscal '18. Our days sales outstanding using the countback method was 48 days for the fiscal '19 fourth quarter versus 51 days for the same period last year, reflecting good collection practices and healthy receivables.

Our short-term deferred revenue balance on January 31 was $115.3 million versus $116.7 million a year ago. And it includes $77 million of deferred maintenance versus $80.8 million, $34 million of deferred subscription versus $31 million, $2.1 million of deferred professional fees versus $3.5 million, and $2.2 million of deferred licenses versus $1.4 million.

As you may recall, our maintenance contracts are billed annually and subscription contracts can either be billed annually or quarterly. Given the variability of our subscription billing practices, we will be providing annual subscription billings growth statistics. Over the last 12 months, our subscription billings grew by 23%, with our 3-year CAGR subscription billings growth at 34%. And our annual run rate for subscription revenue has now reached the $100 million mark.

I'll finish out financial review with our 2020 guidance. As I mentioned during last quarter's call, we anticipate that the subscription revenue growth will slow at the beginning of FY '20 due to the exceptional business close at the end of fiscal '18 and the immaturity of the funnel as we enter into fiscal '18. And our guidance reflects this. We expect subscription revenue growth around 20% during the first few quarters and to reaccelerate toward the end of FY '20, approaching 30%.

With the declining professional services revenue that I mentioned earlier and the shift of business from licenses to Software-as-a-Service, we expect to have a relatively flat overall top line growth despite the continued growth of our cloud business. With that, for 2020 first quarter, we're expecting revenue of $78 million to $79 million, including subscription revenue of $25 million to $25.5 million; GAAP pretax loss of $4 million to $5 million; and non-GAAP pretax loss of $1 million to $2 million. For the full year, we anticipate revenue of $330 million to $335 million, including subscription revenue of $110 million to $112 million; GAAP pretax of approximately breakeven; and non-GAAP pretax income of $10 million to $13 million.

With that, back to you, Anton.

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Anton Chilton, QAD Inc. - CEO, Joint Interim COO & Director [5]

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Thank you, Daniel. So last year saw us continue the growth of our cloud business with several important wins. In the fourth quarter, about 50% of our new cloud business came from new customers and 50% from the conversion of existing customers on-premise to the cloud. Clearly, the market opportunity available from new customers far exceeds the opportunity from conversions, particularly with our product leadership driving market share increases in the future. We will continue to increase our emphasis on winning new customers away from our competitors. In addition to our new cloud customers, about 1/3 of our additional business came from existing cloud customers as they added additional capacity or solution capabilities.

I'd now like to review some of the highlights by geography. North America, our most mature market, had a strong finish to the year both in the cloud and on-premise businesses. Asia Pacific and Latin America experienced the fastest growth in the cloud, and this could signal an acceleration of cloud adoption in both those regions. EMEA, however, had a disappointing year, suffering from various execution issues. We've already implemented a number of management changes designed to get our EMEA business back on track over the next couple of quarters.

Our strategic accounts team performed well, and while we did not match the prior record year, they have built a solid funnel for FY '20. I'm particularly pleased with the performance of our DynaSys and Precision divisions, both of which showed impressive growth in the cloud and significant advancement in their solutions.

Looking at our verticals. Life sciences and automotive continued to perform well, while electronics and industrial and CP, food and beverage lagged behind. Globally, we do expect to reaccelerate growth in our cloud business through FY '20 as our funnel is strong. In fact, in month 1 of our first quarter, we've already met the bookings achieved in the prior year first quarter. Our 3-year plan sees continuing momentum in our cloud revenues driving to a 30% annualized growth rate. We're also pleased that as our cloud business continues to grow, we've also seen our continuous efforts in driving efficiency in automation pay off as margins improved in our cloud operations business.

With respect to our solution portfolio, with Channel Islands is now generally available to cloud customers, we've made significant progress with the product that delivers a world-class user experience, serving up real-time personalized decision support information accessible anywhere, anytime. We currently have in excess of 30 customers deploying the solution, with 10 of those already live.

In conjunction with Channel Islands, our enterprise platform provides the capability to personalize and extend the QAD applications and even develop discrete business applications in a low code, no code content world. In a world where disruption is a constant and manufacturing industries are transforming at an ever accelerating pace, this kind of flexibility will be critical in enabling our customers to thrive and adapt to the challenges of today as well as tomorrow.

QAD Labs launched last year, where we work with customers on digital transformation initiatives, have delivered solutions connecting QAD applications to shop floor machines and processes. This is providing real-time visibility of production status to our customers. We've also been applying machine learning and AI to help improve forecasting and planning processes for customers, too. We will continue to invest R&D effort in these areas.

Looking ahead, our cloud funnel is looking strong and continues to grow with the value up 25% in comparison to the same time last year. We expect that growth to continue as we increase our sales and marketing capacity globally with a focus on lead generation to support those growth goals. And we expect our professional services business to recover in the back end of the year as our business in EMEA regains shape.

We are making material investments in enhancing our sales capabilities globally, which, when combined with investments we're making in R&D, will have an impact to our profitability in fiscal '20. On the organizational front, we're developing an extended inside sales and lead-generation capability as well as increasing our field sales force. We're coupling this with extensive training in our global sales methodology and processes.

Our cloud solution continues to go from strength to strength, with impressive performance in application availability numbers as well as being compliant with world-class physical and cybersecurity standards. We will also be extending our global reach with the launch of a data center capability in China in the second half of this year.

With that, I'll now hand over to Pam, and she'll go over more details around our cloud business and talk a little more about the enterprise platform.

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Pamela M. Lopker, QAD Inc. - Founder, President & Director [6]

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Thanks, Anton. You hear me, right? Okay. So FY 2019 was a watershed year for QAD and cloud. We started selling cloud ERP 10 years ago, in FY 2009, and sold 5 customers that year. This year, we gained 67 new cloud customers, a thirteenfold increase since FY '09. Out of 67 customers, 41 were new customers and 26 were conversions from on-premise. We are now at a run rate of excess of $100 million a year and have moved from the starting stages to where the growth engine for QAD is most definitely cloud.

On October 31, 2018, Gartner published their first Magic Quadrant for cloud ERP, where QAD was placed as a visionary. In this report, Gartner stated, "QAD has a strong offering for operational ERP for midsize and large enterprises. Its modular technology architecture and road map position it well for the future. QAD had an -- has an extremely loyal customer base. Its reference customers scored it very highly in terms of their overall satisfaction, with its support and responses to reported issues."

As expected, Gartner also mentioned they could only find a few references for our new technology. So this year, we will be focused on the rollout of Channel Islands as standard partner -- or, standard product in gaining those references. At this point, I should mention here that Channel Islands has always been our internal project name, and we will be releasing our new product under the name QAD Adaptive Applications, where QAD Adaptive ERP is the component of that.

Fundamentally, the markets that we serve and even the way in which customers manufacture and sell is being disrupted. While this has been true in the past, disruption and the need for change is accelerating. To survive and thrive, our customers need to rapidly respond to change, and QAD needs to provide an ERP solution that provides rapid response with greater business fit for today and future needs.

No longer can enterprise install a system that takes years to install and then basically is set in stone but -- and is expected to support their business for the next 10 years. They need a system that is quick to implement and adapt as their business requirements change on a continuous basis. With QAD Adaptive ERP, we are now delivering a next-generation cloud ERP system that is adaptable to evolving requirements and enables manufacturing enterprises to run their operations effectively, utilizing best industry practices that QAD delivers and will continue to build out.

QAD Adaptive ERP is built on the QAD Enterprise Platform, which provides our customers and our partners with the ability to extend and adapt the application in a low code, no code environment, in fact, the same platform that QAD is building future enhancements to our product on for general release. So really, an amazing change in technology. The QAD Adaptive ERP as their interface enables our customers, employees to access the application in an intuitive and efficient fashion from any device and from any location, requiring no download or client-side code.

We expect that the QAD adaptive applications will provide the foundation that will last for years to come. We will be continuing to build on that with emerging requirements in areas like machine learning, data lakes and digital twins. Many of these technologies will be spearheaded via QAD Labs, exploiting the QAD enterprise foundation that allows us to bring this to market quickly and in a controlled manner.

Unlike many cloud products, cloud ERP for manufacturing enterprises is not a point solution. It is a complex solution and needs to be robust and efficient in providing 100% or near 100% uptime. For years, both industrial and financial analysts did not think this could be accomplished in the cloud. Contrary to this thinking, a decade ago, we felt that cloud was the future not just for point solutions but for even complex ERP for manufacturing companies that we serve.

Given our track record in ERP for manufacturing and our history of embracing new technologies, cloud ERP was ours to take, and we took it on. It feels great to be here 10 years later and see the success that we achieved. I'm certainly looking forward to the next 10 years as we exploit our technologies and our capabilities and really move fast in this market.

Thanks so much. Back to you, Anton.

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Anton Chilton, QAD Inc. - CEO, Joint Interim COO & Director [7]

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Thank you, Pam. So we have a strong funnel, and we're investing in our sales capacity and marketing capabilities to deliver new business. Our executive and senior management compensation is completely aligned to driving the growth of that cloud business. When we look at the disruption and change that's pervasive in the industries we serve, with our solution portfolio and digital transformation capability, we see ourselves uniquely placed to help manufacturers navigate this period of uncertainty. We have a leadership position with our cloud solutions that is driving continued new customer wins and market share gains, providing the basis for strong, strong future growth. We're excited and confident about the next phase of growth for QAD.

We will now take questions live. Operator, could you please give the instructions for questions?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question will come from [Mr. Farooq] with Sidoti & Company.

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Unidentified Analyst, [2]

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Daniel, maybe this question is for you. I had a question regarding the guidance. In terms of your guidance for fiscal 2020, it sort of assumes that there will be growth in expenses. Or am I reading it wrong, because your revenues look like they're going to be flat year-over-year?

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Daniel Lender, QAD Inc. - Joint Interim COO, CFO, Executive VP & Corporate Secretary [3]

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Yes. That's correct. So on the revenue side, we -- as I mentioned during my prepared remarks, there is a -- given the fact that professional services is coming down and the natural decline in maintenance and licenses as our business is shifting from the on-premises business to the cloud, we do expect on a top line to be relatively flat despite the growth that we will see in the subscription business. So as Anton mentioned, we are making a number of investments on both sales and marketing and R&D. On the sales and marketing side, we're spending over $1 million in what we call the account-based marketing and advertising. We're adding close -- we're planning to add close to 100 people in that group. On the R&D side, we'll continue to develop our Channel Islands as well as the advanced technologies. So there's about 25 headcount, plus additional professional fees in those areas. So those are the 2 main areas where you're going to see some additional investment.

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Unidentified Analyst, [4]

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Okay. And one more follow-up, if I may. You mentioned that you're going to be shifting towards billings growth statistics. Is that -- do you think that's going to be a key metric for investors to evaluate to get a gauge for QAD's growth in the future?

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Daniel Lender, QAD Inc. - Joint Interim COO, CFO, Executive VP & Corporate Secretary [5]

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Yes, absolutely. It is a key metric, and we will be providing that. As I mentioned, over the last 12 months, our subscription billings grew by 23%; and on a 3-year basis, the growth was 34%.

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Operator [6]

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Our next question will come from Bhavan Suri from -- with William Blair.

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Bhavanmit Singh Suri, William Blair & Company L.L.C., Research Division - Partner & Co-Group Head of Technology, Media and Communications [7]

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At the airport, so I apologize for the background noise. I guess, maybe for Anton and Pam to start off with, when you look at the macro and you're not tied to automotive and discrete manufacturing as you used to be, but are you seeing any macro slowdown there? You did talk about EMEA, so I'd just love to have some more color what happened in EMEA. But even globally China, I'd love to see -- love to hear some color on sort of what you're seeing in the global manufacturing economy. And then you can sort of maybe even -- any impact of tariffs you may have seen in China. Just love to understand how the macro is trending and what your outlook for fiscal '20 is for macro.

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Anton Chilton, QAD Inc. - CEO, Joint Interim COO & Director [8]

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Right, sure. I can take that, Bhavan, yes. So I think I'd say, generally, we see customers, obviously, there is a lot of uncertainty around with tariffs and what's going on in various parts of the world. That said, it has not flowed through as an impact into our funnel and our expectations around what we can do this year. Indeed, part of the area that we're investing in more heavily this year is in China, so that's part of where that sales and marketing investment is going. On your question specific to EMEA, we don't believe that, that was a market opportunity issue. We still see the economies there; the manufacturing economy is pretty healthy. There was more about execution within the QAD organization. So we've taken the opportunity to make some changes. We've put in place a new leader there, Steve Gardner, who's been a part of QAD for a long time and successfully led our Precision division over the last few years. So we're expecting him to get the sales and marketing engine firing on all cylinders through this year seeing that. We certainly -- there's a little bit more nervousness in the automotive market, with vehicle sales down, but we see bright spots in that industry, too. So I'd say, overall, people are -- there's uncertain times. People are talking about them, but we've not seen the impact flow through to our funnel, our pipeline growth at the moment.

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Bhavanmit Singh Suri, William Blair & Company L.L.C., Research Division - Partner & Co-Group Head of Technology, Media and Communications [9]

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Okay. Okay. And then you did sort of -- even Q3 earnings call, you've discussed the timing of deal closure and everything else and sort of the shape of the first half versus second half. I guess, when you look at that and you look at the guide to subscription, which I'll get to in a second, but when you look at that, I guess, even just for the existing guide, how much visibility and confidence do you have in that second half re-acceleration? You talked about obviously closing 1-month worth of a quarter -- the amount you booked is -- in a month has been a quarter versus last year. And I didn't ask invoicing or duration, so we could see some of that this year. But I'd love to understand how much visibility and confidence you have in that re-acceleration? Like do you feel like that's in the bag and you feel good about it? Or do certain things have to happen for that to occur?

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Anton Chilton, QAD Inc. - CEO, Joint Interim COO & Director [10]

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We're feeling good about the pipeline. As we've said -- or I said in my prepared statement, the funnel was up 25%. That's the overall funnel. There's still obviously work to do to go out and close that business. And to that point, as we've appointed a new head of global sales, Ed Boclair -- again, Ed has been part of the QAD organization for a long time and successfully led the growth in cloud that was spearheaded by our North American organization over the last few years. And Ed's putting in place more lead generation capability and capacity, and that's part of that investment, too. So we're really expecting that to pay dividends. We've made some senior appointments around business development, where we have a focus on penetrating into some of our competitors' bases and so going after specific accounts that we believe would benefit from the QAD solutions and the cloud offerings that we have. So we're confident with the state of the funnel and with what we're building behind that and the people we put in place to go and drive that growth in that business.

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Bhavanmit Singh Suri, William Blair & Company L.L.C., Research Division - Partner & Co-Group Head of Technology, Media and Communications [11]

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Got it. Got it. Congrats, Ed. I know him well, so it's a nice promotion for Ed. I guess, now turning to a little bit of the financials. If I look at subscription guidance, despite the sort of -- the acceleration in the back half, like if I look at sort of Q1, it's stronger than we had expected, but maybe I mismodeled. If I look at the full year guidance and it's lower by about $5 million. So maybe Daniel or Anton can jump in. Just maybe walk us through the moving parts there. And I'm using subscription, but if I look at the full year revenue guidance, it's probably below our consensus. It's about $20 million. Services impact's $15 million, and so it feels like the subscription number is down by $5 million. So help me think through that. And maybe if I'm wrong, just maybe for investors, what those moving parts look like. And then I have one more follow-up.

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Daniel Lender, QAD Inc. - Joint Interim COO, CFO, Executive VP & Corporate Secretary [12]

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Yes. Sure, Bhavan, I'll cover that. So on the subscription side, basically what we saw already in quarter -- Bhavan, I mentioned that on my -- on the call last quarter as well, and we expected to see slower growth in the first part of the year. And we're still seeing that today. So our -- as I mentioned earlier, our overall growth in subscription billings is just north of the 20% mark. So over the first few quarters, we expect that growth to -- not to accelerate. We expect that growth to accelerate at the end of the year. So that's -- from a mechanical standpoint, that's where we see the subscription revenue going. So probably, if I were to look at models that may be out there, I would say probably the earlier quarters of the year might be a bit high compared to what we're seeing today. But as I mentioned, towards the back end of the year, we would expect to be getting close to that 30% mark again and putting us in a very good position for the following year also. With regards to the top line, the overall revenue, as I mentioned, the professional services business, we expect about a 10% or so decline from a revenue standpoint there. In addition to that, our maintenance business will continue to come down from where it was this last year. And that maintenance decline is mainly driven by our on-premises implementations converting to the cloud. So our cancellation rates actually remain at historical levels. They're actually -- from a re-up basis, we are -- that business is very, very healthy. And then as the business is also shifting to the cloud, the licenses business will decline as well. So combination of declines and all those 3 revenue lines, the growth in subscription quite doesn't make up for that this year.

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Bhavanmit Singh Suri, William Blair & Company L.L.C., Research Division - Partner & Co-Group Head of Technology, Media and Communications [13]

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Got it. Got it. And that touches my follow-up. So if I think not even this year, next year, 2, 3 years out, and you think about this 30% growth, which we've discussed quite a bit and you think about the mix between new and existing customers, you sort of said it's 50-50. But if I think about existing customers driving 3x op side or maintenance and new customers coming in small deals, do you need to add more new customers? Is that kind of how we have to think about what that needs to look like to sustain 30% growth to really support that? Like how should we think about that mix not today but over the pipeline? Does Anton and Ed need to go up -- get a lot more new customers to maintain that 30% growth? Or do you think you can do it in the same 50-50 combination?

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Daniel Lender, QAD Inc. - Joint Interim COO, CFO, Executive VP & Corporate Secretary [14]

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Yes. So let me start with that question. Then, I'll pass it over to Anton for additional color. And I think, generally, we are seeing tremendous potential now in terms of new customers. So I think it will continue to be a combination of both conversions and new customers. Over time, that shift -- that percentage will shift, I believe, from the 50-50 to a greater emphasis to new customers. In fact, Pam quoted a number of customers in -- on a customer basis this year, and we've already seen a great -- we already have this year, in terms of number of customers, a greater number of new customers than we did conversion in FY '19, and I'm sure Anton will add to my comments.

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Anton Chilton, QAD Inc. - CEO, Joint Interim COO & Director [15]

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Yes, absolutely. I mean, in short, Bhavan, there's obviously good potential in both those areas. We do have a big installed base on on-premise we'll have to go at. But we expect that to be a fairly long tail with that, too. And so to maintain those growth rates, the new businesses, a target we have. With where the product is at right now, we think that we are uniquely placed. The combination of the technology, the enterprise platform and pretty much, in my view, unprecedented levels of speed of deployment capability that we have, will be an important factor for large global manufacturers as they try and get on a more flexible platform to meet all of these changes and these disruptions that we see coming. And so we see there's an opportunity there for us to go and target our competitors' base and go and grab those new clients. So -- and I support what Daniel says. I think over the next few years, we'll see that percentage shift more in the favor of new business, but there's still big opportunity in installed base for many years to come, too.

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Operator [16]

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We'll go now to Zach Cummins with B. Riley FBR.

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Zachary Cummins, B. Riley FBR, Inc., Research Division - Analyst [17]

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So can you talk more about the issues in the EMEA region? I know you've made some leadership changes. But can you talk about some of the other actions that you have planned to kind of get that business to rebound in the second half of 2020?

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Anton Chilton, QAD Inc. - CEO, Joint Interim COO & Director [18]

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Sure, Zach. Yes, absolutely, I can take that. So yes, we really saw those in the execution side, on the sales and lead generation activities over there. And we had some shrinkage in our sales force. And so we've taken very direct actions in addition to putting in new management, and there's a number of people there that are in new positions in addition to Steve Gardner. We're investing heavily in growing both our lead generation capability with an inside sales team as well as new sales executives. We're also -- Ed is rolling out a global sales process that will drive a level of consistency around how we approach sales across all of the different regions, and I think that's going to have a marked effect. We've created a new global, what we call, a sales enablement function, which is supporting the adoption of the processes and the methods that we've adopted, and that'll be helping, too. So -- and finally, with marketing, we're taking a much stronger position with corporate marketing, looking at our ability to support lead generation and nurturing with the acquisition of our account-based marketing capability. So those will have benefits across all of the regions globally, but particularly in EMEA, we expect to see the benefit realized towards the back end of this year as we get that back on track.

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Zachary Cummins, B. Riley FBR, Inc., Research Division - Analyst [19]

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Understood. That's helpful context. And then in terms of the competitive landscape, it sounds like more of your focus is now shifting to taking some of the customers away from your competitors. Has there been really any major changes that you've seen in the competitive landscape over the past couple of quarters?

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Anton Chilton, QAD Inc. - CEO, Joint Interim COO & Director [20]

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I'd say not necessarily just over the past couple of quarters, but over time, what we've seen is customers moving away from 7-, 10-year implementation projects, particularly in the larger global manufacturers. And with all the changes that are coming, if you just take the automotive market as an example, right, I mean huge changes there, new OEMs that are coming in, electrification of vehicles and so on, the proliferation of connected vehicles and software in vehicles. It's really changing the entire supply chain and what's being bought and how it's being made. And for those kind of companies to adapt rapidly to that kind of pressure, they can't afford to be in implementation cycles that span 7, 10 years. And so we know and we've proven that we can do it. We can roll out literally tens to a hundred of sites in 24 months. And so we think with our new technology platform, that allows these new -- will allow new customers to deploy extremely rapidly. But then with the enterprise platform, they've got the flexibility to keep making changes as they need to and adapting to those competitive pressures and those pressures they see from consumers and the industry in general.

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Pamela M. Lopker, QAD Inc. - Founder, President & Director [21]

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And there's a lot of things that the larger ERP companies that had traditionally been our competitors are really struggling to come up with a viable cloud offering in ERP. Instead are kind of what I'd say, retreating to [growing] point solutions. So for companies that do want cloud solutions, particularly on the global basis, I think we're in an excellent position there.

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Zachary Cummins, B. Riley FBR, Inc., Research Division - Analyst [22]

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Great. And then final question for me. You've really started to roll out the QAD adaptive applications and some of the customers have gone live at this point. What's sort of the early feedback that you've gotten from customers? And what's kind of the plan to really get this aggressively rolled out to more of your customers going forward?

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Anton Chilton, QAD Inc. - CEO, Joint Interim COO & Director [23]

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Sure. So certainly, the initial feedback is great, both in terms of the user experience. So with things like our embedded analytics capability, they're able to get really personalized and informed rich information in real-time that's helping them make quick decisions without having to leave the application or go out to Excel or another business intelligence solution or something like that. The accessibility of the application, as well, is important. As we've added in things like our advanced technology stuff, so production execution, we're increasing the visibility of the status of production throughout the entire process, manufacturing process, right down to the status of machines on the shop floor, and that's something that the customers that are early adopters of that are delighted with. And then, of course, I think we're just starting to scratch the surface with the power of the enterprise platform. As we talked about earlier, the ability to extend the application or even build new business applications in a low code, no code context, safeguarding the upgradability of the application for the future, I think, is going to be something that's really, really powerful. And I'd say we're just in the early stages of that. So from a rollout and pick-up perspective, we're going to be launching the QAD adaptive solutions at our Explore event in May this year in New Orleans. And we have set some targets to aggressively build on the early adopter program that we've had and have probably upwards of 50 customers moving to our Channel Islands through this year and then proving out the enterprise platform capability through that period.

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Operator [24]

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And next, our question will come from Brad Reback with Stifel.

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Brad Robert Reback, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [25]

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Anton, with the completion of the Channel Islands platform, are you now in a position to accelerate M&A activity?

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Anton Chilton, QAD Inc. - CEO, Joint Interim COO & Director [26]

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We're certainly going to be continuing to look at M&A activity. And our policy will remain consistent, but we want to look for complementary solutions that really add value to our customers and enhance the solution and functional footprint of our core application. So yes, it's something we're going to be looking at for sure on an ongoing basis.

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Brad Robert Reback, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [27]

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Great. And one quick follow-up. While customer count may be 50-50 of sort of cloud growth, can you give us a sense of what the new versus existing is on the billing side?

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Daniel Lender, QAD Inc. - Joint Interim COO, CFO, Executive VP & Corporate Secretary [28]

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Yes, sure, Brad. On the billing side, the conversions bring in more revenue initially. So even though it's about 50-50, it's about a 60-40 with regards to conversions to new customers. New customers just take longer to deploy and bring all the revenue over time.

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Operator [29]

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And at this time, I'd like to turn the conference back to Anton Chilton.

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Anton Chilton, QAD Inc. - CEO, Joint Interim COO & Director [30]

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Okay. Well, thank you, everybody, for your attendance and your questions. We look forward to updating you again in May with our first quarter results. Goodbye for now.

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Operator [31]

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Ladies and gentlemen, this conference will be available for replay after 4:00 p.m. today through midnight on Wednesday, March 27. You may access the AT&T executive replay system at any time by dialing 1 (800) 475-6701 and entering the access code 462707. International participants dial 320 365-3844. That does conclude our conference for today. Thank you for your participation and for using AT&T Teleconference. You may now disconnect.