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Edited Transcript of QADA earnings conference call or presentation 26-Nov-19 10:00pm GMT

Q3 2020 QAD Inc Earnings Call

SANTA BARBARA Nov 27, 2019 (Thomson StreetEvents) -- Edited Transcript of QAD Inc earnings conference call or presentation Tuesday, November 26, 2019 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Anton Chilton

QAD Inc. - CEO & Director

* Daniel Lender

QAD Inc. - 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

* Ishfaque Ahmed Faruk

Sidoti & Company, LLC - Analyst

* Kevin Liu

* 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, and welcome to the QAD Fiscal 2020 Third Quarter Financial Results Call. (Operator Instructions) And as a reminder, today's call is being recorded. I would now like to turn the call over to our host, Chief Accounting Officer, Kara Bailey -- Bellamy, I'm sorry. Please go ahead.

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

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Hello, everyone, 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'll turn the call over to our CEO, Anton Chilton.

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

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Thank you, Kara. Good afternoon, and thank you for joining today's call to discuss QAD's Fiscal '20 Third Quarter Results. Joining me on today's call are Pam Lopker, our President; and Daniel Lender, Chief Financial Officer. Total revenue was in line with guidance for the quarter, with an expected decline over the same period last year largely due to reductions in professional services and license sales.

We closed a record number of cloud deals, and momentum in competitive new cloud customer wins continues to be strong. Material improvements in both professional services and cloud margins have contributed to a stronger-than-forecast net income.

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

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

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Thank you, Anton. Third quarter total revenue and subscription revenue were generally in line with our guidance, while before tax profit, both GAAP and non-GAAP, exceeded our projections, resulting from higher subscription and professional services margins. For the fiscal '20 third quarter, currency had a $1.2 million negative impact compared with last year and a $700,000 negative impact compared with fiscal '20 second quarter. Our profit was negatively impacted by $242,000 compared with prior year and $100,000 compared with the second quarter.

Please note that my discussion today about growth rates are given on a constant currency basis, unless otherwise stated. Third quarter revenue was $77.8 million compared with $79.6 million last year, primarily resulting from anticipated declines in our professional services business and in license sales.

As previously discussed, last year's professional services revenue included a multi-set global project. Lower license revenue was due mainly to our transition to the cloud.

Subscription revenue grew 16% and accounted for 35% of our business for fiscal 2020 third quarter. On a rolling 12-month basis, our subscription billings grew by 18%, with a 3-year CAGR of 28%. Subscription margins for the third quarter grew to 65% versus 64% a year ago. For the fourth quarter, we expect subscription margins to remain at similar levels.

Maintenance and other revenues totaled $29.7 million compared with $30.4 million last year. On a performance basis, maintenance and other revenue was down about $220,000, with the decline relating mainly to cloud conversions. Conversions are expected to continue impacting our maintenance revenue line. But as a reminder, the conversion opportunity is generally 3x maintenance, which gives us additional growth potential in a higher dollar margin on an ongoing basis.

Professional services revenue was $17.5 million compared with $20.7 million for last year's third quarter. Last year's results included a multisite global project for personnel augmentation services, which has since been completed. Services margins improved to 6%, up from 1% for last year's third quarter and negative 4% for the fiscal '20 second quarter, as a result of ongoing cost-saving initiatives. We continue to expect breakeven services margins for the full year.

License revenue for the fiscal '20 third quarter was $3.3 million compared with $4.6 million last year. In fiscal '20 period, there were 2 license deals greater than $300,000, the same as in last year's third quarter.

Total revenue by vertical for the third quarter was: automotive, 36%; high-tech and industrial, 34%; consumer products and food and beverage, 15%; and life sciences and other, 15%. By geography, total revenue was North America, 49%; EMEA, 29%; Asia Pacific, 15%; and Latin America, 7%.

Gross margin for the third quarter improved to 57% from 53% last year. Sales and marketing expense was $19.8 million or 25% of total revenue versus $18.4 million or 23% of total revenue for last year's third quarter. The increase related primarily to higher headcount.

R&D expense amounted to $13.6 million for fiscal '20 third quarter compared with $13.2 million a year ago. As a percentage of total revenue, R&D expense was 18% this year and 17% last year. General administrative expense was $9.2 million or 12% of total revenue versus $8.1 million or 10% of total revenue last year. The increase mainly resulted from the movement of certain personnel into G&A from other areas.

Stock compensation expense totaled $2.9 million for the fiscal '20 third quarter and $2.1 million last year. This brings GAAP pretax income to $1.5 million compared with $3.6 million for last year's third quarter, non-GAAP pretax income was $4.6 million versus $5.7 million last year.

We finished the quarter with approximately $134 million in cash and equivalents compared with approximately $139 million at the end of fiscal '19. Cash flow from operations for the first 9 months of fiscal -- of the year was $7.7 million compared with $15.1 million for the same period last year. Accounts receivable was $39.7 million at October 31 versus $46.4 million a year ago, mainly due to lower services and maintenance billings. Days sales outstanding using the countback method was 45 days for fiscal '20 third quarter compared with 48 days for the same period last year.

Our short-term deferred revenue balance at October 31 was $81.9 million versus $80.5 million a year ago, including $32.8 million of deferred subscription versus $27.8 million; $47.1 million of deferred maintenance versus $50.7 million; $1.7 million of deferred professional fees versus $1.8 million; and $200,000 of deferred license another versus $200,000. As a reminder, our maintenance contracts are billed annually while subscription contracts can be billed either annually or quarterly.

I will finish up my remarks for the full year fiscal 2020 guidance, reflecting lower professional services in the second half of the year, lower licenses in Q4 and currency effect. Revenue of approximately $311 million, including subscription revenue of approximately $108 million, GAAP pretax loss of approximately $4 million and non-GAAP pretax income of approximately $8 million.

With that, I'll turn it back to you, Anton.

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

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Thank you, Daniel. So as discussed earlier, it was very pleasing to see the volume of cloud deals up to a record number and in particular the continued momentum in winning new customers, affirming our competitive strengths in ERP cloud for global manufacturers.

We closed 25 cloud deals, with 14 coming from those new customers and 11 from conversions. As I mentioned on our last call, our newly launched adaptive ERP and low-code/no-code enterprise platform provides significant opportunity to keep that competitive momentum going. That said, while the skew in deal numbers this quarter tended towards new customers, on a year-to-date basis we still see a 50-50 deal value mix between conversions and new customers, and our sales pipeline reflects that mix. We continue to experience less short-term demand for large professional services projects, with the majority of converting customers that like to move and enjoy the benefits of the QAD cloud in advance of completing upgrade projects. But our heavy emphasis on managing costs in professional services and placing a stronger focus on expanding partner utilization on a global basis has allowed us to materially improve margins in that sector of the business. Our continuous efforts to drive efficiency through automation and process improvements in our cloud business has seen cloud margins also improve over the period.

Looking at the quarter geographically, North America continued to perform well. Following the end of the quarter, we're also very pleased to welcome Michael Brunnick, who has joined us as our new Senior Vice President for North America.

Michael comes to QAD with many years of enterprise software sales experience in companies such as Luminoso Technologies, Socialware, HP Software, Open Text and Vignette. We expect Michael will build on the success that Ed Boclair, our Senior Vice President of Global Sales, achieved in North America prior to his global appointment.

EMEA had a solid quarter and continue to build the pipeline for the remainder of this year and the next. We're continuing to complete our sales team in the region, with only a few slots remaining open. And while discussing EMEA, I'm currently speaking to you from our office in Barcelona. I spent the last few weeks here in Europe, attending a number of customer and partner-focused events.

Customers have responded exceptionally well to our positioning of QAD adaptive ERP as an enabler for rapid change and also to the application of our industrial Internet of Things backbone, where we connect manufacturing operations and the shop floor to the ERP in real time. Asia Pacific and Latin America showed a bit of weakness, mainly around our China business where the trade war seem to be having some impact on their economy.

3 of our verticals, electronics, industrial, consumer packaging, food and beverage and life sciences performed quite well in terms of prior bookings in the quarter. Automotive was a bit lower after having an absolute banner second quarter and remained strong on a year-to-date basis.

Our employee count came down a bit to north of 1,900 full-time employees mainly due to the adjustments we made in our professional services organization. Our total direct salespeople stands at now about 90. We're still looking to hire a few more in specific areas and are pleased with the caliber of talent we've been able to attract.

On the solution side of the business, we recently held a hackathon in Poland, hosting teams from over 25 of our EMEA partners who develop new business applications in our low-code/no-code enterprise platform. With just 24-hour development time, we saw some outstanding results, with some functionally rich apps developed in just that short time span.

In the QAD Labs, we continue to invest R&D resources in digital transformation, and indeed our last version of demand and supply chain planning now ships with embedded artificial intelligence and machine learning, helping customers further increase demand forecast accuracy.

I'll now hand the call over to Pam for a bit more color on those cloud deals.

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

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Thanks, Anton. As was said, in Q3, we had 25 new bookings. There were 11 conversions and 14 net new deals. We saw orders from all regions and all verticals, with North America having exceptional cloud quarter and our CP, food and beverage vertical (inaudible) delay in bookings and revenue -- booking revenue.

This quarter, we had a food and beverage win against SAP and Oracle. The company was using an older version of JDE, which, of course, is now owned by Oracle, and they were in the midst of considering a very expensive multiyear move to either SAP or Oracle. Towards the end of their evaluation, the company purchased a food and beverage company using QAD and decided to take a look. At the end of the review, they determined QAD could meet their needs in a much shorter time, and the platform technology would eliminate most, if not all, their customizations. So this quarter, we received an order for the first of potentially many more sites from this company.

Last quarter, I mentioned Europe had a large competitive win against SAP at a large automotive supplier. I'm happy to say that this customer is already live and referenceable. From contract to live in less than 3 months, really exciting and a very pleased customer.

Again, this quarter, we had several small life science wins. I love looking at the technology coming out of these start-ups, and I'd like to point out a few of the amazing capabilities. So if you look at these customer bases here this quarter, we will have solutions where kids will soon be able to get their ear tubes in doctors' offices without surgery.

For people of all ages, there will be a way to repair and actually regrow diseased, injured or defective tissues and organs. For patients on dialysis, soon they'll be able to have dialysis treatment in the comfort of their own home.

For chronically ill patients, the next generation of medical devices will have smart sensors and artificial intelligence applied to clinical data to improve diagnostics, strategic interventions, entry prevention and better overall patient care, really exciting capability in those areas.

We won these accounts from a longer list of competitors, but mainly NetSuite, SAP and Infor. Our customers told us they selected QAD due to our life science experience, support for regulatory compliance in the cloud and easy-to-use solutions.

Our ability to deliver adaptive ERP cloud solutions for our global manufacturing customers, enabling agile business processes at an unprecedented level of speed, is providing exciting capabilities to both existing and new customers. Thanks, Anton. Back to you.

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

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Thank you, Pam. So looking forward, our investments in sales and marketing continue to drive lead flow volumes, which remain ahead of our internal targets. And our cloud pipeline continues to grow and currently is up over 25% from the same period last year.

As reinforced by feedback from our customer conferences in EMEA this month, manufacturers' need for rapid response to change continues to increase. QAD adaptive applications give our customers and prospects cloud solutions, providing them the ability to adapt in real time. Our total addressable market for cloud solutions continues to grow, and our market position is improving. Short-term risks do still remain a factor, including uncertainty facing manufacturers around tariff negotiations and global geopolitics.

PMIs globally have continued a slow decline and may play a part in future deal cycles. As stated in prior calls, so far we haven't seen a material effect on our pipeline, and we don't expect it to affect our longer-term goals.

In summary, we continue to win business from competitors, and we're aggressively driving our cloud business with substantial market opportunity in front of us. We remain exceptionally well positioned to meet our long-term objectives.

Operator, we're ready to take questions from analysts.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we have a question from Bhavan Suri from 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 [2]

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I wanted to touch on the continued trends of cloud customers sort of on the existing base. There's a long runway there for conversions from existing base. You've sort of mentioned it bounces back and forth between new, but I guess the big question I have is, have you seen any change, have you seen an increase maybe in the interest around cloud adoption, the base is still pretty steady eddy? At some point, I think, obviously, we see that sort of inflection happening as people understand the value of the cloud. Just sort of seeing -- what you're seeing from trends in terms of the conversations, the adoption, the acceptance, the interest, would love to get a little more color there.

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

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Sure. Thanks, Bhavan. Absolutely. So as we said, we expect the deal mix to stay at that kind of 50-50 by value. That said, obviously, we continue to grow the business. And so I would say, as part of that, there is a growing groundswell, if you like, of momentum in the existing base on that shift towards cloud, and that helps us maintain that 50-50 kind of mix.

So we're seeing both an increase in new business as well as an increase in interest from customers on the conversion side. And when you put those two things together, that's helping us grow our business overall.

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Bhavanmit Singh Suri, William Blair & Company L.L.C., Research Division - Partner & Co-Group Head of Technology, Media and Communications [4]

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Yes, yes, increase there in the pipeline and the billings number there. I guess you obviously mentioned China as an impact, but love to understand about the customer adoption funnel buildup with Alibaba. Is that too early yet? And if it is, when do you expect it to be sort of a meaningful contributor? Could this offset some of the tariff issues or those 2 things sort of tied together? Love to get some color on the relationship and how it's progressing and then obviously the offset to the tariffs issue.

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

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Yes. Look, relationship, we're very, very happy with. We have our first customer live in the cloud there, and that's been very, very successful. We're right at the final stages with another existing customer that's looking to move 6 of their China sites under a large enterprise customer global, but they're looking to move their 6 Chinese manufacturing operations into the Alibaba Cloud in the near term. I would say, just the general sentiment in China right now, and there has been an impact on the economy, so things are moving a little bit slower than we would have liked and anticipated originally. But we still are very confident that in the medium term this is a great relationship for us and it's going to drive increased cloud momentum in that China business, but a little bit slower than we had originally anticipated.

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

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So we do -- if I could add to that, we did have cloud partnerships in Asia Pacific, not in China. And we did see resistance from the Chinese companies as well as sites in China to move to a data center that was actually in Singapore.

So by having this relationship with Alibaba in China, I think that may help neutralize that or at least that's what the customers are saying to us that they want to make sure that their data is actually in China and the Alibaba deal is a good one.

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Operator [7]

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And now to line of Brad Reback from Stifel.

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Brad Robert Reback, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [8]

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Anton, any update on how we should think about the subscription growth rate for next year? I think last quarter, you talked about exiting at a 30% growth rate. It seems between FX and maybe some of the macro that might be off the table, but any color would be helpful.

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Anton Chilton, QAD Inc. - CEO & Director [9]

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Yes. Absolutely. So Daniel has put the guidance stuff together, so I'll maybe ask him to just give you a bit more of that -- the detail.

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Daniel Lender, QAD Inc. - CFO, Executive VP & Corporate Secretary [10]

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Yes. So we haven't issued guidance for next year, Brad. But so far, we believe we are actually in track to return to 30%, given the bookings that -- traction that we've gotten this year and what we're expecting in Q4. So we do expect to be coming back towards the 30% level next year.

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Brad Robert Reback, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [11]

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Great. And Daniel, on the cloud gross margin, you guys have clearly done an excellent job driving that higher, how should we think about additional gains from the mid-60s here?

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

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Yes. So we're still aiming to improve it by 1% to 2% on a yearly basis, Brad. And we're still in early stages with regards to our Channel Islands, and so we're still working through some of the technology requirements that are needed to run all of the additional capabilities that Channel Islands brings so -- but we do expect that when we issue guidance next year, we'll issue some more firm longer-term goals with regards to our overall margins there.

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Operator [13]

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And now to the line of Zach Cummins from B. Riley.

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Zachary Cummins, B. Riley FBR, Inc., Research Division - Analyst [14]

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Just a few incremental for me. I mean in terms of the guidance that's implied for Q4, can you talk about the drivers for a little bit of the acceleration we're expecting to see for subscription growth in Q4 of this year?

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

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So Daniel, do you want to go over the guidance numbers there?

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Daniel Lender, QAD Inc. - CFO, Executive VP & Corporate Secretary [16]

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Yes. I think if I understand your question -- if we understand your question correctly, Zach, you're talking more about -- are you talking more about the business drivers behind the subscription growth?

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

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Yes. That and in terms of -- it seems like it's going to -- at least on a reported basis, it's going to be getting to closer to 20%-plus growth versus kind of that mid-teens level that we had here in Q3.

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Daniel Lender, QAD Inc. - CFO, Executive VP & Corporate Secretary [18]

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Yes. So I mean from a -- we've -- as I've mentioned when I was answering Brad's question relating to next year, we've done I think a very good job this year in improving our overall bookings from where we were last year. So we've showed a significant improvement, and that throughout the year has been translating into that additional subscription revenue. And the -- we do have quite a strong pipeline for Q4. Q4 tends to be a stronger quarter from a seasonality standpoint for us. And we -- so that will clearly have an impact both in terms of the revenue for Q4 as well as our revenues next year.

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

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Got it. That's helpful. And Anton, can you talk about your approach to professional services going forward? I know you've rationalized a little bit of that organization and started to offload some more to third-party partners, but how should we think about the professional services line and your approach to that as we continue to move forward here?

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

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Yes. Absolutely. I think as I talked about it on the last call, we've had, at that time, longer-term plans to grow professional services at a much slower rate than we grow the rest of the business, particularly around cloud, and start to integrate more with or expand our partner network around that and using them in a much more integrated fashion. And we've accelerated that plan now. So we've done some of the rightsizing to get the costs under control, drive those margins back up as we've done.

We think we're at a good level now that gives us a good foundation on which to then increase our use of partners, still have critical mass within the QAD services organization that allows us to bring all of the good stuff around program management capability. And then, as I said, over the medium term, it'll grow that business, but at a much lower rate than the rest of the business, particularly the cloud growth.

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Operator [21]

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And now to the line of Kevin Liu from K. Liu & Company.

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Kevin Liu, [22]

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Maybe just kind of following on to the services question. So certainly, you're bringing in more partners to help out on the implementation side, could you talk to what extent you're also seeing more leads or addition to the funnel coming in from partners?

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

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So yes we've been focused primarily on -- right now in terms of expanding services partner network. We will be bringing in somebody that's going to be helping us expand, let's say, the sales channels through partners. And so our intention there is to, particularly with the launch of adaptive ERP and the enterprise platform, we think there's going to be an attraction there for both our existing partners to extend their businesses and also for new partners to come in. So I'd say that's -- the primary focus right now has been on partners to supplement our services capability and capacity. Moving forward, we'll be adding to that an incremental focus on getting more and more channel partners there and increasing that part of the business, too.

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Kevin Liu, [24]

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Got it. And then just looking at kind of the implied guidance for the fourth quarter here, certainly, subscription continues to decline, but that also implies licenses might actually come down sequentially. With Q4 typically being a strong quarter kind of for overall bookings and license growth, maybe talk about some of the drivers there? Is it predominantly just seeing more adoption of the cloud within your pipeline or do you anticipate some sort of macro weakness among the deal cycles there?

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Anton Chilton, QAD Inc. - CEO & Director [25]

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So as Daniel [flagged] there, our pipeline is looking good for Q4. And so we're not seeing the effect of macro at this point. Of course, those things can change. But right now, we're feeling confident about the size of the pipeline we've got compared to the targets that we have and looking forward to a strong performance there from a cloud perspective, for sure.

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Daniel Lender, QAD Inc. - CFO, Executive VP & Corporate Secretary [26]

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Yes. With regards to licenses, Kevin, our sales force is being zeroed in on bringing in cloud deals. And this year, really, we're not seeing -- the funnel is now really heavily weighted towards cloud. There's very, very few license deals left out there. So we're not expecting a seasonally higher license number that we've seen in other years, and that we had -- when we started the year, we were kind of planning on that potential.

So it's really not -- I mean there is some effect on licenses from the overall manufacturing, lack of growth in manufacturing because any licenses that we get is additional users, by the fact that the sales force is entirely focused on cloud, we're not seeing anything else out there that would make that number go higher.

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Kevin Liu, [27]

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Got it. That's helpful. And then just lastly, obviously, this year has been big in terms of hiring on the sales side. Can you talk about how you're feeling about the productivity ramp of the reps you've added over the course of this year? And how you're feeling about your self-capacity going into next year?

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Anton Chilton, QAD Inc. - CEO & Director [28]

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Yes. I think we're on track in terms of what we plan to hire. As I said on the call, very pleased with the caliber of the people that we brought into the organization.

We do typically plan for somebody to take around 6 to 9 months to come up speed to, let's say, full sales productivity. But pleasingly, actually, we've seen some of the people that we got in early this year already contributing to those cloud bookings performance, so I'm happy with that. We've got a few slots left to fill, but not many. And we think that puts us in a really good and strong position heading into next year to continue that momentum.

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Operator [29]

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And now to the line of Ishfaque Faruk from Sidoti & Company.

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Ishfaque Ahmed Faruk, Sidoti & Company, LLC - Analyst [30]

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A question regarding guidance. The guidance for Q4 sort of implies a slight decline from the guidance you guys laid out for Q2. And you guys -- Daniel, you mentioned briefly that some of that has to do with licenses. Is the rest of the delta primarily to do with professional services or maintenance? How should we think about it going forward?

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Daniel Lender, QAD Inc. - CFO, Executive VP & Corporate Secretary [31]

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Yes. So our professional services revenue is lower, in general. It was a bit lower than we were expecting even in Q3, and we're expecting about a same run rate in Q4. Having said that, we've really managed the profitability of that business and adjust it to the revenue line. So on a bottom line basis, actually, there's no effect there. And then there's the currency effect that I talked about earlier, with this quarter there was about $200,000 on subscription. Overall, it's about -- it was about $700,000 from last quarter. So given where currencies are today, that's having an impact to the overall year as well.

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Ishfaque Ahmed Faruk, Sidoti & Company, LLC - Analyst [32]

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Okay. And on the cloud, you guys had very strong cloud bookings and margins have been up significantly as well. And Daniel, the cloud outlook that you mentioned that you expect subscription to go back up to 30% growth for the coming year or so, is that mostly predicated on the recent cloud bookings that you guys had?

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Daniel Lender, QAD Inc. - CFO, Executive VP & Corporate Secretary [33]

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Yes. I mean our expectations, it's -- some of it has to do with the cloud bookings that we've done through the first 3 quarters of the year. And then the remainder is based on our expectations for Q4 and the first couple of quarters of next year. That's really -- those are really going to be the key drivers for growth next year.

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Ishfaque Ahmed Faruk, Sidoti & Company, LLC - Analyst [34]

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Okay. And my last question, on the Alibaba relationship, you guys mentioned that you guys have, like, a client up and running. Do you -- are you -- what are you guys seeing in terms of your initial conversations with some of the China-based companies moving forward, et cetera, now that they're -- they feel more secure with China-based data centers?

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Anton Chilton, QAD Inc. - CEO & Director [35]

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Yes. Back to the point Pam was making earlier, we've had a very positive reaction. And I think that comes in 2 areas, right? So one is having the capability locally in China, and so they feel much more secure about having their data in China. And then secondly, of course, the power of the Alibaba brand. It's very well-known and very well-respected over there. And so when you put those 2 things together, together with the QAD cloud ERP, I think it's a very compelling message. So I think that's stimulating a lot of interest.

Interestingly, the Chinese government is also compelling or at least encouraging organizations to start to use more and more cloud services. And so I think that will help us drive that momentum forward too into the medium term.

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Operator [36]

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Thank you. I'd now like to turn the call back over to our host, Anton Chilton, for closing remarks. Please go ahead, sir.

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Anton Chilton, QAD Inc. - CEO & Director [37]

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Okay. Well, if there's no more questions, we thank you, and we look forward to our announcing of quarter 4 results in a few months' time. Thank you very much.

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Pamela M. Lopker, QAD Inc. - Founder, President & Director [38]

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Thanks, everybody.

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Operator [39]

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Thank you. And ladies and gentlemen, this call will be available for replay after 4:00 p.m. Pacific Time today through December 3, 2019, at midnight. You may access the AT&T replay system at any time by dialing 1 (800) 475-6701 and entering the access code 473393. International participants may dial (320) 365-3844.

And that does conclude our conference for today. Thank you for your participation, and for using the AT&T Executive Teleconference Service. You may now disconnect.