QAD Inc. Q4 '20 Earnings Preview

QAD (QADA) reports its fiscal Q4 ’20 results after the close on Wednesday, March 18. Between a more favorable manufacturing backdrop and management’s lowered FY ’20 guidance following last quarter’s print, we believe expectations for Q4 have been appropriately set. Our estimates for the quarter are generally consistent with both guidance and consensus, and we expect QAD’s results to meet Street expectations. As for FY ’21, the Institute for Supply Management reported further expansion in the manufacturing sector for the month of February, but sentiment was more cautious than the prior month as coronavirus wreaked havoc on supply chains. Of course, COVID-19 concerns have escalated further in recent weeks, raising questions regarding the ultimate economic impact. With this in mind, we expect management’s initial outlook for FY ’21 to reflect a degree of conservatism and think current consensus forecasts, which sit above our estimates, are likely to sit at or above the high-end of guidance at best. As such, those looking to trade around the print ought to look elsewhere. For those with a longer-term perspective, however, the sell-off in shares amidst broader market declines of late creates an attractive buying opportunity, in our opinion. Trading at less than 2x sales, we believe downside risk has been mostly mitigated, and we continue to anticipate both a reacceleration in subscription revenue growth and renewed margin expansion in the current fiscal year. We believe the improvement in fundamentals should push the stock closer to our $51.00 price target, which represents a FY ’21 EV/EBITDA multiple of 3.0x.

Our Q4 estimates include $78.8 million in revenue, $4.1 million in adjusted EBITDA and $0.11 in non-GAAP EPS, generally in line with the Street’s $78.7 million in revenue, $4.4 million in adjusted EBITDA and $0.12 in non-GAAP EPS. While we would typically ascribe the most uncertainty to our estimates for license and professional services revenue, management’s guidance reflects a fairly significant sequential uptick in subscription revenue, leaving us relatively comfortable with the less visible aspects of the business. As for the outlook, our estimates already reflect another year of declines in license and maintenance revenue, which should be more than offset by growth in subscription fees. Specifically, we project a 22% Y/Y increase in subscription revenue to $131.5 million, representing an acceleration relative to the ~18% increase implied in management’s FY ’20 guidance. We also assume approximately 180 basis points of expansion in the adjusted EBITDA margin to 5.5%, which we view as readily achievable.

Our report with model and disclosures is available here.