COST ACCOUNTING

On March 7, QAD Inc. (NASDAQ: QADI), a global provider of collaborative enterprise applications for manufacturing and distributing organizations, reported improved operating results for the fourth quarter and fiscal 2002 year ended January 31, 2002. For Q4 2001, revenues amounted to $53.5 million, up 8% from $49.6 million reported in the preceding Q3 2002, but 10% down compared to $59.2 million a year ago. Likewise, the license revenues of $19.6 million for Q4 2002 improved 36% over the preceding Q3 2002, but again down 10% compared to $21.8 million in Q4 2001. Pro forma net income for Q4 2002, which amounts have been adjusted to exclude amortization of intangibles from acquisitions, a goodwill impairment loss, restructuring charges and a deferred tax asset valuation allowance, was $4.1 million, compared with pro forma net income of $3.4 million for the prior-year fourth quarter. Reported net income for Q4 2002, however, was $1.0 million compared with $2.4 million in fiscal 2001 (See Figure 1 below).

Figure 1

The fourth quarter of fiscal 2002 marked the company's sixth consecutive quarter of positive cash flow, as QAD generated cash flow from operations of $4.2 million. QAD's balance sheet at January 31, 2002 was strengthened by an increase of approximately 40% in cash and equivalents to $50.8 million, from $36.5 million at the end of January 2001.

For the fiscal year ended January 31, 2002, revenues were $204.0 million, a 4.7% decline compared with $214.1 million, for the prior fiscal year. License revenues for the fiscal 2002 were $62.8 million, a 9% decline compared with $69.2 million, for fiscal 2001. Operating income, adjusted for pro forma amounts in both years, was $4.9 million for fiscal 2002, a significant improvement from the $9.3 million operating loss in fiscal 2001.

Operating results were reportedly bolstered by gross margin improvement to 58% in fiscal 2002 from 53% in fiscal 2001 due to revenue mix, as well as cost containment efforts that reduced operating expenses by 8% year-over-year on a pro forma basis. Pro forma net income for fiscal 2002 increased to $0.4 million from a pro forma net loss of $12.5 million for fiscal 2001. Reported net loss for fiscal 2002 was $5.3 million, which is still a significant improvement to a prior-year net loss of $25.4 million (See Figure 2 below). For the full 2003 fiscal year, the company expects revenues to range between $210 and $220 million and operating income margin to equal approximately 5%.

Figure 2

The company points out the following major achievements during the quarter and the entire fiscal year:

• QAD secured three new customers in the fourth quarter for its QAD eQ private trading exchange (PTX) application suite. QAD eQ is a collaborative applications suite that creates private trading exchanges and enables intelligent order management via the Internet. The QAD eQ solution reportedly enables companies to quickly integrate their internal operations with those of suppliers, partners and customers, and provides manufacturers with new avenues of doing business electronically.

• The company also continued to broaden acceptance of its QAD MFG/PRO eB web-enabled ERP solution as customers realized the significant new functionality and value built into this new improved edition of enterprise software. Complementary products from QAD such as QAD eQ are integrated with MFG/PRO eB. The new release includes enhancements to the manufacturing, distribution, financial, and service and support applications of the solution. For manufacturing, Kanban Sizing automatically sizes and resizes Kanban quantities and the number of Kanban cards or containers.

• For distribution, Customer Sequence Schedules address the need to ship product in a particular customer-specified sequence. For financials, an Extended Account Structure offers up to 32 characters for setting up general ledger accounts. For service and support, the Project Realization Management Module manages the execution portion of customer service, implementation, and configuration projects, including the procurement and shipment of project inventory, labor, and expenses involved in field installation. It also tracks project budgets and manages invoicing.

• Fiscal 2002 brought increased market penetration of QAD Supply Visualization (SV), a hosted web service that could generate increased profit for manufacturers by reducing operating and inventory costs through real-time collaboration with suppliers. QAD SV is the first application made available on a subscription basis through QAD's new MFGx.net manufacturing exchange, with which suppliers can have visibility of the sell-side of a manufacturer's supply chain. More than 135 QAD customers are currently evaluating the service and those QAD customers have connected nearly 200 additional trading partners who are accessing and evaluating the collaborative service.

Market Impact

Although there is continued sense of mixed blessing, it appears that QAD is beyond its most challenging days. The company deserves admiration for its traditional innovativeness and endurance despite limited resources compared to many competitors. QAD's (reportedly standing for Quality, Applications, Delivery) main ERP product MFG/PRO (alluding the product for manufacturing professionals) has been one of the most functional and, at the same time, one of the easiest to install and maintain manufacturing-oriented products in the market, with a low total cost of ownership (TCO). Its large client base remains satisfied and committed, as shown in typical follow up sales and project scope expansion to other functional modules and to other sites, after the initial MFG/PRO implementation.

The company has also done a masterful job in identifying and developing add-on vertically focused functionality through partnerships in the areas of warehouse management, product configuration and manufacturing execution system (MES). Another factor that bodes well for QAD's future is its international coverage, product localization features, and a broad geographic revenue mix, which no vendor of its size can tout (QAD applications run at more than 5,200 sites in approximately 80 countries in 26 languages). It also has a strong and dedicated international implementation channel among mid-market manufacturing oriented regional services companies such as Atos Origin.

Also, from its inception, QAD has been focused on developing sharp vertical manufacturing functionality long before most of its competitors. By delivering functionality specific to selected vertical industries, QAD has made its name within the automotive, consumer packaged goods (CPG), medical devices, industrial, electronics, and food & beverage segments.

The entrepreneurial spirit and enthusiasm of its founders/owners and an early mover advantage could not entirely make up for its finite resources. As a result, during mid and late 90s, many high-flying ERP competitors outpaced QAD both in the scope of the ERP functionality and market share-wise. Consequently, the lack of strong integrated global corporate financial and HR modules prevented QAD from securing many mega-enterprise deals.

To again leapfrog the competition, QAD embarked a few years ago on delivering applications that would optimize complex order fulfillment process across multiple enterprises/divisions. More recently, the focus has also evolved to target collaborative e-Business and event-driven manufacturing. These market need support for demand events such as a customer order, supply events such as a supply disruption, process events, product events, or others. QAD has thereby created a notable business-to-business (B2B) collaboration vision to appeal to its mid-market user base. The company shifted its focus from being a mere ERP vendor dedicated to the industrial mid-market to fully leveraging the Internet in the applications it provides to manufacturers and distributors to link their back-office systems to those of their business partners via private trading exchanges. To that end, QAD eQ product (formerly On/Q), might be viable for some focused areas such as direct materials procurement and/or replenishment and sales order fulfillment.

QAD Collaborative Applications

The eQ is a PTX suite that contains four applications: Commerce Relationship Management, Sell-Side, Buy-Side, and Replenishment. This software provides the backbone to allow a manufacturer to establish a private trading exchange among its suppliers and/or customers, with support for XML messaging, Java, HTML, and no need for a client side of the software. QAD eQ is also devised to support private Internet exchanges that are connected to multiple sites, run on diverse ERP systems, and to accommodate a rule-based order management functionality. One potential virtue of private trade exchanges is that enterprises should automate procurement without necessarily opening up sensitive information to unwanted eyes. Moreover, while most Internet exchange strategies rely heavily on procurement software, QAD eQ acts as a holistic order management hub by including commerce relationship management (relationship modeling), sell-side, buy-side, and replenishment applications.

QAD Supply Visualization (SV), on the other hand, is a hosted application that can be accessed via the new QAD MFGx.net manufacturing exchange through browser and password only. The SV module comes pre-integrated with the most recent versions of MFG/PRO, namely eB and 9.0 releases. It is devised to provide real-time visibility of inventory and order status to users through QAD's Poller software. From MFGx.net, users that are not necessarily the MFG/PRO users can download the software, which updates the system at certain time intervals by replicating data from the QAD MFG/PRO database and uploading it to SV. QAD MFGx.net is the vertical exchange, which also offers associated education and services, while QAD provides full consulting, implementation, migration and support services.

Challenges

Nevertheless, delivery of the above products has taken its toll on QAD's performance during last few years. In addition to venturing into a new territory for QAD (outside of traditional ERP), the dual product delivery had for some time confused/detracted customers, sales force and partners. All of them were not clear about whether and when to deploy MFG/PRO and/or eQ. The technological foundation disparity of the products has also taken its toll by doubling the development expenses and in delivering products integration.

Namely, MFG/PRO is written in the Progress proprietary development tool, which makes QAD dependent and vulnerable. Contrary to it, these new products (eQ and SV) are based on Java and other contemporary Web-based open technologies. MFG/PRO initially ran on Progress DB only (therefore being the most proven there, and with a majority of installations). The support for Oracle DB was introduced a few years ago, still with Progress tool. Because the Progress database is less scaleable than the Oracle database, it has less appeal to large organizations. The above predicament has resulted in part with stalled sales during last few years (See Figure 2 below).

Figure 2

However, the difficulties seem to be winding down, as the array of hefty losses seems to have been stemmed, while the company has concurrently delivered products and resolved their interconnectivity, which should keep it abreast with ever increasing market requirements. Additionally, QADs 'collaborative commerce' eQ system not only works with its flagship MFG/PRO, but also with others ERP and legacy systems.

It also connects with supply chain planning systems like QAD's partner Adexa, and demand planning systems like Demantra. Thus, there is the potential to build functionality on the usual heterogeneous mix of systems one may find in multi-national companies at this level. Look for QAD continuing to build on its early to market 'collaborative commerce' suite which might be ever appealing as more upper mid-market manufacturers seek to improve their external trade partner interactions to realize efficiency, responsiveness and reduced costs.

The openness and interconnectivity mantra of QAD's entire offering (via its Q/Link product) are commendable and quite needed given the company's strategy of penetrating individual plants of large worldwide dispersed corporations, although they yet have to be demonstrated 'en masse' in practice. Therefore, also look for more MFG/PRO ready-made application programming interfaces (APIs) to e.g., SAP, Oracle and PeopleSoft, to further open up the system, and more native functionality in both MFG/PRO and eQ.

Competitive Impact

The above facts have therefore positioned QAD as a notable player in the upper middle discrete manufacturing market. It is a direct competitor for the likes of J.D. Edwards, Baan, IFS, Intentia, Epicor and Navision, and belongs to the Top 10 global manufacturing ERP vendors. QAD's mind share within automotive, medical equipment and industrial and electronics discrete manufacturing segments remains strong. It offers a shop floor level solution typically associated with fast implementation and price tags suitable for multi-national mid-market enterprises that do not require a global unified finance and HR strategy.

By combining eQ (for supply chain management requirements) and MFG/PRO (for traditional manufacturing ERP requirements), QAD often additionally competes with SAP, Oracle and PeopleSoft in its sectors of focus, where it provides the individual factory level ERP solution while these giants remain the preferences at the corporate level.

The latest release of QAD MFG/PRO, eB, is a full web-enabled ERP foundation suite covering sales and distribution (sales order processing (SOP), customer and supplier schedules, products configuration, purchasing, etc), engineering (bills of material (BOMs)/formulas/recipes, routings/work centers, engineering change control, cost accounting management, etc), manufacturing control (inventory management, work orders, quality management, repetitive manufacturing, shop floor control, etc), manufacturing planning (master production scheduling (MPS), material requirements planning (MRP), capacity requirements planning (CRP), etc.) and a slew of typical financial modules. Additionally, it features advanced pricing management, advanced planning & scheduling (APS) including a supply chain optimizer, factory optimizer and global planner with available to promise (ATP) and shop floor sequencing, demand management, sales force automation (SFA), electronic data interchange (EDI), and service and supply chain modules (with distribution requirements planning (DRP) and enterprise operations management).

While the acceptance of its new collaborative e-Business modules proves to be well received by its existing MFG/PRO customer base, QAD still has to create greater market recognition and additional revenue from beyond it. Following last two years of particularly relying upon its existing customer base, look for QAD to more aggressively pursue winning new business.

The combination of MFG/PRO, eQ, SV, and embedded point solutions from its premier partners (IBM, Adexa, Robocom, Access Commerce, etc.) might provide QAD with a product set also suitable for larger, multinational corporations. Still, QAD's reliance on a number of partnerships to deliver extended-ERP functionality may not be the preferable option for its target market - medium sized manufacturing organizations that still prefer a single source provider and single data model and solution architecture.

The conundrum, for penetrating the higher-end of the market though, could also lie in the fact that MFG/PRO is not at the forefront of natively provided ERP functionality, particularly in terms of multi-national financials/consolidation, budgeting, project accounting/management, HR/payroll, marketing campaigns, etc. Without these in hand, it is a tall order for any vendor to penetrate the corporate management level competing against likes of Oracle, SAP and PeopleSoft. Production management remains MFG/PRO's strongest module, and, therefore, QAD has often been implemented only in manufacturing divisions of large global organizations that use a Tier 1 ERP product for corporate financials and/or HR applications.

Although QAD covers multiple manufacturing styles such as make-to-stock (MTS), make-to-order (MTO), configure-to-order (CTO), engineer-to-order (ETO), mixed mode/hybrid and repetitive, it has not traditionally been particularly strong in the 'to-order' aspects. The company hints at product enhancements in that regard in the foreseeable future. There is thus even a challenge of fending off the bigger vendors' attempt to sway the corporate executives to implement QAD's system corporate wide (or, at least, in as many divisions as possible) given that these vendors might emulate QAD's deep manufacturing functionality over a period of time.

User Recommendations

While the scattered clouds over QAD remain, the gloomy past seems to be far behind. The company has broadened its product lines and seems to at least keep abreast of current collaborative requirements (if not being ahead of the curve). It should, however, more vigorously target the manufacturing and distribution mid-market within its industries of focus (automotive, consumer products, electronics, food & beverage, industrial products, and medical devices) a

QAD MFG/PRO users should position eQ and SV central to their collaborative B2B e-Business strategies although being informed about competitive products cannot hurt. Non-QAD users may benefit from evaluating eQ and SV products for their collaborative needs. QAD's ability to create a collaborative business process, to dynamically configure it, to run it within the bounds of the system, and to dynamically reconfigure it as required (e.g., when the business process changes) sounds compelling and might up the ante for other contesting vendors.

The companies that would benefit from evaluating the QAD product offering are upper mid-market (with $50 million -- $1 billion in revenue) light batch, make-to-stock (MTS), repetitive, and light assembly-to-order (ATO) discrete multi-national manufacturers and their divisions, with a need for solid production planning and execution, customer service, and collaborative B2B e-commerce functionality. These companies will also prefer a decentralized mode of operation, where each division has somewhat autonomous and specific business operation.

QAD should be included on a short list in selections for a multi-national manufacturing and distributing enterprises where lean manufacturing, configure-to-order (CTO) assembly, shop floor execution, quality management, collaborative order fulfillment, and field service modules are the main pillars (bear a high importance) of an enterprise application.

Large global corporations with a centralized management philosophy looking for strong global corporate financial and HR modules, for a highly scalable cross-platforms solution, and for much broader functionality beyond traditional ERP boundaries (e.g., more intricate CRM, or complex project management/engineer-to-order (ETO) functionality) from a single vendor may benefit from evaluating other products at this stage.

SOURCE :http://www.technologyevaluation.com/research/articles/qad-seemingly-nearing-the-corner-16623/