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EX-32.1 - EXHIBIT 32.1 - QAD INCex32-1.htm
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EX-31.1 - EXHIBIT 31.1 - QAD INCex31-1.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

   (Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended July 31, 2017

 

OR

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

   For the transition period from ____________________ to _________________________

 

Commission file number  0-22823

 

QAD Inc.

(Exact name of Registrant as specified in its charter)

 

Delaware

77-0105228

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

100 Innovation Place, Santa Barbara, California  93108

(Address of principal executive offices)

(805) 566-6000

(Registrant's telephone number, including area code)

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☑  No ☐.

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑  No ☐.

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.  (Check One):

 

Large accelerated filer ☐

Accelerated filer ☑

Non-accelerated filer ☐  (Do not check if a smaller reporting company)

Smaller reporting company ☐

 

 

 

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ☐ 

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐  No ☑.

 

As of August 31, 2017, there were 16,003,497 shares of the Registrant’s Class A common stock outstanding and 3,213,126 shares of the Registrant’s Class B common stock outstanding. 

 

 
 

 

 

QAD INC.

INDEX

 

 

Page

PART I - FINANCIAL INFORMATION

 

 

 

 

 

 

ITEM 1.

Financial Statements (unaudited)

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of July 31, 2017 and January 31, 2017

1

 

 

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Six Months Ended July 31, 2017 and 2016

2

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended July 31, 2017 and 2016

3

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

4

 

 

 

 

 

ITEM 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

13

 

 

 

 

 

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

26

 

 

 

 

 

ITEM 4.

Controls and Procedures

26

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

 

 

ITEM 1.

Legal Proceedings

27

 

 

 

 

 

ITEM1A.

Risk Factors

27

 

 

 

 

 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

27

 

 

 

 

 

ITEM 3.

Defaults Upon Senior Securities

27

 

 

 

 

 

ITEM 4.

Mine Safety Disclosure

27

 

 

 

 

 

ITEM 5.

Other Information

27

 

 

 

 

 

ITEM 6

Exhibits

27

 

 

 

 

 

SIGNATURES

28

 

 

 
 

 

 

PART I

 

ITEM 1 – FINANCIAL STATEMENTS

 

QAD INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(unaudited)

 

   

July 31,

2017

   

January 31,

2017

 

Assets

               

Current assets:

               

Cash and equivalents

  $ 149,202     $ 145,082  

Accounts receivable, net of allowances of $2,207 and $2,205 at July 31, 2017 and January 31, 2017, respectively

    42,397       69,441  

Other current assets

    14,500       15,351  

Total current assets

    206,099       229,874  

Property and equipment, net

    30,520       30,872  

Capitalized software costs, net

    800       732  

Goodwill

    10,872       10,558  

Deferred tax assets, net

    7,286       6,166  

Other assets, net

    1,961       2,688  

Total assets

  $ 257,538     $ 280,890  
                 

Liabilities and Stockholders’ Equity

               

Current liabilities:

               

Current portion of long-term debt

  $ 456     $ 446  

Accounts payable

    9,128       11,316  

Deferred revenue

    89,661       104,125  

Other current liabilities

    30,451       33,636  

Total current liabilities

    129,696       149,523  

Long-term debt

    13,540       13,767  

Other liabilities

    4,672       4,914  

Commitments and contingencies

               

Stockholders’ equity:

               

Preferred stock, $0.001 par value. Authorized 5,000,000 shares; none issued or outstanding

               

Common stock:

               

Class A, $0.001 par value. Authorized 71,000,000 shares; issued 16,605,215 shares at both July 31, 2017 and January 31, 2017

    16       16  

Class B, $0.001 par value. Authorized 4,000,000 shares; issued 3,537,380 shares at both July 31, 2017 and January 31, 2017

    4       4  

Additional paid-in capital

    196,950       197,594  

Treasury stock, at cost (932,024 shares and 1,125,552 shares at July 31, 2017 and January 31, 2017, respectively)

    (12,947

)

    (15,170

)

Accumulated deficit

    (67,534

)

    (61,127

)

Accumulated other comprehensive loss

    (6,859

)

    (8,631

)

Total stockholders’ equity

    109,630       112,686  

Total liabilities and stockholders’ equity

  $ 257,538     $ 280,890  

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

 
1

 

 

QAD INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(in thousands, except per share data)

(unaudited)

 

   

Three Months Ended

   

Six Months Ended

 
   

July 31,

   

July 31,

 
   

2017

   

2016

   

2017

   

2016

 
                                 

Revenue:

                               

Subscription

  $ 17,420     $ 12,317     $ 32,763     $ 23,809  

License

    6,743       6,416       12,008       10,363  

Maintenance and other

    31,971       33,266       63,877       66,102  

Professional services

    19,824       17,779       38,692       34,901  

Total revenue

    75,958       69,778       147,340       135,175  
                                 

Costs of revenue:

                               

Subscription

    7,428       6,740       15,148       12,940  

License

    828       765       1,513       1,490  

Maintenance and other

    7,840       7,742       15,534       15,511  

Professional services

    20,598       17,557       39,365       35,001  

Total cost of revenue

    36,694       32,804       71,560       64,942  
                                 

Gross profit

    39,264       36,974       75,780       70,233  
                                 

Operating expenses:

                               

Sales and marketing

    17,697       17,294       35,284       34,232  

Research and development

    11,689       11,069       23,221       22,212  

General and administrative

    9,224       8,483       17,817       16,489  

Amortization of intangibles from acquisitions

    111       166       274       331  

Total operating expenses

    38,721       37,012       76,596       73,264  
                                 

Operating income (loss)

    543       (38

)

    (816

)

    (3,031

)

                                 

Other (income) expense:

                               

Interest income

    (493

)

    (159

)

    (661

)

    (331

)

Interest expense

    157       161       313       335  

Other (income) expense, net

    1,208       (433

)

    1,812       437  

Total other (income) expense

    872       (431

)

    1,464       441  
                                 

(Loss) income before income taxes

    (329

)

    393       (2,280

)

    (3,472

)

Income tax expense (benefit)

    832       (575

)

    1,452       (1,648

)

                                 

Net (loss) income

  $ (1,161

)

  $ 968     $ (3,732

)

  $ (1,824

)

                                 

Basic net (loss) income per share

                               

Class A

  $ (0.06

)

  $ 0.05     $ (0.20

)

  $ (0.10

)

Class B

  $ (0.05

)

  $ 0.04     $ (0.17

)

  $ (0.08

)

Diluted net (loss) income per share

                               

Class A

  $ (0.06

)

  $ 0.05     $ (0.20

)

  $ (0.10

)

Class B

  $ (0.05

)

  $ 0.04     $ (0.17

)

  $ (0.08

)

                                 

Net (loss) income

  $ (1,161

)

  $ 968     $ (3,732

)

  $ (1,824

)

Other comprehensive income, net of tax:

                               

Foreign currency translation adjustment

    1,132       (246

)

    1,772       360  

Total comprehensive (loss) income

  $ (29

)

  $ 722     $ (1,960

)

  $ (1,464

)

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

 
2

 

 

QAD INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

   

Six Months Ended

July 31,

 
   

2017

   

2016

 
                 

Cash flows from operating activities:

               

Net loss

  $ (3,732

)

  $ (1,824

)

Adjustments to reconcile net loss to net cash provided by operating activities:

               

Depreciation and amortization

    2,971       3,003  

Loss on disposal of equipment

    12       4  

Provision for doubtful accounts and sales adjustments

    187        

Stock compensation expense

    4,360       3,701  

Change in fair value of derivative instrument

    3       212  

Changes in assets and liabilities:

               

Accounts receivable

    28,110       20,412  

Other assets

    895       (2,910

)

Accounts payable

    (2,580

)

    (3,518

)

Deferred revenue

    (17,987

)

    (13,015

)

Other liabilities

    (4,601

)

    (4,045

)

Net cash provided by operating activities

    7,638       2,020  

Cash flows from investing activities:

               

Purchase of property and equipment

    (1,571

)

    (1,682

)

Capitalized software costs

    (480

)

    (62

)

Net cash used in investing activities

    (2,051

)

    (1,744

)

Cash flows from financing activities:

               

Repayments of debt

    (222

)

    (233

)

Tax payments related to stock awards

    (2,781

)

    (1,584

)

Cash dividends paid

    (2,675

)

    (2,642

)

Net cash used in financing activities

    (5,678

)

    (4,459

)

                 

Effect of exchange rates on cash and equivalents

    4,211       1,160  
                 

Net increase (decrease) in cash and equivalents

    4,120       (3,023

)

                 

Cash and equivalents at beginning of period

    145,082       137,731  
                 

Cash and equivalents at end of period

  $ 149,202     $ 134,708  

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

 
3

 

 

QAD INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

  

1.   BASIS OF PRESENTATION AND RECENT ACCOUNTING PRONOUNCEMENTS

 

Basis of Presentation

 

In the opinion of management, the accompanying unaudited Condensed Consolidated Financial Statements fairly present the financial information contained therein. These statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In management’s opinion, all necessary adjustments, consisting of normal, recurring and non-recurring adjustments, have been included in the accompanying Condensed Consolidated Financial Statements to present fairly the financial position and operating results of QAD Inc. (“QAD” or the “Company”). The Condensed Consolidated Financial Statements do not include all disclosures required by accounting principles generally accepted in the United States of America for annual financial statements and should be read in conjunction with the audited financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended January 31, 2017. The Condensed Consolidated Financial Statements include the results of the Company and its wholly owned subsidiaries. The results of operations for the three and six months ended July 31, 2017 are not necessarily indicative of the results to be expected for the year ending January 31, 2018.

 

Recent Accounting Pronouncements

 

With the exception of those discussed below, there have been no recent changes in accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”) or adopted by the Company during the six months ended July 31, 2017, that are of significance, or potential significance, to the Company.

 

Accounting Standards Adopted

 

The Company adopted ASU 2016-09 regarding ASC Topic 718, Improvements to Employee Share-Based Payment Accounting during the third quarter of fiscal year 2017. The adoption required the Company to reflect any adjustments as of February 1, 2016, the beginning of the annual period that includes the interim period of adoption. In addition, with the adoption of the standard, the Company was required to revise its reported quarterly results for the six months ended July 31, 2016, representing a retrospective adjustment to beginning accumulated deficit and to the previously reported results for the six months ended July 31, 2016.

 

Accounting Standards Not Yet Adopted

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. The standard was issued to provide a single framework that replaces existing industry and transaction specific U.S. GAAP with a five-step analysis of transactions to determine when and how revenue is recognized. The accounting standard update will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, to defer the effective date of ASU 2014-09 by one year. Therefore, ASU 2014-09 will become effective for the Company beginning in fiscal year 2019 and we do not plan to early adopt. The Company expects to adopt the requirements of the new standard in the first quarter of fiscal 2019, utilizing the modified retrospective method of transition.

 

The Company anticipates this standard might have a material impact on its consolidated financial statements. The Company has assigned internal resources and has hired third party consultants to assist in the evaluation of that impact. While the assessment of all potential impacts of the standard is on-going, the Company currently believes the most significant impact relates to accounting for software license revenue. The requirement to have VSOE for undelivered elements to enable the separation of revenue for the delivered software licenses is eliminated under the new standard. In addition, removal of current limitations on contingent revenue may result in revenue being recognized earlier for some contracts. The Company expects revenue related to subscription and professional services to remain substantially unchanged and is still in the process of evaluating the impact of the new standard on these arrangements.

 

Due to the complexity of some contracts, the actual revenue recognition treatment required under the new standard for these arrangements may be dependent on contract-specific terms and vary in some instances. The Company is also continuing to evaluate the impact of the standard on recognition of costs related to obtaining customer contracts, primarily with respect to sales commissions. The commission accounting under the new standard is significantly different than the Company's current policy of expensing commissions upfront. The new standard will require the Company to defer direct and incremental commission costs to obtain new subscription and maintenance contracts and amortize those costs over the expected period of benefit. We are still evaluating the period of benefit but expect to be in the range of five to seven years.

 

While the Company continues to assess the potential impacts and disclosure requirements of the new standard, the Company cannot reasonably estimate quantitative information related to the impact of the new standard on the financial statements.

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842).  ASU 2016-02 requires companies to generally recognize on the balance sheet operating and financing lease liabilities and corresponding right-of-use assets. ASU 2016-02 is effective for the Company in its first quarter of fiscal 2020 on a modified retrospective basis and earlier adoption is permitted. The Company is currently evaluating the impact of the pending adoption of ASU 2016-02 on its consolidated financial statements and expects that most of its operating lease commitments will be subject to the new standard and recognized as operating lease liabilities and right-of-use assets upon adoption of ASU 2016-02.

 

 

 
4

 

 

In October 2016, the FASB issued ASU 2016-16, Income Taxes: Intra-Entity Transfers of Assets Other than Inventory which requires that entities recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. ASU 2016-16 will be effective for the Company's fiscal year beginning February 1, 2018. The standard is required to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company is currently evaluating the accounting, transition, and disclosure requirements of the standard. 

 

In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies the subsequent measurement of goodwill to eliminate Step 2 from the goodwill impairment test. In addition, it eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if that fails that qualitative test, to perform Step 2 of the goodwill impairment test. Therefore, the same impairment assessment applies to all reporting units. The amendments will be effective for the Company’s fiscal year beginning February 1, 2020. Early adoption is permitted. The new guidance is required to be applied on a prospective basis. The Company does not believe adoption of ASU 2017-04 will have a material impact on its consolidated financial statements.

 

In January 2017, the FASB issued ASU 2017-01, Business Combinations: Clarifying the Definition of a Business, which provides a more robust framework to use in determining when a set of assets and activities is a business. The amendments will be effective for the Company’s fiscal year beginning February 1, 2018. Early adoption is permitted. The new guidance is required to be applied on a prospective basis. The effect of adoption of ASU 2017-01 will depend upon the nature of the Company's future acquisitions, if any.

  

2.   COMPUTATION OF NET (LOSS) INCOME PER SHARE

 

The following table sets forth the computation of basic and diluted net (loss) income per share:

 

   

Three Months Ended

   

Six Months Ended

 
   

July 31,

   

July 31,

 
   

2017

   

2016

   

2017

   

2016

 
   

(in thousands, except per share data)

   

(in thousands, except per share data)

 

Net (loss) income

  $ (1,161

)

  $ 968     $ (3,732

)

  $ (1,824

)

Less: Dividends declared

    (1,344

)

    (1,326

)

    (2,675

)

    (2,642

)

Undistributed net loss

  $ (2,505

)

  $ (358

)

  $ (6,407

)

  $ (4,466

)

                                 

Net (loss) income per share – Class A Common Stock

                               

Dividends declared

  $ 1,151     $ 1,134     $ 2,290     $ 2,257  

Allocation of undistributed net loss

    (2,145

)

    (306

)

    (5,483

)

    (3,813

)

Net (loss) income attributable to Class A common stock

  $ (994

)

  $ 828     $ (3,193

)

  $ (1,556

)

                                 

Weighted average shares of Class A common stock outstanding—basic

    15,914       15,694       15,863       15,644  

Weighted average potential shares of Class A common stock

          586              

Weighted average shares of Class A common stock and potential common shares outstanding—diluted

    15,914       16,280       15,863       15,644  
                                 

Basic net (loss) income per Class A common share

  $ (0.06

)

  $ 0.05     $ (0.20

)

  $ (0.10

)

Diluted net (loss) income per Class A common share

  $ (0.06

)

  $ 0.05     $ (0.20

)

  $ (0.10

)

                                 

Net (loss) income per share – Class B Common Stock

                               

Dividends declared

  $ 193     $ 192     $ 385     $ 385  

Allocation of undistributed net loss

    (360

)

    (52

)

    (924

)

    (653

)

Net (loss) income attributable to Class B common stock

  $ (167

)

  $ 140     $ (539

)

  $ (268

)

                                 

Weighted average shares of Class B common stock outstanding—basic

    3,212       3,205       3,211       3,204  

Weighted average potential shares of Class B common stock

          70              

Weighted average shares of Class B common stock and potential common shares outstanding—diluted

    3,212       3,275       3,211       3,204  
                                 

Basic net (loss) income per Class B common share

  $ (0.05

)

  $ 0.04     $ (0.17

)

  $ (0.08

)

Diluted net (loss) income per Class B common share

  $ (0.05

)

  $ 0.04     $ (0.17

)

  $ (0.08

)

 

 

 
5

 

 

Potential common shares consist of the shares issuable upon the release of restricted stock units (“RSUs”) and the exercise of stock options and stock appreciation rights (“SARs”). The Company’s unvested RSUs and unexercised SARs are not considered participating securities as they do not have rights to dividends or dividend equivalents prior to release or exercise.

 

The following table sets forth the number of potential common shares not included in the calculation of diluted earnings per share because their effects were anti-dilutive:

 

   

Three Months Ended

   

Six Months Ended

 
   

July 31,

   

July 31,

 
   

2017

   

2016

   

2017

   

2016

 
   

(in thousands)

   

(in thousands)

 

Class A

    3,219       1,027       3,129       2,883  

Class B

    384       151       387       361  

  

  

3.   FAIR VALUE MEASUREMENTS

 

When determining fair value, the Company uses a three-tier value hierarchy which prioritizes the inputs used in measuring fair value. Whenever possible, the Company uses observable market data. The Company relies on unobservable inputs only when observable market data is not available. Classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. The assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability.

 

The following table sets forth the financial assets and liabilities, measured at fair value, as of July 31, 2017 and January 31, 2017:

 

   

Quoted Prices in

Active Markets for

Identical Assets

(Level 1)

   

Significant

Other

Observable

Inputs

(Level 2)

   

Significant

Unobservable

Inputs

(Level 3)

 
           

(in thousands)

         

Money market mutual funds as of July 31, 2017 (a)

  $ 121,084                  

Money market mutual funds as of January 31, 2017 (a)

  $ 116,043                  

Liability related to the interest rate swap as of July 31, 2017 (b)

          $ (193

)

       

Liability related to the interest rate swap as of January 31, 2017 (b)

          $ (190

)

       

___________________________

(a) Money market mutual funds are recorded at fair value based upon quoted market prices.

(b) The liability related to the interest rate swap is recorded at fair value based upon a valuation model that uses relevant observable market inputs at quoted intervals, such as forward yield curves.

 

Money market mutual funds are classified as part of “Cash and equivalents” in the accompanying Condensed Consolidated Balance Sheets. The amount of cash and equivalents deposited with commercial banks was $28 million and $29 million as of July 31, 2017 and January 31, 2017, respectively.

 

The Company’s note payable bears a variable market interest rate commensurate with the Company’s credit standing. Therefore, the carrying amount outstanding under the note payable reasonably approximates fair value based on Level 2 inputs.

 

There have been no transfers between fair value measurement levels during the six months ended July 31, 2017.

 

Derivative Instruments

 

The Company entered into an interest rate swap in May 2012 to mitigate the exposure to the variability of one month LIBOR for its floating rate debt described in Note 6 “Debt” within these Notes to Condensed Consolidated Financial Statements. The fair value of the interest rate swap is reflected as a liability in the Condensed Consolidated Balance Sheets and the change in fair value is reported in “Other (income) expense” in the Condensed Consolidated Statements of Operations and Comprehensive Loss. The fair value of the interest rate swap is estimated as the net present value of projected cash flows based upon forward interest rates at the balance sheet date.

 

 

 
6

 

 

 The fair values of the derivative instrument at July 31, 2017 and January 31, 2017 were as follows (in thousands):

 

 

(Liability) Derivative

 
     

Fair Value

 
 

Balance Sheet

Location

 

July 31,

2017

   

January 31,

2017

 

Derivative instrument:

                 

Interest rate swap

Other liabilities

  $ (193

)

  $ (190

)

Total

  $ (193

)

  $ (190

)

 

The change in fair value of the interest rate swap recognized in the Condensed Consolidated Statements of Operations and Comprehensive Loss for the six months ended July 31, 2017 and 2016 was $(3,000) and $(212,000), respectively.

  

4. CAPITALIZED SOFTWARE COSTS

 

Capitalized software costs and accumulated amortization at July 31, 2017 and January 31, 2017 were as follows:

 

   

July 31,

2017

   

January 31,

2017

 
   

(in thousands)

 

Capitalized software costs:

               

Acquired software technology

  $ 3,458     $ 3,458  

Capitalized software development costs

    1,069       748  
      4,527       4,206  

Less accumulated amortization

    (3,727

)

    (3,474

)

Capitalized software costs, net

  $ 800     $ 732  

 

Acquired software technology costs relate to technology purchased as a result of the Company’s fiscal 2013 acquisitions of DynaSys and CEBOS. In addition to the acquired software technology, the Company has capitalized costs related to translations and localizations of QAD Enterprise Applications.

 

It is the Company’s policy to write off capitalized software development costs once fully amortized. Accordingly, during the first six months of fiscal 2018, approximately $0.2 million of costs and accumulated amortization were removed from the balance sheet.

 

Amortization of capitalized software costs was $0.4 million and $0.5 million for the six months ended July 31, 2017 and 2016 respectively. Amortization of capitalized software costs is included in “Cost of license” in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Loss.

  

The following table summarizes the estimated amortization expense relating to the Company’s capitalized software costs as of July 31, 2017:

 

Fiscal Years

 

(in thousands)

 

2018 remaining

  $ 424  

2019

    197  

2020

    144  

2021

    35  
    $ 800  

 

 

5.   GOODWILL AND INTANGIBLE ASSETS

 

Goodwill

 

The changes in the carrying amount of goodwill for the six months ended July 31, 2017 were as follows:

 

   

Gross Carrying

Amount

   

Accumulated

Impairment

   

Goodwill, Net

 
   

(in thousands)

 

Balance at January 31, 2017

  $ 26,166     $ (15,608

)

  $ 10,558  

Impact of foreign currency translation

    314       -       314  

Balance at July 31, 2017

  $ 26,480     $ (15,608

)

  $ 10,872  

 

 

 
7

 

 

The Company performed its annual goodwill impairment review during the fourth quarter of fiscal 2017. The analysis compared the Company’s market capitalization to its net assets as of the test date, November 30, 2016. As the market capitalization significantly exceeded the Company’s net assets, there was no indication of goodwill impairment for fiscal 2017. The Company monitors the indicators for goodwill impairment testing between annual tests. No adverse events occurred during the six months ended July 31, 2017 that would cause the Company to test goodwill for impairment.

 

Intangible Assets

 

   

July 31,

2017

   

January 31,

2017

 
   

(in thousands)

 

Amortizable intangible assets

               

Customer relationships (1)

  $ 1,500     $ 2,721  

Trade name

    349       515  
      1,849       3,236  

Less: accumulated amortization

    (1,707

)

    (2,821

)

Net amortizable intangible assets

  $ 142     $ 415  

______________________

(1)

Customer relationships include the impact of foreign currency translation.

 

The Company’s intangible assets are related to the DynaSys and CEBOS acquisitions completed in fiscal 2013. Intangible assets are included in “Other assets, net” in the accompanying Condensed Consolidated Balance Sheets. As of July 31, 2017, all of the Company’s intangible assets were determined to have finite useful lives, and therefore were subject to amortization. It is the Company’s policy to write off amortizable intangible assets once fully amortized. Accordingly, during the second quarter of fiscal 2018, the Company wrote off approximately $1.5 million of cost and accumulated amortization related to the DynaSys acquisition which became fully amortized during the quarter.

 

Amortization of intangible assets was $0.3 million for each of the six months ended July 31 2017 and 2016. Estimated future amortization expense relating to the Company’s intangible assets as of July 31, 2017 is $142,000 in fiscal 2018.

 

6.   DEBT  

 

   

July 31,

2017

   

January 31,

2017

 
   

(in thousands)

 

Note payable

  $ 14,047     $ 14,269  

Less current maturities

    (456

)

    (446

)

Less loan origination costs, net

    (51

)

    (56

)

Long-term debt

  $ 13,540     $ 13,767  

 

Note Payable

 

Effective May 30, 2012 QAD Ortega Hill, LLC, wholly owned by the Company, entered into a variable rate credit agreement (the “2012 Mortgage”) with Rabobank, N.A., to refinance a pre-existing mortgage. The 2012 Mortgage has an original principal balance of $16.1 million and bears interest at the one month LIBOR rate plus 2.25%. One month LIBOR was 1.23% at July 31, 2017. The 2012 Mortgage matures in June 2022 and is secured by the Company’s headquarters located in Santa Barbara, California. In conjunction with the 2012 Mortgage, QAD Ortega Hill, LLC entered into an interest rate swap with Rabobank, N.A. The swap agreement has an initial notional amount of $16.1 million and a schedule matching that of the underlying loan that synthetically fixes the interest rate on the debt at 4.31% for the entire term of the 2012 Mortgage. The terms of the 2012 Mortgage provide for QAD Ortega Hill, LLC to make net monthly payments of $88,100 consisting of principal and interest and one final payment of $11.7 million. The unpaid balance as of July 31, 2017 was $14.0 million.

   

 

 
8

 

 

7.  ACCUMULATED OTHER COMPREHENSIVE LOSS

 

The components of accumulated other comprehensive loss, net of taxes, were as follows:

 

   

Foreign

Currency

Translation

Adjustments

 
   

(in thousands)

 

Balance as of January 31, 2017

  $ (8,631

)

Other comprehensive income before reclassifications

    1,772  

Amounts reclassified from accumulated other comprehensive loss

     

Net current period other comprehensive income

    1,772  

Balance as of July 31, 2017

  $ (6,859

)

 

During the first six months of fiscal 2018 there were no reclassifications from accumulated other comprehensive loss.

 

8.  INCOME TAXES

 

In determining the provision for income taxes for the second quarter of fiscal 2018, the Company calculated income tax expense based on actual quarterly results, adjusted for discrete items recorded during the period. Due to the near breakeven forecast for fiscal 2018, actual quarterly results provided a more reliable estimate of quarterly tax expense. In determining the provision for income taxes for the second quarter of fiscal 2017, the Company calculated income tax expense based on the estimated annual tax rate for the year, adjusted for discrete items recorded during the period.  

 

The Company recorded income tax expense (benefit) of $0.8 million and $(0.6) million in the second quarter of fiscal 2018 and 2017, respectively. The Company’s effective tax rate was (253%) for the second quarter of fiscal 2018 compared to (146%) for the same period in the prior year. The difference in the effective tax rate is primarily due to the difference in calculation methodology (actual vs. estimated) and the valuation allowance recorded against additional U.S. deferred tax assets generated during the second quarter of fiscal 2018.

 

The Company recorded income tax expense (benefit) of $1.5 million and $(1.6) million for the first six months of fiscal 2018 and 2017, respectively. The Company’s effective tax rate was (64%) for the first six months of fiscal 2018 and 47% for the same period in the prior year. The difference in the effective tax rate is primarily due to the difference in calculation methodology (actual vs. estimated) and the valuation allowance recorded against additional U.S. deferred tax assets generated during the first six months of fiscal 2018.

  

The gross amount of unrecognized tax benefits was $1.7 million at July 31, 2017, including interest and penalties. The unrecognized tax benefits were reduced by $1.0 million with an accompanying reduction of deferred tax assets, as a result of the netting required under ASU 2013-11. The entire amount of unrecognized tax benefits, if recognized, will impact the Company’s effective tax rate. This liability is classified as long-term unless the liability is expected to conclude within twelve months of the reporting date.

 

The Company’s policy is to recognize interest and penalties, if any, related to unrecognized tax benefits as a component of income tax expense. As of July 31, 2017, the Company has accrued approximately $0.2 million of interest and penalty expense relating to unrecognized tax benefits.

 

The Company files U.S. federal, state, and foreign tax returns that are subject to audit by various tax authorities. The Company is currently under audit in:

 

 

India for fiscal years ended March 31, 2010, 2013 and 2014

  

Iowa for fiscal year ended January 31, 2014

 

During fiscal 2018, the Company closed the following audits with no adjustment:

 

 

India for fiscal years ended March 31, 1998, 1999 and 2015

 

 

 
9

 

 

9.  STOCKHOLDERS’ EQUITY

 

Dividends

 

The following table sets forth the dividends that were declared by the Company during the first six months of fiscal 2018:

 

Declaration

Date

Record Date Payable    

Dividend

Class A

     

Dividend

Class B

      Amount  

6/13/2017

6/27/2017

7/6/2017

  $ 0.072     $ 0.06     $ 1,344,000  

4/11/2017

4/25/2017

5/2/2017

  $ 0.072     $ 0.06     $ 1,331,000  

 

10.  STOCK-BASED COMPENSATION

 

The Company’s equity awards consist of RSUs and SARs. For a description of the Company’s stock-based compensation plans, see Note 5 “Stock-Based Compensation” in Notes to Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended January 31, 2017.

 

Stock-Based Compensation

 

The following table sets forth reported stock-based compensation expense for the three and six months ended July 31, 2017 and 2016:

 

   

Three Months Ended

July 31,

   

Six Months Ended

July 31,

 
   

2017

   

2016

   

2017

   

2016

 
   

(in thousands)

   

(in thousands)

 

Cost of subscription

  $ 36     $ 27     $ 61     $ 49  

Cost of maintenance and other revenue

    95       73       172       140  

Cost of professional services

    274       212       494       385  

Sales and marketing

    368       321       685       598  

Research and development

    304       249       557       486  

General and administrative

    1,515       1,211       2,391       2,043  

Total stock-based compensation expense

  $ 2,592     $ 2,093     $ 4,360     $ 3,701  

 

 RSU Information

 

The estimated fair value of RSUs was calculated based on the closing price of the Company’s common stock on the date of grant, reduced by the present value of dividends foregone during the vesting period.

 

The following table summarizes the activity for RSUs for the six months ended July 31, 2017:

 

   

RSUs

   

Weighted

Average

Grant Date

Fair Value

 
   

(in thousands)

         
                 

Outstanding at January 31, 2017

    623     $ 20.56  

Granted

    293       30.66  

Released (1)

    (235

)

    20.48  

Forfeited

    (8

)

    20.17  

Outstanding at July 31, 2017

    673     $ 24.98  

_________________________

 

(1)

The number of RSUs released includes shares withheld on behalf of employees to satisfy the minimum statutory tax withholding requirements.

 

The Company withholds a portion of the released shares as consideration for the Company’s payment of applicable employee income taxes. During the three months ended July 31, 2017, the Company withheld 70,000 shares for payment of these taxes at a value of $2.2 million. During the six months ended July 31, 2017, the Company withheld 72,000 shares for payment of these taxes at a value of $2.3 million.

  

Total unrecognized compensation cost related to RSUs was approximately $15.8 million as of July 31, 2017. This cost is expected to be recognized over a weighted-average period of approximately 3.1 years. 

 

 

 
10

 

 

SAR Information

 

The weighted average assumptions used to value SARs granted in the six months ended July 31, 2017 and 2016 are shown in the following table:

 

 

 

   

Six Months Ended

July 31,

 
   

2017

   

2016

 

Expected life in years (1)

    5.50       5.25  

Risk free interest rate (2)

    1.82

%

    1.16

%

Volatility (3)

    33

%

    36

%

Dividend rate (4)

    0.91

%

    1.51

%

 

____________________________

(1)

The expected life of SARs granted under the stock-based compensation plans is based on historical vested SAR exercise and post-vest forfeiture patterns and includes an estimate of the expected term for SARs that were fully vested and outstanding.

 

(2)

The risk-free interest rate is based on the U.S. Treasury yield for a term consistent with the expected life of SARs in effect at the time of grant.

 

(3)

The Company estimates the volatility of its common stock at the date of grant based on the historical volatility of the Company’s common stock for a period equivalent to the expected life of the SARs, which it believes is representative of the expected volatility over the expected life of the SARs.

 

(4)

The Company expects to continue paying quarterly dividends at the same rate as the six months ending on July 31, 2017.

 

The following table summarizes the activity for outstanding SARs for the six months ended July 31, 2017:

 

   

SARs

(in thousands)

   

Weighted

Average

Exercise

Price per

Share

   

Weighted

Average

Remaining

Contractual

Term (years)

   

Aggregate

Intrinsic

Value

(in thousands)

 

Outstanding at January 31, 2017

    2,793     $ 15.51                  

Granted

    380       31.65                  

Exercised

    (73

)

    10.70                  

Expired

    (1

)

    9.09                  

Forfeited

                           

Outstanding at July 31, 2017

    3,099     $ 17.60       4.4     $ 40,378  

Vested and exercisable at July 31, 2017

    2,146     $ 14.11       3.3     $ 35,187  

 

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the aggregate difference between the closing stock price of the Company’s common stock based on the last trading day as of July 31, 2017, and the exercise price for in-the-money SARs) that would have been received by the holders if all SARs had been exercised on July 31, 2017. The total intrinsic value of SARs exercised in the six months ended July 31, 2017 was $1.4 million. The weighted average grant date fair value per share of SARs granted in the three and six months ended July 31, 2017 was $9.59. The weighted average grant date fair value per share of SARs granted in the three and six months ended July 31, 2016 was $5.43.

 

The number of SARs exercised includes shares withheld on behalf of employees to satisfy minimum statutory tax withholding requirements.  During the three months ended July 31, 2017, the Company withheld 12,000 shares for payment of these taxes at a value of $0.4 million. During the six months ended July 31, 2017, the Company withheld 16,000 shares for payment of these taxes at a value of $0.5 million.

 

At July 31, 2017, there was approximately $7.2 million of total unrecognized compensation cost related to unvested SARs. This cost is expected to be recognized over a weighted-average period of approximately 3.0 years.

  

 

 
11

 

 

11. DEFERRED REVENUES

 

Deferred revenues consisted of the following:

 

   

July 31,

2017

   

January 31,

2017

 
   

(in thousands)

 

Deferred maintenance

  $ 63,037     $ 78,923  

Deferred subscription

    22,804       20,389  

Deferred professional services

    2,657       2,550  

Deferred license

    888       1,740  

Deferred other revenue

    275       523  

Deferred revenues, current

    89,661       104,125  

Deferred revenues, non-current (in Other liabilities)

    2,118       2,353  

Total deferred revenues

  $ 91,779     $ 106,478  

 

Deferred maintenance and subscription represent billings and customer payments made in advance for support and subscription contracts. Support and subscription are billed in advance with corresponding revenues being recognized ratably over the support and subscription periods. Support is typically billed annually while subscription is billed quarterly or annually. Deferred license results from undelivered products or specified enhancements, customer specific acceptance provisions and software license transactions that cannot be segmented from undelivered consulting or other services. Deferred professional services revenues represent both prepayments for professional services where revenues for these services are generally recognized as the Company completes the performance obligations for the prepaid services and services already provided but deferred due to software revenue recognition rules.

 

12.  COMMITMENTS AND CONTINGENCIES

 

Indemnifications

 

The Company sells software licenses and services to its customers under written agreements. Each agreement contains the relevant terms of the contractual arrangement with the customer and generally includes certain provisions for indemnifying the customer against losses, expenses and liabilities from damages that may be awarded against the customer in the event the Company’s software is found to infringe upon certain intellectual property rights of a third party. The agreements generally limit the scope of and remedies for such indemnification obligations in a variety of industry-standard respects.

 

The Company believes its internal development processes and other policies and practices limit its exposure related to the indemnification provisions of the agreements. For several reasons, including the lack of prior indemnification claims and the lack of a monetary liability limit for certain infringement cases under the agreements, the Company cannot determine the maximum amount of potential future payments, if any, related to such indemnification provisions.

 

Legal Actions

 

The Company is subject to various legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. While the outcome of these claims cannot be predicted with certainty, management does not believe that the outcome of any of these legal matters will have a material adverse effect on the Company’s consolidated results of operations, financial position or liquidity.

 

13.  BUSINESS SEGMENT INFORMATION

 

The Company markets its products and services worldwide, primarily to companies in the manufacturing industry, including automotive, consumer products, food and beverage, high technology, industrial products and life sciences industries. The Company sells and licenses its products through its direct sales force in four geographic regions: North America; Europe, the Middle East and Africa (“EMEA”); Asia Pacific; and Latin America and through distributors where third parties can extend sales reach more effectively or efficiently. The North America region includes the United States and Canada. The EMEA region includes Europe, the Middle East and Africa. The Asia Pacific region includes Asia and Australia. The Latin America region includes South America, Central America and Mexico. The Company’s Chief Operating Decision Maker, the Chief Executive Officer, reviews the consolidated results within one operating segment.

 

Subscription, license and maintenance revenues are allocated to the region where the end user is located. Professional services revenue is assigned based on the region where the services are delivered.

 

 

 
12

 

 

 

   

Three Months Ended

July 31,

   

Six Months Ended

July 31,

 
   

2017

   

2016

   

2017

   

2016

 
   

(in thousands)

   

(in thousands)

 

Revenue:

                               

North America (1)

  $ 35,156     $ 32,815     $ 68,526     $ 62,334  

EMEA

    22,227       19,835       43,108       39,627  

Asia Pacific

    12,967       12,137       25,133       23,817  

Latin America

    5,608       4,991       10,573       9,397  
    $ 75,958     $ 69,778     $ 147,340     $ 135,175  

 

____________________________

 

(1)

Sales into Canada accounted for 1% of North America total revenue in the three and six months ended July 31, 2017 and for 2% of North America total revenue in the three and six months ended July 31, 2016.

 

  

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

FORWARD-LOOKING STATEMENTS

 

In addition to historical information, this Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. Any statements contained herein that are not statements of historical fact should be construed as forward looking statements, including statements that are preceded or accompanied by such words as “may,” “believe,” “could,” “anticipate,” “projects,” “estimates,” “will likely result,” “should,” “would,” “might,” “plan,” “expect,” “intend” and words of similar meaning or the negative of these terms or other comparable terminology. Forward-looking statements are based on the Company’s current expectations and assumptions regarding its business, the economy and future conditions. A number of risks and uncertainties could cause actual results to differ materially from those expressed or implied in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in Part I, Item 1A entitled “Risk Factors” within our Annual Report on Form 10-K for the year ended January 31, 2017. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s opinions, expectations and projections only as of the date hereof and are subject to risks, uncertainties and assumptions about our business. We undertake no obligation to revise or update or publicly release the results of any revision or update to these forward-looking statements except as required by applicable securities laws. Readers should carefully review the risk factors and other information described in other documents we file from time to time with the Securities and Exchange Commission (“SEC”).

 

INTRODUCTION

 

The following discussion should be read in conjunction with the information included within our Annual Report on Form 10-K for the year ended January 31, 2017, and the Condensed Consolidated Financial Statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q.

 

CRITICAL ACCOUNTING POLICIES

 

Our condensed consolidated financial statements are prepared applying certain critical accounting policies. The SEC defines “critical accounting policies” as those that require application of management’s most difficult, subjective, or complex judgments. Critical accounting policies require numerous estimates and strategic or economic assumptions that may prove inaccurate or subject to variations and may significantly affect our reported results and financial position for the period or in future periods. Changes in underlying factors, assumptions, or estimates in any of these areas could have a material impact on our future financial condition and results of operations. Our financial statements are prepared in accordance with U.S. GAAP, and they conform to general practices in our industry. We apply critical accounting policies consistently from period to period and intend that any change in methodology occur in an appropriate manner. Accounting policies currently deemed critical, including a) revenue; b) accounts receivable allowances for doubtful accounts; c) capitalized software development costs; d) goodwill and intangible assets — impairment assessments; e) valuation of deferred tax assets and tax contingency reserves; and f) stock-based compensation are further discussed in our Annual Report on Form 10-K for the fiscal year ended January 31, 2017. There have been no significant changes to our accounting policies and estimates as discussed in our Annual Report on Form 10-K for the fiscal year ended January 31, 2017. 

 

 
13

 

  

BUSINESS OVERVIEW

 

QAD (“QAD”, the “Company”, “we” or “us”) is a global leader in cloud-based enterprise software solutions for global manufacturing companies across the automotive, life sciences, consumer products, food and beverage, high technology and industrial products industries. We offer full-featured, secure and flexible enterprise and supply chain solutions built for global manufacturing companies which can be delivered in the cloud, on premise or via a blended combination of sites on premise and in the cloud.  Our mission is to provide best-in-class software that enables our customers to operate as effective enterprises with their business processes running at peak efficiency and perfectly aligned to their strategic goals. Our solutions, called QAD Enterprise Applications, enable measurement and control of key business processes and support operational requirements, including financials, manufacturing, demand and supply chain planning, customer management, business intelligence, business process management, supply chain execution, transportation management, service and support, enterprise asset management, analytics, enterprise quality management, interoperability, process and performance, and internationalization.

 

 We have four principal sources of revenue:

 

 

Subscription of Enterprise Applications through our cloud offering in a Software as a Service (“SaaS”) model as well as other hosted applications;

 

License purchases of Enterprise Applications;

 

Maintenance and support, including technical support, training materials, product enhancements and upgrades;

 

Professional services, including implementations, technical and application consulting, training, migrations and upgrades.

 

We operate primarily in the following four geographic regions: North America, Latin America, EMEA and Asia Pacific. In the first six months of fiscal 2018, approximately 47% of our total revenue was generated in North America, 29% in EMEA, 17% in Asia Pacific and 7% in Latin America. The majority of our revenue is generated from global customers who have operations in multiple countries throughout the world. Subscription, license and maintenance revenues are allocated to the region where the end user is located. Professional services revenue is assigned based on the region where the services are delivered. A significant portion of our revenue and expenses are derived from international operations which are primarily conducted in foreign currencies. As a result, changes in the value of foreign currencies relative to the U.S. dollar have impacted our results of operations and may impact our future results of operations. Our results during the second quarter of fiscal 2018 included $1.3 million of foreign currency losses as the U.S. dollar depreciated against many other currencies, most notably the euro. At July 31, 2017, we employed approximately 1,830 employees worldwide, of which 650 employees were based in North America, 580 employees in EMEA, 500 employees in Asia Pacific and 100 employees in Latin America. The increase of approximately 120 employees compared to the same date last year is primarily due to hiring in professional services and in research and development.

 

Our customer base and our target markets are primarily global manufacturing companies; therefore, our results are heavily influenced by the state of the manufacturing economy on a global basis. As a result, our management team monitors several economic indicators, with particular attention to the Global and Country Purchasing Managers’ Indexes (“PMI”). The PMI is a survey conducted on a monthly basis by polling businesses that represent the makeup of respective sectors. Since most of our customers are manufacturers, our revenue has historically correlated with fluctuations in the manufacturing PMI. Global macro economic trends and manufacturing spending are important barometers for our business, and the health of the U.S., Western European and Asian economies have a meaningful impact on our financial results.

 

We are transitioning our business model from traditional perpetual licensing to cloud-based subscription. Recurring revenue, which we define as subscription revenue plus maintenance revenue, accounted for 65% and 67% of total revenue for the first six months of fiscal 2018 and 2017, respectively. By reducing our customers’ up-front costs and providing more flexibility in how customers gain access to and pay for our products, we expect our cloud business model will be more attractive to our customers than perpetual licenses. We anticipate this will increase our long-term revenue growth rate by increasing total subscriptions and customer value over time. During the first six months of fiscal 2018 subscription revenue, representing 22% or our total revenue, grew 38% to $32.8 million from $23.8 million for the same period last year. Trailing twelve month subscription revenue grew 39% to $61.1 million from $44.1 million in the prior period. As a result of our increased cloud-based subscription revenue, our license revenue is declining in comparison to prior years; a trend that we believe will continue. The shift is putting adverse pressure on short-term profitability as we invest to support growth of our cloud business.

 

RESULTS OF OPERATIONS 

 

We operate in several geographical regions as described in Note 13 “Business Segment Information” within the Notes to Condensed Consolidated Financial Statements. In order to present our results of operations without the effects of changes in foreign currency exchange rates, we provide certain financial information on a “constant currency basis”, which is in addition to the actual financial information presented in the following tables. In order to calculate our constant currency results, we apply the current foreign currency exchange rates to the prior period results.

 

 

 
14

 

 

Revenue

 

   

Three Months

Ended

July 31, 2017

   

Three Months

Ended

July 31, 2016

   

Change in

Constant

Currency

   

Change due

to Currency

Fluctuations

   

Total Change

as Reported

$

   

%

 

(in thousands)

                                               

Revenue

                                               

Subscription

  $ 17,420     $ 12,317     $ 5,125     $ (22

)

  $ 5,103       41

%

Percentage of total revenue

    23

%

    18

%

                               

License

    6,743       6,416       268       59       327       5

%

Percentage of total revenue

    9

%

    9

%

                               

Maintenance and other

    31,971       33,266       (1,261

)

    (34

)

    (1,295

)

    -4

%

Percentage of total revenue

    42

%

    48

%

                               

Professional services

    19,824       17,779       2,083       (38

)

    2,045       12

%

Percentage of total revenue

    26

%

    25

%

                               

Total revenue

  $ 75,958     $ 69,778     $ 6,215     $ (35

)

  $ 6,180       9

%

 

 

 

   

Six Months

Ended

July 31, 2017

   

Six Months

Ended

July 31, 2016

   

Change in

Constant

Currency

   

Change due

to Currency

Fluctuations

   

Total Change

as Reported

$

   

%

 

(in thousands)

                                               

Revenue

                                               

Subscription

  $ 32,763     $ 23,809     $ 9,121     $ (167

)

  $ 8,954       38

%

Percentage of total revenue

    22

%

    18

%

                               

License

    12,008       10,363       1,679       (34

)

    1,645       16

%

Percentage of total revenue

    8

%

    7

%

                               

Maintenance and other

    63,877       66,102       (1,618

)

    (607

)

    (2,225

)

    -3

%

Percentage of total revenue

    43

%

    49

%

                               

Professional services

    38,692       34,901       4,264       (473

)

    3,791       11

%

Percentage of total revenue

    27

%

    26

%

                               

Total revenue

  $ 147,340     $ 135,175     $ 13,446     $ (1,281

)

  $ 12,165       9

%

 

Total Revenue. On a constant currency basis, total revenue was $76.0 million for the second quarter of fiscal 2018, representing a $6.3 million, or 9%, increase from $69.7 million for the same period last year. When comparing categories within total revenue at constant rates, our results for the second quarter of fiscal 2018 included an increase in subscription, license and professional services partially offset by a decrease in maintenance and other. Revenue outside the North America region as a percentage of total revenue was 54% and 53% for the second quarter of fiscal 2018 and 2017, respectively. On a constant currency basis, total revenue increased across all regions during the second quarter of fiscal 2018 when compared to the prior year.

 

On a constant currency basis, total revenue was $147.3 million for the first six months of fiscal 2018, representing a $13.4 million, or 10%, increase from $133.9 million for the same period last year. When comparing categories within total revenue at constant rates, our results for the first six months of fiscal 2018 included an increase in subscription, license and professional services partially offset by a decrease in maintenance and other. Revenue outside the North America region as a percentage of total revenue was 53% and 54% for the first six months of fiscal 2018 and 2017, respectively. On a constant currency basis, total revenue increased across all regions during the first six months of fiscal 2018 when compared to the prior year.

 

Our products are sold to manufacturing companies that operate mainly in the following six industries: automotive, consumer products, food and beverage, high technology, industrial products and life sciences. Given the similarities between consumer products and food and beverage as well as between high technology and industrial products, we aggregate them for management review. The following table presents revenue by industry for the three and six months ended July 31, 2017 and 2016: 

 

   

Three months ended

July 31,

   

Six months ended

July 31,

 
   

2017

   

2016

   

2017

   

2016

 

Automotive

    38

%

    35

%

    37

%

    33

%

Consumer products and food and beverage

    15

%

    18

%

    16

%

    19

%

High technology and industrial products

    32

%

    33

%

    32

%

    33

%

Life sciences

    15

%

    14

%

    15

%

    15

%

Total revenue

    100

%

    100

%

    100

%

    100

%

 

 

 
15

 

 

Subscription Revenue. Subscription revenue consists of recurring fees from customers to access our products via the cloud and other subscription offerings. Subscription revenue is billed on a quarterly or annual basis and recognized ratably over the term of the agreement, typically 12 to 60 months. On a constant currency basis, subscription revenue was $17.4 million for the second quarter of fiscal 2018, representing a $5.1 million, or 41%, increase from $12.3 million for the same period last year. On a constant currency basis, subscription revenue increased across all regions during the second quarter of fiscal 2018 when compared to the prior year. The increase in subscription revenue was primarily due to sales of QAD Enterprise Applications in the cloud, which represented over 85% of total subscription revenue in the second quarter of fiscal 2018 and 2017. Cloud revenue consists of new customer sites; existing Enterprise Applications users converting from on-premise; and additional users and modules purchased by our existing cloud customers. Approximately half of our cloud revenue comes from existing customers converting Enterprise Applications users to cloud users and the other half comes from new customers and new modules. Our cloud customer retention rate is in excess of 90%. We track our cloud retention rate by calculating the annualized revenue of customer sites with contracts up for renewal during the period compared to the annualized revenue associated with the customer sites that have canceled during the period. The percentage of revenue not canceled is our retention rate.

 

On a constant currency basis, subscription revenue was $32.8 million for the first six months of fiscal 2018, representing a $9.2 million, or 39%, increase from $23.6 million for the same period last year. On a constant currency basis, subscription revenue increased across all regions during the first six months of fiscal 2018 when compared to the prior year. The increase in subscription revenue was primarily due to sales of QAD Enterprise Applications in the cloud, which represented over 85% of total subscription revenue in the first six months of fiscal 2018 and 2017.

 

The following table presents cloud revenue by region for the three and six months ended July 31, 2017 and 2016:

 

   

Three months ended

July 31,

   

Six months ended

July 31,

 
   

2017

   

2016

   

2017

   

2016

 

North America

    57

%

    60

%

    56

%

    62

%

EMEA     22

%

    15

%

    22

%

    15

%

Asia Pacific

    14

%

    16

%

    14

%

    15

%

Latin America

    7

%

    9

%

    8

%

    8

%

Total cloud revenue

    100

%

    100

%

    100

%

    100

%

 

 

The following table presents cloud revenue by industry for the three and six months ended July 31, 2017 and 2016:

 

   

Three months ended

July 31,

   

Six months ended

July 31,

 
   

2017

   

2016

   

2017

   

2016

 

Automotive

    35

%

    39

%

    36

%

    39

%

Consumer products and food and beverage

    12

%

    16

%

    13

%

    16

%

High technology and industrial products

    25

%

    18

%

    23

%

    18

%

Life sciences

    28

%

    27

%

    28

%

    27

%

Total cloud revenue

    100

%