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QADA's Quarter

Mark Gomes
Thu, 28 May 2015 23:04:40 GMT

Thursday evening, QAD (QADA) announced earnings for the quarter ended May 2015. Revenues came in at $69.3 million, missing Wall Street estimates by a slight margin ($0.7 million). EPS came in at 9-cents, missing estimates by 2-cents. After reading the press release and listening to the earnings conference call, it was abundantly clear that the main culprit was foreign currency exchange rates. For the three-month period ending in May, the US dollar hovered at its highest rate in six years (since the end of the last recession, to be precise). The strong dollar has impacted the earnings of numerous US-based corporations with international exposure. However, investors have seen through these exchange rate headwinds and even the affected companies' stock prices remain near all-time highs. Specific to QAD, management commentary was upbeat on almost every aspect of the business. The perpetual license business, as well as the Cloud business, continue to grow. The Cloud business, in particular, should exit the year at a revenue run rate in excess of $10 million per quarter, gr owing at ~40% annually. Based on prevailing market valuations, QAD's Cloud business would reasonably be valued at $250 million (5x forward revenues) as a standalone entity. Evaluating the rest of the business, QAD's base of maintenance revenue would be very reasonably valued at approximately $270 million (2x maintenance revenues). If we combine this with the value of QAD's perpetual license business, Santa Barbara real estate, and balance sheet (which we estimate to be over $130 million), we derive a sum of the parts valuation of $650 million for QADA. That's about $35 per share. This unlocked value has been our thesis on QAD since we first recommended the stock at $11.73 on March 24, 2013. Since that time, the company has reported some great quarters and some not so great quarters. Through it all, the concept of fair valuation has prevailed, enabling the stock price to continually gravitate towards its rightful valuation (rising by approximately 100% on our watch). Overall, with the exception of currency exchange rates (which cannot be controlled), we are quite pleased with the company's progress in the quarter. Accordingly, we continue to remain positive on shares of QADA.

Fri, 29 May 2015 15:12:46 GMT

So, at $35 per share, would you then say "it is fairly valued, time to sell and move on?". And regarding market value for the cloud business, is that the best way to value the segment today? I read somewhere that market value for tulips was quite high at some point. Since qada is a value play, just trying to get a better sense of where you consider the conservative valuation to be.

Mark Gomes
Fri, 29 May 2015 15:29:12 GMT

I like the tulip comment... especially since the tulip-like valuations enabled me to make a ton of money during the Internet bubble. Not believing the hype pays off in the end. I actually use tried-and-true methods (and the occasional tried-and-true rules of thumb) when a complete DCF analysis proves prohibitive to construct. I only valued the maintenance stream at 2x to account for the cannibalization from the Cloud business (which has been minimal to this point). I'm confident in my valuation assessment and the stock has responded with 100%+ returns :) As for your question about selling at $35, the answer is no. By the time it gets to $35, some would argue that the company will have grown and be worth more than $35. They would be correct. However, I don't like owning fairly-valued (or slightly undervalued) companies. That leaves no room for error. Thus, the latest point at which I'll be exiting QADA is when it has tripled (around $33).

Fri, 29 May 2015 16:00:13 GMT

Thanks for the follow up, provides some much appreciated clarity. Now stop messing around on the forum and get back to finding another triple! ;)

Wed, 25 Nov 2015 15:39:30 GMT

Nice call Mark on trimming the QAD position. I did after your last newsletter suggested that you would be looking at it and low and behold off 12% today already on 3X avg. daily volume. Thanks!

Wed, 25 Nov 2015 18:13:18 GMT

Mark, for those who did not have a subscription in March of 2013, and have not seen an opportunity to get into QADA, should they use this pull back as an entry point?

Thu, 26 Nov 2015 01:20:46 GMT

also curious about the same thing as Kurt

Thu, 26 Nov 2015 15:17:39 GMT

33/23 - 1 = 43% upside. Anything above 5% works for me.