| Small & micro cap project / Activism insight
QAD Inc.: Signs of moat
QAD Cloud ERP and QAD Enterprise Applications allow customers to monitor, control and support their operations, whether operating a single plant or multiple sites located around the world. In a nutshell, QAD provides manufacturing ERP and supply chain solutions.
SIGNS OF MOAT
(1) Migration from a licensing to a recurring business model
The company is transitioning from selling perpetual licenses to providing access to its software on a subscription basis as part of its cloud offering.
- Growing subscription revenue: Subscription fees increased from $3.5 million in FY 2009 to $91.9 million in FY 2018.
- Increasing the subscription gross margin: The subscription gross margin increased from 43% in Q2 FY 2016 to 63% in Q2 FY 2020.
- Huge base: The company’s solutions are used by over 300,000 active users, of which cloud and subscription users have grown to 43,000 in 2019 from 33,000 in the prior year.
- Sticky revenue / renewal: Even though the company does not report exact renewal rates, it reported that renewal rates are over 90%.
(2) Niche target
Unlike focusing on all verticals, QAD focuses predominantly on (a) manufacturing industries (b) primarily on six industries (automotive, consumer products, food and beverages, high technology & industrial products, and life sciences and (c) small and medium sized industries. Given the fact that QAD is cheaper than SAP, QAD has established itself as a trusted SaaS provider for small and medium sized manufacturers.
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