From Computer Business Review, a sister publication.
In November last year, when his 17-year old company was on the verge of breaking the $100m barrier, Karl Lopker, chief executive of manufacturing software vendor QAD, brushed aside suggestions that it was time to go public. Flotation was, he said, just one financial strategy, and not an overriding aim. Nevertheless, less than a year later, Lopker has done exactly that and, at the beginning of August, QAD made its debut on Wall Street. So why the change of heart? Pam Lopker, president and founder of QAD, admits there was a need for a swift change of strategy. The proceeds of the IPO, she says, will help the company maintain the strong balance sheet needed to execute its long-term strategies. The company, which supplies manufacturing software based on the Progress fourth generation language, has a major redevelopment project underway. QAD’s results have fluctuated significantly in the past, and the company will benefit from the stabilizing influence of a major injection of cash. In its most recent fiscal year, QAD recorded a net profit of $1m on revenues of $126.4m, compared with a loss of $686,000 in the previous year. But given that profits stood at $3.7m in 1993, last year’s performance looks less than sparkling. What is more, although the company has posted year-on-year revenue growth for the past five years, the rate of growth slowed significantly each year between 1992 and 1995. There was an big upturn in the most recent annual results, when QAD reported revenue growth of 41%, but due to a restatement of the company’s financial year, 1996 was 13 months long. The problem of fluctuating results is not an unusual one among vendors of business application software. However, QAD’s revenues in any quarter are often derived from a limited number of large, non-recurring license fees. For example, revenue from four customers represented approximately a quarter of license fees in the company’s most recent quarter. QAD’s ability to source cash easily will be a key factor in the success of two major product strategies. First, the company is in the process of an ambitious, object-oriented rewrite of its flagship product, manufacturing software package MFG/PRO. Importantly, this move will also allow QAD to side-step the tricky issue of its continued reliance on struggling application development tools company, Progress Software, on whose 4GL programming language MFG/PRO is based.
High marks for strategy
QAD remains committed to Progress at present, although the tools vendor clearly faces some severe challenges. All tools companies are in transition and hurting as a result, argues Pam Lopker. Certainly, there are plenty of opportunities for Progress to develop Java tools, and it is ideally placed to do so, she says. The second major initiative is the planned launch of a new line of object-oriented supply chain management applications, ON/Q, scheduled for release in mid-1998. Bobby Cameron, senior analyst with Forrester Research, believes that ON/Q could prove a major coup for QAD. The market for manufacturing software is moderately saturated. What is driving new sales for companies like QAD is supply chain capabilities, which is where ON/Q fits in. QAD will have the first object-oriented supply chain management software on the market – I give them very high marks for strategy, he says. These moves, however, are costing QAD dear. Investment in R&D currently stands at approximately 18% of revenues, compared with an industry average of around 10%. We’re a product-oriented, technology-based company. Our strategy on R&D spending will not change, says Lopker. While the cash infusion brought about by the IPO will help ease this R&D burden, shareholders will expect to see its business advantage reflected in the company’s performance. While QAD accepts that it has a low profile in comparison to competitors such as SAP and Baan, Pam Lopker points to some key customers as evidence of the company’s worthiness as a competitor to such giants. For example, Lucent Technologies, the AT&T spin-off which makes telecommunications switching equipment, uses SAP’s R/3 business applications package on a corporate level, but runs MFG/PRO at 130 sites worldwide, including a $2bn flagship manufacturing plant. While the IPO will undoubtedly bring QAD more attention, the company needs to ensure that the net result of that attention is positive.
