The weighted average assumptions used to value SARs granted in the three months ended April 30, 2015 and 2014 are shown in the following table:
The following table summarizes the activity for outstanding SARs for the three months ended April 30, 2015:
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 April 30, 2015, and the exercise price for in-the-money SARs) that would have been received by the holders if all SARs had been exercised on April 30, 2015. The total intrinsic value of SARs exercised in the three months ended April 30, 2015 was $1.5 million.
The number of SARs exercised includes shares withheld on behalf of employees to satisfy minimum statutory tax withholding requirements. During the quarter ended April 30, 2015, the Company withheld 15,600 shares for payment of these taxes at a value of $0.4 million.
At April 30, 2015, there was approximately $4.8 million of total unrecognized compensation cost related to unvested SARs. This cost is expected to be recognized over a weighted-average period of approximately 2.4 years.
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 three months ended April 30, 2015:
| | | RSUs | | | Weighted Average Grant Date Fair Value | |
| | | (in thousands) | | | | |
| | | | | | | |
| Restricted stock at January 31, 2015 | | | 503 | | | $ | 16.27 | |
| Granted | | | 60 | | | | 21.93 | |
Released (1) | | | (2 | ) | | | 13.09 | |
| Forfeited | | | (5 | ) | | | 16.79 | |
| Restricted stock at April 30, 2015 | | | 556 | | | $ | 16.88 | |
(1) | The number of RSUs released includes shares withheld on behalf of employees to satisfy statutory tax withholding requirements. |
The Company withholds, at the employee’s election, a portion of the released shares as consideration for the Company’s payment of applicable employee income taxes. During the three months ended April 30, 2015, the Company withheld 600 shares for payment of these taxes at a value of $14,000.
Total unrecognized compensation cost related to RSUs was approximately $6.7 million as of April 30, 2015. This cost is expected to be recognized over a weighted-average period of approximately 2.6 years.
11. DEFERRED REVENUES
Deferred revenues consisted of the following:
| | | April 30, 2015 | | | January 31, 2015 | |
| | | (in thousands) | |
| Deferred maintenance revenue | | $ | 75,744 | | | $ | 86,381 | |
| Deferred subscription revenue | | | 11,622 | | | | 11,563 | |
| Deferred services revenue | | | 2,621 | | | | 2,813 | |
| Deferred license revenue | | | 1,028 | | | | 1,890 | |
| Deferred other revenue | | | 393 | | | | 74 | |
| Deferred revenues, current | | | 91,408 | | | | 102,721 | |
| Deferred revenues, non-current (in Other liabilities) | | | 2,114 | | | | 2,361 | |
| Total deferred revenues | | $ | 93,522 | | | $ | 105,082 | |
Deferred maintenance and subscription revenues represent 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 typically billed quarterly. Deferred license revenues result 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 services revenues represent both prepayments for our 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.
License and subscription revenues are assigned to the geographic regions based on both the proportion of users in each region and sales effort. Maintenance revenue is allocated to the region where the end user customer is located. Services revenue is assigned based on the region where the services are performed.
| | | Three Months Ended April 30, | |
| | | 2015 | | | 2014 | |
| Revenue: | | (in thousands) | |
North America (1) | | $ | 30,222 | | | $ | 29,139 | |
| EMEA | | | 21,802 | | | | 24,151 | |
| Asia Pacific | | | 11,725 | | | | 11,332 | |
| Latin America | | | 5,516 | | | | 3,863 | |
| | | $ | 69,265 | | | $ | 68,485 | |
(1) | Sales into Canada accounted for 2% of North America total revenue in each of the three months ended April 30, 2015 and 2014. |
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,” “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 current expectations and assumptions that are subject to risks and uncertainties that 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, 2015. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s opinions 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, 2015, 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 recognition; b) accounts receivable allowances for bad debt and sales returns; c) capitalized software development costs; d) impairment assessments on goodwill and intangible assets; e) business combinations; f) valuation of deferred tax assets and tax contingency reserves; and g) stock-based compensation are further discussed in the Annual Report on Form 10-K for the fiscal year ended January 31, 2015. 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, 2015.
BUSINESS OVERVIEW
QAD Inc. (“QAD”, the “Company”, “we” or “us”) is a leading global provider of vertically-oriented, mission-critical enterprise software solutions for global manufacturing companies across the automotive, life sciences, consumer products, food and beverage, high technology and industrial products industries. Our mission is to deliver best-in-class software that enables our customers to operate more effectively on a global basis. QAD Enterprise Applications enables measurement and control of key business processes and supports operational requirements. We deliver our software solutions to our customers in a format that best meets their current and future needs - either in the cloud, on premise, or blended. Increasingly, our customers are selecting either a cloud-based deployment or a blended deployment, which is a combination of on-premise and cloud-based software, as they expand their businesses globally and as they recognize the benefits of full featured ERP cloud-based software.
At the core of our solutions is our enterprise resource planning (“ERP”) suite called QAD Enterprise Applications or MFG/PRO. Our ERP suite is also deployed in the cloud as QAD Cloud ERP. QAD Enterprise Applications supports the core business processes of our global manufacturing customers, including key functions in the following areas: financials, customer management, manufacturing, demand and supply chain planning, supply chain execution, transportation management, service and support, enterprise asset management, analytics, enterprise quality management, interoperability, process and performance, and internationalization. We also focus on the foundation and technology of our applications, such as user interface and usability.
We have four principal sources of revenue:
| · | License purchases of our Enterprise Applications; |
| · | Subscription of our Enterprise Applications through our cloud offering in a Software as a Service (“SaaS”) model as well as other hosted Internet 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 quarter of fiscal 2016, approximately 44% of our total revenue was generated in North America, 31% in EMEA, 17% in Asia Pacific and 8% in Latin America. The majority of our revenue is generated from global customers who have operations in multiple countries throughout the world. License and subscription revenues are assigned to the geographic regions based on both the proportion of users in each region and sales effort. Maintenance revenue is allocated to the region where the end user is located. Services revenue is assigned based on the region where the services are performed. 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. At April 30, 2015, we employed approximately 1,670 employees worldwide, of which 630 employees were based in North America, 500 employees in EMEA, 460 employees in Asia Pacific and 80 employees in Latin America.
Our customer base and our target markets are 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.
Our business model is evolving. We continue to assess current business offerings and introduce more flexible license and service offerings in the cloud which have ratable revenue streams. The accounting impact of these cloud offerings and other business decisions are expected to result in an increase in the percentage of our ratable revenue, making for more predictable revenue over time, while correspondingly reducing our up-front perpetual license revenue stream. Over time, we expect our business model transition to expand our customer base by eliminating higher up-front licensing costs and providing more flexibility in how customers gain access to and pay for our products. We expect this business model transition will increase our long-term revenue growth rate by increasing total subscriptions and customer value over time.
We remain diligent about managing our expenditures while making essential investments to drive growth. If we are unable to successfully achieve our major business initiatives we may not achieve our financial goals.
OVERVIEW OF THE FISCAL 2016 FIRST QUARTER
A significant portion of our business is conducted in currencies other than the U.S. dollar, particularly the euro. We operate in several geographical regions as described in Note 13 “Business Segment Information” within the Notes to Condensed Consolidated Financial Statements. In the first quarter of fiscal 2016, approximately 56% of our total revenue was generated outside of North America and we expect to continue generating a significant portion of our revenue outside the U.S. Weakening of the value of the U.S. dollar compared to foreign currency exchange rates generally has the effect of increasing our revenues but also increasing our expenses denominated in currencies other than the U.S. dollar. Similarly, strengthening of the U.S. dollar compared to foreign currency exchange rates generally has the effect of reducing our revenues but also reducing our expenses denominated in currencies other than the U.S. dollar. We plan our business accordingly by deploying additional resources to areas of expansion, while continuing to monitor our overall expenditures given the economic uncertainties of our target markets. In order to provide a framework for assessing how our underlying businesses performed excluding the effect of foreign currency fluctuations, we compare the changes in results from one period to another period using constant currency. In order to calculate our constant currency results, we apply the current foreign currency exchange rates to the prior period results. In the table below, we present the change based on actual results in reported currency and in constant currency.
| | | Three Months Ended April 30, 2015 | | | Three Months Ended April 30, 2014 | | | Change in Constant Currency | | | Change due to Currency Fluctuations | | | Total Change as Reported | |
| (in thousands) | | | | | | | | | | | | | | | |
| Total revenue | | $ | 69,265 | | | $ | 68,485 | | | $ | 6,148 | | | $ | (5,368 | ) | | $ | 780 | |
| Cost of revenue | | | 32,098 | | | | 31,431 | | | | (2,815 | ) | | | 2,148 | | | | (667 | ) |
| Gross profit | | | 37,167 | | | | 37,054 | | | | 3,333 | | | | (3,220 | ) | | | 113 | |
| Operating expenses | | | 36,407 | | | | 36,756 | | | | (1,691 | ) | | | 2,040 | | | | 349 | |
| Income from operations | | $ | 760 | | | $ | 298 | | | $ | 1,642 | | | $ | (1,180 | ) | | $ | 462 | |
Operating Results. Our first quarter results were significantly impacted by foreign currency fluctuations. Total revenue for the first quarter of fiscal 2016 increased by 1%, to $69.3 million, when compared to the same period last year. Currency had an adverse impact on total revenue of $5.4 million. On a constant currency basis, total revenue increased by $6.1 million, or 10%. The primary driver of our revenue growth was subscription revenue due to our cloud offering.
While the impact of currency changes negatively affected our revenue, it also reduced our expenses. Total cost of revenue increased by 10% on a constant currency basis, but after taking into account currency fluctuations, cost of revenue increased only 2%, to $32.1 million, when compared to the same period last year. Similarly, operating expenses on a constant currency basis increased by 5%, but after the impact of currency, operating expenses decreased by 1% to $36.4 million. The net unfavorable impact of currency fluctuations on our income from operations was $1.2 million.
License Revenue. License revenue is primarily derived from software license fees that customers pay for our core product, QAD Enterprise Applications, and any add-on modules they purchase. In the first quarter of fiscal 2016, license revenue increased by 3% to $6.9 million when compared to the same period last year. When we enter into a multi-element transaction with fixed fee services or when we sell licenses for additional users under a pricing model that does not satisfy vendor specific objective evidence (“VSOE”) requirements, we may be required to recognize license revenue ratably over the longer of the maintenance period or expected services implementation timeframe rather than recognizing license revenue at the time of sale. Additionally, if at the time of the license sale we have not finalized the services agreement, we will defer the entire arrangement until the services agreement is signed.
Our success in closing license deals for existing customers, new customers that are affiliates of existing customers and customers that have employees with historical experience working with QAD tends to be higher than with new customers that have no QAD affiliations. As a result, we place increased focus on these opportunities. A majority of our license revenue is generated from existing customers and their affiliates. We believe global economic volatility will continue to shape customers’ and prospects’ buying decisions, making it difficult to forecast sales cycles for our products and the timing of large software license sales. In addition, as we focus on our cloud sales we may experience a correspondingly negative effect on license revenue.
Subscription Revenue. Growing our cloud solution and offering our products as SaaS continues to be a key strategic and growth initiative for us. In the first quarter of fiscal 2016, subscription revenue increased by 52% to $9.4 million compared to the prior year period. Our cloud customers include a mix of existing customers who have converted from our on-premise model and new user implementations of our cloud solution. Subscription revenue is generally billed on a quarterly basis and recognized ratably over the term of the agreement, typically 12 to 36 months.
Maintenance Revenue. We offer support services 24 hours a day, seven days a week in addition to providing software upgrades, which include additional or improved functionality, when and if available. In the first quarter of fiscal 2016 maintenance revenue was significantly impacted by unfavorable foreign currency movements. As a result, maintenance revenue decreased by 8% to $33.3 million when compared to the same period last year. The decrease in maintenance revenue was due to an adverse currency impact of $2.7 million. Maintenance revenue fluctuations are influenced by: (1) new license revenue growth; (2) annual renewal of support contracts; (3) increase in customers through acquisitions; (4) fluctuations in currency rates; (5) adjustments to revenue as a result of revenue recognition rules; and (6) customer conversions to QAD Cloud ERP. The vast majority of our customers renew their annual support contracts. Over the last three years, our annual revenue renewal rate of customers subscribing to maintenance has been greater than 90%. Maintenance revenue is generally billed on an annual basis and recognized ratably over the term of the agreement, typically twelve months. As we focus on our cloud sales we may experience a corresponding negative effect on maintenance revenue. When customers convert to QAD Cloud ERP they no longer pay for maintenance as those services are included as a component of the subscription offering.
Professional Services Revenue. Our services business consists of professional services, including consulting and training related to our solutions. In the first quarter of fiscal 2016, our services revenue remained relatively flat at $19.6 million when compared to the same period last year. On a constant currency basis professional services revenue increased by $1.8 million offset by an adverse currency impact of $1.8 million. Our professional services organization provides our customers with expertise and assistance in planning and implementing our solutions whether in the cloud or on-premise. Consultants typically assist customers with the initial installation of a system, the conversion and transfer of the customer’s historical data into our software, and ongoing training, education, and system upgrades. We believe our professional services enable customers to implement our software efficiently, support a customer’s success with our solution, strengthen our customer relationships, and add to our industry-specific knowledge base for use in future implementations and product innovations. Our services margins tend to range from about breakeven to 10%. We believe we offer competitive rates and view our services organization as a department supporting the implementation and deployment of our products and improving the overall customer experience. Services margins lower our overall operating margin as services margins are inherently lower than margins for our license, maintenance and subscription revenues. In fiscal 2016 we expect services revenue will grow in relation to overall revenue growth on a constant currency basis because growth in license and subscription revenue typically generates more services projects. Services revenue may be impacted by currency fluctuations; however, since we generally use local resources our costs are also impacted by similar currency fluctuations, providing a natural hedge. As a result, our margins tend to remain consistent.
Although our professional services are optional, many of our customers use these services for some of their planning, implementation, or related needs. Professional services are typically rendered under time and materials-based contracts with services typically billed on an hourly basis. Professional services are sometimes rendered under fixed-fee based contracts with payments due on specific dates or milestones.
Professional services revenue growth is contingent upon license and subscription revenue growth and customer upgrade cycles, which are influenced by the strength of general economic and business conditions and the competitive position of our software products. We use our partners and subcontractors to supplement our internal resources. This allows us to quickly respond to demand fluctuations while somewhat mitigating low utilization in slow times. We believe this also helps us extend our global reach by keeping a higher number of partners engaged and knowledgeable about our product.
Our professional services business has competitive exposure to offshore providers which could create the risk of pricing pressure, fewer customer orders and reduced gross margins.
Cash Flow and Financial Condition. In fiscal 2015, we successfully closed a public offering of 2 million shares of our Class A stock resulting in net cash received of $37.0 million after underwriting discounts and commissions and offering expenses. In the first quarter of fiscal 2016 the offering underwriters exercised in full an option to purchase additional shares. As a result, a further 450,000 shares of Class A common stock were issued generating approximately $8.4 million in additional net proceeds. We also generated cash flow from operating activities of $4.3 million during the first quarter of fiscal 2016.
Our cash and equivalents at April 30, 2015 totaled $130.9 million, with the only debt on our balance sheet of $15.0 million related to the mortgage of our headquarters. Our primary uses of cash have been funding investment in research and development and funding operations to drive revenue and earnings growth. In addition, we use cash for acquisitions, dividend payments, share repurchase programs and other equity related transactions.
In fiscal 2016, we anticipate that our priorities for use of cash will be growing our cloud business in addition to developing sales and services resources and continued investment in research and development to drive and support growth and profitability. We will continue to evaluate acquisition opportunities that are complementary to our product footprint, solutions delivery and technology direction. We will also continue to assess share repurchases and dividend payments. We do not anticipate additional borrowing requirements in fiscal 2016.
RESULTS OF OPERATIONS
Revenue
| | | Three Months Ended April 30, 2015 | | | Three Months Ended April 30, 2014 | | | Change in Constant Currency | | | Change due to Currency Fluctuations | | | Total Change as Reported $ | | | % | |
| (in thousands) | | | | | | | | | | | | | | | | | | |
| Revenue | | | | | | | | | | | | | | | | | | |
| License fees | | $ | 6,851 | | | $ | 6,652 | | | $ | 825 | | | $ | (626 | ) | | $ | 199 | | | | 3 | % |
| Percentage of total revenue | | | 10 | % | | | 10 | % | | | | | | | | | | | | | | | | |
| Subscription fees | | | 9,419 | | | | 6,192 | | | | 3,434 | | | | (207 | ) | | | 3,227 | | | | 52 | % |
| Percentage of total revenue | | | 14 | % | | | 9 | % | | | | | | | | | | | | | | | | |
| Maintenance and other | | | 33,383 | | | | 36,076 | | | | 55 | | | | (2,748 | ) | | | (2,693 | ) | | | -7 | % |
| Percentage of total revenue | | | 48 | % | | | 53 | % | | | | | | | | | | | | | | | | |
| Professional services | | | 19,612 | | | | 19,565 | | | | 1,834 | | | | (1,787 | ) | | | 47 | | | | 0 | % |
| Percentage of total revenue | | | 28 | % | | | 28 | % | | | | | | | | | | | | | | | | |
| Total revenue | | $ | 69,265 | | | $ | 68,485 | | | $ | 6,148 | | | $ | (5,368 | ) | | $ | 780 | | | | 1 | % |
Total Revenue. On a constant currency basis, total revenue was $69.3 million and $63.2 million for the first quarter of fiscal 2016 and 2015, respectively, representing a $6.1 million, or 10%, increase from the same period last year. When comparing categories within total revenue at constant rates, our results for the first quarter of fiscal 2016 included increases in all revenue categories except for maintenance and other revenue which was flat. Our customers are widely dispersed and no single customer accounted for more than 10% of total revenue in any of the last three fiscal years. Revenue outside the North America region as a percentage of total revenue was 56% and 57% for the first quarter of fiscal 2016 and fiscal 2015, respectively. On a constant currency basis, total revenue increased in all regions during fiscal 2016 when compared to the same period last 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 food and beverage and consumer products as well as between high technology and industrial products, we aggregate them for management review. Revenue by industry for the first quarter of fiscal 2016 was approximately 30% in automotive, 22% in consumer products and food and beverage, 33% in high technology and industrial products and 15% in life sciences. In comparison, revenue by industry for the first quarter of fiscal 2015 was approximately 29% in automotive, 23% in consumer products and food and beverage, 33% in high technology and industrial products and 15% in life sciences.
License Revenue. On a constant currency basis, license revenue was $6.9 million and $6.1 million for the first quarter of fiscal 2016 and 2015, respectively, representing a $0.8 million, or 13%, increase from the same period last year. License revenue increased in our North America and Latin America regions and decreased in our EMEA and Asia Pacific regions during the first quarter of fiscal 2016 when compared to the same period last year. One of the metrics that management uses to measure license revenue performance is the number of customers that have placed sizable license orders in the period. During the first quarter of fiscal 2016, five customers placed license orders totaling more than $0.3 million and no orders exceeded $1.0 million. This compared to the first quarter of fiscal 2015 in which two customers placed license orders totaling more than $0.3 million and no orders exceeded $1.0 million.
Subscription Revenue. On a constant currency basis, subscription revenue was $9.4 million and $6.0 million for the first quarter of fiscal 2016 and 2015, respectively, representing a $3.4 million, or 57%, increase from the same period last year. Subscription revenue increased across all regions during the first quarter of fiscal 2016 when compared to the same period last year. The increase in subscription revenue was primarily due to sales of our QAD Cloud ERP product offering which represented over 80% of total subscription revenue in each of the first quarters of fiscal 2016 and 2015. QAD Cloud ERP revenue consists of new customers, QAD customers converting from on-premise and additional users and modules purchased from our existing cloud customers. In the first quarter of fiscal 2016 our North America region generated approximately 57% of our global cloud revenue while our Asia Pacific, EMEA and Latin America regions generated approximately 12%, 13% and 18%, respectively. During this period we recognized $0.9 million of subscription revenue in our Latin America region related to one customer where we had deferred revenue in previous periods related to a complex implementation. We recognized the revenue once the implementation and rollout of their users was completed and we received confirmation from the customer that the local requirements were being met by the service offering. Excluding the one-time recognition, on a constant currency basis subscription revenue growth would have been 41%. In the first quarter of fiscal 2015 our North America region generated approximately 67% of our global cloud revenue while our Asia Pacific, EMEA and Latin America regions generated approximately 12%, 11% and 10%, respectively. Cloud revenue by industry for the first quarter of fiscal 2016 was approximately 48% in automotive, 15% in consumer products and food and beverage, 15% in high technology and industrial products and 22% in life sciences. In comparison, cloud revenue by industry for the first quarter of fiscal 2015 was approximately 44% in automotive, 20% in consumer products and food and beverage, 13% in high technology and industrial products and 23% in life sciences. We expect the growth rate of subscription revenue in the future to be primarily attributable to growth in sales of our QAD Cloud ERP product offering.
Maintenance and Other Revenue. On a constant currency basis, maintenance and other revenue was $33.4 million and $33.3 million for the first quarter of fiscal 2016 and 2015, respectively, representing a $0.1 million increase compared to the same period last year. Maintenance and other revenue increased in our EMEA and Latin America regions, remained relatively flat in our Asia Pacific region and decreased in our North America region during the first quarter of fiscal 2016 when compared to the same period last year. The increase in maintenance and other revenue was primarily attributable to license revenue growth partially offset by the impact of customers converting to QAD Cloud ERP and customer cancellations. When customers convert to QAD Cloud ERP they no longer pay for maintenance as those services are included as a component of the subscription offering.
We track our rate of contract renewals by determining the number of customer sites with active contracts as of the end of the previous reporting period and compare this to the number of customers that renewed, or are in the process of renewing, their maintenance contracts as of the current period end. Our maintenance contract renewal rate has remained in excess of 90% for the first quarters of both fiscal 2016 and 2015. We monitor our deferred maintenance revenue balance on a constant currency basis in order to gauge the health of our recurring revenue and track customer conversions from maintenance to subscription revenue. Our deferred maintenance revenue was $75.7 million as of April 30, 2015 compared to $81.8 million as of April 30, 2014. Deferred maintenance revenue was negatively impacted by foreign currency changes, particularly due to the changes in the euro compared to the U.S. dollar. On a constant currency basis, deferred maintenance revenue would have been $5.8 million higher as of April 30, 2015, or $81.5 million.
Products are generally shipped as orders are received or within a short period thereafter. Accordingly, we have historically operated with little backlog. Because of the generally short cycle between order and shipment and the relatively low amount of subscription sales, we believe that our backlog as of any particular date is not currently significant. Our total short-term deferred revenue as of April 30, 2015 was $91.4 million, of which $75.7 million was related to deferred maintenance and will be recognized over the period of the maintenance support. Deferred subscriptions totaled $11.6 million primarily related to hosting and cloud services we will provide over periods up to the next twelve months. Deferred services totaled $2.6 million and represents prepayments for our professional services where revenues for these services are recognized as we complete the performance obligations as well as services already provided but deferred due to U.S. GAAP revenue recognition rules. The remaining short-term deferred revenue balance as of April 30, 2015 of $1.5 million primarily relates to deferred licenses where the majority of the balance is deferred due to U.S. GAAP revenue recognition rules.
Professional Services Revenue. On a constant currency basis, professional services revenue was $19.6 million and $17.8 million for the first quarter of fiscal 2016 and 2015, respectively, representing a $1.8 million, or 10%, increase compared to the same period last year. Professional services revenue increased in our EMEA, Asia Pacific and Latin America regions and decreased in our North America region during the first quarter of fiscal 2016 when compared to the same period last year. The increase in professional services revenue period over period can be attributed to a higher number of engagements, which we believe was a result of more implementation or upgrade projects generated by increased cloud subscriptions and license sales.
Cost of Revenue
| | | Three Months Ended April 30, 2015 | | | Three Months Ended April 30, 2014 | | | Change in Constant Currency | | | Change due to Currency Fluctuations | | | Total Change as Reported $ | | | % | |
| (in thousands) | | | | | | | | | | | | | | | | | | |
| Cost of revenue | | | | | | | | | | | | | | | | | | |
| Cost of license fees | | $ | 929 | | | $ | 900 | | | $ | (37 | ) | | $ | 8 | | | $ | (29 | ) | | | -3 | % |
| Cost of subscription | | | 5,064 | | | | 3,786 | | | | (1,350 | ) | | | 72 | | | | (1,278 | ) | | | -34 | % |
| Cost of maintenance and other | | | 7,777 | | | | 8,170 | | | | (15 | ) | | | 408 | | | | 393 | | | | 5 | % |
| Cost of professional services | | | 18,328 | | | | 18,575 | | | | (1,413 | ) | | | 1,660 | | | | 247 | | | | 1 | % |
| Total cost of revenue | | $ | 32,098 | | | $ | 31,431 | | | $ | (2,815 | ) | | $ | 2,148 | | | $ | (667 | ) | | | -2 | % |
| Percentage of revenue | | | 46 | % | | | 46 | % | | | | | | | | | | | | | | | | |
Cost of license fees includes license royalties, amortization of capitalized software costs and fulfillment. Cost of subscription includes salaries, benefits and bonuses of our cloud operations group, located in the United States and India; stock-based compensation for those employees; hardware and hosting costs; royalties; professional fees; travel expense; and an allocation of information technology and facilities costs. Cost of maintenance and other includes salaries, benefits and bonuses of our support group located around the world; stock-based compensation for those employees; travel expense; professional fees; fulfillment; and an allocation of information technology and facilities costs. Cost of professional services includes salaries, benefits and bonuses of employees fulfilling service contracts; stock-based compensation for those employees; third-party contractor expense; travel expense for services employees; and an allocation of information technology and facilities costs.
Total Cost of Revenue. On a constant currency basis, total cost of revenue (combined cost of license fees, cost of subscription, cost of maintenance and other and cost of professional services) was $32.1 million and $29.3 million for the first quarter of fiscal 2016 and 2015, respectively, and as a percentage of total revenue was 46% for each of the first quarters of fiscal 2016 and 2015. The non-currency related increase in cost of revenue of $2.8 million, or 10%, in the first quarter of fiscal 2016 compared to the first quarter of fiscal 2015 was primarily due to higher personnel expenses and hosting costs associated with higher subscription revenue and higher personnel expenses associated with higher services revenue.
Cost of License Fees. On a constant currency basis, cost of license fees was $0.9 million for each of the first quarters of fiscal 2016 and 2015. Cost of license fees as a percentage of license revenue was 14% for the first quarters of both fiscal 2016 and 2015.
Cost of Subscription. On a constant currency basis, cost of subscription was $5.1 million and $3.7 million for the first quarter of fiscal 2016 and 2015, respectively, representing an increase of $1.4 million, or 38%. The non-currency related increase in cost of subscription of $1.4 million in the first quarter of fiscal 2016 compared to the first quarter of fiscal 2015 was primarily due to higher salaries and related costs of $0.7 million as a result of higher headcount of approximately 24 people, higher hosting costs of $0.4 million and higher information technology and facilities allocated costs of $0.2 million. We expect to continue investing in our cloud business and, as a result, we expect costs will continue to increase and margins may be impacted. Cost of subscription as a percentage of subscription revenue was 54% and 61% in the first quarter of fiscal 2016 and 2015, respectively. Excluding the one-time $0.9 million subscription recognition, cost of subscription as a percentage of subscription revenue would have been 59% for the first quarter of fiscal 2016.
Cost of Maintenance and Other. On a constant currency basis, cost of maintenance and other was $7.8 million in each of the first quarters of fiscal 2016 and 2015. Cost of maintenance and other as a percentage of maintenance and other revenue was 23% for each of the first quarters of fiscal 2016 and 2015.
Cost of Professional Services. On a constant currency basis, cost of professional services was $18.3 million and $16.9 million for the first quarter of fiscal 2016 and 2015, respectively, representing an increase of $1.4 million, or 8%. The non-currency related increase in cost of professional services of $1.4 million in the first quarter of fiscal 2016 compared to the first quarter of fiscal 2015 was due primarily to higher salaries and related costs of $1.2 million as a result of higher headcount of approximately 41 people and higher travel expense of $0.2 million, partially offset by lower third-party contractor costs of $0.2 million. Cost of professional services as a percentage of professional services revenues was 93% and 95% for the first quarter of fiscal 2016 and 2015, respectively.
Sales and Marketing
| | | Three Months Ended April 30, 2015 | | | Three Months Ended April 30, 2014 | | | Change in Constant Currency | | | Change due to Currency Fluctuations | | | Total Change as Reported $ | | | % | |
| (in thousands) | | | | | | | | | | | | | | | | | | |
| Sales and marketing | | $ | 17,145 | | | $ | 16,477 | | | $ | (1,773 | ) | | $ | 1,105 | | | $ | (668 | ) | | | -4 | % |
| Percentage of revenue | | | 25 | % | | | 24 | % | | | | | | | | | | | | | | | | |
Sales and marketing expense includes salaries, benefits, bonuses, stock-based compensation and travel expense for our sales and marketing employees in addition to costs of programs aimed at increasing revenue, such as trade shows, user group events, advertising and various sales and promotional programs. Sales and marketing expense also includes personnel costs of order processing, sales agent fees and an allocation of information technology and facilities costs.
On a constant currency basis, sales and marketing expense was $17.1 million and $15.3 million for the first quarter of fiscal 2016 and 2015, respectively, representing an increase of $1.8 million, or 12%. The non-currency related increase in sales and marketing expense of $1.8 million in the first quarter of fiscal 2016 compared to the first quarter of fiscal 2015 was primarily due to higher salaries and related costs of $0.7 million as a result of higher headcount of approximately 20 people, higher sales agent fees of $0.3 million, higher travel expense of $0.3 million, higher professional fees of $0.2 million and higher information technology and facilities allocated costs of $0.2 million.
Research and Development
| | | Three Months Ended April 30, 2015 | | | Three Months Ended April 30, 2014 | | | Change in Constant Currency | | | Change due to Currency Fluctuations | | | Total Change as Reported $ | | | % | |
| (in thousands) | | | | | | | | | | | | | | | | | | |
| Research and development | | $ | 10,657 | | | $ | 11,195 | | | $ | (54 | ) | | $ | 592 | | | $ | 538 | | | | 5 | % |
| Percentage of revenue | | | 16 | % | | | 17 | % | | | | | | | | | | | | | | | | |
Research and development is expensed as incurred and consists primarily of salaries, benefits, bonuses, stock-based compensation, training and travel expense for research and development employees and professional services, such as fees paid to software development firms and independent contractors. Research and development expense also includes an allocation of information technology and facilities costs, and is reduced by reimbursements from joint development projects. As part of our vertical focus we regularly seek joint development arrangements with our customers in order to enhance specific functionality and industry experience, although the number and size of joint development arrangements may fluctuate.
On a constant currency basis, research and development expense was $10.7 million and $10.6 million for the first quarter of fiscal 2016 and 2015, respectively, representing an increase of $0.1 million. Expense categories within research and development expense remained relatively consistent.
General and Administrative
| | | Three Months Ended April 30, 2015 | | | Three Months Ended April 30, 2014 | | | Change in Constant Currency | | | Change due to Currency Fluctuations | | | Total Change as Reported $ | | | % | |
| (in thousands) | | | | | | | | | | | | | | | | | | |
| General and administrative | | $ | 8,441 | | | $ | 8,904 | | | $ | 136 | | | $ | 327 | | | $ | 463 | | | | 5 | % |
| Percentage of revenue | | | 12 | % | | | 13 | % | | | | | | | | | | | | | | | | |
General and administrative expense includes salaries, benefits, bonuses, stock-based compensation and travel expense for our finance, human resources, legal and executive personnel, as well as professional fees for accounting and legal services, bad debt expense and an allocation of information technology and facilities costs.
On a constant currency basis, general and administrative expense was $8.4 million and $8.5 million for the first quarter of fiscal 2016 and 2015, respectively, representing a decrease of $0.1 million, or 1%. The non-currency related decrease in general and administrative expense of $0.1 million in the first quarter of fiscal 2016 compared to the first quarter of fiscal 2015 was primarily due to lower costs associated with an internal systems upgrade of $0.2 million and lower professional fees of $0.1 million partially offset by higher stock compensation of $0.2 million.
Amortization of Intangibles from Acquisitions
Amortization of intangibles from acquisitions was $0.2 million for the first quarters of both fiscal 2016 and 2015. Amortization expense in each of the first quarters of fiscal 2016 and 2015 was due to the intangible assets acquired in our fiscal 2013 acquisitions of DynaSys and CEBOS.
Other Expense (Income)
| | | Three Months Ended | | | Increase (Decrease) Compared to Prior Period | | | Three Months Ended | |
| | | April 30, 2015 | | | $ | | | % | | | April 30, 2014 | |
| (in thousands) | | | | | | | | | | | | |
| Other (income) expense | | | | | | | | | | | | |
| Interest income | | $ | (57 | ) | | $ | - | | | | 0 | % | | $ | (57 | ) |
| Interest expense | | | 183 | | | | 2 | | | | 1 | % | | | 181 | |
| Other (income) expense, net | | | (119 | ) | | | (345 | ) | | | -153 | % | | | 226 | |
| Total other (income) expense, net | | $ | 7 | | | $ | (343 | ) | | | -98 | % | | $ | 350 | |
| Percentage of revenue | | | 0 | % | | | | | | | | | | | 0 | % |
