QAD and the Future of the Other Pure Plays

May 11, 2006 from AMR Research and written by Bruce Richardson - "Believe it or not, we are rapidly approaching the three-year anniversary of PeopleSoft’s bid to buy JD Edwards, as well as Oracle’s surprise bid for PeopleSoft. All of that occurred between June 2 and 7, 2003.

But it didn’t stop there, the ERP market consolidation continued after these megadeals. A month later, SSA Global completed the acquisition of Baan, and it added Marcam a year later. It had already acquired Infinium Software (formerly Software2000) and various ERP assets from Computer Associates. Last November, Golden Gate Capital bought Geac and merged it in with Infor Global Solutions.

Geac and Infor had been active participants in the race to consolidate the ERP market, too. Past Geac ERP acquisitions included Dun & Bradstreet Software and JBA. Of the two, though, Infor (formerly Agilisys) had been far more aggressive. Its ERP stable included Infor Business Solutions (a German ERP vendor and the source of its new name), Lilly Software, and MAPICS. As you may recall, MAPICS had previously acquired Frontstep (formerly Symix) and Pivotpoint.

Let’s not leave out the recent Lawson-Intentia marriage, the CDC Software purchase of Ross Systems, or any of the past ERP buys by Microsoft, Epicor, IFS, or Sage Group. Who’s next?

This week I attended the QAD Explore 2006 conference in Denver. The highlight for me was the chance to have a series of candid conversations with Pam and Karl Lopker, the wife-and-husband team that run the company. Since Pam founded QAD in 1979, the company has grown to a $225M company, with more than 5,500 licensed sites (more than 8,000 total plants).
Given the size of its installed base and strength across six core verticals (automotive, consumer goods, electronics, food and beverage, industrial products, and life sciences), QAD makes a very attractive acquisition target. Indeed, before PeopleSoft bought JD Edwards, former PeopleSoft executives told me they had their eyes on QAD until the Lopkers put the “Not for Sale” sign up.
I asked the Lopkers about their intentions to join the growing ERP Aggregators club. While they average one acquisition or purchase each quarter, these are usually around intellectual property. They expressed no interest in buying or merging with another ERP vendor, as they don’t see the need to just get bigger.

When positioning against SSA Global, Infor, Oracle, and others, QAD has a compelling message in its core verticals: every dollar you spend with us on licenses and maintenance goes right back into improving and enhancing one ERP system. The company also pledges that it won’t be funding a move into the very low end or high end of the ERP space, nor does it have plans to move beyond the current core verticals. So far, the story appears to be resonating. Last year, 30% of revenue came from first-time customers.

If anything, the Lopkers are making bigger bets on their own products, and aggressively looking to buy, OEM, or partner to round out their products. R&D spending will be up this year to at least 16% of revenue. When asked to list his top three R&D priorities, Mr. Lopker said accelerating the development of the new eB3.0 release (QAD is moving closer to having the world-class financials it has needed), the integration of the Microsoft .NET user interface, and the continued development of the production planning products. The latter is helping to push QAD even deeper into manufacturing.

When I asked the Lopkers about their top growth priorities, they both responded with the same answer: emerging countries, especially China and India. QAD is ramping up the hiring of developers and services people in both countries. Clearly, there is a huge sales opportunity here, too, as multinationals accelerate the opening of new manufacturing sites across Asia.

180 View - On the one hand, we see huge companies getting even bigger through consolidation. On the other hand, we see a relatively small company able to survive and thrive in the midst of the ERP giants. Our explanation for the success of QAD and other smaller ERP developers is as follows.

1. ERP systems are not a commodity at least with respect to operational functionality (distribution, manufacturing...). By focusing on a specific vertical, smaller ERP vendors can compete effectively partly because of functionality tailored to the needs of the vertical and party because the employees of the smaller ERP vendor are often extremely knowledgeable about the vertical.
2. Some people would prefer to be a big fish in a small pond. In other words, some companies prefer to work with smaller ERP vendors where they believe they will have a bigger influence and be able to speak directly to the owners.
3. Small companies have less resources to invest in R&D, but they also don't have the same baggage as the big vendors that need to worry about all the systems they have acquired. Smaller companies can be more nimble in adapting to new technology.