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QAD Inc (NASDAQ:QADA)
Q4 2020 Earnings Call
Mar 18, 2020, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the QAD Fiscal Fouth Quarter Financial Call. [Operator Instructions]

I would now like to turn the call over to our host Kara Bellamy, Chief Accounting Officer. Please go ahead.

Kara Bellamy -- Chief Accounting Officer and Corporate Controller

Hello, everyone, and welcome to today's call. Before we begin, I'd like to ensure that everybody understands that our discussion may contain forward-looking statements that are based on certain expectations and analyses. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated. QAD undertakes no obligation to revise or update these forward-looking statements to reflect events or circumstances after the date of this call. For a complete description of these risks and uncertainties, please refer to QAD's 10-K and 10-Q filings with the Securities and Exchange Commission.

Please also note that during this call we will be discussing non-GAAP pre-tax income, which is a non-GAAP financial measure as defined by SEC Regulation G. A reconciliation of this non-GAAP financial measure to the most directly comparable GAAP measure is included in today's press release, which is posted on the company's website.

Now I'll turn the call over to our CEO, Anton Chilton.

Anton Chilton -- Chief Executive Officer

Good afternoon everyone and thank you for joining today's call to discuss QAD's fiscal '20 fourth quarter and full year results. Joining me on the call are Pam Lopker, our President; and Daniel Lender, Chief Financial Officer.

We enjoyed a strong finish to the year in terms of cloud sales with bookings growing by 71% over the prior year. Our cloud subscription margins also grew to 64% for the year, continuing our incremental improvement in this area. We maintained a positive margin in professional services and these factors combined together to help us achieve positive results in the quarter. We met guidance for total revenue that came in just under on subscription revenue as a result of the majority of our deals closing late in the quarter. Our competitive position drove continued momentum in our cloud business. We closed a record number of deals in the year with a healthy balance across new business to QAD as well as the conversion of on-premise customers.

With a solid close to fiscal '20, we see our investments in sales and marketing continue to pay off. Notwithstanding the effects of the COVID-19 pandemic, our business remains in good shape and well positioned to achieve our long-term strategic targets.

I'll now turn it over to Daniel to discuss the financial results and provide some details around our long-range plan and the associated targets.

Daniel Lender -- Chief Financial Officer

Well, thank you. Anton. We ended fiscal 2020 meeting pre-tax income meeting total revenue guidance and we're slightly below subscription guidance due to the timing of closing deals in the quarter. Although the deals came later than planned, we did hit a record number closing 35 new cloud deals in the quarter. For the fourth quarter, subscription margin again grew to an all-time high of 67%, helping us achieve our year-over-year improvement to subscription margins. There was no meaningful currency impact to the bottom line for the fiscal '20 fourth quarter compared with last year's fourth quarter and the fiscal '20 third quarter.

Fourth quarter total revenue was $78.6 million, compared with $82.7 million for last year's fourth quarter, primarily resulting from anticipated declines in our professional services and maintenance businesses as well as in-license sales. Subscription revenue grew 19% and accounted for 36% of our business for the total fiscal 2020 fourth quarter.

I'd now like to provide some annual cloud metrics to help you better understand our business, some of which we have provided in the past and some are new. Annual bookings growth was 71% for fiscal 2020. New cloud deals for fiscal '20 were 99, split roughly half between conversions and new customers. New cloud deals for the fourth quarter were 35, including 17 conversions and 18 new customers. Subscription billings for the fiscal year grew by 23% with a three year CAGR of 29%. Annual subscription revenue achieved a run rate of $120.5 million. Net dollar revenue -- sorry net dollar retention rate, which we calculate by comparing the revenue of each customer from a year ago to revenue of the same customers in the current year was 108% for fiscal '20. Retention rate continues to be in excess of 90%.

Subscription backlog grew 31% to $150.4 million as of January 31, 2020. Maintenance and other revenues totaled $28.7 million compared with $30.5 million last year with a decline relating mainly to cloud conversions and our historical attrition rate. Professional services revenue was $15.9 million compared with $19.1 million for last year's fourth quarter. Services margins were 2% up from negative 1% last year, but down from 6% for the fiscal '20 third quarter, mainly as a result of lower than anticipated revenue from Asia-Pacific. We achieved our goal of reaching breakeven services margin for the full year.

License revenue for the fiscal '20 fourth quarter was $5.3 million compared with $9.1 million last year. In the fiscal '20 period, there were two license deals greater than $300,000 versus $700,000 in the prior year. Our total revenue by vertical for the fourth quarter was high-tech and industrial 36%, automotive 34%, consumer products and food and beverage 15% and life sciences and other 15%. By geography, total revenue was North America at 49%, EMEA 31%, Asia Pacific 14% and Latin America 6%.

Gross margin for the fourth quarter improved to 58% from 55% last year, principally driven by improvement in subscription margin. Sales and marketing expenses was $21.3 million or 27% of total revenue versus $20.3 million or 25% of total revenue from last year's fourth quarter. The increase was due to higher personnel and severance costs versus last year. R&D expense amounted to $13.2 million for the fiscal '20 fourth quarter compared with $13.3 million a year ago. As a percentage of total revenue, R&D expense was 17% this year and 16% last year.

G&A expense was $10.4 million or 14% of total revenue versus $8.4 million or 10% of total revenue for last year's fourth quarter. The increase mainly resulted from the movement of certain personnel into G&A from other areas, and higher stock compensation expense. Supplementation expense totaled 3 million for fiscal fourth quarter and $2.5 million last year. This brings GAAP pre-tax income to $764,000 compared with $3.2 million for last year's fourth quarter. Our non-GAAP pre-tax income was $3.8 million versus $6 million last year.

We finished the year with approximately $137 million in cash and equivalents compared with approximately $139 million at the end of fiscal '19. Cash flow from operations for fiscal 2020 was $16.8 million compared with $19 million for fiscal 2019. Accounts receivable was $81 million at January 31, versus $81.6 million a year ago and our outstanding, using the count back method was 45 days for the fiscal fourth quarter compared with 48 days for the same period last year.

Our short-term deferred revenue balance at January 31 was $118.4 million versus $115.3 million a year ago, including $45.7 million of deferred subscription versus $34 million, $69.6 million of deferred maintenance versus $7 million 7 million. $2.7 million of deferred professional fees versus $2.1 million and $400,000 of deferred license another versus $2.2 million. As a reminder, our maintenance contracts are billed annually, while subscription contracts can be billed either annually or quarterly. Given the current level of uncertainty related to COVID-19 and its economic and social implications to our customers and our business. We are not providing year the guidance at this time.

For our quarterly guidance, given the travel and other restrictions currently in place in most countries, our professional services and our license revenues could vary significantly. As a result, for the quarter we're not providing our normal guidance and will only provide guidance for recurring revenue, which consists of subscription revenue and maintenance revenue. We estimate recurring revenue will account for over 75% of our total revenues. For fiscal 2021 first quarter, QAD expects subscription revenue of $31 million and maintenance revenue of $27 million. In addition to the subscription metric that we're providing, we're also including our long-term aspirational model in our corporate presentation that is available on our website. We develop the long-term model as part of five-year strategic plan, and while the timing is shifting as a result of the current turmoil created by the COVID-19 endemic, the underlying assumptions on our market positioning remain the same. Our long-term model cost for 25% to 30% growth to subscription revenues, an improvement of our subscription margin from 64% to between 69% and 70%, an improvement of overall gross margin from 55% to between 60% and 61% and efficiency gains in sales and marketing from 26% of revenues to between 22% and 24%. R&D from 18% of revenues to be between 14% and 15%. G&A from 13% of revenues to between 8% and 9% which would result in operating income between 12% and 17%. We assume a long-term tax rate of approximately 25%.

That concludes my remarks Anton. I'll turn the call back to you.

Anton Chilton -- Chief Executive Officer

Thank you, Daniel. So as discussed earlier, we were very happy with our performance in cloud sales in the year and seeing deals at record levels. I was pleased to see the conversion of customers to the cloud continue in line with our plans, and we're also attracting increasing numbers of new customers to the QAD Cloud and this affirms our competitive strengths. Our Adaptive ERP and low-code no-code enterprise platform will help keep that competitive momentum going. And indeed the Enterprise platform was a key decision factor in our largest cloud win of the year and Pam will provide more color on that shortly.

We closed 35 new cloud deals in the fourth quarter and 99 new cloud deals for the year. As we've discussed on prior calls, we do expect the 50-50 deal mix between conversions and new customers to extend into the foreseeable future. Improvements in our cloud margins are in line with our expectations and/or is a result of our ongoing efforts to drive efficiency through automation and process improvements. As Daniel highlighted, we expect these improvements to continue over the medium term driving incremental efficiency gains of 1% to 2% per annum.

Looking at the quarter geographically, North America continued to perform well. EMEA had a really solid quarter too and we feel that business has really turned the corner with our leadership and sales and marketing changes paying dividends there. Asia-Pacific and Latin America also grew Cloud business over the prior year.

In our divisions businesses, we also saw cloud momentum continue to build at substantial growth in our subscription revenue year-over-year. We also welcomed Corey Rhodes as our new President of Precision. The QAD global trade and transportation execution business. Corey comes to QAD with over 25 years in enterprise software and transportation experience. Prior to running QAD, he led the sales and marketing efforts of E2open. Before E2open he led Amber Road's, North American Sales and Marketing, tripling the revenue then helping them -- lead them to a successful IPO in 2014.

With a strong finish to the year, demand for professional services projects had started to show signs of a pickup, just before the outbreak of COVID-19, but now as you might imagine with customers and QAD implementing working from home policies, we're already seeing a slowdown in projects and timeframes extending beyond original plans. Speaking of the COVID-19 issues, we are pleased to see the design of our services delivery organization with the combination of diverse geographical spread and the ability for 100% of our service delivery personnel to work remotely is allowing us to provide uninterrupted service for our cloud customers and to ongoing support for our global customer base. From the outset we designed our cloud operations to be resilient given the mission critical nature of the systems we provide to our customers. In fact, we fully tested the reliability of our operations in the past after two major incidents, a fire in our office complex in India closed the office for a number of months and the mud slides that we have back in Santa Barbara closed our headquarters for a few weeks. In both cases services continued uninterrupted. We remain prepared for any eventuality.

A few weeks ago, we established a COVID-19 management team that has been coordinating global activities and responses on a daily basis with our short-term priority focus on two areas. The health and well-being of our employees, their families and the communities in which we operate and continuity in business operations, ensuring we provide ongoing support to our customers and helping them keep their business operations going. At the same time, we continue to aggressively pursue all aspects of our business. In sales and marketing we're driving opportunities and developing our pipeline in line with our strategic goals. On the solution side of the business, the next version of our Adaptive ERP is being released this month with exciting developments across the product suite.

We're also taking the opportunity to divert some resources from our services organization to accelerate development in automating aspects of our implementation methodology. This will help us shorten project timelines and reduce customer effort. At this point, we've not seeing material effects on our current opportunities, but we do expect some negative impact of services revenues, bookings and license sales in the short-term. However, with 75% of our business based on recurring revenue, we feel this provides a good platform of stability going forward. That said, our overall cloud funnel is still strong and stands 20% higher than at the same time last year.

I'll now hand over to Pam for detail on our cloud bookings.

Pamela Lopker -- President

Great. Thanks, Anton. So this is an exciting quarter and exciting year for cloud. Q4 and all of FY '20 represented extremely strong bookings for QAD cloud. In Q4, we had 35 new cloud customers representing 18 net new and 17 conversions. This compares with 23 the quarter Q4 before. In all of FY '20, we had 99 new cloud customers, representing 50 net new and 49 conversions, compared to 67 the previous year. That's amazing how we keep that kind of 50-50, but this quarter and this year while at times we had one more net new than conversion to the cloud. So this is a record quarter and a record year for QAD cloud both in bookings as well as in number of customers. All regions showed bookings growth quarter-over-quarter and year-over-year with North America leading in revenue and Europe showing exceptional growth. All verticals contribute to the quarter with industrial leading the way and life science had an exceptional growth year.

QAD Adaptive ERP built on our Enterprise Platform as being adopted by nearly every net new and upgrade. Today we have 75 customers active with the Adaptive ERP either in implementation stages or actually live. QAD Adaptive ERP provides a great incentive to upgrade and move to the cloud. Our biggest cloud win this year was a French headquartered industrial global company, where QAD Adaptive ERP was a driver in selecting QAD cloud over SAP. The company wanted to add Industry 4.0 capabilities but was having difficulties due to their highly customized on-premise systems and use of mainly -- of many third-party products. They also recognized that their business IT team of experts were managing mundane task rather than driving their business. QID -- QAD identified 20 major existing customizations that could be easily built as an extension in QAD Enterprise platform. The company brought 43 people to our headquarters and on only one day converted all 20 customizations to the platform as extensions. They all left as true believers. This cloud deal is replacing on-premise implementations of QAD as well as SAP and Exact.

I also want to mention our life science vertical which had expectacular year with 140% increase in bookings year-over-year and 21 new cloud customers. As you might know, most of our life science companies start up -- start with us is as very small companies or even zero revenue companies. And I'm delighted to say that 41% of this year's cloud revenue from life science was from adding more users and more modules to support their growth.

A great example of this is the gene therapy company that first purchased QAD cloud in 2017 for 100k. As they grew, they increased purchases every year since 2017 and in FY '20 purchased 1.3 million of new users and modules to support a greenfield manufacturing site, really amazing success for both our customer and of course QAD.

Back to you, Anton.

Anton Chilton -- Chief Executive Officer

Thank you, Pam. Looking forward, we feel we're in great shape to drive toward the long-term goals that Daniel outlined. Disruption and change of the new normal for global manufacturers and our next generation Adaptive solutions ERP and the enterprise platform are exactly what businesses need to support a real time and rapid response to those changes. We believe we're exceptionally well positioned against our major global competitors and we'll continue to grow market share as more and more new customers are attracted to the QAD cloud and the trend of conversion continues. Of course, the COVID-19 pandemic as materially increased risk and uncertainty and will undoubtedly have an effect on our short-term results. However, our long-range plan and the underlying fundamentals in which has been built remain sound. The timeframe of which we achieve them will extend as a result of the current situation.

In summary, prudence is our watchword over the coming months. As I said earlier, we are immediately focus on the priorities of health and well-being of all in addition to supporting our customers through this difficult time. We have short-term cost-control measures in place to see it through the next few months, but which may be increased if the current situation becomes protracted. We have a strong balance sheet with good cash position. We remain aggressively focused on driving our cloud business, and we know once the situation passes, we have substantial market opportunity in front of us.

Operator, we're ready to take questions from analysts.

Questions and Answers:

Operator

All right. Thank you. [Operator Instructions] And our first question comes from Bhavan Suri from William Blair. Please go ahead, sir.

Bhavan Suri -- William Blair -- Analyst

Hey guys, can you hear me OK?

Daniel Lender -- Chief Financial Officer

Yes.

Anton Chilton -- Chief Executive Officer

Yes.

Bhavan Suri -- William Blair -- Analyst

Great. So, I really appreciate the color and the clarity on net dollar retention rate from the metrics right. I think that's really helpful. And obviously a nice job there on the quarter in the cloud wins. I guess just first start at a high level. As you think about us coming out, none of us know when or how deep this goes, but when you talk to your customers and you talk about the conversations, and this is probably a leading question, given the cloud win, but I'd love to understand, you've had cases where customer said we're going to go to cloud, and then they went on premise. We've had multiple license wins into the cloud, but given the situation now where people are working remotely and the idea of coming into the office do ERP supply chain, financials seems ridiculous.

I'd love to understand a little long term as you talk about to some of the customers, is the cloud much more palatable coming out of this -- maybe the deals don't happen right now, but as we deal with the current situation we think about 6-12 months out, are they starting to get -- the understanding the cloud is a better deployment solution for them or is that still early? Love to understand how they're thinking about the strategic nature of the cloud vis-a-vis on-prem given what's happening today and how your position and sort of providing a true cloud solution, whereas like guys like as if you don't, how is that playing out in terms of like a long-term potential opportunity to accelerate the business?

Anton Chilton -- Chief Executive Officer

Yes. I'll take that, Bhavan. So, great question and to exactly your point, we do see this is going to have an impact in the short term because decision cycle is going to be extended and people are obviously focussed on immediate, but it does absolutely underline the message I think in two ways for me. So one is that having your ERP in the cloud gives its some protection. So as a customer, you don't need people in an IT center or an office trying to look after it. And then as I said in the script, we've deliberately designed our cloud operations and support model in a way that we've got centers of excellence geographically disbursed around the world. So that gives us some protection, although of course, COVID-19 now is in increasingly more countries, but then you couple that geographic disbursednness with our ability to have 100% of all people accessing those systems remotely to provide the control.

I think there is a second level of resilience there, which is really powerful. And yes, we are increasingly in conversations where even before this was becoming important to customers and more and more of the recognized, I think this will it is drive that message home even more significantly.

Bhavan Suri -- William Blair -- Analyst

Yes. It makes sense. It's good to hear that customers actually think of that. And then a little more tactical as you guys think about the pipeline today, obviously it's done well, but you guys are a complex product, heavy lifting. How are customers dealing with the interim right now which is that still the fallout of COVID or corona versus your ability to demo and then more importantly implement? Give us some color on how that's playing out in conversation with customers and what that might mean for delayed, because obviously, you haven't given us guidance you've given us some subscription color. Sort of help us think through what you're actually hearing on the ground from customers, both in Asia, but also global?

Anton Chilton -- Chief Executive Officer

Yes, sure. Look, we saw the immediate impacts in Asia to start with, in particularly China. But now, the timing for us is if things changed on a global basis pretty quickly at the beginning of last week with more and more travel restrictions coming in place, it was in the US. Italy had already gone into locked down and so on. And we've seen in the last sort of five or six working days, more and more customers responding likewise. So instituting working from home policies. Some of them have let's say postponed some of the work they're doing on projects. Many of them are making do and we do have -- we've reached out to our customers where we on active projects, making sure that they know we're here for them and we can support them remotely. So we're doing as much work as we can remotely, we're using virtual conferencing facilities and video facilities to keep some of that going. But of course it is having an effect and it will slow projects down and it will extend some of the deadlines. It's OK to do some of the work remotely. It's pretty hard to go live on a about basis for example and do all the training you need to.

So I'd say on the services side of the business is seeing the immediate effect of this. On the sales side, we are driving our sales cycles remotely. So using video conferencing to do demos and things like that. We're still driving ourselves hard. So far the immediate opportunities to out in the pipeline seem to be progressing. But we know that that could change very, very rapidly if the situation deteriorates or even just continues in the current cycle. And so that's making it very difficult for us to forecast on that side of the business.

Operator

Thank you. And now to the line of Brad Reback from Stifel. Please go ahead, sir.

Brad Reback -- Stifel, Nicolaus & Company -- Analyst

Great. Thanks very much. Anton, I think you guys are in somewhat of a unique position given your international exposure. You have three offices, I think in China. Can you walk us through what's transpired there over the last three months. How customer interaction is played through and where it stands today. Thanks.

Anton Chilton -- Chief Executive Officer

Yes. Absolutely. I mean the government were pretty much dictating what steps were being taken. To a certain extent, I guess the the holiday around Chinese New Year businesses are slowing down already. But it also meant that some people had already traveled to locations that they couldn't get back from to the home locations. We of course like everyone else instituted a stay at home and don't travel policy. We did then follow the guidelines each province had its own recommendations in terms of when offices reopened. Our major office in Shanghai if I'm not mistaken reopened mid February and we managed to get about a third of our workforce back in there.

Of course there extraordinary situation that to air conditioners weren't running. Windows were being opened and people were maintaining the recommended 6 feet social distance. So working conditions remained pretty challenging. That said, we remain in regular contact with our customers, of course, they were experiencing the same issues. Our services projects there pretty much dried up. Now we're getting closer back to, I wouldn't call it normality but more normal working practices are coming online on a daily and weekly basis. And so we expect them notwithstanding the risk of a reemergence if I the cases break out, but we think they are ahead of of the rest of the world in terms of being ready to get back to normal business, but it's still going to be slow for a while, and it's still a difficult situation.

Pamela Lopker -- President

And I think...

Brad Reback -- Stifel, Nicolaus & Company -- Analyst

And not trying to put words in your mouth, but from your sense thus far it probably looks like a four to eight week restart after we begin to get an all clear out there.

Anton Chilton -- Chief Executive Officer

Yes. We'd hope that it would be something like that. I mean, we are in touch with our staff virtually every day. The management team over there are very keen obviously to get back to normal business and we're all ready to do that. So yes, we remained hopeful of that kind of timeframe seems likely.

Brad Reback -- Stifel, Nicolaus & Company -- Analyst

Great. Thank you very much.

Pamela Lopker -- President

And I would say that the Chinese government was actually quite accommodating as all of our developers as service people move to their home environments. They allowed us to get outside of the Chinese firewall and they assist us in doing that. So they were also to willing to work with the situation.

Operator

All right, thank you. And now to the line of Zach Cummins from B Riley, FBR. Please go ahead.

Zach Cummins -- B Riley, FBR -- Analyst

Yeah, hi, good afternoon and thanks for taking my questions. I know, during the script you talked about your approach to spending in the near term, especially given the challenging environment. I mean can you do a little bit more of a deep dive into potential changes. If the operating environment remains challenging for I guess the foreseeable future?

Anton Chilton -- Chief Executive Officer

Yes. I think we remain the underlying from fundamentals of the business at good given that we've got 75% recurring revenue. So that puts us in a good position and strong balance sheet, good cash position. That's all helpful. Our short-term measures we are trying to, as I said prudence is the way we're going. And we are restricting discretionary spend, things like external spend on consulting and training and all those kind of things. We have an amount of variable compensation that gives us some buffer in that process too. Of course, restricted from a health perspective. But that's also going to have an impact on cost containment in the short term.

We are also diverting some internal resources where off projects are on delayed projects to help us accelerate some of the competitive advantage work that we're doing around our services methodology. If things become protracted, we have a number of different options that we can look at around flexible working scenarios and further restrictions on discretionary spend. We're looking at open positions and delaying those as much as it makes practical sense, unless it's an absolutely essential position, with postponing those hirings, so we would do more of that. So there is a lot of creative thought gone into this and of course we did have the experience of navigating pretty successfully through the global financial crisis. And we've got some good experiences there for how we manage costs in a protracted event or scenario where things are really tight.

Zach Cummins -- B Riley, FBR -- Analyst

Got it. That's helpful and then just a final question around the professional services, where it seems like you've definitely had some projects that have been delayed at this point. I mean is there any potential that you could see some of these projects come back into the fold as things get more toward a, what we would call it a normalized environment here, maybe in the back half of the year or how should we be thinking about the professional services business?

Anton Chilton -- Chief Executive Officer

Yes. Absolutely we've -- to this point, we've not had any projects to my knowledge that have been canceled outright. So some have slowed, some are postponed with activity stalled, but everybody is expecting those to pick back up and get back to normal. I think the timing of that, it's probably conservative to say yes, the second half of the year, we'd expect to see activity picking up. In some areas, we could see that go faster. We know some geographies of -- seem to have managed the containment phase of this better than others and so activity may pick up faster there than other places. Of course, this is all happening quickly, as you know. So, we're keeping an eye on and a daily basis. But yes, I'd say, certainly we expect business to be approaching back to normal in the second half of the year.

Operator

Thank you. And now to the line of Kevin Liu from K. Liu Company. Please go ahead.

Kevin Liu -- K. Liu & Company -- Analyst

Hi, good afternoon. First question just around kind of the subscription and maintenance guidance for the first quarter here. Obviously kind of a nice uptick on the SaaS line on a little bit of a drop off in maintenance. Is that mostly reflective of the conversion activity you saw in Q4. And then one general type question. If you are kind of delayed in terms of going live on some of these projects and how does that impact your ability to recognize subscription revenues going through these next few quarters?

Daniel Lender -- Chief Financial Officer

Yes, sure. Kevin. So first of all, regarding the subscription and maintenance lines, the uptick in subscription is mainly related to the strong activity around bookings that we talked about earlier in the call, and the lower maintenance revenue is a reflection of both a -- the significant amount of customers that have converted from on-premises to the cloud as well as we normally get some attrition on the maintenance line and a lot of the contracts actually happen get renewals in Q4, and as a result of those -- as a result of that, if you're going to see any drop in maintenance revenue will typically happen between Q4 and Q1.

Relating to the revenue recognition, we wouldn't necessarily expect delays in in those projects to cause a revenue recognition issue. As revenue starts to get recognized typically around the time of when the customer gains connectivity to their system and they start using, which in a lot of cases actually happens early on in the implementation because already utilizing a number of those systems. What it will have obviously an impact on is relating to the timing in terms of when they would start adding additional users or additional modules and so forth, so the add-on business will certainly be impacted from a timing standpoint.

Kevin Liu -- K. Liu & Company -- Analyst

Understood. That's helpful. And then I appreciate you guys putting out the longer term targets here. When I look at your subscription gross margin target, obviously you came out of Q4 very strong, and if you guys are able to improve that by about 100 to 200 basis points annually. It seems like you should be in that range fairly early on in the plan. So could you speak a little bit to kind of the timing of some additional investments that might need to go into the cost line for there or whether or not there is just a fair amount of conservatism built in and you can actually do much better than what you're targeting?

Daniel Lender -- Chief Financial Officer

Yes. So with regards to margins, yes, Q4 was a very good margin number on its own. However, we -- when we look at margins we really tend to look at these on a 12 month basis. So for the year, we did achieve about a 1% improvement over prior year. And as you pointed out, we've been talking about that 1% to 2% per year improvement. So we believe we should we should continue to be able to achieve that 1% to 2% improvement per year. With regards to how fast can we get to our targets, I mean, obviously, we're going to do everything we can to make that as quickly as possible. But we -- I wouldn't -- I'm not expecting at this moment, the rate of improvement to have a significant acceleration to what we've done in the past.

Kevin Liu -- K. Liu & Company -- Analyst

Got it. And then just final question. As you kind of look across the 26 different sub verticals you are in today, a lot of them from the surface seem like they should bounce back fairly quickly once things get back to normal. I'm curious as you guys kind of do your deep dives, whether there are any particular areas that you think are going to be challenged and wouldn't be able to recover once we get this behind us?

Anton Chilton -- Chief Executive Officer

No, I don't think so. Luckily, we don't have a lot of business in the travel, hospitality industry, although some of our customers would supply to that. But I think for the main, if you looked at our big segments of auto, that is there was a general slowdown auto. Anyway, but we saw some bright spots in there in terms of electric vehicle manufacturers and new organizations coming in around software and connected vehicles and so on. So we'd expect that to pick back up. We may have some customers in industrial and so on and others that are affected by short term supply chain disruption. But again I don't think we see that any of our segments that we serve are in long-term trouble so to speak and we see this more of a blip. How long and extended it is, of course depends on how quickly countries can get to grips with the containment. But yes, we're not worried about one specific or more verticals at the moment in terms of the long-term.

Operator

All right. Thank you. And our final question today comes from Ishfaque Faruk from Sidoti & Company. Please go ahead.

Ishfaque Faruk -- SIdoti & Company -- Analyst

Hi, good afternoon guys. A couple of questions from me. Based on the -- some of the commentary you guys laid out it seems pretty obvious that there is going to be a tapering off of professional services revenue at least in the first half. Do you have a sense for like which geographies will get like particularly see lesser professional services implementations and so forth in the first half?

Anton Chilton -- Chief Executive Officer

I think if you asked that question a month ago, we would have said obviously, China. I think with how governments and now companies are reacting to the current situation, many companies last week instituted working from home policies and travel bans, many more doing that on a daily basis. So we are really seeing that spread fairly evenly across all of the territories that we serve.

Ishfaque Faruk -- SIdoti & Company -- Analyst

Okay and Daniel, maybe a little bit more on the long-term model that was obviously very helpful. And in terms of the long-term subscription gross margin numbers, you still said on the call that you still expect 1% to 2% gross margin expansion. Do you still feel the same way for fiscal '20? Or do you think that might be a little haywire considering the current situation that's going on?

Daniel Lender -- Chief Financial Officer

Yes. No. So it's actually -- it would actually be our fiscal '21 but...

Ishfaque Faruk -- SIdoti & Company -- Analyst

Excuse me. I'm sorry.

Daniel Lender -- Chief Financial Officer

Yes. No sure. But I mean, I think we are -- we continue to target that improvement for this year. I think we have entered the year with a strong footing in terms of the number of deals that we closed throughout the year. So I think from that perspective, I think we're in reasonably a good shape and obviously any further investments that go into our data centers on operations etc will need to time those carefully as the year progresses to ensure that we can maintain that sort of improvement.

Ishfaque Faruk -- SIdoti & Company -- Analyst

All right. Thank you guys.

Anton Chilton -- Chief Executive Officer

Thank you.

Daniel Lender -- Chief Financial Officer

Thank you.

Anton Chilton -- Chief Executive Officer

Okay. Thank you everybody. Thanks for your questions and for listening in. And we look forward to announcing our first quarter results in the near future.

Pamela Lopker -- President

Thanks.

Operator

[Opeartor Closing Remarks]

Duration: 56 minutes

Call participants:

Kara Bellamy -- Chief Accounting Officer and Corporate Controller

Anton Chilton -- Chief Executive Officer

Daniel Lender -- Chief Financial Officer

Pamela Lopker -- President

Bhavan Suri -- William Blair -- Analyst

Brad Reback -- Stifel, Nicolaus & Company -- Analyst

Zach Cummins -- B Riley, FBR -- Analyst

Kevin Liu -- K. Liu & Company -- Analyst

Ishfaque Faruk -- SIdoti & Company -- Analyst

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