QAD Inc (QADA) Q4 2021 Earnings Call Transcript

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QAD Inc (QADA)
Q4 2021 Earnings Call
Mar 24, 2021, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day and welcome to the QAD Financial Results for Fourth Quarter Fiscal Year 2021 Conference Call. [Operator Instructions]

I would now like to turn the conference over to Kara Bellamy. Please go ahead, ma'am.

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 CEO, Anton Chilton.

Anton Chilton -- Chief Executive Officer

Thank you, Kara. Good afternoon, everyone, and thank you for joining today's call to discuss QAD's fiscal '21 fourth quarter and financial year results. Joining me on the call are Pam Lopker, our President; and Daniel Lender, Chief Financial Officer.

Building on the momentum carried over from our third quarter, I'm delighted to report another set of good results across the board, a growth in subscription of 24% when compared to the same quarter last year, improvement in our subscription gross margins of 70%, moving professional services margin to 11% and moving up our overall margin to 62% were particularly pleasing to see. Those improvements compounded on the performance in prior quarters drove a substantial increase in earnings for the full year.

While our annual cloud bookings were at 87% of last year. Given the context at the macro level, we feel our sales performance for the year was strong and we posted our second highest cloud sales result on record. Right at the close of the year, we were delighted to announce the acquisition of Allocation Network, a best of breed provider of supply management solutions based out of Munich in Germany, a great addition to our integrated supply management capabilities, which I'll talk more about later.

In one of the most difficult and challenging year we've ever seen, keeping sales momentum going, driving our sales pipeline to record levels, delivering implementation and upgrade projects remotely and making margin improvements across the board was impressive, and I'm exceptionally proud of what the QAD team has managed to deliver.

I'll now turn it over to Daniel to discuss the details of the financial results.

Daniel Lender -- Chief Financial Officer

Well, thank you, Anton. Our solid fourth quarter results rounded out a successful year in spite of challenging environment. Subscription and maintenance revenue came in ahead of our expectations in part due to currency tailwinds. Pre-tax profitability grew substantially from last year's fourth quarter and from the fiscal '21 third quarter, as a result of our initiatives to expand margins and continued focus on cost controls. Subscription margins improved another 3 percentage points from the same quarter last year to 70%, and professional services margin improved 9 percentage points to 11%, driven by our ability to deliver remote implementations, our focus on managing whitespace and the ongoing strategy of building and utilizing our partner network.

Currency had an approximate $1.5 million positive effect of total revenue compared with last year's fourth quarter and $1.2 million positive effect compared with the third quarter of fiscal 2021. Profitability was favorably impacted by $300,000 versus prior quarter, but it was a negligible impact versus prior year. Due to fluctuating currency during the year, there was a positive impact to total revenue in the fourth quarter, but a negative $1.2 million impact for the full year revenue, including a $300,000 negative impact on subscription revenue.

Total revenue for the fiscal '21 fourth quarter grew to $83 million from $78.6 million last year. As a result of higher subscription revenue, partially offset by lower professional services, maintenance and license revenue. For the full year, total revenue was $308 million versus $311 million. The current revenue accounted for 78% of total revenue for our fiscal year. Subscription revenue growth continued to accelerate, improving 24% to $35.5 million. Subscription revenue now accounts for 43% of our full business, up 7 percentage points from last year's fourth quarter. Currency movements positively impacted subscription revenue by $400,000 compared with both the prior-year and the prior sequential quarter. For the year, subscription revenue increased by 22%.

I'll now review our annual cloud metrics. FY' 21 annual bookings were 87% of the prior-year bookings. While the first three quarters of fiscal '21 were on par with the prior year, we were not expecting to match our fourth quarter bookings from last year, as those were exceptionally strong. The level of new customer deals affected bookings, as we talked about it earlier in the year, sales cycles for new customers were impacted the most during the pandemic, and as a result, those cycles were lengthened. New cloud deals for fiscal '21 were 95, including 48 from new customers and 47 from conversions. In comparison to prior year including 119 new cloud deals, new cloud deals for the fourth quarter were 32 versus 37 in the prior year, new customers were 14 versus 20 and conversions 18 versus 17.

Subscription billings grew by 18% for the fiscal year with a three-year CAGR of 21%. Our short-term deferred revenue balance included $56.3 million of deferred subscription versus $45.7 million in the prior year, an increase of 23%. Annual subscription revenue grew to more than $131 million. Our net dollar retention rate, which we calculate by comparing the revenue of each customer from a year ago to the revenue of the same customer in the current year was 105% for the fiscal '21. As we expected and discussed earlier in the year, the rate of add-on sales to existing customers slowed down due to the pandemic. Retention rate continues to be in excess of 95%.

Maintenance revenue was $27.2 million for the fiscal '21 fourth quarter and $1.6 million declined from last year, related mainly to cancellations and cloud conversions. Our maintenance retention rate remains in excess of 90%, however, I remind you that because some of our customers were and continue to be impacted by the pandemic, we did see some increase in maintenance cancellations or maintenance revenue reductions, particularly early in the pandemic. For the full year, maintenance revenue declined 9%.

Professional services revenue totaled $15.1 million versus $15.9 million for last year's fourth quarter and was up slightly on a sequential basis. For the full year, professional services revenue declined 15%. This revenue decline was planned and consistent with our focus on building our partner network and improving and sustaining margins. Our services margins were stable throughout the year, reaching a high of 11% for the fourth quarter and 7% for the year.

License revenue for the fiscal '21 fourth quarter was $5.2 million versus $5.3 million in last year's fourth quarter, with sales primarily coming from existing customers, purchasing new seats or modules. For the full year, license revenue declined 33%, with our sales efforts focused on the cloud, we do not expect a meaningful increase in year-over-year license revenue in the foreseeable future.

Total revenue by vertical for the fiscal '21 fourth quarter was automotive 28%; high-tech and industrial, 37%; life sciences and another, 18%; and consumer products and food and beverage, 17%. By geography, total revenue was fairly consistent to last year with North America at 48%; EMEA at 31%; Asia Pacific 13% and Latin America 8%. Gross margin for the fourth quarter of fiscal '21 improved to 62%, up from 58% last year, primarily driven by improved subscription and professional services margins. Sales and marketing expenses totaled $18.4 million or 22% of total revenue versus $21.3 million or 27% of total revenue for last year's fourth quarter. A majority of the decline was due to reduced travel and bonus expense.

R&D expense equaled $14.7 million compared with $13.2 million for last year's fourth quarter. The increase in R&D expense mostly related to higher personnel expense due to higher headcount. As a percentage of total revenue, R&D increased to 18% from 17% for last year's fourth quarter.

G&A expense was $11 million for the fiscal '21 fourth quarter compared with $10.4 million for last year's fourth quarter. The increase in G&A expense primarily was due to higher stock compensation and professional fees. As a percentage of total revenue, G&A expense declined to 13% from 14% from last year's fourth quarter. Stock compensation expense totaled $4.1 million for the fiscal '21 fourth quarter and $3 million last year, the increase was partly related to higher PSU achievement. This brings operating income to $7.3 million compared with $350,000 last year.

For the quarter, GAAP pre-tax income grew to $5.9 million from $800,000 a year ago and non-GAAP pre-tax income was $10.1 million compared to $3.8 million last year. For the full year, GAAP pre-tax income was $10.8 million compared with $3.6 million, GAAP pre-tax loss for last year and non-GAAP pre-tax income rose to $25.5 million from $8.4 million a year ago. We incurred a tax benefit of $2.3 million in the fourth quarter of fiscal '21. We reversed our valuation allowance for German subsidiary during the quarter as a result of the acquisition of Allocation Network, providing us with the ability to use existing NOLs to offset taxes owed.

We ended the year with approximately $143 million in cash and equivalents compared with $137 million at the end of fiscal '20. Our cash balance remains very strong even after the completion of the Allocation Network or acquisition in the quarter. Cash flow from operations for fiscal '21 totaled $32.9 million compared with $17 million last year, increase directly related to our improved profitability. Accounts receivable was $82.6 million at January 31, 2021 versus $81 million at the same time last year. Days sales outstanding using the count back method was 47 days for the fiscal '21 fourth quarter versus 45 days for the prior-year quarter. Our short-term deferred revenue balance on January 31 was $125.7 million versus $118.4 million a year ago.

Now, I will provide an update on guidance for next year. As a result of COVID-19, we implemented a number of cost-saving initiatives that resulted in significantly reduced travel expense, the cancellation of in-person customer events and reductions in discretionary spending throughout fiscal 2021. As the global economies emerged from the pandemic, we do expect to see travel and customer-related events to pick back up, but not to the historical levels. We and our customers have adapted quite effectively to engaging remotely during sales cycles and implementations of our solutions.

We'll continue to monitor the cost containment measures we've put in place during the pandemic, focusing on improved profitability going forward. Given the stabilization of the environment, we are reinstating our prior practice of providing both quarterly and yearly guidance. For the first quarter of fiscal '22, we expect subscription revenue of $36.5 million, maintenance revenue of $26 million, breakeven operating income including stock-based compensation expense of $3.7 million. For the full fiscal 2022 year, we expect subscription revenue of $160 million, maintenance revenue of $102 million and operating income of $12 million, including stock-based compensation expense of $17 million.

In addition to our first quarter guidance, we have also updated our five-year strategic targets and have posted them on our website. Our long-term model calls for 27% to 30% three-year CAGR in subscription revenues, subscription margin improvement to between 70% and 72%, improvement in total gross margin to between 61% and 63%, efficiency gains in sales and marketing expense to between 18% and 20% of total revenue, R&D expense to between 14% and 15% of total revenue, G&A expense to between 9% and 10% of total revenue, and this will result in adjusted EBITDA of between 20% and 22% of total revenue and we assume a long-term tax rate of approximately 25%.

Now I like to turn the call back to you Anton.

Anton Chilton -- Chief Executive Officer

All right. Thank you, Daniel. So you might remember from our last call, we reported success in our goal of pulling forward cloud deals from our fourth quarter into our third quarter. That success combined with the longer sales cycles for new customer deals related to the ongoing challenges in the macro environment manned our fourth quarter bookings as we expected came in lower than prior year.

Nevertheless, given the exceptional strength of the prior year quarter and in the current context, we consider it a strong sales performance for the year, and as I said earlier, allowed us to post the second highest ever cloud bookings result. Consistent with our third quarter, we saw a representation of each of our key vertical markets in the cloud sales mix, and it was good to see healthy levels of activity in all our focused verticals. There are still a few sub segments in those verticals that are having a tough time, but those tend to be companies serving the travel and hospitality industries. Pam as usual provide some more color on some of those details shortly.

A good indicator on the continued recovery is a lessening of pressure from negatively impacted customers on maintenance renewals through the last quarter and retention rates are still above 90%. From a geographic perspective, North America continued with good sales performance and had a solid quarter in cloud bookings. Our EMEA region posted good sales too, especially in light of the lockdowns which occurred in many parts of that region, midway through the quarter. Asia-Pacific and Latin America had quiet quarters and the slow pace in business activity in China was still apparent. As discussed on the last call it remains unclear whether this is as a result of COVID-19 or trade relations between the US and China or some combination of the two, and we continue to monitor the situation on the ground very closely.

Our Precision and Dynasys divisions finished the year strongly, both in terms of sales and a growing pipeline for FY '22. The pandemic continues to highlight the importance of logistics and supply and demand chain planning. While our overall results and sales were strong, we nevertheless maintained our vigilant focus on management of expenses across the entire business. This continuous effort helped us improve our profitability yet again and has highlighted opportunities to extend efficiencies in our business post the pandemic. As discussed in prior calls, we do not anticipate a return to prior spend levels in travel and also see opportunities to reduce our office footprint over time.

With cloud margins improved yet again reaching 70%, up 3% over the same quarter last year, we've hit our stated target and done so ahead of plan. The professional services side of the business continued the long run of positive margin results, which improved again to 11%. We also saw an increase in activity over the earlier part of the year and were particularly busy in Europe through the holiday period. Our focus remains on working closely with the partner community and continuing to drive improvements to our bottom line.

Looking at future opportunities, our competitive strengths continue to attract new customers to the QAD cloud, and while the number of new cloud customers closed in the quarter was not as high as the prior-year due to long sales cycles as a result of the pandemic, new customers are strongly represented in our sales funnel. I was delighted, as I said earlier, to announce at the end of the year our acquisition of Allocation Network based in Munich, Germany with the customer portfolio across a broad range of verticals including companies like BMW, Brusa Erdinger, Vice Brow, Samsung, Siemens and Volkswagen. This best of breed provider of supplier management solutions really rounds out our capabilities in this area, and it's hugely complementary to our existing solutions portfolio. The pandemic and its effect on supply networks has put in sharp relief the need for manufacturers to have robust integrated supplier management capabilities. With the addition of Allocation Network, we're excited about our prospects in this space globally, and also to now have a much stronger direct footprint in Germany.

Our sales pipeline continues to develop strongly with our weighted pipeline at the present time, up 33% when compared to the same time last year. Our unweighted pipeline value is now more than double what it was this time last year, increasing by almost 110%. Both weighted and unweighted pipelines are again at new record levels, indicating a healthy medium- to long-term sales outlook as a result. What is also really pleasing is that within those increases our new customer pipeline has grown by 90%, continuing to demonstrate the value of the investments we've made and lead generation in the new business area.

With the vaccine rollout programs now under way in most major economies and with the global manufacturing PMI at 53.2, an output now having risen for the eighth straight month, we are increasingly bullish about the medium- to long-term prospects for the business. We finished our fiscal '21 very strongly and given all the indicators we feel good about fiscal '22 and our long-term targets.

I'll now hand over to Pam for more detail and color on our cloud customers.

Pamela Lopker -- President

Thanks, Anton. Q4 was a good growth quarter for QAD cloud with 32 new cloud bookings, 18 from conversions and 14 from net new customers. While the quarter was more heavily weighted toward conversions, we believe we will continue to hold the 50-50 between conversions and net new bookings that we have seen historically, at least for the next few quarters. From a cloud activity perspective, all regions contributed to Q4 bookings, with North America and Europe performing exceptionally well. In Q4, all verticals provided booking revenue with industrial electronics led the way followed by -- closely by life science.

Given we are reviewing our year-end, I thought I would take a bit of time to talk about our cloud customer base. Several years ago, industry analysts told us that most manufacturing enterprises, especially larger ones would not consider moving their ERP to the cloud as operations are mission critical and need to be up in performance often times 24x7. Well, we agreed with the mission critical requirements, we also felt that due to the global nature of manufacturing enterprises, most companies were either running an internal private cloud or considering moving to one.

So moving to the QAD cloud would be a logical step. We believe our success has proven us right. Looking at our customers, no customer represents more than 10% of our cloud revenue, while many customers are increasing their spend with us due to the overall growth in addition of new customers, we expect this will continue into the future with no customers going forward representing more than 10% of our cloud revenue.

Our top 25 revenue customers represents all of our verticals with automotive followed by life science and industrial, the largest percentage by counts. The average Company revenue of our top 25 customers is $12 billion per year, certainly these are large global companies. The smallest 50 customers also represent all verticals with life science being the largest percentage by count at 35%, many of these life science companies are in the pre-product stage. The average Company revenue for our smallest 50 customers is $22 million per year, heavily weighted by these life science companies, many with zero or very little revenue.

Manufacturing companies are different from insurance or government entities, as manufacturers grow, they tend to grow globally, opening manufacturing, sales and distribution centers in more and more locations and countries. Global companies have complex requirements, including support of local laws, business organizational design, joint venture integration, security, shared services and ease at M&A and divestitures, all of which QAD handled very well in our cloud offerings.

The only count that's changed and the pace of change is accelerating. In talking with prospects and customers, we highlight the decrease longevity of companies on the S&P 500. The key point here is that size is no longer a criteria for survival and, in fact, may be a liability. Such companies are often hard to move and too often legacy ERPs hold them back. For every large Company that falls off the S&P 500, it is replaced with the smaller companies that is growing. Well, there is a liability to being big, smaller companies face other challenges, it would be a mistake to think smaller means simpler, smaller companies need to compete against their larger Company competitors in a complex global marketplace across similar supply chains but with less resources. This makes them need to efficiently manage their business more and more critical, going from one to two sites is comparatively more challenging than going from 50 sites to 60 sites. Likewise the same is true for going global, their first acquisition, their first divestiture, their first new line of business is comparatively more challenging than subsequent one.

These are all areas that QAD can help those customers and have lots of established services engagements in that area. Doing something for the first time and in global environment, not only requires the capabilities of larger businesses that have done it before, but it also requires a greater level of process and system flexibility. With our sole focus on manufacturing, QAD tend to deliver the needed capabilities to both large and smaller companies without the complexity and system load that more than often becomes overwhelming and limits growth. I think we've proven that by looking at our success in our customer base, both very small and very, very large companies using QAD cloud.

Back to you. Anton.

Anton Chilton -- Chief Executive Officer

Right. Thanks Pam. All right so looking to the future, we are growing increasingly confident about our long-term goals and have taken another solid step toward them with our fourth quarter and full fiscal year results. Last year, we did set out our long-term goals putting a heavy emphasis on cloud growth while improving bottom line performance and it's pleasing to see our investments and efforts in those areas continue to pay off. Our pipeline growth especially in the context of the pandemic demonstrates that our lead generation strategy has legs and reinforces the growing attraction of enterprise cloud solutions from manufacturers on a global scale.

From a product and professional services perspective, we remain committed to delivering enterprise cloud solutions to global manufacturers that support their needs to deal with change, uncertainty and disruption on a continuous basis. Our acquisition of Allocation Network underpins that commitment. Following on from the success of our virtual fourth stream event, QAD Tomorrow, last September and our launch of the Adaptive Manufacturing Enterprise vision, we will be hosting a second event in May focused specifically on the challenges global manufacturers face in today's complex supply chain. As the disruption brought about by the pandemic and issues such as the recent global shortage in chips, that's silicon not potato, has demonstrated manufacturers need real-time visibility and agility across their entire networks and in their individual suppliers. That's exactly what the event will focus on.

While COVID-19 cases spike, sorry, case spikes continue to occur in various parts of the world, short-term uncertainty does remain a lingering but diminishing factor. We remain vigilant of course and continue to keep a close eye on the key business trends, in new business sales, cloud conversions and renewals with existing customers. But as things stand right now, with that eight months of growth in global manufacturing and a strong pipeline, we feel increasingly positive about the year ahead and in good shape to drive another year of concrete progress toward our goals.

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

Questions and Answers:

Operator

Thank you. [Operator Instructions] And the first question will come from Bhavan Suri with William Blair. Please go ahead.

Anton Chilton -- Chief Executive Officer

Bhavan you're on mute? Just checking. Chuck why don't we move to the next question, if we're going to get that question. Thank you, and we'll get him back next.

Operator

Okay. Our next question will come from Brad Reback with Stifel. Please go ahead.

Brad Reback -- Stifel -- Analyst

Great. Thanks very much and thanks for all that color on the cloud, really helpful. As you look into your five-year target, the 27% and 30% subscription or cloud CAGR, how should we think about the acceleration there from where we are today? Is that going to be a combination of conversions and new customers or do you see it skewing one way versus the sort of 50% -- the 50-50 we've seen historically? Thanks.

Anton Chilton -- Chief Executive Officer

All right. Thanks Brad. Yeah, I'd say for the short- to medium-term, we do expect that sort of 50-50 mix by deal count to continue. Of course, over time, we'll have converted more and more of our existing customer base. And so medium-term, so let's say, 18 months, two years out, we should start to see a bigger skew toward the new customers, and that's what we'd expect to see and that's why we've been investing in lead generation around new business to make sure that pipeline is really strong by the time we get to that point that we needed to be. So yeah that's the plan.

Brad Reback -- Stifel -- Analyst

Okay. And on that latter point Anton, have you seen the complexion of conversions begin to change at all over the last several years. Obviously, you've been at this very successfully for a long time, I'm just wondering if customers today that are moving look different meaningfully than those that move three, four, five years ago?

Anton Chilton -- Chief Executive Officer

Yeah, I think so. I think there's a few things there, I'd say, Brad. So first of all, cloud really took off first of all, in North America, that was followed by EMEA and then more laterally by Asia-Pacific and Latin America. And so there's still, I'd say, momentum is really strong in North America and continues to be so. And so from that perspective, we might be closer to the top of the S curve, if you like, then say in other parts of the world, but there's still a long runway there. And then EMEA comes a bit behind that and so on.

So yeah, we think, moving forward, the pandemic has also underpinned, I think, the benefits of having those systems in the cloud, you don't have an IT team that needs to look after, I mean, as you worry about data center staff, availability and all that stuff taken care for you. And then you think about security complications, and those continue to mount up and become more and more complex, and having someone else deal with that, I think is a real benefits of those customers to. And of course finally just recognizing that they can then focus on their business -- of running their business and adapting to all this change and supply chain disruption and so on. So when you put all those together, I'd say, this momentum building there, which encourages more and more of the existing base to consider moving to the cloud for the foreseeable future.

Brad Reback -- Stifel -- Analyst

That's great. Thanks very much.

Anton Chilton -- Chief Executive Officer

Thanks, Brad.

Operator

The next question will come from Bhavan Suri with William Blair. Please go ahead.

Bhavan Suri -- William Blair -- Analyst

Hey, guys. Its Suri again. Can you hear me?

Anton Chilton -- Chief Executive Officer

Yes.

Bhavan Suri -- William Blair -- Analyst

Anton and Daniel. Thank you. So I actually want to touch a little bit on the large deal activity and the sustainability of the large deal activity, you had great strength from guys signing -- from customer signing larger deals, like what is the driver there, I'd love to -- we talked about costs and we talk about the Adaptive ERP like what is driving that for the larger lands, the expands? And then how should we think about the ability to explain that, how was the ability to keep running that going forward?

Anton Chilton -- Chief Executive Officer

Yeah, thanks Bhavan. So, I'd say, first of all, certainly global manufacturers recognize the challenge of working in today's world with the speed of change adapting business models and so on. And say older generation ERP has not really helped them move systems at pace with business model changes and certainly with QAD Adaptive ERP they get that opportunity, so that's one driver.

The other is, when competitively, many global manufacturers have always considered SAP is, in the past, as a first choice. With the activity at SAP, the launch of S-4/HANA a few years ago, no migration path to fully implementation as the candidate look for alternatives and viable alternatives. And QAD on a global scale is one of the very few of those, and so we've definitely had some success there and that then is compounded by the realization that the economics and the time to benefit of choosing QAD's solution over larger competitive like SAP orders of magnitude better.

So the ability to roll out much more quickly, get that time to benefit and subsequently keep that application up to date is all driving that. And a lot of those customers, that Pam talked about, made decisions for the reasons I've just spoken about, and many of those that were on a SAP strategy have a long-term goal of replacing their SAP footprint with QAD and we'll continue to drive that. So we feel like we've got a lot of runway in that space, both with new customers looking for an alternative and existing customers that continue to drive out into new divisions and expand their QAD footprint.

Bhavan Suri -- William Blair -- Analyst

No Anton, I think that's really helpful. I think the question is that, that begs for a follow-up is, like where do you think the SAP forced migration ends up being a tailwind, like we talked about this on NVRs, we talked about these on earnings calls, but like it will be -- SAP is doing this force migration to HANA and it's been a tailwind, but how do we quantify that tailwind? Did you and Pam have talked about it seems to the shift, help us think through what, I mean, not as on for quarter or a year, over the next three to five years, like what do you think that plays out as for the cloud growth for the business for new logos?

Anton Chilton -- Chief Executive Officer

Yeah, I think it's going to be a significant portion of our growth. I don't want to give you a percentage at this point, but I think for two reasons...

Bhavan Suri -- William Blair -- Analyst

I mean you could, Anton...

Anton Chilton -- Chief Executive Officer

I could. Daniel is staring at me very intensely right now.

Bhavan Suri -- William Blair -- Analyst

I'm sure.

Anton Chilton -- Chief Executive Officer

So yeah, I think a couple of things that are going to drive that, right. So first of all just building on the back of our existing success and then getting that story out there and then more and more of the manufacturers that are may be today postponing that decision to move from ECC 6 and thinking and planning about what they do every year that goes by, that's a year that the existing system is older, more customizations, more issues with it. And so I think we will see this double whammy in our favor of more and more success, more and more awareness of what QAD can do. And then the sun of burning platform, if you like, and the need to get off older systems as time goes by.

Bhavan Suri -- William Blair -- Analyst

I appreciate the color. Ultimately, we think about this cloud transition and we think you guys are well positioned. I think those tailwinds are interesting and I appreciate you're not willing to give color on 200 bps or 300 bps but it's something as you guys go forward we thought for all of us get color on. Thanks so much, Anton. I appreciate it. Thanks for taking my question.

Anton Chilton -- Chief Executive Officer

Thanks, Bhavan.

Operator

[Operator Instructions] Our next question will come from Kevin Liu with K. Liu & Company. Please go ahead.

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

Hi, good afternoon and congrats on a strong finish to the year. First question I had here for you was just, in terms of sales cycles, have you seen those start to return back to kind of the cadence that you saw pre-COVID or is there still some hesitation out there among your customer base to pursue some larger transformational deals?

Anton Chilton -- Chief Executive Officer

Yeah. Thanks Kevin. Certainly as we talked about in the fourth quarter, I think particularly not exclusively but particularly given a few key spikes in a number of countries in Europe, we saw some hesitation and therefore some lengthening of sales cycles. The good news is those are lengthened rather than completely curtailed, and so I think there's still good opportunity there. If we look geographically, first of all, and I'd say business activity has been strongest in North America and the desire to keep transactions moving, it's been the strongest and so the effect is diminishing more quickly in North America followed by Europe and then Asia-Pac and Latin America, which seems to be going at a slightly slower pace, but we have seen increased levels of activity in the Asia Pacific region over the last couple of months and so we take that as a positive sign that starting to catch up now too.

If you look them vertically, there's good activity across all of our vertical markets with the exception of some narrow subsegments within each of those, I talked about those earlier sort of anybody that's serving the transportation or certain elements of the transportation industry, with certain elements of the hospitality industry, they may be struggling, we expect that to continue for some time until really the whole vaccine program is substantially complete on a global basis. But outside of that yes we see a lot of positive momentum.

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

Got it. And this may be related somewhat to the prior question on SAP, but I just wanted to do the talk a little bit more about the doubling and kind of the unweighted pipeline, what are some of the drivers around that, is that really just kind of force migration that's driving a lot more interest or has the pandemic prompted folks to look a lot more kind of digital transformation across the board? And then more specifically to the organization, given the size of the pipeline and where you still -- what you're still seeing in terms of sales cycles, how are you feeling about the size of your go-to-market organization and whether you should be investing more aggressively in that going across the year?

Anton Chilton -- Chief Executive Officer

Great. Okay. So a few questions. So we think about source of pipeline growth, it's really a combination of factors. So as we talked about a few minutes ago, more and more customers are encouraged by the benefits of cloud and so existing customers make up a good portion of that pipeline thinking about moving from their on-premise security environment to the cloud. A good portion of our lead generation focus that we invested in over the last sort of 18 months, two years has been around new business, and so I think we're seeing just a combination there of the fact that we are out and we are putting real effort into finding leads and opportunities together with some of the examples you used.

So the pandemics really highlighted a whole range of reasons why cloud, cloud ERP in general makes sense for manufacturers, supply chain disruption. So a lot of interest in our supply chain products today, things like demand, supply chain, planning, global trade and transportation execution, supplier management as part of that, that's all fueling that sort of thing as well. So it's really a combination of all those factors that's coming together to help that increase.

In terms of go-to market model, we're pretty comfortable with where we're at. I think we made statements last year that we were investing in that, we're seeing those investments start to pay off. So we now see a more proportional response to growth in terms of scaling up the organization versus getting sort of investing ahead of the curve, so to speak. So from a ratio perspective, we do foresee becoming more efficient over the next couple of years and that's baked into those long-term targets, that Daniel talked about earlier.

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

Okay. And just lastly on the acquisition of Allocation Network, any insight you can provide in terms of just the expected contribution, dealer total or recurring revenue for this year? And then anything you can offer from their growth or margin profile historically?

Daniel Lender -- Chief Financial Officer

Yes, Kevin. So with regards to Allocation Network, we are incorporating them straight into our overall results, we're not going to be reporting on them on a separate basis, and actually significant leverage and significant reason of why we acquired and it's because we believe that many of our customers on a global basis will be in the need for it, so a lot of that product is going to be actually sold directly by our sales force around the world, where they will continue or some of the people that are now QAD employees from Allocation Network, they will continue to sell mainly inside of Germany, inside of their existing contracts and installed base. They are not making a material impact to the P&L up or down. So there is really no impact there.

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

Understood. Thanks for taking the question.

Anton Chilton -- Chief Executive Officer

Thanks.

Operator

The next question will come from Bhavan Suri with William Blair. Please go ahead.

Becker -- William Blair -- Analyst

Hey, guys. This is Becker [Phonetic] here actually. I wanted to just touch on to from the partner investments that you guys have focused on here and kind of the updated long-term target maybe really early stage from a partner perspective, but it's been a key kind of focus in investment area. I guess how should we be thinking about partners kind of layering in and contributing more meaningfully to growth, maybe not here in calendar '21, but as we look kind of into that three to five-year kind of type of timeframe?

Anton Chilton -- Chief Executive Officer

Yeah. Thanks Bhavan. So as you say, relatively early days for us and the focus right now has been putting that foundation layer in place, making sure that we have the processes and systems in place to support the acquisition, the on boarding of partners and growing and scaling that. And to that point, actually, we've gone into agreements with four new partners in Latin America over the last few months, which is really pleasing to see. In terms of the effect on the business and material contribution to growth, I don't think you'll see that until sort of mid-way through next year. We've got to get them on board, we've got to get them trained up, help them with lead generation in building their pipelines, but we've got that baked in our plans, and as I say, sort of 18 months out or so we should start to see that flow through.

Becker -- William Blair -- Analyst

Thanks, guys.

Anton Chilton -- Chief Executive Officer

Thank you.

Operator

The next question will come from Matthew Galinko with Sidoti. Please go ahead.

Matthew Galinko -- Sidoti -- Analyst

Hey, good afternoon and thank you for taking my questions. Can you comment on the sensitivity of the full year maintenance and subscription guidance against your pipeline of conversion activity?

Daniel Lender -- Chief Financial Officer

Yeah, from a guidance perspective, I mean some of that will be coming from conversions. One statistic that Anton didn't mention is, we've now reached about a quarter of our installed base or 25% have converted from a perpetual environment to the cloud. So there's still significant amount that's out there for us. So for this year, I think we're still likely going to be counting on about a 50-50 mix. So there is some sensitivity to that, but also as Anton mentioned, there has been a significant growth to our new cloud customer pipeline. So, quite a bit of that growth as well will be coming from that.

Matthew Galinko -- Sidoti -- Analyst

Got it. I think -- yeah, no that was helpful. And then I think you touched on some traditional business travel expenses maybe starting to return, maybe that was around business development, I'm not quite sure, I might have missed the details about that, but I think you said you don't want it return to historical levels. Can you just go back over that and just kind of specifically what's coming back and what are the limitations and sort of what are the downs on what the new normal looks like kind of from a practical perspective and how that sort of flows into the P&L? Thanks.

Daniel Lender -- Chief Financial Officer

Yeah, sure. There is -- we do expect some travel to return. Obviously, the timing of that will be dependent on how quickly we, in the United States and everywhere around the world, get out of the pandemic. We believe most of the travel for us during this fiscal year will come stem from our sales activities. Some of the new customer sale that we talked about earlier, the lengthening of the sales cycles to a degree is hinging up or the fact that it's hard to meet with new customers on a face-to-face basis. So some level of travel is always helpful when it comes to getting those deals in place. So we do expect to see some there.

And so the sales and marketing expense will see an increase there, but again we have and our customers have learned how to conduct a lot of these meetings that before needed to be face-to-face, in some cases, with large groups of people, meaning location face-to-face, doing those remotely. So on a more long-term basis, we don't believe that the level of travel will be returning to prior levels. The other area where we will see some increase in travel will be with some of the implementations, are there still some pieces of implementations that sometimes are easier to conduct on site, a lot of travel that happens on implementations is actually rebuilt back to the customer, so you won't necessarily see that affecting directly the bottom line. The rest of business travel around the other areas, we still expect that it will be quite minimal, but I think that this year we will definitely see some of that increase.

Matthew Galinko -- Sidoti -- Analyst

All right. Thank you.

Daniel Lender -- Chief Financial Officer

Right. Thank you.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Anton Chilton for any closing remarks. Please go ahead, sir.

Anton Chilton -- Chief Executive Officer

Well, thank you for joining today everybody. That concludes our call. We are looking forward to updating you in May with the results of our fiscal 2022 first quarter.

Operator

[Operator Closing Remarks]

Duration: 50 minutes

Call participants:

Kara Bellamy -- Chief Accounting Officer and Corporate Controller

Anton Chilton -- Chief Executive Officer

Daniel Lender -- Chief Financial Officer

Pamela Lopker -- President

Brad Reback -- Stifel -- Analyst

Bhavan Suri -- William Blair -- Analyst

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

Becker -- William Blair -- Analyst

Matthew Galinko -- Sidoti -- Analyst

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