Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Progress Software Corporation (NASDAQ:PRGS)

F4Q08 Earnings Call

December 18, 2008 9:00 am ET

Executives

Norman R. Robertson - Chief Financial Officer and Senior Vice President of Finance and Administration

Joseph W. Alsop - Co-Founder, Chief Executive Officer

Richard D. Reidy - Chief Operating Officer

David G. Ireland - Executive Vice President

Analysts

Brent Williams - The Benchmark Company

Steve Koenig - Keybanc

Richard Davis - Needham & Company

Robert Kirkpatrick - Cardinal Capital

Operator

Good day and welcome to the Progress Software Corporation fourth quarter earnings conference call.

At this time, I'd like to turn the conference over to Bud Robertson. Please go ahead, sir.

Norman R. Robertson

Good morning. This is Bud Robertson, Senior Vice President of Finance and Administration and Chief Financial Officer of Progress Software Corporation. Joining me today are Joe Alsop, CoFounder and CEO, Rick Reidy, Chief Operating Officer, and members of the senior management team.

We've prepared a slide presentation to view with this call. The slide presentation can be found on the Investor Relations section of the Progress website by clicking on the Live Webcast icon.

The matters we'll be discussing today, other than historical financial information, consist of forward-looking statements that involve certain risks and uncertainties. Statements indicating that we expect, estimate, believe, are planning or plan to are forward looking, as are other statements concerning future financial results, product offerings or other events that have not yet occurred.

There are several important risk factors which could cause actual results or events to differ materially from those anticipated by the forward-looking statements contained in our discussion today. Information on these risk factors is included in our Securities and Exchange Commission reports.

We reserve the right to change our budget, product focus, product release dates, plans and financial projections from time to time as circumstances warrant. We shall have no obligation to update or modify the information contained in our discussion in the future when such changes occur.

With respect to any non-GAAP financial measures discussed in this call, we have provided on our website a presentation of the most directly comparable GAAP financial measure and a reconciliation of the non-GAAP financial measure to the most directly comparable GAAP financial measure. You can access this information, which is included in our earnings release, at www.Progress.com.

We reported this morning the following results for our fiscal fourth quarter and full fiscal year of 2008, which are reflected in the first few slides of the online presentation. On a GAAP basis, we reported the following:

Revenue for the quarter increased 2%, from $137 million in Q4 of fiscal 2007 to $139 million.

Operating income for the quarter decreased 46%, from $15.8 million in Q4 of fiscal 2007 to $8.5 million.

Net income decreased 47%, from $12.1 million in Q4 fiscal 2007 to $6.5 million.

And diluted earnings per share decreased 41% to $0.27 in Q4 of fiscal 2007 to $0.16.

On a non-GAAP basis, we reported the following:

Non-GAAP revenue increased 4%, from $137 million in Q4 of fiscal 2007 to $142 million.

Non-GAAP operating income increased 2%, from $33.4 million in Q4 of fiscal 2007 to $34 million.

Non-GAAP net income was approximately flat at $24 million with Q4 of fiscal 2007.

And non-GAAP diluted earnings per share increased 7%, from $0.54 in Q4 of fiscal 2007 to $0.58 this quarter.

The non-GAAP results in the fourth quarter of 2008 exclude after-tax charges of $6 million for stock-based compensation, $4.4 million in restructuring and acquisition-related expenses, $4.7 million for amortization of acquired intangibles, $1.7 million for purchase accounting adjustments for deferred revenue, and $0.7 million for professional service fees associated with the investigation and shareholder derivative lawsuits related to the company's historical stock option grant practices.

The non-GAAP results in the fourth quarter of fiscal 2007 exclude after-tax charges of $3.7 million for stock-based compensation, $2.7 million for amortization of acquired intangibles, $5.1 million for impairment of goodwill, and $0.3 million for professional services fees associated with the investigation and shareholder derivative lawsuits related to the company's historical stock option grant practices.

For the full fiscal year on a GAAP basis, we reported the following:

Revenue for the year increased 4%, from $494 million in fiscal 2007 to $516 million.

Operating income for the year increased 13%, from $57.2 million in fiscal 2007 to $64.4 million.

Net income increased 9%, from $42.3 million in fiscal 2007 to $46.3 million.

And diluted earnings per share increased 13%, from $0.96 in fiscal 2007 to $1.08.

On a non-GAAP basis, we reported the following:

Non-GAAP revenue increased 5%, from $494 million in fiscal 2007 to $518 million.

Non-GAAP operating income increased 6%, from $109 million in fiscal 2007 to $116 million.

Non-GAAP net income increased 6%, from $77.4 million in fiscal 2007 to $81.9 million.

And non-GAAP diluted earnings per share increased 9%, from $1.76 in 2007 to $1.92.

The non-GAAP results in fiscal 2008 exclude after-tax charges of $14.7 million for stock-based compensation, $4.4 million for restructuring and acquisition-related expenses, $12.9 million for amortization of acquired intangibles, $1.7 million for purchase accounting adjustments for deferred revenue, and $1.9 million for professional services fees associated with the investigation and shareholder derivative lawsuits related to the company's historical stock option grant practices.

The non-GAAP results in fiscal 2007 exclude after-tax charges of $16.6 million for stock-based compensation, $11.1 million for amortization of acquired intangibles, $5.1 million for impairment of goodwill, and $2.3 million for professional services fees associated with the investigation and shareholder derivative lawsuits related to the company's historical stock option grant practices.

The following operational analyses were presented utilizing our non-GAAP financial information.

In reviewing the fiscal 2008 fourth quarter, within the year-over-year total revenue increase of 4%, software license revenue was up 4%, maintenance revenue increased 7%, and professional services revenue decreased 13%.

For the full fiscal year, software license revenue was up 3%, maintenance revenue increased 9%, and professional services revenue decreased 6%.

With regard to the impact of changes in foreign exchange rates on the fourth quarter, total revenue in the fourth quarter of fiscal 2008 would have increased 10% on a constant currency basis versus the 4% increase reported. Software license revenue would have increased 10% on a constant currency basis versus the 4% increase reported. Maintenance and service revenue would have increased 10% on a constant currency basis versus the 4% increase reported.

For the full fiscal year on a constant currency basis, total revenue in fiscal 2008 would have increased by 3% versus the 5% increase reported. Software license revenue would have increased 1% on a constant currency basis versus the 3% increase reported. Maintenance and services revenue would have increased 3% on a constant currency basis versus the 6% increase reported.

As noted on Slide 12, international business was 54% of the quarterly total, as compared to 58% in Q4 of fiscal 2007. For the full fiscal year, international business was 57% in each year.

Revenue from the OpenEdge product line decreased 12% to $79.9 million this quarter from $90.6 million in Q4 of fiscal 2007 and represented approximately 56% of the total revenue this quarter as compared to 66% of the total revenue in Q4 of fiscal 2007.

Revenue from the DataDirect product line decreased 4% to $22.8 million from $23.7 million in Q4 of fiscal 2007.

Revenue from the Enterprise Infrastructure product line, including the recently acquired IONA product line, increased 75% to $39.4 million from $22.5 million in Q4 of fiscal 2007.

For the full fiscal year, revenue from the OpenEdge product line decreased 2% to $331 million from $337 million in fiscal 2007 and represented approximately 64% of total revenue this year as compared to 68% of total revenue in fiscal 2007.

Revenue from the DataDirect product line increased 5% to $77.5 million from $73.9 million in fiscal 2007.

Revenue from the Enterprise Infrastructure product line, including the recently acquired IONA product line, increased 32% to $109 million from $83 million in fiscal 2007.

Revenue from channel partners, including application partners and OEMs, accounted for 50% of our total license business this quarter as compared to 56% in Q4 of fiscal 2007.

For the full fiscal year, revenue from channel partners, including application partners and OEMs, accounted for 53% of our total license business as compared to 55% in fiscal 2007.

Within the OpenEdge product line, partners accounted for 69% of our license business this quarter as compared to 74% in Q4 of fiscal 2007, and for the full fiscal year accounted for 71% of our license business as compared to 70% in fiscal 2007.

Our aggregate revenue backlog at the end of fiscal 2008 was approximately $179 million, of which $144 million was included on our balance sheet as deferred revenue, primarily related to the unexpired maintenance and support contracts. The remaining amount of backlog of approximately $35 million was composed of multi-year license agreements of approximately $25 million and open software license orders received but not shipped of approximately $10 million.

Our aggregate revenue and backlog at the end of fiscal 2007 was approximately $178 million, of which $147 million is included on our balance sheet as deferred revenue, primarily related to unexpired maintenance and support contracts. The remaining amount of backlog of approximately $31 million was composed of multi-year license arrangements of approximately $21 million and open software license orders received but not shipped of approximately $10 million.

We do not believe that backlog as of any particular date is indicative of future results.

Quarter end headcount of 1,926 was up approximately 16% from one year ago. The increase was primarily due to the acquisition of IONA.

Looking at Slide 16, highlighting balance sheet information, our cash balance was approximately $119 million at the end of the quarter.

In addition, we had approximately $65 million in investments related to municipal and student loan auction rate securities that we classified as noncurrent on our balance sheet because these securities failed to clear at auction and we are currently unable to sell these securities in the market. The failed auctions have resulted in higher interest rates being earning on these securities, but the investments currently lack short-term liquidity. We have recorded a temporary reduction in value of approximately $7 million due to the lack of liquidity.

Our accounts receivable days sales outstanding or DSO was 61 days at the end of the fourth quarter, down 1 day from one year ago and down 3 days from last quarter.

During the fourth quarter of fiscal 2008, we repurchased approximately 0.2 million shares of our stock at a cost of $3.2 million. At the end of the fourth quarter, there were approximately 9.8 million shares available for repurchase under our Board-authorized share repurchase program that expires on September 30, 2009. A summary of our historical share buyback is reflected in Slide 17.

During the past few months, there have been several significant announcements and developments. In September we announced the completion of the acquisition of IONA Technologies. We acquired IONA for an aggregate purchase price of approximately $126 million net of cash. The purchase price was funded with existing cash resources. The addition of IONA strengths our position as the industry's independent choice for infrastructure software supporting heterogeneous distributed IT environments implementing an SOA.

In October we announced the release of our Fuse ESB 4.0, an enterprise version of Apache ServiceMix 4.0, the most widely deployed standard space open source enterprise service bus. Fuse 4.0 comprises important new capabilities that will help the productivity of developers, including support for Java Business Integration or JBI 2.0 standard and backwards compatibility with JBI 1.0, which ensures that Fuse Version 3.0 and ServiceMix Version 3.0 components are seamlessly deployable into Fuse ESB 4.0.

In November we announced the availability of the Progress OpenEdge 10.2A business application development platform. With the release of OpenEdge 10.2A, we offer customers and application partners new graphical user interface capabilities to enable them to build a Microsoft .NET based Windows GUI natively within the award-winning OpenEdge development platform without requiring any training or prior knowledge of .NET itself.

More information on these announcements and other announcements and upcoming events can be found on our website at www.Progress.com.

In looking to fiscal 2009 in the first quarter, we are providing the following guidance:

For fiscal 2009, we expect GAAP revenue to be in the range of $532 million to $542 million, and we expect non-GAAP revenue to be in the range of $535 million to $545 million. The nonGAAP revenue expectation includes adding back the purchase accounting adjustments for deferred revenue.

Software license revenue is expected to be in the range of $200 million to $210 million.

We expect revenue from the OpenEdge product line to be in the range of $285 million to $295 million, representing a year-over-year decline of approximately 11% to 14%, with approximately half of the decline attributable to the year-over-year changes in exchange rates.

We expect revenue from the Data Infrastructure product line, which includes the DataDirect, DataXtend, DataServices and ObjectStore products to be in the range of $105 million to $115 million, representing year-over-year growth of approximately 5% to 15%.

We expect revenue from the Enterprise Infrastructure product line, which includes the Sonic, Actional, Apama, [Audic], Fuse and Orbix products, to be in the range of $130 million to $140 million, representing a year-over-year increase of approximately 50% to 65%.

We expect GAAP operating income to be between $65 million and $71 million. We expect nonGAAP operating income to be in the range of $114 million and $120 million.

We estimate that non-operating income will be around $1 million for each quarter of fiscal 2009, although this may vary depending on interest rates, potential stock repurchases, fluctuations in foreign exchange rates, and our cash balances.

We expect our effective tax rate to be between 36% and 37% for GAAP purposes and between 34% and 35% for non-GAAP purposes. The difference primarily relates to the tax treatment of share-based compensation and amortization of acquired intangibles.

Estimated future weighted average share count for earnings per share depends on future options activity, future share repurchases, share prices and other factors. For now, we think using a share count of between 41 million and 42 million for each of the quarters of fiscal 2009 for diluted earnings per share seems reasonable.

We expect diluted earnings per share on a GAAP basis to be in the range of $0.98 to $1.08. On a non-GAAP basis, which excludes total charges of approximately $0.87, we expect non-GAAP diluted earnings per share to be in the range of $1.85 to $1.95.

For the first quarter of fiscal 2009, we expect GAAP revenue to be between $123 million and $125 million and non-GAAP revenue to be between $125 million and $127 million.

We expect software license revenue of between $46 million and $48 million.

We expect diluted earnings per share on a GAAP basis to be in the range of $0.13 to $0.15.

On a non-GAAP basis, which excludes total charges of approximately $0.24, we expect nonGAAP diluted earnings per share to be in the range of $0.37 to $0.39.

We're utilizing an average euro exchange rate of $1.35 in preparing this guidance. We estimate that the difference between this rate and the average euro rate in fiscal 2008, along with the changes in other currencies, will result in a 5% to 6% reduction in the growth rate for revenue in fiscal 2009.

Our non-GAAP results exclude share-based compensation, amortization of acquired intangibles, purchase accounting adjustments for deferred revenue, acquisition-related expenses, and professional services fees associated with our ongoing stock option investigation. A reconciliation between our GAAP and non-GAAP expectations is included in our press release.

This guidance assumes no further economic shocks, the continued success of our partners, successful integration of our acquisition of IONA Technologies, improvement in our ability to generate new business and end user accounts, continued strong performance from our higher-growth product lines, especially the Enterprise Infrastructure product line and DataDirect product line, and no significant strengthening of the U.S. dollar against currencies from which we derive a significant portion of our business.

As we have advised, these and a number of additional factors may affect future results and actual results may differ materially. Consequently, there can be no assurance that we will achieve results consistent with these comments.

We plan on releasing financial results for our first fiscal quarter on Thursday, March 19 and holding the usual conference call that morning at 9:00 a.m. We will be holding our annual analysts' day on January 29th in Boston. More information on this event will be posted to our website in the near future.

This conference call will be recorded in its entirety and be available on our website at www.Progress.com in the Investor Relations section.

I'd now like to open up the call for questions. We'll take questions first from the analysts that publish research on Progress Software and then questions from anyone on the call.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) Your first question comes from Brent Williams - The Benchmark Company.

Brent Williams - The Benchmark Company

The easy housekeeping question first - the amount of ARS that's on the balance sheet went up. Can you walk me through that?

Norman R. Robertson

That was related to the acquisition of IONA. They had some ARSs on their balance sheet.

Brent Williams - The Benchmark Company

And then can you give me a sense of how the large deal business in EID in general, maybe the IONA business in particular, did during the quarter and outlook any changes in the expected pipeline or close rates for larger deals for that business going forward into fiscal 2009?

Norman R. Robertson

The EI business, the pipelines have been good. The deals somewhat have been slowed a little bit because of signature requirements and people reevaluating what's in their capital spending, but so far the deals we expected to come through came through or are slightly a little bit behind where we anticipated. But as of right now we haven't seen deals being lost because of the economy, although they are being slowed down.

Richard D. Reidy

I'd also add that their fiscal year ends at the end of December, so there's still a lot of business that comes in for them normally in December that we're working on now.

Norman R. Robertson

Yes, Rick's addressing the IONA business there.

Brent Williams - The Benchmark Company

And then you had said in the subheadline to the press release that the IONA integration is nearly completed. What's left and how's that tracking relative to the schedule?

Richard D. Reidy

Well, the primary thing that's left is the systems, which have to be brought over to our systems, which is going to happen in January - February, Q1. So that will be the final integration piece, as well as we're still obviously merging people and stuff. But that's the primary big left in Q1.

Brent Williams - The Benchmark Company

And then, let's see, traditionally I have to ask a question about Apama. You called out again in the headline on the press release that that was particularly strong. Is there any sort of color that you can give there?

Richard D. Reidy

No, we were very pleased with the year we had in Apama overall and the quarter we had in Q4. Even in this rather turbulent times within capital markets, people are still looking to improve profitability and almost certainly manage risk, and that's a product that's perfectly suitable for that type of thing.

In addition, we're also finding and signing up a lot of partners. I think one of them is in this press release, EQT, where we're finding more and more people are using SAS models or implementing their trading strategies through partners rather than building up the entire infrastructure themselves.

And then lastly, we're finding more and more multi-product Progress deals, particularly sold into the large integration base, where CEP is an important component in that whole mix. So overall, we're pretty pleased with where Apama is and where it's going.

Brent Williams - The Benchmark Company

So following on that last comment, do you see the pipeline changing substantially towards nonfinancial service deals? Is it picking up? What's the sort of relative balance looking like going forward?

Richard D. Reidy

Yes. Well, certainly in the multi-product deals into the Progress base, many of those would be outside the financial services base, and we are expecting and budgeting for a big pickup in that next year. But we're also looking at other verticals, such as energy, logistics, telecommunications and other areas, to focus on as well.

So we will see a diversified Apama strategy next year in '09.

Operator

Your next question comes from Steve Koenig - Keybanc.

Steve Koenig - Keybanc

I'm wondering if you can help us understand a little bit in terms of our guidance, if you look at it on a constant currency basis and you look at the various business, it looks like it's down constant currency from last guidance if I'm doing my math right. I'm wondering if you could provide some color on what are the changes that you've seen and what are the net effects in terms of your business areas?

Norman R. Robertson

Well, it is down on a constant currency basis from the last one due to the fact that, like the economy, we're starting to see deals slow down. We're concerned about Q1 and 2 based on most companies will be through their budget in December and then, if they get the deer in the headlight syndrome, they're going to potentially freeze in Q1, which concerns us.

So when you look at the product lines, as we mentioned, the OpenEdge business is down on a constant currency basis, the DataDirect businesses are up on a constant currency basis, and obviously the Enterprise Infrastructure group is up because of IONA. And if you take IONA out, it's probably slightly up, with some groups being up more than others, but that's in general where they're up.

So basically, on a constant currency basis, the two to three major groups that were up, with the OpenEdge business being slightly down.

Steve Koenig - Keybanc

And in terms of the change you've seen over the last quarter, which of the businesses is most resistant? Which ones are you expecting a bigger impact?

Norman R. Robertson

Up or down or what was the question?

Steve Koenig - Keybanc

Yes, sorry. In terms of the change over the last three months, your outlook, which businesses have maintained the best outlook, which ones do you think have weakened a little bit?

Richard D. Reidy

I think the way we think about it is we could broadly classify our businesses into three buckets and some of those, quote, business and product lines span some of these categories that we're talking about.

But there are certainly some products that we have that show immediate effect, immediate profitability, immediate reduction of risk, immediate benefit that people see immediately that we're still pretty bullish on, even in tough economic climates, for example, some of our DI stuff and some of our Apama stuff.

And then there's a whole class of our products that are just very sticky. We have long relationships, customers, a big installed base that we think we could manage relatively effectively through an economically troubled times, and those would be things like our OpenEdge business, for example, and some of the IONA business, some of the DataDirect, a strong OEM business, and things like that.

The generic classic SOA infrastructure business is the area that we're being very cautious about in this troubled time insofar as people could delay purchasing decisions themselves a quarter or two to see how this is all shaping up. So I'd say that we're a bit more cautious about the classic SOA infrastructure business than we have been in the past.

Operator

(Operator Instructions) Your next question comes from Richard Davis - Needham & Company.

Richard Davis - Needham & Company

When I talk to private infrastructure companies, some have been doing well and it sounds like you guys touch a lot of parts of the infrastructure world. The guys that are doing well are pricing inexpensively, not cutting price. But is price a driver for sales or is it just kind of natural conservatism among the buyers because they're like wow, we're under pressure? So that was question one.

And then more broadly, could you just talk about your thoughts over the next year to two years or so, just about kind of your concept of acquisitions versus even potentially spinning of interesting parts of your business? For example, let's say Apama got to become a big business, would you ever spin that off or any parts, just notionally.

Richard D. Reidy

I'll start off and Joe will finish.

On your first question, price in and of itself is not the key driver right now in our conservatism and the perception that our customers will be conservative. Much of the cost, particularly in SOA infrastructure, is borne after the sale for a customer, so they're looking at the broader expense of implementing a SOA infrastructure. So our piece of it isn't - and the price of our piece of it isn't  it isn't the key driver.

On the second question, I'm glad you brought that up because these economic times also bring us a lot of opportunity as well as a company in that, as we look through our acquisition strategy, many of the people we might be interested in are themselves, let's just say crassly, cheaper, but in general, let's say, more open to acquisition. So the good side of this whole coin right now is that I think our acquisition strategies could be accelerated as a result of the times that we're in today.

Joseph W. Alsop

I think Rick stole most of my thunder. I'll just add that, although price is always a bit of a factor, I just have not seen that as a big issue. Obviously, if you're a startup company or something like that, maybe you want to use that as a lever to get in the door, whereas a more established company like ourselves is focused on the ROI. And as Rick pointed out, the total cost of implementation really only has a fraction of the cost allocated to the actual software.

With respect explicitly to the question about spinning off - and I think you referred to Apama, Richard - I think one of the things that was said earlier was that we're seeing more multiproduct deals. I think Rick, if I remember correct, explicitly talked about certain deals where there's an opportunity to sell things in conjunction - you know, multiple technologies - in conjunction with Apama.

I think as time goes by customers are looking for more of a complete solution from a single vendor. Certainly, we're refocusing some of our positioning and marketing efforts and are pleased that Gary Conway's joined us as Chief Marketing Officer to emphasize the business value of what we're providing and the return on investment. Typically those deals, those opportunities, will involve more than a single Progress product line.

So I think our strategy at this point - not that it might change in the future - is to improve the synergies among the product lines rather than spin one off. I think also we've proven that we're pretty good at running mature product lines for profitability and have a good track record on that. And of course that generates a tremendous amount of the profitability and cash flow that drives the company.

I hope that's responsive to your question.

Operator

(Operator Instructions) Your next question comes from Robert Kirkpatrick - Cardinal Capital.

Robert Kirkpatrick - Cardinal Capital

Could you take a few moments and explain to us kind of what you're using in terms of foreign exchange forecasts in this forecast versus the previous forecast?

Norman R. Robertson

This forecast we're using, as we mentioned, the euro is $1.35 and in the prior forecast, last time it was, remember from the call, $1.42. The pound, we're using $1.55 for this one and prior it was $1.85. Those are the two big major drivers of our currency.

Robert Kirkpatrick - Cardinal Capital

And are they both about equal or is the euro much more important to you?

Norman R. Robertson

The euro's [lighter].

Robert Kirkpatrick - Cardinal Capital

So three-quarters, one-quarter, something like that?

Norman R. Robertson

Two to one.

Robert Kirkpatrick - Cardinal Capital

Two to one, okay. And then any comments on your stock buyback program?

Norman R. Robertson

Yes. Well, you know stock buybacks, there are a number of factors that affect our ability to buy back shares, including blackout periods, our cash position, acquisition opportunities, etc., etc. And, as you know, this quarter we spent over $100 million to acquire IONA. And during the course of the year we spent over $100 million in stock buyback, so they're about the same number over the course of the year.

And every quarter's different. We did $40 million in buybacks last quarter and then we did the IONA acquisition.

Robert Kirkpatrick - Cardinal Capital

So the implication is that you were blacked out much of the period?

Norman R. Robertson

The implication is, you know, we have so many cash resources and you have to look at the cash balances. And, you know, what are you going to do? You going to buy back shares or are you going to buy companies? And the number one priority has been the acquisition of companies and technologies to strategically grow the business.

Robert Kirkpatrick - Cardinal Capital

And then any comments on working capital for the year or for your forecast period?

Norman R. Robertson

What specifically did you have in mind?

Robert Kirkpatrick - Cardinal Capital

You had, it looked like it was a bit of an outflow in 2008 and I was wondering, with the acquisition being impacted in the full year, will you have -

Norman R. Robertson

Yes, I know. This year was timing; it's just a balance sheet timing issue. We have things  bonuses paid differently and different rates versus which accrue and the timing of other payables. Receivables are in line with what you'd expect, like we said the DSO is where it is. The over 90 actually about the same. So there's not really any basic change other than the timing of the payables, and that's bonus accruals versus payments, those kind of things.

Operator

Your next question comes from Steve Koenig - Keybanc.

Steve Koenig - Keybanc

I'm wondering if you can elaborate a little bit on looking out maybe next year - maybe even three if you will - on the impact of SAS adoption by your application partners on the OpenEdge business and also how does that affect the structure of the contracts and the timing of OpenEdge revenue?

David G. Ireland

The events here in question - basically SAS adoption - what we've seen on our end for '08 and similar to '07 is over a 20% growth in the SAS business, and we project that to continue forward. So there's been a good strong adoption by the application partner community and the application partner community sees that as a competitive advantage. So we're pretty pleased with the results.

Joseph W. Alsop

I think part of your question was sort of how do we account for it. Is that correct?

Robert Kirkpatrick - Cardinal Capital

Yes.

Joseph W. Alsop

We basically take the revenue monthly. It's basically rental of our infrastructure as part of the partner's application. And one of the decisions that we made quite a few years ago is that we would provide our technology on the SAS model to those partners who were willing to accept the SAS or rental, well, I'll just call it the rental model - or subscription, that's the word I was hunting for - in terms of how they do business.

Now, a couple of points. One, there is some potential for cannibalization. In other words, we might not get an upfront license deal and instead get a SAS deal that extends over years a month at a time under the subscription model, but strategically we felt that it was important to do it and therefore we were willing to accept that trade-off.

In fact, however, I don't think the trade-off has been all that severe because most of the business that our partners have gotten under the SAS model has been incremental business, it's put them in a new, much better competitive position, potentially repositioned them in the marketplace as they go after new accounts, and I think in general has been an enormous invigorating influence on our partners. I think, if I remember correctly, I heard a quote from a year ago from some of our partners that are most heavily committed to SAS that half their business in a few years would be SAS.

Now, our SAS revenues are still a fairly small fraction of our total OpenEdge license revenue. But, as Dave mentioned, it's been growing pretty quickly.

Operator

And at this time we have no other questions in queue. I'd like to turn the call back to Mr. Robertson for any additional or closing comments.

Norman R. Robertson

Thank you. This concludes today's conference call and we at Progress wish you a happy holiday. Thank you for participating.

Operator

And again, that does conclude today's call. Thank you for your participation. Have a good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Progress Software Corporation F4Q08 (Qtr End 11/30/08) Earnings Call Transcript
This Transcript
All Transcripts