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Actuate Corporation (NASDAQ:ACTU)

Q4 2008 Earnings Call

February 2, 2009 5:00 pm ET

Executives

Thomas E. McKeever - Vice President, Corporate Development & General Counsel

Peter I. Cittadini - President, Chief Executive Officer & Director

Daniel A. Gaudreau - Chief Financial Officer & Senior Vice President, Operations

Analysts

Nathan Schneiderman - Roth Capital Partners

Patrick Walravens – JMP Securities

Kevin Liu – B. Riley & Company, Inc.

Frank Sparacino – First Analysis Corp.

Justin Cable – Global Hunter Securities, LLC

Operator

Welcome to the Q4 and fiscal year 2008 Actuate Corporation earnings conference call. My name is Tanya and I will be your operator for today. At this time all participants are in listen only mode. We will be conducting a question-and-answer session towards the end of this conference. (Operator Instructions) I would now like to turn the call over to Mr. Tom McKeever, General Counsel and VP of Corporate Development.

Thomas E. McKeever

Welcome everyone to Actuate’s fourth quarter and fiscal 2008 financial results conference call. I’m Tom McKeever, Actuate’s General Counsel. Joining me today is Pete Cittadini, our President and CEO, and Dan Gaudreau, our CFO.

Before I turn the call over to Pete I’d like to remind everybody that the statements contained in this presentation that are not purely historical are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. These include statements regarding Actuate’s expectations, beliefs, hopes, intentions or strategies regarding the future.

All such forward-looking statements in this presentation are based upon information now known by Actuate and Actuate disclaims any obligation to update or revise any such forward-looking statements based on changes in expectations or the circumstances or conditions on which such expectations may be based. Actual results could differ materially from Actuate’s current expectations.

Factors that could cause or contribute to such differences include but are not limited to the general spending environment for information technology products and services in general and business intelligence and rich internet application and performance management software in particular, quarterly fluctuations in our revenues and other operating results, our ability to expand our international operations, our ability to successfully compete against current and future competitors, the impact of acquisitions on the company’s financial and/or operating condition, the ability to increase revenues through our indirect distribution channels, general economic and geopolitical uncertainties and other risk factors discussed in Actuate’s SEC filings specifically our annual report on Form 10-K for the 2007 fiscal year that was filed on March 17th, 2008 and our quarterly reports on Form 10-Q that filed on May 9, August 8 and November 7, 2008.

I’d also like to advise everyone that during this call we will be discussing certain financial measures that have not been calculated in accordance with GAAP. These non-GAAP financial measures such as non-GAAP operating margin percentages, non-GAAP net income and non-GAAP earnings per share are presented as a supplement to and not a substitute for our GAAP financial results.

This afternoon’s press release contains complete set of GAAP financial results as well as the reconciliation between our GAAP and non-GAAP results and that press release is posted on our Investor Relations website at www.Actuate.com. I’d also like to note that this call is being webcast live on our Investor Relations website at www.Actuate.com accompanied by a set of slides and will be available on an archived basis following the call.

Now, I’d like to turn the call over to Pete.

Peter I. Cittadini

Welcome to the call. We’re going to go through a set of slides so I’m going to start off with some factual information starting on Slide Number 4. As far as Q4 was concerned revenues came in at $33.2 million that’s in comparison to $33.7 million in Q3. License revenue of $10.1 million basically the same as Q3 where we did $10 million. Again, the license revenue for Q4 of ’08 $10.1 million.

As far as non-GAAP EPS associated with Q4 it was $0.10 and again that compares with $0.08 in Q3 of this year and a very solid showing in cash flow from operations at $5.1 million of cash. Moving on to Slide Number 5 when we look at the full year summary ’08 revenues were $131 million that’s in comparison to $140.6 million in 2007. License revenues were $40 million again in comparison to $53.2 million in 2007.

Non-GAAP EPS of $0.27 and again that’s in comparison to $0.33 in 2007. $29.5 million in cash flows which was a record in 2008 and that was up 29% in cash flows year-over-year. Moving on to the next slide you’ll see again logos from fourth quarter transactions. I think you’ll continue to note that the business is becoming much, much more well balanced even though we continue to do a fair amount of our business from financial services institutions on a global basis.

In 2008 the total company sales to financial services were 35%. You’ll see that there are other blue chip non-financial services sector customers that we’re doing business with. The one thing that we’re extremely pleased at and again we believe that this is being driven by our Open Source strategy is a well balanced business associated with a much broader customer base. Moving on to Slide Number 7 let’s look to BIRT and let’s start with the most salient statistic on that slide.

We were forecasting $16 million however we came in at $15.4 million so close but no cigar from a forecasting standpoint. However you have to note that in a year like 2008 the increase year-over-year in our BIRT related business was 93% which is pretty good for 2008. Another thing that we exceeded was $6.5 million cumulative downloads of BIRT life to date within the confines of the quarter.

So basically we had million download quarters across the four quarters and that’s just incredible. You know that we ended 2007 with a little over $2 million. For us to be standing at $6.5 million today is incredible. The other thing I’d like to note is instead of hounding you on all of these downloads on a quarter-by-quarter basis I think our next communication will be associated with hitting the 10 million mark from a cumulative download perspective.

I’d really like to focus on customer acquisition and revenue statistics on a going forward basis associated with the BIRT product line. So the next time you hear downloads from me it’ll be at 10 million and I don’t anticipate that’ll be too far off into the future. The other thing you’ll see on this slide is today we’re noted as being one of the top 10 most downloaded commercially supported Open Source application.

We’re certainly top of the heap when you look at true Open Source players and in our particular case Open Source players that have an enterprise software heritage, so very, very uniquely positioned within the marketplace. Moving on to Slide Number 8 we’ll look at some 2008 business highlights and we’ll start with BIRT Exchange.

As you know BIRT Exchange is our complimentary site to www.Eclipse.org which allows us better visibility into the usage of BIRT and the users of BIRT. As you’ll see through the graph there’s been a steady growth in visitors to www.BIRTExchange.com and we’ll continue to invest and work diligently to make sure that that happens on a going forward basis.

We also had over 9,000 registrations with over 5,500 unique commercial downloads from BIRT Exchange in 2008 so that’s extremely, extremely substantial. As far as the number of transactions with BIRT related products and services as you may remember we were extremely excited that we broke the 100 mark in Q3 of 2008 just last quarter.

Well we exceeded 140 of those transactions in Q4 and have a total BIRT related transaction number of 380 for the year. That’s exceptional traction and acceptance of that product line which is very, very important to our future as you know. As far as new customer transactions for the company in 2008 we did over 140 new customer transactions which again is very, very solid number under the circumstances that we’re faced with 2008.

Again when you look at the projects that are being enabled with our products, again very well balanced from an inside and outside firewall standpoint, roughly 50/50. Though again 50% of what we’re enabling these days are inside the firewall BI and performance management types of applications and approximately 50% are outside the firewall customer facing extranet types of applications which again gives us good balance and hedges our future depending on how one type of project is funded on a going forward basis versus the other type of projects.

Of course we launched Actuate 10 as well as Actuate Performancesoft Views 8 adding more value to BIRT in the marketplace. Moving on to Slide Number 9 a little bit about our mission in 2009 and it’s all about connecting the dots.

What I mean by that is our marketing investment in 2009 is making sure that everyone that uses BIRT and again today we estimate 500,000 to 600,000 developers associated with those 6.5 million downloads that they understand when they’re creating extremely impactful applications with BIRT they’re really creating with a product from Actuate Corporation and that when they need additional products and/or services associated with what they’re building with BIRT they can always turn to Actuate regardless of the size of the added value piece that they’re looking for.

Again as far as ’09 is concerned for us it’s all about connecting the dots between BIRT and Actuate Corporation. We’ll be sharing information on that with you through varying venues throughout the year. Moving on to Slide Number 10 this is a very, very important slide. It is a graphic representation of what we’ve created thus far that’s highly differentiated and wanted by prospects and customers on a global basis.

This is pretty much a schematic of what you get from Actuate and what you get from other Open Source BI vendors and/or traditional BI vendors. You’ll see that there are four windows there. The two windows on the left are the typical Open Source BI vendor product line where you have free Open Source products that you can readily digest but what you typically do with them from a commercialization standpoint is very low value componentry for embedded applications.

The cool thing about Actuate is you get all of that with actuate if that is what you’re interested in. The traditional BI vendors have focused on departmental applications and enterprise class applications but of course don’t have a freeware offering or an embedded application offering that is more vis-à-vis an Open Source vendor strategy.

What we have is a product offering that spans all four of the windows. You can get started right out of the blocks with Actuate on an enterprise app or you can started with freeware and then depending on the evolution of the project come and get more technology from us or based on where the developer gets reassigned understand that Actuate would always be available to you whether it’s free, embedded, departmental or enterprise class applications that you’re working on as far as your latest assignment.

Again this schematic very important to us because it shows the highly differentiated nature of what Actuate brings to the market vis-à-vis virtually all other alternative vendors. Finally looking further into ’09 I’d like to make a few statements as to what you can expect. You can expect a very solid maintenance space to continue due to the mission critical nature of the applications that we build whether it be intranet or extranet oriented.

And we expect that maintenance base to grow. As far as BIRT related business is concerned we expect to increase that year-over-year at least by 30% which would basically be a $20 million year up from the $15.4 million year we had with BIRT related business. You can continue management to be driving best in class non-GAAP operating margins and to us that’ll be defined as 16% to 21% in operating margins.

You can rest assured that we’re committed to continuing very solid and strong cash flows from operations. That wraps up my comments with regards to 2009 and now I’ll hand it over to Dan.

Daniel A. Gaudreau

I’m going to start on Slide 13. This is a summary of the fourth quarter. Total revenues for Q4 ’08 totaled $33.2 million. That was down 15% from Q4 of ’07 and essentially flat with Q3 of ’08. License revenues totaled $10.1 million in Q4 ’08. Maintenance revenues were $19.9 million and professional services revenues totaled $3.2 million.

Non-GAAP operating income totaled $8.8 million with a corresponding operating margin of 26.6%. Despite a decrease in our total revenues through good cost management we were able to increase our operating margin from the 25.9% reported in Q4 ’07. Non-GAAP earnings per share totaled $0.10, that was down $0.01 from Q4 ’07.

GAAP earnings per share totaled $0.08, that was down from the $0.16 reported in Q4 ’07 and that requires some explanation. There were two primary reasons for the decline in GAAP earnings. The first is taxes. In Q4 of ’07 we released the majority of our deferred tax valuation allowance that resulted in a favorable GAAP tax line on the P&L of about $3.3 million.

That’s compared with a $1 million provision in Q4 ‘08. That alone has a negative EPS impact of about $0.06 on a GAAP basis. Foreign exchange, in Q4 ‘08 we experienced about a $600,000 FX loss primarily due to weakness in the pound and that has another about a $0.01 impact on earnings per share.

We had another good cash flow generation quarter at $5.1 million and that contributed to a record $29.5 million for the year. Slide 14, on the left side of this chart our annual revenues for the past four years. Our revenues overall declined 7% during 2008. US revenues declined 8% while international revenues declined 4%.

As we’ve mentioned on prior calls we first experienced the weakness in the US at the end of 2007 and the softness has continued throughout 2008. The international markets were healthy until the end of the second quarter of ‘08 and have gotten progressively worse as shown in the right chart.

Fourth quarter ‘08 revenues in the US declined 12% but international revenues declined 22% for an overall 15% decline. I would like to point out however at this time that the fourth quarter and total year 2007 US revenues included a large $3 million back maintenance transaction so “normalized” US revenues excluding that item were essentially flat Q4 to Q4.

Next chart, services revenue growth, on the left side of this chart our services revenue for the past four years. Services revenues overall increased 4% during 2008. Maintenance revenues increased 8% to $76.6 million while services revenues declined another 11% to $14.3 million. Professional services revenues declined as a result of lower volume of license orders and the fact that we have the organization focused on profitability.

Fourth quarter ‘08 maintenance revenues declined 6%. However maintenance revenues increased 9% when excluding the $3 million back maintenance transaction I mentioned before. That occurred in Q4 ‘07. Next slide, again to point out, just to make sure it’s clear, Q4 maintenance revenues totaled $19.9 million.

That was a decline of 6% versus ‘07 as reported. However when considering the $3 million back maintenance transaction in Q4 of ‘07 run rate maintenance revenues actually increased 9% year-over-year. For the fiscal year maintenance revenues were $76.7 million up 8% on a reported basis, up 12% when you exclude that $3 million transaction from the ‘07 numbers.

We closed transactions greater than $100,000 with 76 customers and we also closed one license transaction in excess of $1 million. As I mentioned previously our professional services group and customer support groups have been focused on profitability through better utilization and it’s working. Non-GAAP services margins were 77.3% in Q4 and a record 75.6% for the year.

Non-GAAP operating margins for Q4 ‘08 was a record 26.6% and we continue to be best in class on this profitability metric as I’ll show you on the next slide. This represents a sample of software companies with annual revenues between $100 million and $200 million. This has excluded companies with negative operating margins of which there are several.

As you can see our operating margin is almost twice that of the next highest company. Again as we have said many times in the past we are committed to profitability and increasing margins as the Open Source strategy plays out in the future. Balance sheet, next chart, cash and investments totaled $58.4 million as of December 31st, ‘08. That was a decrease of $10 million from year end ‘07 and down about $23 million sequentially.

During Q4 ‘08 we used $30 million of our cash along with $30 million of debt to complete a $60 million stock buy back. Accounts receivable ended the quarter at about $28 million down almost $11 million from 12/31/07. Despite accounts receivable being somewhat high at 12/31/07 due to back end loading we have experienced good cash collections this year.

Deferred revenue totaled $43.4 million essentially flat with 12/31/07 but up over $2 million from last quarter. Next slide, cash flow from operations for fiscal year ‘08 totaled $29.5 million. That was up 29% from fiscal year ‘07. Cash flows continue to be generated from our operating income and reductions in accounts receivable.

Days sales outstanding ended the year at 78 down 13 days from 12/31/07. Deferred revenue ended the year at $43.4 million up $2.2 million from Q3 ‘08 and essentially flat from a year ago. Deferred revenue could have been a few million dollars higher however we experienced some timing issues of bookings and billings in AMEA and the delay of one large MR transaction in the US. We expect deferred revenue to increase in Q1 ‘09 as these renewals get invoiced.

We repurchased approximately 17.1 million shares at a cost of $60 million in Q4 ‘08 and 19.8 million shares at a cost of about $73 million for the full year of ‘08. We ended 2008 with 542 employees. That was down 47 or 8% from a year ago. Next chart, this is describing the tender offer we did in December.

We tendered for up to $60 million worth of Actuate common stock, approximately 20.7 million shares were tendered within our stated range of $3.00 to $3.50 per share. We ended up purchasing 17.1 million shares or approximately 28.5% of shares outstanding as of September 30th, ‘08 at the $3.50 high end of the range for a total cost of $60 million. That resulted in a pro ration for those who tendered of 83% of the amount tendered.

Approximately 44.2 million shares of common stock will be issued and outstanding after the purchase of those shares. Also during the quarter we entered into a revolving credit agreement with Wells Fargo in the principle amount of $50 million. Next slide, due to continued uncertainties in the macro economic environment globally we’re not going to give specific revenue guidance or ranges.

However we will offer the following selected items that may help the analysts and investors model our business with a higher degree of accuracy. The BIRT business is expected to increase by 30%. Maintenance revenues will continue to grow in 2009 regardless of software license growth. We have never experienced a decline in maintenance revenues and our renewal rates remain above 90%.

We expect non-GAAP operating margins in the 16% to 21% range, earnings per share to increase year-over-year and a continued strong positive cash flow. We are modeling constant FX rates. Other income and expense is estimated at approximately $1 million of net expense for 2009 due primarily to lost interest income on the $30 million of cash we used on the Dutch tender as well as interest expense we’re going to incur on the $30 million of debt.

Finally effective in 2009 we will be modifying the non-GAAP tax rate down from the 30% used in 2008 to 20% going forward. The last slide, Slide 22, we will be presenting at a couple of conferences coming up. The first is Roth Capital down in the beautiful Ritz Carlton in Orange County on February 18th and then the B. Riley conference in Las Vegas March 18th through 19th at the Palms and we invite you all to attend.

With that, that concludes the formal part of the presentation. We now open it up to Q&A.

Question-And-Answer Session

Operator

(Operator Instructions) Your first question comes from Nathan Schneiderman - Roth Capital Partners.

Nathan Schneiderman - Roth Capital Partners

A couple of few questions for you here, just curious did you have any or what was the magnitude of catch up maintenance payments this quarter and also last quarter?

Daniel A. Gaudreau

Let me give you maybe a higher level number, catch up back maintenance year-over-year was down about $1 million, at least $1 million. I’m not sure I want to get in to specific quarters Nate.

Nathan Schneiderman - Roth Capital Partners

Just to clarify there because just trying to put our arms around the sequential dip in maintenance, did you have some renewal issues or churn or what can you say about the sequential decline because even if you strip out the large catch up in the year ago you increase sequentially, what can you help us with there?

Daniel A. Gaudreau

We did not experience any unusual declines. I would say that that large US transaction that I was talking about, a chunk of that would have hit revenue as well as some of the MR backlog in EMEA, that also would have hit revenue. Now, you should expect to see that in Q1.

Nathan Schneiderman - Roth Capital Partners

That’s just a deal that pushed to Q1?

Daniel A. Gaudreau

That’s correct.

Nathan Schneiderman - Roth Capital Partners

On the big deal comps of 76 versus 95 in the year ago on the $100,00 plus, is that just macro or is there anything else that you would highlight for the sharp decline year-over-year?

Peter I. Cittadini

I think it is macro and I think it was an absolute solid baseline business quarter. As you know, we only did one sizeable transaction of $1 million plus and baseline business got us to the $10.1 million of license. So, I’d say it’s primarily macro when you’re just looking at the year-over-year from last Q4.

Nathan Schneiderman - Roth Capital Partners

Can you clarify, you gave us the non-GAAP tax rate, I’m curious what is the GAAP tax rate you estimate for ’09 and to the extent that there is sharp decline year-over-year, what’s driving that decline?

Daniel A. Gaudreau

We expect GAAP taxes in ’09 to pick up I would say so we booked about $1 million this year on whatever the pre-tax number was. I would say that the GAAP tax rate will be approaching that 20% and therefore that’s why we’re modeling it as the non-GAAP rate as well.

Nathan Schneiderman - Roth Capital Partners

But why was there such a big decline?

Daniel A. Gaudreau

It will be an increase, the GAAP rate.

Peter I. Cittadini

Nate, are you asking why a decline in the non-GAAP tax rate?

Nathan Schneiderman - Roth Capital Partners

Well, you had talked about the change from 30% to 20%.

Daniel A. Gaudreau

30% echoes back in history several years. It actually started at 37.5%. When we went public I said, “Look in order to maintain some consistency so the guys in the analyst community don’t go crazy with varying tax rates,” I said, “I’m going to establish 37.5% as a normal tax rate for non-GAAP purposes.” Then I changed that to 30% several years ago. When I finally determined that the Swiss tax haven that we had is creating an amazing amount of favorable impact to the tax line on a GAAP basis.

You’ll see in the past five years I think our GAAP taxes have been effectively zero for the past five years. Therefore, we’ve been really punishing our non-GAAP earnings at a 30% tax rate in my opinion and it just has not been realistic. If you look at a long term blended rate of US at some, not fully taxed because we do have tax planning in the US as well, but you look at the international side with a very low effective tax rate I think a 20% rate is just more realistic. I mean we haven’t even been close to that on a GAAP basis, not even close.

Nathan Schneiderman - Roth Capital Partners

Final question area for you, I was just curious on the guidance, I know you’re not getting specific here but do you feel like the likely scenario is revenue down year-over-year?

Peter I. Cittadini

That’s the reason behind the lack of guidance, it could be up, it could be flat, it could be down. When you’re confronted with that type of situation, what do you do? You don’t give guidance.

Operator

Your next question will come from Patrick Walravens – JMP Securities.

Patrick Walravens – JMP Securities

What rate do you charge for maintenance?

Peter I. Cittadini

20% normally.

Patrick Walravens – JMP Securities

And what’s a good assumption in terms of the non-renewal rate?

Daniel A. Gaudreau

You could use somewhere between 5% and 7%. I think that would be safe.

Patrick Walravens – JMP Securities

And that’s on a dollar basis?

Daniel A. Gaudreau

Yes.

Patrick Walravens – JMP Securities

I guess I’m going to try this from a little different point of view but when we look at sort of your worst case scenario, your 16% operating margin, you must have had some revenue assumption around that, can you share with us what that is?

Daniel A. Gaudreau

No.

Patrick Walravens – JMP Securities

How do you do it? SAP did this and they said, “Listen, here’s our operating margin guidance. Here’s the revenue levels at which we calculate those ranges but we’re not guiding to the revenue levels.” But, I guess how did you come up with the 16% to 21%?

Peter I. Cittadini

We believe we can take an effective and swift resizing action depending on what we see happen to the license revenue line in order to hit that range. That’s basically it. If you look at the solidity of the maintenance, if you look at our projections for professional services, our internal projections which we won’t be sharing with any one and then you look at the wide diversity associated with what could happen with any enterprise software company’s license line during the course of ’09.

We just feel confident that we can take the right actions from an expense standpoint in order to hit that operating margin range we gave you.

Patrick Walravens – JMP Securities

Did I understand right? Are you basically saying that the maintenance should be up year-over-year every quarter?

Daniel A. Gaudreau

I didn’t say every quarter but year-over-year.

Patrick Walravens – JMP Securities

Did you say that we can at least assume Q1 will be up over Q4.

Daniel A. Gaudreau

Didn’t say that assumption either.

Peter I. Cittadini

Didn’t say that.

Patrick Walravens – JMP Securities

Is that a safe assumption?

Daniel A. Gaudreau

Don’t know.

Patrick Walravens – JMP Securities

I guess my last question more on the expense side, I mean you had a pretty good drop off in – your sales and marketing from Q3 to Q4 went from $13.2 to $11.8 and R&D and G&A also all took pretty nice step downs from Q3 to Q4. I guess one, how did you accomplish that? And, is Q4 a good baseline for us to use?

Daniel A. Gaudreau

Well, we did it primarily through headcount reduction. And is that a good baseline? I would say it is a fairly good baseline.

Operator

Your next question comes from Kevin Liu – B. Riley & Company, Inc.

Kevin Liu – B. Riley & Company, Inc.

I guess first question, I just wanted to get more clarity in to the BIRT this year. One thing you mentioned is that you had 140 new customers, how many of those were brought in via BIRT? Then just wondering if you look at kind of the largest BIRT customers, how much in revenues would you say they account for and if you could provide any sort of guidance in terms of rough split between licenses versus services revenues?

Peter I. Cittadini

As far as the BIRT revenue is concerned?

Kevin Liu – B. Riley & Company, Inc.

Exactly.

Peter I. Cittadini

The BIRT revenue probably is about 50% license and 50% other right which would be professional services, first year maintenance, maintenance renewal, training, things of that nature and these are just approximate ranges. As far as the 140 new customers, a good portion, I don’t know exactly what the subset of the 140 included BIRT but lots of those customers were solely BIRT customers so that is again, driving new customer growth across sector growth for us as well. What was your other question that was in there?

Kevin Liu – B. Riley & Company, Inc.

I guess maybe just expanding on that, with the sales and marketing line continuing to come down as a percentage of the overall revenues, is that primarily a function of the BIRT business driving more of your overall revenues or is there going to be some need to ramp up some spending on the [inaudible] side again?

Peter I. Cittadini

No, both sales and marketing, I believe will come down for the ’09 year. A percentage of the marketing funds as far as reduction in marketing funds is directly attributable to BIRT. I’d love to tell you that it’s all today coming down from the sales and marketing standpoint because of the success of BIRT in the market place but it’s clearly a combination of the Open Source strategy, BIRT and the macro environment where just operational management techniques have to come in to play.

Kevin Liu – B. Riley & Company, Inc.

Then, as you look at kind of the pipeline entering 2009, how would you say that compares versus where we were last year? Then also, just wondering if on the enterprise side you’re seeing a lot more interest in BIRT give the focus on cost cutting for many companies.

Peter I. Cittadini

There is on the enterprise side. We’re continuously surprised to see how many large companies have Open Source initiatives and Open Source standardization of certain products including BIRT. So, I would say that BIRT dovetails very nicely again with our large account focus and we’ll stay large account focused even outside of the financial services sector so we’ll use a lot of the same business rational with other industries.

Pipeline is reasonable however, the issue with pipelines and I’m sure you’ll find this will all of your clients, there’s just so much lack of visibility of when that pipeline is going to be shaken free if you will or if the client can pull a trigger on spending against a budget. I’m sure there are companies out there that have I don’t know $100 million pipelines where they could possibly be forecasting as little as $5 million of revenue against that pipeline.

I think pipeline is probably not as valiant of a point these days because of the lack of visibility and my prediction is that software companies in general with large pipelines won’t be able to secure at the same percentage rates that they were able to secure them in the past.

Operator

Your next question comes from Frank Sparacino – First Analysis Corp.

Frank Sparacino – First Analysis Corp.

I’d be curious if you could just talk about close rates in Q4? Then, throughout the year whether or not you saw any significant changes quarter-to-quarter?

Peter I. Cittadini

Close rates against the pipeline Frank?

Frank Sparacino – First Analysis Corp.

Yes Pete.

Daniel A. Gaudreau

I’ll make a comment without numbers. Like I think I said in the body of the text here, the close rates in the US were really week in Q4 ’07 but what we saw I think this year Q4 ’08 was I would say much, much better rate of close. Where we saw tremendous weakness was on the international side since Q2 of ’08 but in the US it seems to me, as I tried to point out on the adjusted revenue numbers, seems to be a little more stable.

Peter I. Cittadini

Close rates can always be better Frank.

Frank Sparacino – First Analysis Corp.

Can I draw a conclusion from those comments Pete and Dan that heading in to ’09 you don’t feel meaningfully worse about the revenue outlook than you did a year ago or is that not fair?

Peter I. Cittadini

I think that’s not fair. I think we are going in to ’09 with a heightened awareness of how tough the market is versus 12 months ago.

Daniel A. Gaudreau

You’ve heard quotes I think from CEOs that say, most of us that present numbers to our boards feel good about the plans right but the guy said, “Don’t get too confident or don’t feel too good about these plans because your customers don’t feel good about your plans, I guarantee you. Demand is down.” So, we go in to the year with a great deal of skepticism but good cost controls, good management and great margins.

Peter I. Cittadini

We believe we’ll have a solid outcome under the circumstances but the circumstances we believe, the visibility we have associated with the circumstances is tougher today than it was a year ago unfortunately.

Frank Sparacino – First Analysis Corp.

Then real quick just two things, ending sales headcount? And then Dan, if you could just give what you think the share count figures should be for ’09?

Peter I. Cittadini

As far as the reps Frank we like to have a budgeted rep count on a global basis this year of 40 at the street level.

Daniel A. Gaudreau

On the share count, the fully diluted obviously the impact of the options have to do with the stock price but I would model somewhere in the neighborhood of 48 to 49 million shares. I think you’d be okay at that level. If the stock rockets, I would bump it up.

Frank Sparacino – First Analysis Corp.

Then Pete, just a follow up on that comment, the 40 street reps, inside telesales adds what another 15 to 20?

Peter I. Cittadini

Oh no, not that many. Inside from a true quota carrying perspective will probably have three to six at any point in time during the course of 2009 and then we’ll have approximately another 10 of representatives that do nothing but lead qualifications. So, we’re sort of going back to basics if you will in 2009 and a lot of what we will be doing is making sure that we do an incredible job qualifying all the net new leads that come in especially the ones driven by Open Source before they’re dispatched to anyone that has the ability to close a transaction.

So, we’re going to be increasing lead qualification resource. We’re going to be decreasing street field reps form an investment standpoint and the inside reps, as I said, would be anywhere between three to five or six at any point during 2009.

Frank Sparacino – First Analysis Corp.

Not to belabor this but just so I know on an apples-to-apples comparison, if you add up those numbers, how does that compare with last quarter and then maybe as you entered a year ago? Because, I show at the end of last quarter you had roughly 60 sales reps?

Peter I. Cittadini

You’ll see less street people in an apples-to-apples comparison, you’ll see dramatically less inside sales people in an apples-to-apples comparison. We sort of got away from the basics of lead qualification over the last number of years and I do want to bring that back. So, that won’t be an apple-to-apple comparison, there will be global lead qual people that we haven’t had for I don’t know maybe five to six years.

Operator

Your final question comes from Justin Cable – Global Hunter Securities, LLC.

Justin Cable – Global Hunter Securities, LLC

Just a couple of quick questions here, in terms of the EPS guidance for 2009 does this assume that you do have the reduced tax rate at 20% so if we were to do an apples-to-apples comparison does that mean that a slight down tick in EPS is the fundamental guidance?

Daniel A. Gaudreau

Well, we never gave what the EPS would be Justin for ’09 we just said it would be up. It’s kind of really leaving it to you to do that modeling. But, the tax rate clearly has a favorable impact, the share count has a favorable impact. An offsetting unfavorable impact is the loss of interest income and higher interest on debt and depending on how you model your revenues and operating margin, that will either go one way or the other.

Justin Cable – Global Hunter Securities, LLC

In terms of foreign currency, a lot of companies have been talking about a foreign currency impact and obviously with the stronger dollar during the quarter and currently, that’s had some negative impact on a lot of other companies. Any idea what the growth or decline would have been on a constant currency basis in India?

Daniel A. Gaudreau

In the revenue line?

Justin Cable – Global Hunter Securities, LLC

Yes.

Daniel A. Gaudreau

It hasn’t been calculated yet. It will obviously be in our K, it just hasn’t been given to me yet. But, I know that on the translation of the balance sheet down in our other income and expense line we got whacked for about $600,000 I think in Q4 and overall for the year $1.8 million so about a $0.02 negative impact in that line for the year.

Justin Cable – Global Hunter Securities, LLC

The last question I had is just on this connecting the dots initiative for 2009, is there any big fundamental change from a sales standpoint? I realize this is more of a marketing initiative but from an indirect or direct sales approach does this change the landscape at all in 2009?

Peter I. Cittadini

It does Justin. We use to be broken down over the last couple of years in order to get appropriate focus and critical mass, broken down in to multiple sales division. One was the Java group that focused on the Open Source product BIRT, one was the enterprise group that focused on large financial services with iServer primarily eRD Pro based applications in custom fashion and the other was the performance management group.

Those are being consolidated in to one group in 2009. Thus, getting everyone extremely well immersed with Open Source, the benefits of Open Source to our customers, to Actuate Corporation, to shareholders, I mean we’re really doing a big push from an organizational standpoint where basically everyone is selling everything to everyone all of the time. There are some new sales techniques from an organizational and operational standpoint that we’re in the midst of moving in to right now.

Justin Cable – Global Hunter Securities, LLC

Do you feel that would cause any kind of distraction on the sales effort in the near term?

Peter I. Cittadini

No, I don’t.

Justin Cable – Global Hunter Securities, LLC

Any changes from an indirect standpoint whether it’s OEMs or resellers?

Peter I. Cittadini

Well the only change and it’s a detail change, the individual that does OEMs on a North American wide basis will be responsible for the OEM number on a global basis. So, a small little change but it could be quite impactful. As you know OEM is moving in the right direction for us.

Operator

Ladies and gentlemen this concludes the question and answer session. I would now like to turn the call over to Mr. Pete Cittadini.

Peter I. Cittadini

That concludes the earnings call for FY 2008 and we look forward to speaking to you again at either the conferences or at the Q1 ’09 earnings call in April. Thank you.

Operator

Ladies and gentlemen thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect.

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Source: Actuate Corporation Q4 2008 Earnings Call Transcript
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