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Actuate Corporation (NASDAQ:ACTU)

Q1 2009 Earnings Call

April 30, 2009 5:00 pm ET

Executives

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

Peter I. Cittadini – President and Chief Executive Officer

Daniel A. Gaudreau - Chief Financial Officer

Analysts

Andrew Lee for Nathan Schneiderman - Roth Capital Partners

Kevin Liu – B. Riley & Company

Frank Sparacino – First Analysis Corp.

Patrick Walravens – JMP Securities

Operator

Welcome to the first quarter 2009 Actuate Corporation earnings conference call. (Operator Instructions) I would now like to turn the call over to Mr. Tom McKeever, Senior Vice President and General Counsel.

Thomas E. McKeever

Good afternoon everyone and welcome everyone to Actuate’s Corporation's quarterly conference call. Joining me to discuss our Q1 2009 results is our President and CEO, Pete Cittadini, and our Senior Vice President of Operations and CFO, Dan Gaudreau.

Earlier today we posted a copy of financial press release for Q1. We have also posted our Q1 earnings call financial slides. All of this data may be viewed at the Investor Relations portion of www.actuate.com.

During the course of this call we will be making projections and other forward-looking statements regarding expected future financial results and business opportunities. Our actual results may be very different from our current expectations. We encourage you to read the 10-Qs and 10-Ks and we file periodically with the SEC. These documents contain a discussion of the risks facing our business, including factors that could cause these forward-looking statements to not come true. We do not currently intend to update these forward statements, except as required by law.

In addition, we will describe certain non-GAAP financial measures. These should be considered in addition to, and not in lieu of, comparable GAAP financial measures. Please refer to our financial press release and earnings call financials slides which show the reconciliation from GAAP to non-GAAP financial measures.

Now I’d like to turn it over to Pete.

Peter I. Cittadini

Welcome everyone to our earnings call. We do have slides on the Web site, as you can see. The first slide I'm going to be starting with is Slide 4, however I would like to preface my part of the presentation with a thank you to the more than 500 Actuate employees globally that have been working extremely hard and sacrificing so that Actuate continues to create substantial business value for its customers and shareholders, even through this very tough economic environment. So I would like to tell everyone great job for our efforts during the quarter 1 2009.

Now on to the first chart and we'll try to keep this brief so we can open it up sooner to Q&A.

Revenues for the quarter were $29.3 million, basically flat with a year ago. License revenues came in at $8.8 million. That's up 15% from a year ago. Non-GAAP EPS at $0.09 per share, up 350% from a year ago and a very solid $5.4 million of cash flow from operations is the high level summary of what transpired in Q1.

Moving on to Slide 5 you will continue to see our focus on blue-chip customers. These are some of the logs associated with first quarter transactions. And again you will note a lot of substantial financial services companies, however you will also note the more horizontal nature of the companies that we're doing business with these days. Companies like T Systems Iberia, Deltek, El Dorado Computing, Parsons, etc.

So again, we are very, very pleased with the horizontal growth of business and we are very pleased with the financial services sector continuing to contribute where we did in excess of 50% of our sales from the financial service sector during the course of Q1.

Moving on you will see of what the new BIRT exchange that was recently enhanced and launched last Friday looks like and you'll see two major tabs at the top of the screen shot. One is products and services, that's BIRTexchange.com and the additive capability is that community tab and that will bring to BIRTexchange.org where it's solely technology-BIRT oriented and community oriented. So that's a little bit about the hierarchy of the new Web site, however the real thing to not is BIRT is definitely on the move.

When you look at the BIRT business within the confines of the quarter, it increased 32% year-over-year, exceeding $3.5 million of business to Actuate Corporation with transactions being over 130 transactions that were BIRT-related transactions within Q1.

If you also look at some of the key BIRT exchange metrics you will see that our total registrations to date are at 15,000, 4,000 of them added in Q1 alone. So the registrations are starting to exponentially climb, which is a really, really good thing for us because it gives us visibility into who is working with BIRT.

If you look at the next three bullet points, that's daily page views, monthly visitors, and commercial downloads, you will note that both sequentially and year-over-year the metrics are up.

As far as daily page views, they were up 28% from Q4, 148% year-over-year. As far as monthly visitors, 57% up from Q4, 235% up from Q1 of last year; and as far as commercial downloads, up 42% from a quarter ago and up 67% from a year ago.

So again, we're very, very pleased with the open source strategy within the confines of our new enterprise software model and clearly the product and strategy behind BIRT is definitely on the move.

Moving on to Slide 7, some of you have seen this before. 2009 really is all about connecting the dots between Actuate Corporation and the BIRT technology and product. And of course, you will see per this slide, we will be focusing on three things, making sure that people understand that BIRT is a premium development environment for stand alone open source offerings as well as an enterprise offering and that it is there to help with a breadth of applications everything from voluminous low-end embedded applications to very high-end enterprise types of applications.

The second bullet point, we're there to make sure we connect the dots and make people understand that the end resulting applications are extremely rich Web 2.0 information applications with which you can do externet types of applications that are consumer facing as well as intranet performance management types of applications for employees.

And finally, our hallmark capabilities of enterprise server scale performance reliability and security all comes with BIRT, as you know. So we are there as you start climbing toward enterprise-scale deployments.

Moving on, again some of you may have seen this before but it's a very essential slide for our 2009 and beyond strategy and it shows that BIRT, coupled with various other commercial pieces of soft ware from Actuate Corporation really allows BIRT to be attractive on any engagement from pure open source to enterprise types of engagements.

So today, if you look at the bottom of the schematic, Actuate is the only one with one development environment that allows for all four types of projects that a global 9000 company may have under its roof.

So the alternatives are disjointed for various vendor approaches for open source, embedded, department, and enterprise applications, or you can just choose Actuate BIRT and have all appropriate software, both open source and commercial, to do open source, embedded, departmental, and enterprise types of applications.

Again, quite a marketing luxury position for our firm to be in 2009 and beyond.

If you move to the Slide 9 you will see basically the same slide but it also shows you that we have, for the very low end of the market, again very voluminous however not extremely valuable from a commercial standpoint, a very friction-lift, self-serve orientated way of getting a hold of the products, working with the products and leaning and supporting your use of the products. And that's down on the lower left.

On the upper left you will see that we are engaging with global partners, whether they be OEMs, ISVs, bars and systems integrators, to do more of the embedded departmental types of applications, leveraging, BIRT along with the appropriate Actuate software for that application while we continue to focus on the right, which is a very effective and efficient direct sales model in our mission to create sort of a brand new way of doing business as a small- to medium-scale enterprise software company that is extremely attractive to shareholders.

And again, if you look at some of profitability picture, hopefully you will see early signs of why those profits are moving up. This schematic really has a lot to do with why those profits are moving up and why Actuate is in a very unique stand-alone position as an enterprise software company that has commercially available software as well as open source software, allowing us this new type of model that will not be available to any others that don't have open source offerings.

Moving on, we thought it would be good to give you a little bit of a view as to the size of the market from Forrester Research. And this particular schematic here on Slide 10 shows you that the Web 2.0 application market is going to be roughly a billion dollars of markets in 2009. The intriguing part of this for us is that it grows to $4.5 billion over the next four years by the end of 2013.

The other real intrigue for us is that it shows the Web 2.0 applications broken down by intranet and externet types of applications. As you know, when you invest in Actuate, one of the unique facets of our investment is that we have a technology stack that is very, very appropriate for externet applications. And just by the way, during Q1 we again had a very well balanced quarter where we did roughly 50% of our revenues from outside the firewall types of applications.

But you will see, per the schematic, that the externet apps continue to grow even faster than the intranet apps which bodes extremely, extremely well for Actuate since it's a unique facet that we bring to the BI market.

Thus, we look at this and say that we are extremely well aligned on a going forward basis because of the externet orientation. Of course, if you are talking about externet applications you are talking about selling into IT, which is what we've done for the last decade and a half and this is also associated with large global enterprises spending in the Web 2.0 marketplace, which is by design who we focus on, very large global 9000 companies that have substantial repeat buying habits associated with both license and maintenance.

So again, we did want to share with you a little bit of data associated with market size and trajectory and how we uniquely fit in pursuit of that market.

Moving on to Slide 11, which is going to be my wrap up slide. I hope you realized, based on the outcome of Q1 that what you have invested in or potentially can invest in is an extremely solid business and we stay committed to a very solid business regardless of economic conditions. I will tell you economic conditions continue to be tough and thus we're quite please with the outcome of Q1.

So what you should look forward to and expect from us on a going forward basis is an extremely solid maintenance base, due to the mission-critical types of applications that we enable for our clients. As I've said many times before, they are not the luxury items that are easily sort of circular files when you're looking to save money.

Number two, you should expect the BIRT-related business to increase by 30% or greater year-over-year in 2009. That will be approximately $20.0 million of BIRT-based business in 2009 from the $15.4 that we did in 2008.

You should continue looking to management to drive best-in-class non-GAAP operating margin, and as you know, for offset is defined as 16% to 21% and you should continue to expect strong cash flow from operations and we believe we got off on the right foot with $5.4 million in Q1 of 2009.

So even though times are tough we believe that the business will stay at Actuate Corporation and when it upticks—and again, there's no prediction on when it upticks—we'll be more ready than the vast majority of folks in order to capitalize on that.

So that's my wrap up and now I would like to hand it over to Dan.

Daniel A. Gaudreau

So I'm on Slide 13. This is a view of the first quarter non-GAAP P&L . total revenues for Q1 were $29.3 million, essentially flat with Q1 of 2008.

License revenues totaled $8.8 million, an increase of 15% versus the first quarter of 2008. We had very good performance in the U.S. and not so good internationally, as I will discuss in a minute.

Maintenance revenues were up 4% year-over-year and now constitute 63% of total revenues.

We had poor results worldwide in professional services revenues as customers continue to cut discretionary spending or bring the work in-house.

We have taken significant cost-reduction action across all functions of the company and have reduced year-over-year quarterly operating expenses by $3.4 million, of 12%. The result is reflected in significantly higher operating income, margins, and earnings per share.

As you can see, we were to post a $5.1 million operating income in Q1 2009 and this represents an operating margin rate of about 18%, the highest Q1 we've had and we continue to be best-in-class for software companies our size.

Higher operating income in Q1, along with a significant decrease of outstanding shares, have produced a 350% year-over-year increase in non-GAAP earnings per share to $0.09.

Slide 14. This chart depicts the year-over-year quarterly revenue performance in North America compared with the international markets. As you can see on the left side of this chart, license, service and overall total revenue performance in North America was strong, despite continued concerns about the U.S. IT spending environment.

Specifically, license revenues increased 52% to $7.0 million, services revenues were up 5% due primarily to maintenance revenue growth and as a result total revenues increased 16%.

We continue to see weak demand for product and services in the international markets, as shown on the right side of this chart. License revenues are down 40%, services down 31% due to a significant decline in professional services activities, and total revenues were down 34% year-over-year.

I should point out however that the decline in the Euro and the British pound had an approximate $1.0 million impact on international and total company revenues.

Slide 15. Other Q1 highlights. I am going to repeat some comments due to their importance. As I mentioned before, North America revenues grew 16% year-over-year with strong license growth at 52%. International demand continued to be soft. Total revenues declined by 34% with a resulting international mix of 23%. That's the lowest we've seen in several years.

We closed transactions greater than $100,000 with 62 customers. That's down from the 68 we reported in Q1 of 2008 but our average order size was up 24% to about $325,000.

We also closed 2 transactions in excess of $1.0 million, both in the financial services sector. This compares with 1 deal a year ago.

Non-GAAP services margins hit a record 78% in Q1, a 500 basis point improvement from a year ago. The margin is obviously the result of our maintenance and support content.

Non-GAAP operating margins for Q1 was 17.6%, a 10.8% increase year-over-year.

Operating expenses were significantly down from a year ago and we will continue to hold headcount and expenses in check.

Non-GAAP earnings per share for Q1 totaled $0.09, a 350% increase from the $0.02 reported a year ago. The increase was primarily the result of stronger operational performance, as well as a lower share count.

Slide 16. Our balance sheet continues to be healthy. We ended the quarter with cash and investments totaling $63.2 million. That's an increase of $4.8 million from December 31, 2008.

Accounts receivable ended the quarter at $24.5 million, down $3.5 million from year end 2008 primarily due to Q1 seasonality.

Deferred revenue totaled $42.6 million, a decrease of $800,000 from December 31, 2008, also due to seasonality and reduced professional services activity.

Next slide. Cash flow from operations totaled $5.4 million for Q1 2009. This is the result of our continued focus on cost control and profitability.

Days sales outstanding ended the quarter at 75 days compared with 78 days at year end 2008.

And we also ended the quarter at 526 employees. That's down 16 from year end 2008 and down 58 from a year ago.

We are reiterating the selected guidance that we provide you last quarter, specifically, 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 high at above 90%.

We expect non-GAAP operating margins in the 16% to 21% range and we have already obviously started off quite well in Q1 with a 17.6% number. Earnings per share to increase year-over-year and we expect continued positive cash flows.

This is a view of our long-term operating model. We believe that our open source strategy will allow us to significantly increase our operating margins. We believe that out of $250.0 million to $350.0 million run rate, or double our current size, we would be expect to be able to increase our operating margins by at least 50%.

Operating margins in the range of 30% to 50% will be realized primarily as a result of productivity improvements and sales and marketing.

And the final slide, Slide 20, we will be attending two conferences in Q1. We will be presenting at the JMP conference in San Francisco on May 20 and we will also be attending the UBS conference in New York City. I'm not sure of the day we will be presenting but it's being held June 9th and 10th.

So that wraps up our formal presentation and now we will open it up to the floor for questions.

Question-and-Answer Session

Operator

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

Andrew Lee for Nathan Schneiderman - Roth Capital Partners

Could you explain why G&A expenses were up so much in Q1? Were there any one-time expenses we should know about?

Daniel A. Gaudreau

It's primarily a timing issue on accounting fees. They were much higher back-end loaded I would say, so they hit in Q1. Accounting and Sarbannes-Oxley fees.

Also, our legal fees are up year-over-year as we continue to pursue non-compliant customers legally.

Andrew Lee for Nathan Schneiderman - Roth Capital Partners

Why was the maintenance down sequentially? Could you also break out the FX impact on the maintenance revenue line item?

Daniel A. Gaudreau

I believe the FX impact was about $600,000 on maintenance alone. It's not unusual to be down sequentially from a Q4.

Andrew Lee for Nathan Schneiderman - Roth Capital Partners

So you were expecting the sequential decline in maintenance?

Daniel A. Gaudreau

Yes. You should expect, like we said before it will on a year-over-year annualized basis, it should grow.

Andrew Lee for Nathan Schneiderman - Roth Capital Partners

How is the linearity in the quarter. How much of as a percentage of the license revenue was book in January, February, and March, and also how does the month of April look so far?

Daniel A. Gaudreau

We experienced normal linearity. I don’t have the exact number but it's probably 20/20/60.

Andrew Lee for Nathan Schneiderman - Roth Capital Partners

Could you share the size of the million dollar license deals and how large was the largest deal.

Daniel A. Gaudreau

No, we don't do that. We only tell you how many million-plus. We don't quantify the exact size, nor do we mention the customer.

Operator

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

Kevin Liu – B. Riley & Company

Typically Q1 has been one of the weaker quarters for license revenues so should we expect that seasonal trend to hold where Q2 is actually stronger than Q1?

And also, as you look at the pipeline, entering this quarter, how does it compare to what you saw coming into Q1?

Peter I. Cittadini

Really, the pipeline is the only thing we can comment on since we're not giving a license forecast. And you have known us for quite a number of years and pipelines have always more than adequate to accomplish what we need to accomplish from a business plan standpoint and that's the way I would characterize pipelines.

Kevin Liu – B. Riley & Company

And then on the sales and marketing line it looks you have done a good job bringing that number down. As we move through this year, any investments you see that are necessary either to kind of expand on the presence or anything we should expect to take that number out further.

Peter I. Cittadini

Nothing substantially or materially. I think we have enough within that line item that if investments need to be made, they would primarily be moneys that get moved around within the line item itself.

Certainly as we get into the year and sales reps get into their accelerators and things of that nature, there would be an uptick directly associated with the commission line, but from a personnel standpoint, I think we're pretty close, if not there.

Kevin Liu – B. Riley & Company

And then going to your long-term model, when you look at the doubling of the revenue size, how much of those revenues would you anticipate BIRT to comprise, at that point.

Peter I. Cittadini

If you look at us at a $250.0 million top line I would say the vast majority would be BIRT at that point in time. And it would just a swag on what the vast majority is defined as because a lot of these applications, as you know, are mission-critical applications that people have done with the RD Pro. I'm sure that's going to continue to be ticking and people are going to be paying maintenance renewals on those for many years to come. but as far as the lion's share of what the new applications consist of, at that point in time it will be primarily BIRT.

Operator

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

Frank Sparacino – First Analysis Corp.

On the BIRT transactions, I think, Pete, you said it was greater than 130. I was wondering if you could give us the year-ago comparison and then also maybe provide some color on the average order size in the BIRT business.

Peter I. Cittadini

I think the average order size is staying about the same because again, the revenues primarily consist of the add-on commercial products that are enabling the BIRT-based applications, so the developer workbench is free.

And off the top of my head, the 130 compares to somewhere in the range of, I think, maybe 60 to 70 a year ago. So moving in the right direction.

Frank Sparacino – First Analysis Corp.

And on the services size guys, I'm just curious if we can get any lower in terms services revenue.

Daniel A. Gaudreau

Do you mean professional service?

Frank Sparacino – First Analysis Corp.

Yes.

Daniel A. Gaudreau

Margins will sky rocket. What a wonderful world. Everyone knows BIRT, loves BIRT, thus we have no proprietary knowledge that's required to have success with Actuate software.

Frank Sparacino – First Analysis Corp.

Do you envision some kind of floor around where we're at today or is that not a fair assumption on my part?

Peter I. Cittadini

That's a speculative assumption I think. With any manpower business, especially in economic times like today, I would love to take credit that it's all BIRT and the mainstream aspects of BIRT that are dwindling the line. There is some of that, but, boy, are people reticent to spend money on the manpower side of the technology business these days.

What used to be $35 an hour blended rates for off shore is not like a $20 blended rate. Everyone is really, really being squeezed.

Daniel A. Gaudreau

I presume you are seeing that in many other companies.

Frank Sparacino – First Analysis Corp.

I think that's true.

Peter I. Cittadini

So could it be lower than it is today? I would have to answer yes. Do we expect it to be lower than it is today? Hopefully not, but we don't know for sure.

Frank Sparacino – First Analysis Corp.

I would just be curious, on the financial services sector, which obviously you performed well, being greater than the 50% of revenue, but my recollection, and maybe it's wrong, is that that number has been lower the last few quarters but any comments there would be helpful.

Peter I. Cittadini

I think we probably hit like some mid-to-low 30 quarters last year, similar top line or quarterly numbers and things of that nature. I don’t know what to say about that other than we primarily are still doing repeat business per our business model with financial services companies on a global basis that know us quite well, have a substantial Actuate infrastructure already built out and invested in, and if they're really looking to curtail costs associated with automation initiatives probably quite smart for them to turn to what's already there versus looking at other alternatives where they don't have a sort of sunk investment through years in the past.

So I would assume any current customer is going to be a great prospect for driving revenues at Actuate on a going-forward basis and I think it's simply that as far the outcome associated with the financial services sector.

Operator

Your next question comes from Patrick Walravens – JMP Securities.

Patrick Walravens – JMP Securities

Forgive me if I missed this at the beginning, but can you give us a little more color on what you see going on internationally? Maybe in terms of the different regions and then maybe just sort of anecdotally.

Peter I. Cittadini

I will give you a top level macro and Dan will delve into a little bit more detail. It is sort of funny, when there is economic downturns, for any you that have European ancestry or European parents like I do, I mean, people can sort of shut down purchases and live extremely efficiently for an extremely long time. It's just part and parcel of the culture and the way they think.

And I really believe at a high level macro environment, we are seeing a lot of that. They are in a world of hurt, just like Americans are, but there natural tendency and initial reaction is to sort of pull back and not spend a lot of money and try to do things as best they can, without spending a lot of money. And Europe is just notoriously good at doing that. I guess the Japanese market has done that for well over a decade and haven't come out of it yet. So at a macro level, it's a little bit concerning.

Now, I think Europeans and the EMEA market will pull out in time. But unlike Americans that are immediately looking for a way where they can start spending again because they're uncomfortable not spending, I don't think markets outside of the U.S. are that comfortable figuring out a quick way to start spending again and immediately reengaging.

So it's pretty interesting. It creates some interesting business dynamics and challenges but I'm sure we're going to sort it out, as good if not better than most.

Daniel A. Gaudreau

The only other color I guess I would add is, like I said, there's probably a million of FX impact on that decline, number one. And number two, it wasn't an issue in the U.K. on a quarter-over-quarter. The U.K. actually performed quite well. It was all other geographies and regions.

Patrick Walravens – JMP Securities

What impact—so you were at the [inaudible] conference and Oracle is now Sun. That's a pretty big shift in the landscape and I'm wondering what impact you think that might have on open source.

Peter I. Cittadini

I think it is very positive for us unless Oracle intends on killing the Java part of the acquisition, which I believe is one of the main reasons why they pulled the trigger on the acquisition. I mean, just speaking specifically on what I think Ellison is trying to accomplish, I really believe he wants to take on IBM and he wants to be a full service enterprise supplier like IBM is that has all aspects of what you need in the technology facet.

But as far as the open source and Java piece, I'm certain he's committed to the future of Java, which is the most relevant of what's transpired to us and our future. As far as whether he deep-six MySQL or tried to convert out MySQL for Oracle, it would be interesting to see what he figures out, is the strategy there, but I think we would be fairly benign to that since we can crank out great applications regardless of what the underlying repository is, whether it be MySQL or Oracle.

Operator

There are no further questions in the queue.

Peter I. Cittadini

I think that wraps it up for the end of Q1. We look forward to seeing you 90 days from now or thereabouts. And again, thank you for your participation and hopefully we see you at some of the shows during the course of Q2.

Operator

This concludes today’s conference call.

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