Actuate Management Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 1.13 | About: Actuate Corporation (BIRT)

Actuate (NASDAQ:BIRT)

Q2 2013 Earnings Call

August 01, 2013 5:00 pm ET

Executives

Thomas E. McKeever - Chief Compliance Officer, Senior Vice President of Corporate Development, General Counsel and Secretary

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

Daniel A. Gaudreau - Chief Financial Officer, Principal Accounting Officer and Senior Vice President of Operations

Analysts

Greg McDowell - JMP Securities LLC, Research Division

Kevin Liu - B. Riley Caris, Research Division

Shebly Seyrafi - FBN Securities, Inc., Research Division

Frank Sparacino - First Analysis Securities Corporation, Research Division

Cindy Wang

James N. Gilman - Drexel Hamilton, LLC, Research Division

Operator

Greetings, and welcome to the Actuate Software Corporation Second Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Tom McKeever, Senior Vice President and General Counsel. Thank you, sir. You may begin.

Thomas E. McKeever

Thank you very much. Good afternoon, everyone, and welcome to Actuate's quarterly conference call. Joining me to discuss our Q2 results is our President and CEO, Pete Cittadini; and our SVP, Operations and CFO, Dan Gaudreau. Earlier today, we posted a copy of our financial press release and earnings call financial slides for Q2 on the Investor Relations portion of actuate.com.

During this call, we will be making projections and other forward-looking statements regarding our expectations, beliefs, hopes, intentions or strategies regarding our expected future financial results and business opportunities. Our actual results may be very different from our current expectations. We encourage you to read the Qs and Ks that 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 through. We do not currently intend to update these forward-looking 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 the earnings call financial slides, which show our reconciliation from GAAP to non-GAAP financial measures.

Now I'd like to turn it over to Pete.

Peter I. Cittadini

Okay. Thank you, Tom, and welcome, ladies and gentlemen, to the Actuate Q2 2013 Earnings Call. For those of you that are going to be following along with the slides, my presentation and commentary is going to actually start on Slide #4.

So let's look into Actuate's Q2 2013 performance. It was a very solid BIRT performance. Q2 revenues were $34.9 million, down 4% year-over-year. This was due to declining performance of Actuate's legacy business, both license and maintenance. This should not be a surprise to anyone since we've stated that within our transition period from legacy to BIRT, legacy revenues will be under pressure and thus, less predictable. There will be both negative quarters and some positive quarters with regards to our legacy business until the crossover point in maintenance is reached. Dan Gaudreau will have further comments regarding this reality of Actuate's business a little bit later.

Our barometer, however, for Actuate's future health is license revenues, more specifically, BIRT and BIRT iHub license revenues. Here, there have been no surprises in the past several years. The business continues to march up into the right on an annual basis, and we will continue to focus on growing this license revenue in the coming quarters and years.

The second bullet on the slide, the Q2 license revenues were $16.2 million, that is up 3% year-over-year. And if you strip out the $1.18 million of Oracle settlement quarterly license revenues which ended in Q1 of 2013, Actuate's Q2 license revenues were up 11% year-over-year. As a matter of fact, outside of Q3 of 2010 where we had an $8.8 million license anomaly from an IBM settlement, Q2's performance at $16.2 million is the strongest license performance for Actuate in a decade.

Moving on to the bullet with regards to EPS. Our non-GAAP fully diluted EPS for the quarter was $0.09. And finally, we had a very solid cash flow from operations at $4.5 million.

Moving on to Slide #5. You'll see, once again, the sort of blue-chip logos that continue to do business with Actuate around the globe. And you'll notice for the logos that we continue to have strength in our business, associated with OEMs, the financial services sector and the government sector.

Moving on to Slide #6. Let's talk a little bit about Actuate's unique hybrid enterprise and Open Source model, which seems to be working quite well. Again, we don't give quarterly guidance or that much color on a quarterly basis associated with the BIRT business and the BIRT iHub business. However, we did want to attempt to give you a bit more color associated with that business within the confines of Q2.

As far as the iHub business is concerned, year-over-year, we did experience double-digit growth, associated both with the overall iHub business and the license iHub business within the confines of the quarter. When we look to the BIRT metrics -- and again, before I get to the BIRT metrics, the iHub is the server technology with which you sort of deploy, administer and manage a BIRT-developed application. But now, if we look at BIRT metrics themselves, and that's what's being driven by the BIRT-interactive development environment that's used by over 2.5 million developers on a worldwide basis, we had record BIRT license business within the confines of the quarter.

Then I will give you additional color that is not on the slide, because I think we've made this number public before. But if you go back to Q1 of 2011, we did approximately $6 million in BIRT license revenues, and that was a record back then. And I will tell you, I do recall that the makeup of the $6 million was primarily a very substantial order for a customer facing application with a very large global bank.

The great thing about Q2 of this year being a record associated with BIRT license revenue, there was no such sort of anomalous deal associated with the outcome of the record BIRT license business.

Also, when you look at BIRT license business from Open Source BIRT users, again, another record. And we beat the previous record by more than $500,000 within the confines of the quarter. We had average -- we had record average license order sizes, again, from these Open Source BIRT users, and I will tell you that the figure is in a substantial 6-figure territory.

And then finally, our continued investment in birt-exchange.com, and thus attracting more of the Eclipse foundation BIRT users over to an Actuate asset continues to move up and to the right, this quarter having in excess of 106,000 total registrants on birt-exchange.com.

Moving on to Page #7 or Slide #7. We've also been very busy making some fairly serious changes in the organizational structure associated with the sales force. These changes here really meant to drive growth and efficiency in pursuit of that growth. And as some of you know, we're on a sales year where we start our sales year July 1, and it ends June 30. And this year, as I said, we've made some substantial changes that I'd like to sort of review with you as part of the slide. We've really got into focused sales forces, so we can ultimately really throttle up the growth aspects of the BIRT and the BIRT iHub business. Thus, we have BIRT-only enterprise and OEM groups of sales representatives that are pursuing those 2.5 million developers when there's an enterprise-level project and/or OEM to pursue and monetize. Again, this is the first time that we've ever done a sales force that has nothing more than a BIRT-only license quota. And we're pursuing it with out of our 70 budgeted heads of sales representatives, 40 of them are focused on pursuit of BIRT and BIRT-based applications, both on the direct customer side and on the OEM side exclusively. We think this is going to drive dramatic increase in productivity over time.

As you know, we also did an acquisition last year of a company called Quiterian. That technology has morphed into BIRT Analytics. It, indeed, is a very interesting and unique product that allows capabilities that couple together Qlik and Tableau with a SAS and SPSS. It sort of brings together the best of both worlds from an ease-of-use and visualizations standpoint, as well as a statistical analysis standpoint. So easy-to-use product with virtually limitless data coming into that easy-to-use user interface. It is sold to business users primarily, though one of Actuate's unique facets of BIRT Analytics, it can be applied to the data being sort of delivered by a BIRT application, with sort of a new genre of the analytics called applied analytics.

But before we get to the sort of the new and very unique emerging markets, we decided that we would dedicate a group of sales representatives on a global basis to pursue business users that are also looking at evaluating products, like Qlik, Tableau, SAS and SPSS. And out of the 70 heads there, we're allocating 8 sales representatives on a global basis with nothing but a BIRT Analytics quota. And again, focusing on their endeavors, not necessarily on the 2.5 million developers of BIRT on a global basis, but business users within the enterprise.

Moving further down the page. I'm sure all of you remember Xenos Corporation that we acquired several years ago. Well, that group is being sort of rebranded the Actuate Content Services group, and it focuses on pursuit of content, architects and managers that create and manage customer-oriented statements for such applications. And there were dedicating 14 sales representatives on a global basis to pursue that market. And that market is indeed tied in with BIRT and the BIRT iHub from a composition in a sort of management, administration and archiving standpoint.

And then the final group, which may sound different to all of you, is an iServer group, and this goes after our legacy iServer customers. And the scenario there is to really focus on maintaining and retaining those cash flows from our legacy install base, both license and primarily, maintenance, for as long as we can with efficiency. And allow those installations incentives to look at and utilize our new BIRT and BIRT iHub technology. However, that group will be quoted with solely legacy iServer product quotas. And the size of that group out of the 70 sales representatives is also the number 8. There'll be 8 sales representatives within the iServer group that pursue and focus on retention of license, maintenance renewal and ultimately, cash flow from that legacy environment that we've built up over the past 1.5 decades, and also to incent them to look at and utilize BIRT in subsequent project initiatives.

So out of the 70 budgeted, the breakdown is 40 associated with BIRT only, 8 associated with BIRT Analytics, 14 associated with the Content Services group and its technology formerly known as Xenos and 8 focused at the legacy install base, customers and projects associated with that.

Before I hand it over to Dan for the financial details, let me reiterate my confidence in our BIRT and BIRT iHub business, and our confidence in that business to grow our license revenue in the future while maintaining best-in-class operating margins defined as 20%-plus.

And with that, over to you, Dan.

Daniel A. Gaudreau

Thanks, Pete. I'm on Slide 9. License revenues for the quarter totaled $16.2 million, an increase of 3% year-over-year. This performance was driven by another solid quarter of double-digit BIRT iHub license revenue growth. As you may recall from our Q1 conference call, the quarterly revenue stream of $1.3 million from a previous legal settlement with Oracle ended Q1 '13. For Q2, on a comparable basis, excluding Oracle from the second quarter of '12, license revenues increased 11%.

Services revenues of $18.7 million declined $1.8 million or 9% from a year ago. The decrease was primarily due to back maintenance transactions and some premium extended end-of-life contracts in the second quarter 2012 maintenance revenues that did not recur at the same level in Q2 2013.

On a more positive note, the dollar value of maintenance contract declines was the lowest level since Q1 of 2011. More significantly, the decline rate in the legacy e.Reports product hit 12%, the lowest level since the second quarter of 2011. So for baseline, "baseline maintenance revenues", this is another solid flat point that indicates the cross over to positive growth is approaching.

In summary, total revenues aggregated $34.9 million, down 4% compared with the second quarter 2012, but flat sequentially. Although license revenues continued to grow despite the end of the Oracle settlement revenue stream, this growth was more than offset by a decline in services revenues.

Non-GAAP operating expenses totaled $28.6 million in the second quarter, and that's an increase of $1.4 million or 5% year-over-year, primarily driven by our continued investment in sales, marketing and R&D, as well as the impact of the Quiterian acquisition which was closed October 16, 2012. Non-GAAP operating income totaled $6.3 million with a corresponding margin of 18%, and non-GAAP earnings per share were $0.09.

Slide 10. This chart shows the historical and projected current year revenue trends segregated between the legacy e.Report product and the modern BIRT iHub product lines. As a result of significant license revenue growth in the iHub products, as shown in the lower left-hand chart, both license and total iHub revenues have surpassed e.Reports. And as we have stated on several previous occasions, services revenues are approaching parity for both product lines. And it appears that based on current trends, iHub's services revenues will surpass e.Reports in the fiscal year 2014, as indicated on the lower right chart.

Slide 11. Some other metrics. The North America international split of revenue was 77%, 23%, respectively. We saw total revenues in EMEA increased 2%, driven by a 40% increase in license revenues. We saw weakness in APAC and flat overall revenues in North America, when adjusting second quarter a year ago for the Oracle settlement revenue.

We booked orders greater than $100,000 for 71 customers. This compares with 73 a year ago. We booked 3 license transactions greater than $1 million. This compares with 2 a year ago. Of the 3 in the second quarter this year, 2 were BIRT, 1 OEM and 1 direct, and the third deal was an e.Reports transaction.

We ended Q2 with 624 employees. That's up 55 from a year ago. The increase was driven by the Quiterian acquisition, as well as our investment in sales-generating personnel. Our sales rep count was 72 at the end of the quarter. We were at 62 reps a year ago.

Next chart. In terms of the balance sheet, cash ended the quarter at $74 million. That's an increase of $7.5 million from 12/31/12, but down almost $7 million from a year ago. The increase during the first half of 2013 was primarily the result of operating profit, higher accounts receivable collections and cash from option exercises, partially offset by a $10 million in stock repurchases.

Accounts receivable ended the quarter at $26.6 million, down $6.5 million from 12/31/2012, but up almost $10 million from a year ago. As a result of strong collections and lower accounts receivable balances in the first half of '13, DSOs ended the quarter at 69, down 16 days from 12/31/12. DSOs were up 27 days from a year ago due to the second quarter a year ago being a record cash collection quarter resulting in unusually low DSOs. Our normal DSO range is in the 60 to 80-day range.

Deferred revenue ended the second quarter 2013 at $44.3 million, that's up approximately $3 million or 7% from a year ago. Once again, I believe this is another indication that the crossover point where maintenance revenue growth turns positive is getting close.

Cash flow from operations in the second quarter totaled $4.5 million, bringing the first half to $14.1 million. And it appears we should have another $20 million-plus cash flow year.

Next chart. Some comments regarding the rest of this year. We've added 55 employees over the past 12 months, 26 from the acquisition of Quiterian and the remainder from increased hiring sales, generating heads and developers. We have realized solid 9% license revenue growth in the first half of 2013, driven entirely by the BIRT iHub. Assuming that macro conditions remain stable, we still expect full year license revenue growth to hit 10% or greater. As a reminder, relative to 2012, we need to overcome a $4 million or 6% negative impact on license revenue as a result of the revenue stream from the Oracle settlement ending Q1 2013.

Even though Q2's operating margin came in at 18%, it is still our objective to maintain annual operating margins at 20%-plus. We will do this by focusing on productivity while growing the top line. And as I mentioned before, legacy revenues will continue to decline, which should be offset by growth in BIRT iHub revenues.

In today's press release, we announced another large share repurchase program. This will be a $40 million, 12-month repurchase program in accordance with the guidelines specified under rule 10b5-1 of the Securities Exchange Act of 1934.

And the final slide. In a couple of weeks, Pete and I will be attending Oppenheimer's Internet & Communications Conference in Boston. If you're attending, we look forward to seeing you on our one-on-one schedule.

Thank you. That concludes the formal remarks. We'll now open it up to Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Greg McDowell of JMP Securities.

Greg McDowell - JMP Securities LLC, Research Division

Great. Pete, I really did appreciate the breakdown of the sales force and where they're going to be focused. I was hoping you can talk a little bit about whether these sales reps will also have sales renewals under them, or are these strictly sort of hunters going after new license revenue? And maybe specifically, also talk about legacy because I know a lot of that is existing business.

Peter I. Cittadini

Okay. Yes, as far as the BIRT reps, they will be primarily hunters when associated with pursuit of new projects. Obviously, the over 5,000 customers will be available to them to call upon, but the majority of the projects that they will be doing will be net new projects associated with BIRT as the IDE and BIRT iHub as the deployment vehicle for the application layer. With BIRT Analytics, that is all hunting since it's a brand-new product line for us, and some of the BIRT Analytics reps are not in place to date. We need to swap out a few skill sets, if you will, from IT-oriented sales representatives to more business user-oriented sales representatives, but that is in process. As far as the Content Services group, that is formerly Xenos and InTec [ph], and they are doing Content Services business that is both expansion of current projects and pursuit of new projects within the customers base and beyond the customer base into new prospects. And then finally, the iServer group. As you know, we haven't been proactively selling the legacy technologies. Thus, part of the focus on growth and efficiency is not to have a bunch of people scattered around, chasing sort of old stuff, new stuff and everything in between. This group is going to be primarily focused on projects that have been in existence for, I would, say many years. At times, as you know, some of those projects require expansion because of more content and/or more content being served up to more users. So there is an incremental license revenue quota associated with being a sales rep within the iServer group, but they're really not pursuing new projects per se. They do have part of their compensation scheme where they're able to sort of get a referral fee, if you will, if they can bring in any of the other sales representatives associated with the other focuses in -- on their project people that they're working with, for BIRT, BIRT Analytics or BIRT Content Services.

Greg McDowell - JMP Securities LLC, Research Division

That's helpful. And maybe one for you Dan. It sounds like Europe was really strong in the quarter. And I was wondering if the $1 million-plus deals you've talked about were mostly Europe-based? Or what was really driving the strong license growth out of Europe?

Daniel A. Gaudreau

Yes. Actually, one was in Europe, Greg. The other 2 were domestic. And yes, that's primarily what drove it. If you were to exclude that deal, it would be about flat, license.

Operator

Our next question comes from the line of Kevin Liu with B. Riley & Co.

Kevin Liu - B. Riley Caris, Research Division

First question here. Just in terms of the sales force changes that you talked about earlier, I mean, it sounds like the Xenos group isn't really disrupted at all. But how much disruption are you factoring in, just from either kind of name the current changes and the like, and just getting people into the proper group?

Peter I. Cittadini

Well, getting them in the proper group is already done. We had our sales kick off on a global basis in Los Angeles a couple of weeks back, so everyone knows what their assignment is, what their territory is, what their account grouping is. Really, the only thing we need to focus in on is getting up to speed with the right sales representatives associated with the BIRT Analytics group. That's very business user-focused. I think everyone is really excited about the pursuit of enterprises and OEMs with BIRT and BIRT only because since it's much more targeted and much more focused. When you wake up in the morning, there's clarity with everything that you're supposed to be doing. So it all works out extremely well. And again, as I said, our reps are quite enthusiastic. Management, even more so.

Kevin Liu - B. Riley Caris, Research Division

Got it. And specifically to the BIRT Analytics product. I guess, is there any additional development required to really make that product ready for the market? And if not, could you also talk about the level of pipeline build that you've seen for it?

Peter I. Cittadini

Yes. Well, I'll take the latter part of the question first. The pipeline is very strong. As a matter of fact, from past acquisitions that we've done where the acquisition came with 0 revenue associated with it, the BIRT Analytics group and product really has hit the ground running better than any of the former acquisitions that we've done from a new technology standpoint where it came with virtually 0 revenue. It was a good contributor to the quarter. I will tell you that it did not break 7 figures, if you will, in its contribution. But it did a very, very good job in sort of its debut quarter. We really do believe that the focus is going to help drive the revenues into the substantial 7 figures on a quarterly basis in the coming quarters and years. As far as what needs to be done with the product, it is very innovative and unique in the market. It sort of sits between the 2 ends of the spectrum from an ease-of-use standpoint and a heavy-duty sort of statistical and analytical standpoint. It's real claim to fame is ease-of-use with no limitations on data, so it really curtails very nicely into the market of Big Data analytics. However, of course, it is a new product for us. The initial work that we're doing on it is UI work and integration in with the iHub. The iHub integrations, not that tough and should be done in a relatively short period of time, I'd say, within the next 2 to 4 months. But they'll be sort of forever innovation associated with the user interface in that product.

Kevin Liu - B. Riley Caris, Research Division

Okay. And one last question for Dan here. Just with respect to the services line, how much of that was professional services versus maintenance?

Daniel A. Gaudreau

Professional services, 1.7. Maintenance, 17.1, if you round up.

Operator

Our next question comes from the line of Shebly Seyrafi with FBN Securities.

Shebly Seyrafi - FBN Securities, Inc., Research Division

So going along the lines of what you're in again, you're going to have 8 salespeople in the Analytics group, and that's around 11% of your revenue. So I'm wondering, you have less than $1 million so far in revenue per quarter. Are you targeting, perhaps, 11% of revenue in the next few years from Analytics, which might imply with my model, around $15 million or so in the next 2 to 3 years per year?

Peter I. Cittadini

Dan, from a percentage standpoint. I think it's a bit -- it's less than 11% in sales, year '14. So again, we'll throw you for a loop here. Just stop wind for a little bit because we're going to be talking sales here for a second here, but I believe it is under 11% for year 1. As far as where it evolves to in year 2 and year 3, Shebly, this could actually be a very exciting product for us. As a matter of fact, when I was in front of the whole field organization in Los Angeles, it's sort of a wildcard technology for Actuate, where it could be a very, very sizable part of the company within a 5-year period of time because of its uniqueness. And as you know, from other people that are primarily analytics companies and analytics products, they are doing quite, quite well. The user interface, if we really evolve and get it right, which I believe we will, because the first phase of it is pretty outstanding, I think the ideal behind the BIRT Analytics products that people are going to love is sort of the limitless nature of the back-end data source and data sources that it can go after, which is a dramatic, dramatic sort of governor associated with all of the other products. The user interface, of course, makes it usable by a typical business user instead of a data scientist or heavyweight statistician. So you couple those 2 things together in unique facets associated with a market that everybody knows, is a real market, a virile market, and one that is just sort of hitting its stride of growth, especially associated with Big Data. And I could see analytics revenues in 5 years possibly being as large as 25%-plus of the overall company's license revenues, to tell you the truth.

Shebly Seyrafi - FBN Securities, Inc., Research Division

Well, that's feasible [ph]. Moving on to the quarters themselves, I know you don't provide quarterly guidance. But I'm wondering, over the past several years, your license growth or revenue, has reported typically, has declined sequentially in Q3. But there are some reports that -- in Americas, there was an improvement in IT spending in the second -- the back half of calendar Q2. I'm wondering if you saw that, too, which might help you break that normal seasonality for your license growth in the third quarter. What are your thoughts?

Peter I. Cittadini

Our thoughts on the macro IT spending is it's mediocre. As we've said before, there's enough there to get the job done, but it's not an ideal arena to be doing battle in. Even though we did post a good quarter associated with our international business, I think the international business is still going to be sort of tough-ish on a going-forward basis. And I think the North American business is sort of okay/mediocre. So I do believe that there will be seasonality associated with our Q3. That's what we're planning for. But we really won't know until September 30.

Shebly Seyrafi - FBN Securities, Inc., Research Division

Okay. And last one for me. The government vertical, how is that going for you? I'm hearing a lot of different things from different companies. Is that an area of increasing uncertainty? How did that work for you in the calendar Q2 and your go-forward outlook?

Peter I. Cittadini

Yes. We did some great transactions with the Department of Defense, specifically the Marines. We've done some international government stuff, the U.K. Secretary of State for Defence, we did a sizable transaction with them. I'd say I'm cautiously optimistic. I know a lot of people are sort of down on government, but for us, it's a sector that we have sort of unfair advantage because of budget costs and spending controls. The whole air covered, that Open Source brings us, is sort of a unique marketing campaign, if you will, that's very Actuate-specific that we can capitalize on that other competitors don't have Open Source offering cannot capitalize on. So I'd say that it's going to be cautiously solid. I'm not overly optimistic, but I'm not down in the dumps like many other software vendors are because of the cost and spending.

Operator

Our next question comes from the line of Frank Sparacino with First Analysis.

Frank Sparacino - First Analysis Securities Corporation, Research Division

Dan, I just wanted to confirm, was headcount down on a sequential basis? What was the figure in Q1?

Daniel A. Gaudreau

Headcount, Q1 was -- did I say it was down on a sequential basis?

Frank Sparacino - First Analysis Securities Corporation, Research Division

No.

Daniel A. Gaudreau

Headcount in Q1 was 620, so we're up 4.

Peter I. Cittadini

Flattish.

Daniel A. Gaudreau

Flattish. And December was 617.

Frank Sparacino - First Analysis Securities Corporation, Research Division

Okay. And looking at North America license revenue, I think, Dan, you said it was flat excluding Oracle?

Daniel A. Gaudreau

Yes, excluding Oracle. But we had a -- I have to admit that we had a tough comp in North America from a year ago. That was just tough comp. It was actually the highest license quarter of the whole year, and that's not typically our seasonal pattern, right? Q4 would usually be the highest license quarter. Q2 happened to be because of some large transaction, I think, in North America during that quarter. Tough comp.

Operator

Our next question comes from the line of Nathan Schneiderman with Roth Capital Partners.

Cindy Wang

This is Cindy Wang for Nathan Schneiderman. Could you tell us about rate [ph] sales disruption from significant changes in quarter structure?

Peter I. Cittadini

Cindy, we really don't expect any disruption at all. As a matter of fact, there is a bit of an elation within the sales force, because now that they're focusing on single targets with single product lines like BIRT and BIRT iHub, quotas have actually gotten to be a bit more modest for them. So everyone is excited, and we don't foresee any disruption associated with new quotas. Really only elation by the sales reps.

Cindy Wang

Okay. So in terms of 2014, is that hold up margin at 20% and grow as fast as possible, or expand the margin as revenue would increase?

Peter I. Cittadini

No, '14 is still going to be an investment year for us, so we're committing to 20%-plus from an operating margin standpoint and we'd like to reinvest the rest of the operating income into growing the business and making the right investments. We expect sizable margin expansion to happen in the years of '15 and '16.

Operator

Our next question is from the line of James Gilman with Drexel Hamilton.

James N. Gilman - Drexel Hamilton, LLC, Research Division

My question is -- 2 questions here. First is BIRT Analytics pricing. I don't know if you've talked much about that and how you might look at it, are you going to be -- what's the basis is going to be maybe usage, data usage. Can you comment on that, please? And I have another question.

Peter I. Cittadini

Yes. It basically boils down to a roughly 8K per user fee, James. You can also purchase it on an unlimited core basis. And there are some limitations associated with data where I think the smallest amount of data is 100 gig to be analyzed, something around that level. But when you normalize everything out, it's basically 8K a user.

James N. Gilman - Drexel Hamilton, LLC, Research Division

Okay. And a follow-up on that one before I ask the second question. So what I'm hearing is you're not necessarily basing pricing on the amount of data that's annualized, is that correct?

Peter I. Cittadini

The amount of data is factored in there. I don't have that pricing off the top of my head, James.

James N. Gilman - Drexel Hamilton, LLC, Research Division

Okay, okay. And the other one is, you talked earlier about the record average deal size coming from the Open Source product. How much of that maybe first-time orders? Or is that more of that they purchase a little bit, and then they've added on to a sub? Can you comment on that?

Peter I. Cittadini

No. Typically, we counted when it is the first time orders. So the majority of the Open Source to commercialization use, utilizing the commercial BIRT iHub, are typically new projects.

James N. Gilman - Drexel Hamilton, LLC, Research Division

Okay, great. And then a follow-up on that would be, percentage of these that you are already aware of, do they come and purchase, or these folks have downloaded the product, the Open Source version, maybe not necessarily aware of them tracking them and make and inbound call or purchase a product. Can you comment on that?

Peter I. Cittadini

Yes. I've said that we are aware of the vast majority of them. They downloaded it. They get used, in most cases, without our knowledge, but then they engage with us, and that's when the sales process sort of starts. It is a much more efficient sales process because they're looking for assistance with their BIRT-based application, which is exclusively points them to Actuate. But there is a sales process associated with that project before the transaction is closed.

Operator

Ladies and gentlemen, at this time, I would like to turn the call back to Mr. Pete Cittadini for any closing comments.

Peter I. Cittadini

Okay. Well, I just want to thank everyone for their attention during the earnings call. We hope to see you in Boston if you're going to be out at that show. If not, we'll be speaking to you in approximately 90 days. Thanks again.

Operator

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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