Progress Software Corporation F3Q09 (Qtr End 08/31/09) Earnings Call Transcript

 |  About: Progress Software Corporation (PRGS)
by: SA Transcripts


(Operator Instructions) Welcome to the Progress Software Corporation Third Quarter Earnings Conference Call. At this time I would like to turn the conference over to Mr. Bud Robertson.

Bud Robertson

This is Bud Robertson, Senior Vice President of Finance and Administration and Chief Financial Officer of Progress Software Corporation. Joining me today are Rick Reidy, President and CEO, Chris Larsen, Senior Vice President of Global Field Operations, and Dave Ireland, Executive Vice President. We have prepared a slide presentation to view during this call. The slide presentation can be found on the Investor Relations section of the Progress website by clicking on the live webcast icon.

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

There are several important risk factors which could cause actual results or events to differ materially from those anticipated by the forward looking statements contained in our discussion today. Information on these risk factors is included in our Securities and Exchange Commission reports. We reserve the right to change our budget, product focus, product release dates, plans and financial projections from time to time as circumstances warrant. We shall have no obligation to update or modify the information contained in our discussion in the future when such changes occur.

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

We reported this morning the following results for our third quarter fiscal 2009, which are reflected in the first few slides of the online presentation. On a GAAP basis, we reported the following. Revenue for the quarter decreased 6% from $126.6 million in Q3 fiscal 2008 to $119.4 million. Operating income for the quarter decreased 50% from $18.1 million in Q3 fiscal 2008 to $9.1 million. Net income decreased 56% from $12.5 million in Q3 fiscal 2008 to $5.5 million. Diluted earnings per share decreased 57% from $0.30 in Q3 fiscal 2008 to $0.13.

On a non-GAAP basis we reported the following. Non-GAAP revenue decreased 5% from $126.6 million in Q3 fiscal 2008 to $119.7 million. Non-GAAP operating income decreased 8% from $27.2 million in Q3 fiscal 2008 to $24.9 million. Non-GAAP net income decreased 13% from $19 million in Q3 fiscal 2008 to $16.5 million. Non-GAAP diluted earnings per share decreased 11% from $0.45 in Q3 fiscal 2008 to $0.40 this quarter.

The non-GAAP results in the third quarter fiscal 2009 exclude after tax charges of $5.8 million for stock based compensation $4.6 million for amortization of acquired intangibles, $0.2 million for purchase accounting adjustments for deferred revenue and a credit of $0.3 million for other adjustments. The non-GAAP results in the third quarter fiscal 2008 exclude after tax charges of $2.8 million for stock based compensation, $2.9 million for amortization of acquired intangibles, and $0.7 million for other adjustments.

The following operational analysis are presented utilizing our non-GAAP financial information. In reviewing the fiscal 2009 third quarter within the year over year revenue decrease of 5%, software license revenue was down 15%, maintenance revenue increased 4% and professional services revenue decreased 22%. With regard to the impact of changes in foreign exchanges rates on the third quarter total revenue in the third quarter fiscal 2009 would have been flat on a constant currency basis versus the 5% decrease reported.

Software license revenue would have decreased 11% on a constant currency basis versus the 15% decrease reported. Maintenance services revenue would have increased by 7% on a constant currency basis versus the 0% increase reported. As noted on slide nine, international business was 54% of the quarterly total as compared to 59% in Q3 of fiscal 2008.

Revenue from the OpenEdge product line decreased 18% to $67 million this quarter from $81.4 million in Q3 of fiscal 2008. Revenue from the Data Infrastructure line decreased 17% to $22.2 million from $26.7 million in Q3 of fiscal 2008. Revenue from the Enterprise Infrastructure product lines including the acquired Iona product line increased 65% to $30.5 million from $18.5 million in Q3 of fiscal 2008.

Revenue from channel partners including application partners and OEMs accounted for 54% of our total license business this quarter as compared to 49% in Q3 fiscal 2008. Within the OpenEdge product line partners accounted for 73% of our license business this quarter as compared to 69% in Q3 of fiscal 2008.

Our aggregate revenue backlog at the end of the third quarter of fiscal 2009 was approximately $170 million of which $144 million was included on our balance sheet as deferred revenue primarily related to unexpired maintenance and support contracts. The remaining amount of backlog of approximately $26 million was comprised of multi-year license arrangements of approximately $24 million and open software license orders received but not shipped of approximately $2 million.

Our aggregate revenue backlog at the end of the third quarter fiscal 2008 was approximately $172 million of which $147 million is included on our balance sheet as deferred revenue primarily related to unexpired maintenance and support contracts. The remaining amount of backlog of approximately $25 million was composed of multi-year license arrangements of approximately $23 million and open software license orders received but not shipped of approximately $2 million. We do not believe that backlog as of any particular date is indicative of future results.

Quarter end headcount of 1,852 was up approximately 8% from one year ago. The increase was primarily due to the acquisition of Iona in the fourth quarter of fiscal 2008.

Looking at slide 11, highlighting balance sheet information, our cash balance was approximately $187 million at the end of the quarter. Our accounts receivable, day sales outstanding (DSO) was 63 days at the end of third quarter down one day from one year ago and down five days from last quarter end.

During the third quarter fiscal 2009 we repurchased approximately 67,000 shares of our stock at a cost of $1.4 million. At the end of the third quarter there are approximately 9.6 million shares available for repurchase under our Board authorized share repurchase program that expires on September 30, 2009. A summary of our historical share buybacks is reflected in slide 12.

During the past few months there have been several significant announcements and developments. In July we announced that the Federal Aviation Administration (NYSEARCA:FAA) selected Progress FUSE products to provide the open source integration underpinnings for their System Wide Information Management (SWIM) Program. The selection of FUSE open source products allows the SWIM program to interoperate with many other existing vendor technologies already in use by the FAA.

Following extensive review of vendors and their offerings the FAA chose FUSE because of stability to easily plug and play into the FAA IT infrastructure and to accommodate different standards for service oriented architectures such as JBI and Web Services.

In August we announced that the Forrester Research had named the Progress Apama complex event processing (CEP) platform as a standout leader in The Forrester Wave: Complex Event Processing Platforms, Q3 2009 Report. In this detailed review of products, the Progress Apama platform received the top score in current offering and market presence. According to the report, Progress Apama earned high marks for its event processing features, its development tools, and its business end user tools, propelling it into its position as a leader. The Forrester Research report evaluated the strengths and weakness of nine CEP platform vendors based on a comprehensive set of evaluation criteria.

Yesterday we announced the appointment of Chris Larsen as our Senior Vice President, Global Field Operations. His appointment in this new executive role is part of our goal to provide a single integrated and customer focused enterprise level sales, services, and support organization globally. Reporting to Rick Reidy, Chris will be responsible for all company wide sales, pre-sales, alliance, technical support and consulting services. More information on these announcements and other announcements and upcoming events can be found on our website at

Looking to fiscal 2009 in the fourth quarter we are providing the following guidance:

For fiscal 2009 we expect GAAP revenue to be in the range of $487 to $490 million and we expect non-GAAP revenue to be in a range of $490 to $493 million. The non-GAAP revenue expectation includes adding back the purchase accounting adjustments for deferred maintenance revenue. Software license revenue is expected to be in a range of $172 to $174 million.

We expect revenue from the OpenEdge product line to be in a range of $271 to $274 million representing a year over year decline of approximately 17% to 18% with over one third of the decline attributed to year over year changes in exchange rates.

We expect revenue from the Data Infrastructure product lines which includes the DataDirect, DataXtend, DataServices, and ObjectStore products to be in the range of $99 to $102 million representing year over year change of approximately -2% to 1%.

We expect revenue from the Enterprise Infrastructure product lines which includes the Sonic, Actional, Apama, Artix, FUSE and Orbix Products to be in the range of $119 to $122 million representing year over year increase of approximately 40% to 43%.

We expect GAAP operating income to be between $47 and $49 million.

We expect non-GAAP operating income to be between $105 and $107 million.

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

We expect our effective tax rate to be between 37% and 38% for GAAP purposes and between 33% and 34% for non-GAAP purposes. The difference primarily relates to the tax treatment of stock based compensation and the amortization of acquired intangibles.

Estimated future weighted average share counts for earnings per share depend on future option activity, future share repurchases, share prices and other factors. For now we think using a share count of between 41 and 42 million for fourth quarter for fiscal 2009 for diluted earnings per share seems reasonable.

We expect diluted earnings per share on a GAAP basis to be in the range of $0.69 to $0.71. On a non-GAAP basis which excludes total charges of approximately $1.03 we expect non-GAAP diluted earnings per share to be in the range of $1.72 to $1.74.

For the fourth quarter of fiscal 2009 we expect GAAP and non-GAAP revenue to between $130 and $133 million. We expect software license revenue between $47 and $50 million. We expect diluted earnings per share on a GAAP basis to be in the range of $0.33 to $0.35. On a non-GAAP basis which excludes total charges of approximately $0.21 we expect non-GAAP diluted earnings per share to be in the range of $0.54 to $0.56. Our non-GAAP results exclude stock based compensation, amortization of acquired intangibles, purchase accounting adjustments for deferred revenue, restructuring charges, acquisition related expenses, and professional service fees associated with our ongoing stock option investigation of derivative law suites. A reconciliation between our GAAP and non-GAAP expectations is included in our press release.

This guidance assumes no further economic shocks, a stabilization of revenue from our application partner channel and proven in our ability to generate new business and user accounts, continued strong performance from our higher growth product lines, especially the enterprise infrastructure and data infrastructure product line and no further strengthening of the US dollar against currencies from which we derive a significant portion of our business.

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

We plan on releasing financial results for our fourth quarter on Tuesday, December 22, and holding the usual conference call that morning at 9:00am. This conference call will be recorded in its entirety and be available on our website at in the Investor Relations section.

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

Question-and-Answer Session


(Operator Instructions) Your first question comes from Richard Davis – Needham

Richard Davis – Needham

With regard to the OpenEdge one of the questions that I get a lot of times from investors is I understand it’s a really sticky product but also understand that there’s a customer mix shift in terms of the way your customers are recognizing revenues and so therefore that’s reflected in your numbers. Do you have a sense as to what percentage of OpenEdge is subscription and is that affecting your reported growth even if notional bookings are probably half way decent?

Bud Robertson

Software Services has been growing very rapidly within the OpenEdge community. As a matter of fact I think we’ve quoted it being 25% growth. However, the number is still a small number so it’s not really; it might have a minor impact but not major at this point in time. If they continue over time obviously which we think is a good model it could impact it going forward.

The other thing is we’re finding that when we talk to our partners that the software services revenue they wouldn’t have normally received at the lower end so it’s not like its cannibalizing their business. They’re finding right now they’re getting additional revenue. They expect in the future that it’ll become a larger part of their business but they’re not seeing that yet.

Richard Davis – Needham

Could you comment, what’s fascinating to me as a student of your space and of industry is just the sharply variable rates of growth you see in infrastructure software. You look five or ten miles away from you guys and you see guys at Pegasystems growing something like 30% a year and other sectors of this space are shrinking or down. How do you, now that you’re CEO, how do you position Progress to anticipate those kind of growth areas or is it more a portfolio strategy where you just figure look we’ve got eight products and hopefully three will be working at any given time?

Rick Reidy

Certainly in the case of Pega where you’re largely focused on one particular high growth segment and you happen to time that right and in their particular case have heavy duty focus in a particular vertical, you can hit a right vein which they seem to have done. I think overall in the application infrastructure business, particularly for portfolio players, at this time, with this economy it’s a mixed bag. Customers are delaying decisions when they can and will purchase when they see immediate ROI or reduced risk or something that brings immediate business value.

We marshal our efforts to focus in those areas particularly in these tough times where people are focused on one of those things; reduced costs, increased revenue, mitigate risk, etc. We’re looking more and more at a solution orientation and vertical marketplaces; examples that we’ve done that are with our DataXtend products and our Apama products over the past couple of years. Overall that’s the waters we all have to navigate these days which is to seek out those rich veins today that people are actually spending money on.

Richard Davis – Needham

With regard to you’ve in the past made acquisitions from time to time and infrequently you’ve sold things off. With regard to acquisitions do you have a hard stop in terms of maximum dilution you would take or do you want to take no dilution or is it you have to cross that bridge when you see it.

Rick Reidy

It all depends on the situation. Obviously if we see an amazing strategic value in something that would ultimately drive shareholder value over the long run, much, much higher than a short term worry about dilution we might consider that. It isn’t a decision we would take lightly though.


Your next question comes from Brent Williams – Benchmark

Brent Williams – Benchmark

What is the Euro exchange rate that you’re dialing into your Q4 guidance?

Bud Robertson


Brent Williams – Benchmark

Going into the geeky product line stuff, within Enterprise Infrastructure can you give any color on Sonic and the Orbix and Artix stuff within that division?

Rick Reidy

The integration business overall actually, Sonic in particular, and Actional actually had considering a pretty good quarter with some bigger deals. Overall that part of our business is pretty stable. You can see in our press release we’ve also done some good stuff with FUSE product I think adding something like 26 new accounts.

Brent Williams – Benchmark

Within Data Infrastructure how much of the divisions performance was due to, can you contrast the shadow and mainframe stuff, ObjectStore, some of the products that are in managed decline versus the good old DataDirect?

Rick Reidy

The classic connect DataDirect business the OM business is strong. The connect business I think for the year, which is a direct end user business will be fine. It did not have a good June and July and had a very good August and looks pretty good into September right now so that looks like its fine. Overall in the DI business June and July weighed heavily on the quarterly results and ultimately on the yearly results but things look good going into Q4.

Same ditto with the mainframe business. The classic connect business is doing fine, mainframe business is slower, and ObjectStore is declining which is weighing a bit on the overall growth numbers.

Brent Williams – Benchmark

Any changes in end user sales trends in the core business, OpenEdge in terms of end user versus application partners are they floating and lock step or are there any sort of change to the mix between the two or the tone of activity for deals going forward?

Dave Ireland

They’re pretty close in the sense of the impact in the economy. It’s probably a little bit greater on the Direct side as we’ve put more emphasis on the Direct side on the newer technology, nothing dramatic either way.

Brent Williams – Benchmark

Of course we can’t possibly have an earnings call without me asking about Apama. Is there any kind of qualitative numbers that we can hang around Apama’s diversification outside financial services? Maybe how many deals or what percentage of the deals signed in the quarter were non-FS or something like what of the proof of concepts prototyped projects that you’re doing before the sale are non-financial services?

Rick Reidy

I don’t have the quantitative numbers to break out. I will say having traveled quite extensively in Q3 and being out talking to customers but also our field guys that the non-financial services CEP segment which is certainly getting a lot of buzz, I think its in our press release, you’ll see that we’re in the Forrester Wave leadership. We’ve been exploring ideal verticals outside of financial services and basically seeing what sticks.

So far up until this year there hasn’t been a lot of closes, there’s been a lot of activity in the peer CEP business. However, I would say that in some regions of the world that I visited that the amount of activity and the amount of buzz and the amount of interest in CEP is very much picking up in that now I can actually talk to a CIO, they’ve actually heard of the whole category of CEP. That category seems to be gaining momentum.

As you know, it’s not been necessarily an area we’ve focused on as a specific marketing vehicle which we’ve been largely focused on capital markets and financial services. That’s an area we’re taking great interest in going forward and I think it’ll pick up.

Brent Williams – Benchmark

Can you give a sense what are your first 100 days type priorities as the galactic overlord of Global super everything, in terms of where you’re spending your time, in terms of customer visits, are you focusing more on the Enterprise Infrastructure, the Enterprise type customers? Are you focusing more on channel partners? You have a unique background working for SAP and also working for TIBCO and of course since you’re ex-TIBCO will you continue the tradition of the former head of the Sonic software unit of taunting Vivec?

Rick Reidy

I’d like to introduce Chris; I have been very public about the notion of creating what we internally call one progress. That is that ultimately as a company being much easier to do business with, being much more effective at doing multi-product sales and increasing average selling price which has been typical in the past when we’ve had separate distinct organizations. Ultimately streamlining our overall field capabilities to be much more effective. I spoke at our last conference call that we were about 75% of the way there and really this is the next key move which is to take all the remaining organization that were separate and combining all under Chris.

I’m personally very excited about the addition of Chris to this particular role, I think he brings a fantastic background and one that’s specifically attuned to the businesses that we’re in both at the business layer at the application level like our OpenEdge products but also in all our infrastructure products. I’m pretty excited to have him on. Since he’s only been here a few days I think you’ve been asked to put together and articulate your plan.

Chris Larsen

I appreciate it, I haven’t got my business cards yet but I like your new title, I’ll see if I can change that to Galactic instead of global. I’m excited about coming on board with Progress. My first meeting with Rick what impressed me most was Rick’s enthusiasm as you just mentioned with Progress and the same thing was true with Barry at the Board level and others.

What am I going to do the next 100 days? Clearly I want to really assess as much as I can where I can leverage the most and leverage very quickly the experience that I bring to the table, because of my unique background having been in the peer applications base and then the infrastructure space to really understand where I can optimize the number of incredible assets that Progress has at its disposal is one of the key attractions to why I took this opportunity.

There are a lot of assets on the table that we can further optimize and take advantage of the marketplace that from a competitive perspective I think there are competitors out there, I won’t name them, they have some weaknesses. The opportunity is there for growth. I want to leverage the team that’s here, understand how to your point get in front of customers and not specifically whether it’s the application partners, whether it’s the OEM channel, whether its our Direct business regardless of what product mix it is I have extensive experience as you can imagine as CEP for non-capital markets, that’s where I got exposed to driving tremendous value with customers.

My focus on the customer base is to get out in front of as many of them as possible over the next 100 days so that when we really have a solid 2010 execution plan that’s going to be driven around creating customer value and when you do that it takes care of shareholder value.


Your next question comes from Brian Murphy – Sidoti & Company

Brian Murphy – Sidoti & Company

Could you give us an update on the competitive environment in the CEP segment and maybe from the perspective of your anticipation of maybe new entrants coming into that space over the next six to 12 months?

Rick Reidy

Competitively, according to Forrester, these aren’t my own judgment are basically the best product out there in the market. Therefore other than some annoying ankle biters that occasionally try to throw free products and software around generally don’t have any problem at all competing against any of the smaller vendors.

With the larger vendors it’s a CEP, Apama play versus the whole stack play. In some cases we’re at the advantage at that point, in other cases they’re at the advantage at that point depending on which portions of the stack are the most interesting. As a peer play CEP I anticipate that we’re going to do very well.


Your next question comes from Eugene Fox - Cardinal Capital Management

Eugene Fox - Cardinal Capital Management

Related to your guidance, it looked like your OpenEdge guidance is essentially the same as it was last quarter but the Data Integration segment is slightly lower. Based on your comments I presume that has to do with weakness in ObjectStore?

Rick Reidy

I wouldn’t fully attribute it to that. I’d say just a poor June and July had a strong August and we’re looking good going forward. Plain and simply a lot of larger deals that we expected to close in June and July didn’t close until August and they dug a hole which I think factor into the yearly. ObjectStore is contributing to that but not necessarily the reduced guidance per se just the overall level of growth rate for the organization.

Eugene Fox - Cardinal Capital Management

Two questions related to the Enterprise Infrastructure segment. Do you have the organic growth rate for that segment ex the Iona acquisition? It looks like you reduced the guidance there can you comment on what factors would have caused you to reduce the guidance for revenue in that sector?

Bud Robertson

On the Enterprise Infrastructure without Iona was a 9.3% reduction in year over year and constant current it was down 4% year over year. As concerns the whole year, the slight reduction it’s basically minor tweaks to the numbers it’s not a big change from where we were before so it’s slightly down based on the fact that Q3 was down.

As a matter of fact, one of the reasons Data Infrastructure is down is also because Q3 was bigger deals were delayed, didn’t say anything lost but the big deals have slowed down. Like Rick said we’re starting to see them come in. The change in both DI and EI has to do with a slower than anticipated Q3 but the pipeline looking like Q4 should come in stronger, therefore we lowered the whole guidance based on the fact that the Q3 slowdown.

Eugene Fox - Cardinal Capital Management

It wasn’t specific to any one or two products?

Rick Reidy

No, that been at the most, “interesting” observation of this whole year. This has been an amazing year where across the board in all geographies and all industries across all products for most, if not all companies, it’s been soft. Progress in the past being very diversified both geographically and product segments and within our OpenEdge channel our partners competing in many different segments we’ve historically been pretty buffeted and immune to local shifts in economic conditions or industry shifts. This is really an amazing year where you just see that pretty much across the board.

Bud Robertson

They’re up and down but like Rick said, there’s no specific product line that we thought was going to grow, isn’t growing, its just a matter of things being a little bit slower just generally across the board. A big impact in Q3, Q4 is rebounding we believe from the point of view of year over year growth for the full year.

Eugene Fox - Cardinal Capital Management

What’s the impact of currency for your entire annual guidance of 2009 at this point?

Bud Robertson

For the 2009 guidance constant currency impact for the full year is going to be around $30 million. Full year impact for ’09 currency is going to be about a $30 million negative impact.

Eugene Fox - Cardinal Capital Management

That’s revenue, what’s bottom line?

Bud Robertson

Probably 20% of that number so you take 20% of the $30 million.

Eugene Fox - Cardinal Capital Management

In light of the economy and the excelling environment what are you guys doing differently to take what’s obviously good and in fact excellent products and make them resonate with your customers more?

Rick Reidy

First, as I touched on earlier, organizationally branding ourselves as Progress, and organizationally combining and go to market as a single company that solves more solutions versus sells a specific product. I think we have a number of assets in this company right now both customers and products and of course employees etc.

We’re at that stage right now we can effectively come together and solve real specific customer problems and actually identifying those problems and creating solutions for those and thus going to market not so much with a technical product such as “Soa Management” but a solution such as Business Transaction Management or Revenue Assurance, etc. where you can actually show customer not only how to solve that particular problem but demonstrate how other customers of our have done the same, and even in the same industry. Just being a lot more focused on their problems versus our desire to schlep a piece of code to them is a huge change for us and one its time is due and its one that the markets are expecting these days.

Eugene Fox - Cardinal Capital Management

How long do you expect the process to take and when do you expect to see tangible evidence of progress there?

Rick Reidy

We certainly see evidence of it already. That’s largely how we sell our Apama product and our pipeline is pretty strong with some of our other products right now with Business Transaction Management. Going forward I would expect that to show, tangible results, move the needle results on top of the entire revenue base of Progress software, I expect that into next year and beyond.


That concludes today’s question and answer session. At this time I’d like to turn the conference back over to Mr. Robertson for any additional or closing remarks.

Bud Robertson

This concludes today’s conference call. Thank you all for participating.


That does conclude today’s conference. We thank you for your participation.

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