Pervasive Software Inc. (NASDAQ:PVSW)
F1Q10 Earnings Call
October 20, 2009; 05:00 pm ET
John Farr - Chief Executive Officer
Randy Jonkers - Chief Financial Officer
Good afternoon, my name is Tracy and I’ll be your conference operator for today. At this time I would like to welcome everyone to the fiscal year 2010 first quarter financial results conference call.
Now I’d like to introduce Randy Jonkers, you may go ahead and begin your conference call.
Thank you, good afternoon and thank you for joining us. I’m Randy Jonkers, Chief Financial Officer, Pervasive Software. While we wait for others to join I will go over the standard disclaimer regarding remarks on this call.
This conference call may contain forward-looking statements within the meaning of the Federal Securities laws, including statements regarding the company’s or management’s intentions, hopes, beliefs, expectations and strategies for the future. Forward-looking statements may include without limitation, statements regarding the following: future investment, sales, market growth and direction, competition, revenue growth, operating margins and profitability.
A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in Pervasive’s most recent filings with the Securities & Exchange Commission. Pervasive does not undertake any obligation to update forward-looking statements to reflect events or circumstances after the date of this conference call.
Also, and as a reminder our non-GAAP results for the quarters ending September 30, 2009 and 2008 exclude the amortization of purchased intangibles and stock based compensation expense, and presents income taxes at a statutory tax rate of 34%. We believe that the non-GAAP results described in today’s press release and in this conference call are useful for an understanding of our ongoing operations and to assist the investor community in comparing Pervasive’s non-GAAP results from period-to-period as well as comparing our results with that of similar companies.
We use these non-GAAP results to compare our performance to that of prior periods, for analysis of trends, to evaluate the company’s financial strength, develop budgets, manage expenditures and develop our financial outlook. Non-GAAP results are supplemental and are not intended as a substitute for GAAP results. Note that our call today is being broadcast simultaneously via the Pervasive website. Welcome to those listeners.
In this call, we’ll cover two primary agenda items. First I will recap Pervasive’s financial results during our first fiscal quarter, and then John will update you on our plans and operations.
Now for the financial results: Today we have released financial results for the first quarter of our fiscal year 2010. Revenue and earnings were at the high-end of our updated guidance provided on October 1. Pervasive revenues totaled $12.2 million in Q1, which is an increase of approximately 300,000 as compared to Q1 of last fiscal year. Our GAAP basis net income was approximately $1.3 million in Q1 and diluted earnings per share were $0.07, which is consistent with Q1 of last fiscal year.
Our effective tax expense rate in Q1 was 31% as compared to a tax rate of 34% in Q1 of last fiscal year. Our non-GAAP net income in Q1 before amortization of purchased intangibles and stock based compensation expense and tax of 34% was $1.6 million compared to $1.8 million in Q1 of last fiscal year.
Our non-GAAP earnings per share were $0.08 a decrease of $0.01 as compared to Q1 of last fiscal year. We ended the quarter with approximately $40.4 million in cash and marketable securities and had approximately 17.9 shares issued in outstanding.
As previously disclosed during the first quarter, we purchased the assets from ChanneLinx for approximately $2.6 million in cash. Also, during the first quarter we repurchased approximately 258,000 Pervasive shares on the open market for a total cost for approximately $1.3 million or approximately $5.08 per share.
We generated approximately $1.2 million of positive cash flow from operations. Our DSOs or day sales outstanding were 69 days, up 22 days from Q1 of last fiscal year. Our DSO calculation was impacted by our large revenue transaction in the amount of $2.4 million, which is an account receivable as of September 30.
By geography our revenue was as follows: Domestic revenue totaled approximately $9 million in Q1, up 34% from Q4 and up 21% from Q1 of last fiscal year. Our international revenue principally Europe and Japan totaled $4.2 million in Q1 down 6% from Q4 and down 7% from Q1 of last fiscal year. At our product level, our database products and our integration products represented approximately two thirds and one third of our business respectively in Q1.
Turning to operating expenses; our operating costs and expenses totaled $10.5 million in Q1, including stock based compensation expense and amortization of related acquired intangibles in approximate amount of $0.5 million, or non-GAAP expense of $9.9 million as compared to non-GAAP expense of $9.4 million in Q1 of last fiscal year.
We had 238 employees at the end of Q1 which represents an increase of 19 employees from the end of the fourth quarter and an increase of 17 from Q1 of last fiscal year. The increase was primarily the result of our acquisition of the ChanneLinx assets.
Now looking forward, we expect revenues in our second quarter of fiscal year 2010 to be in the range of $11 to $12 million compared to $11.2 million in Q2 of fiscal year 2009, and we expect GAAP basis diluted earnings of $0.04 to $0.07 per share compared to GAAP basis diluted EPS of $0.06 in Q2 of fiscal 2009.
We anticipate that our effective tax rate for the second quarter will be approximately 31%. Non-GAAP profitability is expected to exclude stock based compensation expense and amortization of acquired intangibles representing approximately $600,000 in the second quarter of fiscal year 2010.
With that, we expect non-GAAP and fully taxed diluted earnings per share in our second quarter at fiscal year 2000 to be five to $0.08, compared to non-GAAP diluted and fully taxed EPS of $0.07 in Q2 of fiscal 2009. Our non-GAAP effective tax rate for comparative purposes reflects the statuary rate of 34% on pre-tax non-GAAP income.
We anticipate cash flows from operations to be between $1.5 and $2.5 million for the second quarter of fiscal year 2010. Also as in prior quarters, we are not providing specific guidance beyond Q2. For EPS calculation purposes we expect our GAAP basis and non-GAAP fully diluted share counts for the second quarter of fiscal year 2010 to be approximately 17.7 million and 18.5 million shares respectively. Relative to this share count estimate excludes the impact of any future share repurchases.
Now, let me turn the call over the John Farr, CEO of Pervasive software. John.
Thanks Randy. It is truly a privilege to lead the chain with such an enviable track record of execution and profitability. The highlights of our September quarter include the completion of our 35th consecutive quarter of profitability, quarter over prior year quarter revenue growth for the eighth time in the past nine quarters, quarter over prior year quarter of operating income growth for the seventh consecutive quarter, completion of the second largest quarterly revenue transaction in corporate history in the amount of $2.4 million, advancement of the agendas of both our data solutions and our DataRush innovation initiatives, completion of our $2.6 million acquisition of the assets of Greeneville South Carolina based ChanneLinx Inc. and representative increase to our next quarter revenue guidance above our recent quarterly range to represent the addition of the revenue of this acquired business.
We enjoyed the first full quarter of returns to our listing on our stock Russell 2000 Stock Index, and we completed our 14th consecutive quarter of active share repurchases in the open market, in which we have in the aggregate invested approximately $31 million repurchased approximately 7.7 million shares or about 30% of our total shares outstanding, maintaining throughout a very healthy balance sheet of more than $40 million in cash and no debt.
Now, let me turn more specifically to the significant elements of our business. First, the database business. Our investments in the database business had enabled us to achieve year-over-year revenue growth of 13% and 3% in fiscal year 2009 and 2008 respectively by marketing our Pervasive SQL and our Version 10 database to the large installed base of loyal ISV customers, and by probably identifying situations where perhaps Pervasive was due some additional royalties for unreported or under reported license fees, and then working with those customers to remedy any inadvertent license compliance matters.
The news in Q1 for our database business was of course the large revenue transaction, this transaction caused us to grow our database again over prior year Q1 which was already a relatively strong quarter in its own.
For you new listeners and as a reminder, our Pervasive PSQL Version 10 database is designed to help ISVs, VARs and OEM partners successfully embrace new technologies including the Windows Server 2008 operating system from Microsoft, as well as take advantage of the latest 64-bit technology for accelerated database performance.
Our database engineering team has continually focused on keeping our product up to date with the ever-changing environment within the known or anticipated needs of our ISV customer base. The team is presently wrapping up work on an update, which will be compatible with Windows 7 desktop operating system when it’s released by Microsoft.
We believe Microsoft is scheduled for release Window 7 this week; we will follow that immediately with the availability for our release candidate to be followed by our actual GA, Generally Available release a week or two later with full Windows 7 compatibility.
In addition, our database engineering team continues to improve the digital licensing capabilities of our product in order to simplify deployment and improve reporting of software licenses sold through our ISV and VAR channels, and used by their end user customers, and we continue to work on multi-core enhancement of our database engines for our future release to support the latest in rapidly proliferating multi-core hardware.
Next, let me update you on the integration business. Investments in the integration business have enabled us to achieve year-over-year revenue growth there as well in the form at 8% and 6% in fiscal years 2009 and 2008 respectively by both expanding existing relationships with large companies as well as continuing to develop new ISV, SaaS and systems integrated partnerships.
Our integration revenues in this first quarter of 2010 were consistent with the results of the preceding three quarters were actually down several hundred K from Q1 of last year. As a remainder Q1 of last year was one in a string of several relatively strong quarters for our integration business, primarily on strong professional services revenue we were experiencing in the summer and fall of calendar 2008.
In addition, we have increased the base of recurring subscription revenue in our integration business over past year. In about two weeks we will host over 100 of our customers here in Austin for our annual integration users’ conference.
The conference features a highly interactive setting, in which attendees participate in break out sessions led by both Pervasive technologists and Pervasive customers. It is designed for sharing best practices and innovative approaches to the data integration challenge. Several of our customers and partners are giving their valuable time to make presentations during the conference, including among others speakers from [Convio], [Daptiv] and [EC Wires].
Attendees will gain insight into Pervasive’s integration roadmap, including a sneak preview of Pervasive Data Integrator Version 10, which is scheduled for release in calendar 2010 with early adaptor programs beginning this winter.
Conference attendees will also receive updates to our technical advancements and future plans around Pervasive DataSolutions, Pervasive DataCloud and Pervasive DataRush initiatives, more on these initiatives in a minute. More importantly, perhaps attendees will learn how to accomplish more, faster using our product to successfully solve their persistent data migration and data integration headaches.
Our solid results have allowed us to capitalize on acquisition opportunities such as our ChanneLinx asset purchase in August 2009. With ChanneLinx innovative WebDI technology and loyal customer base we’ll add a compelling solution to our Pervasive product family.
The ChanneLinx business generated approximately $2 million, which is in unaudited number, in revenue in over the 12 months ended June 30, 2009, and includes 16 dedicated software professionals. We see complimentary opportunities in every sector of our business.
Pervasive Data Integrator provides industry leading last-mile integration that can help ChanneLinx hub and trading partner customers rapidly and affordably connect an enormous range of endpoint data sources and applications to the WebDI data interchange. Pervasive DataSolutions offers immediate affordable web-based integration for ChanneLinx customers who happen to use QuickBooks and Salesforce CRM or Microsoft Dynamics CRM.
ChanneLinx has a strong stable customer base including blue-chip companies and Pervasive DataRush can bring breakthrough high-performance analytics and data-crunching capabilities to their massive datasets, and we are excited about the opportunity to introduce ChanneLinx low-cost, web-based business interchange automation between partners to existing Pervasive customers including Pervasive PSQL ISVs as well as to new prospects.
The ChanneLinx team now operates as Pervasive Business Exchange inside the Pervasive family of products, and all of our teams are busy working through plans to achieve the synergies we believe exists within this acquired business.
Now, an update on Pervasive’s innovation initiatives: Our solid core business results have allowed us to continue to fund our commitments to innovation, namely Pervasive DataSolutions and Pervasive DataRush. We learned a lot in fiscal year 2009 about Pervasive DataSolutions products and the needs of our customers while winning our current 150 plus subscriber base essentially one customer at a time.
We continue to invest in systems and processes to automate as fully as possible the new customer experience. We also increased our investment in sales and marketing this summer with the addition of a business development resource who is focused on building relationships and initiating sales conversations with potential channel partners, that will allow us to win customers many at a time for more effective return on our investments.
I plan to remind you all one year from today in that conference call about the day, not so long ago, when our data solutions subscriber base was only 150 plus. Also earlier this summer, we successfully moved our entire Pervasive DataCloud infrastructure to Amazon Elastic Cloud for more a cost-effective capacity and virtually limitless scalability. So for an entire quarter now, we have been running our DataSolutions customer base via our Pervasive DataCloud.
Our Pervasive DataSolutions team continues to innovate. The team is building prototypes of new solutions that we expect will contribute to our product line in fiscal year 2010, most of which will leverage the capabilities of our Pervasive DataCloud.
We continue to experiment with new product ideas to leverage the goings-on, if you will, with Twitter and Facebook. So we have Amazon EC2, Pervasive DataCloud, Twitter, Facebook, I'll tell you this team is investing, we are investing in building our credibility in the Cloud and with new media.
Pervasive DataRush is the groundbreaking technology that addresses the gap between available hardware processing power, exploding volumes of data and what the software industry has been able to deliver in terms of commercial applications to exploit multi-core hardware and efficiently extract useful intelligence from massive datasets.
The emerging business Pervasive DataRush boasts an outstanding engineering team and proven technology and is positioned at the beginning of an emerging market with referenceable used cases and referenceable partners in a company willing and able to invest significant resources in the market development effort.
In January 2009 we began to invest in Pervasive DataRush sales and marketing ending the September quarter with eight technical personnel and now four in sales and marketing. Since the beginning of this new fiscal year, in other words the last 90 to 120 days, the team has demonstrated our innovative parallel data mining efforts at the 15th annual conference on Knowledge Discovery and Data Mining, that’s KDD event in Paris, France, demonstrated our recently developed Recommender System at Predictive Analytics world this week in Alexandria, Virginia and announced our first DataRush based solution with our ISV partner Aha! software.
That solution is called Strato-Studio. Strato-Studio is innovative crowd based high-performance analytics services platform available on Amazon EC2 and combines Aha!’s Software’s analytics management system with our high-performance parallel data processing engine Pervasive DataRush, and leverages Pervasive’s DataCloud to deliver the industry’s premier on-demand analytics services platform for data miners and business users.
Strato-Studio’s initial service is enhanced and on-demand Monte Carlo simulation. This innovation protects users from encountering the traditional scalability, speed and productivity limitations of Monte Carlo simulations on desktop applications. Running predictive models on Strato-Studio allows for greatly enhanced productivity as users can specify and run robust iterations on ultra large datasets without slowing down another work.
The on-demand approach permits rapid iterative regression model validation for data miners enabling them to deliver more value to their business users. Strato-Studio is a great example that Pervasive is partnering to enable a whole new class of Cloud based analytics bringing the power of Pervasive DataRush to mainstream audiences.
On-demand analytics with Aha! Software and presentations at KDD and predictive analytics world, here too we are investing in building our credibility in this case in world of data mining in high performance analytics.
I have recently had the pleasure of getting closer to my DataRush team in last couple of months as I had been serving as the interim general manager for that group. I am more excited now than ever before about the possibilities in this business. Our opportunity pipelines are growing with a relative emphasis on systems integrators serving government and healthcare.
I am presently recruiting for permanent GM for this business, I’m focused on finding the right person with right combination of talents including an emphasis on sales and marketing and start up mentality and market development experience.
We are recruiting by word of mouth and are focused presently on identifying talented executives inside or formally with Sun, who will possibly be acquired by Oracle. RapidMind which was recently acquired by Intel, Interactive Super Computing recently acquired by Microsoft and SPSS recently acquired by IBM, and we are talking to candidates now but we are also committed to letting the recruiting process mature over the coming month.
In summary, our opportunities are many. So I would ask you to just imagine what if in the next 12 to 24 months we complete another large database revenue transaction, multi-core becomes relevant and valuable to our database customer base, Microsoft Windows Server 2008 with soon to be released Windows 7 becomes a real catalyst in packaged applications serving SMP, what if our integration business grows with increasing channel and other recurring revenue, What if consolidation of competitors in our respective markets continues, what if our DataSolutions business scales would aggregate our channels and Data Solutions establishes credibility in the cloud and in new media.
What if we achieve synergies with the ChanneLinx acquisition and what if we complete our next acquisition when an appropriate candidate is identified? What if DataRush achieves its first million dollars in revenue and we establish credibility in analytics and data mining markets, and lastly what if we increase our cash and reduce our shares outstanding and the economy improves. We are investing in all of those various possibilities.
A quick investor relation’s note: We are schedule to present at the TechAmerica AeA Classic Investor Conference to be held in San Diego on November 3. I have been personally exercising for months in preparation for this particular conference, which involves us delivering 11 back-to-back 30-minute presentations to respective customers.
I’m ready, but I also think that time really flies when you have a good story to tell, and we have a really good story to tell. We hope to see many of you at this event and any other events in the future. I will now open the floor for question.
(Operator Instruction) At this time there are no questions in the queue.
I will assume that we either have technical difficulty, or we are in the middle of a busy earning season. Thank you all for your participation. We know that we have quite a few people on the line and in fact if it was technical difficulty then please feel free to call Randy or myself later this evening. Thanks a lot.
This concludes today conference call. You may now disconnect.
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