Actuate Management Discusses Q3 2013 Results - Earnings Call Transcript

Nov. 5.13 | About: Actuate Corporation (BIRT)

Actuate (NASDAQ:BIRT)

Q3 2013 Earnings Call

November 05, 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

Frank Sparacino - First Analysis Securities Corporation, Research Division

Operator

Greetings, and welcome to the Actuate Q3 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Tom McKeever, Senior Vice President and General Counsel. Thank you, Mr. McKeever, you may begin.

Thomas E. McKeever

Thank you. Good afternoon, everyone, and welcome to Actuate Corporation's quarterly conference call. Joining me to discuss our Q3 2013 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 Q3 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 true. 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 a reconciliation from GAAP to non-GAAP financial measures.

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

Peter I. Cittadini

Thanks, Tom, and welcome, ladies and gentlemen. For those of you that are following along on the website, I'm going to be starting with Slide #4. However, before I get started with my slides, I'd like to make a few statements with regards to the Actuate business.

Firstly, we've launched an evolved and enhanced positioning for Actuate. It is evidenced in our new website that went live yesterday, and I encourage all of you to visit and get educated with the enhanced positioning for our foreseeable future. I'll be explaining this new positioning to you later in the presentation, but you should check out the website. It's a new design, but most importantly, the positioning and the content is what I'd like you to focus in on.

And then strategically, when we look at the quarter from a strategy standpoint, it was a solid quarter for Actuate Corporation. We're investing in our future BIRT iHub software offering and are using the BIRT iHub license metric as the barometer for how our business is doing. As you all know, we are transitioning out of our legacy iServer base business, which still contributes to our license and maintenance revenues. However, it makes it difficult to forecast exactly what each 90-day period will bring in overall business.

The reality is the total revenue is a less revealing metric than the iHub performance to Actuate and its shareholders. We have admitted the legacy side of the business as lumpy and difficult to predict. So we want to reiterate that the reason a shareholder should hold the Actuate equity is because of the BIRT iHub business today and in the future. We're feeling enough critical mass associated with that business along with stability and predictability, that is in the iHub business, that we will be giving guidance in 2014 associated with this part of Actuate Corporation, which is our future.

We have not yet finalized the exact packaging of this guidance but on the Q4 earnings call, this information will be communicated to our shareholders and perspective shareholders.

Now if you kindly would go to Slide #4. I'll start with the formal part of the presentation.

Revenues for the quarter were $32.3 million, flat year-over-year despite the challenges with legacy license and weakness in Asia Pacific.

License revenue totaled $14.3 million, up 8% year-over-year and up 18% year-over-year when you exclude the Oracle settlement portion that we took a year ago into those license numbers. We also had several million dollar-plus deals slip. However, these transactions look promising for closure within the confines of Q4.

The license growth was exceptional when you look at the BIRT iHub license performance. It was up 56% year-over-year, which represents the second largest iHub performance in the company's history, and that's particularly impressive for a Q3.

The non-GAAP fully diluted EPS of $0.07 were down $0.01 year-over-year, and cash flow from operations as they were last Q3 were in the negative, this time to the tune of $2.1 million.

Moving on to Slide #5. You'll see a partial list of our third quarter transactions and note that we continue with blue-chip Global 9000 customers that continue to buy our product. As a matter of fact, 80% of all of our Q3 revenue came from the Global 9000 accounts. 83% of the overall Q3 business came from the sectors of OEM and financial services, and government was the third sector in its contributions to our Q3, but there was indeed some revenue slippage within the government sector between July and September.

Moving on to Slide #6. A little bit about Actuate's positioning. Actuate provides software for over 3 million BIRT developers to deliver personalized analytics and insights to customers, partners and employees. Simply stated, that's what our company does. Personalized analytics and insights, both inside and outside the firewall, thus, to customers, partners and employees.

Moving on to Slide #7. Actuate is the leader in personalized analytics and insights, and the reason why is Actuate's scalable solutions save time and improve your brand experience by delivering personalized insights to customers, partners and employees. Again, the keyword for us, which is our heritage, is scalability. Actually, if you go to the bottom of the slide, you'll see that Actuate applications have delivered personalized insights to over 2 million (sic) [200 million] customers, partners and employees. So when you look at the world of business intelligence defined as everything from analytics to dashboarding to reporting, no one really has the penetration in human beings getting personalized insights associated with their information more so than Actuate Corporation and our applications.

And any 1 of these 4 reasons that you see on the slide will certainly lead you to Actuate as your solutions provider, and that is if you're looking for intuitive and visual-engaging experience for either your employees, partners or customers; when you're looking from -- for unique insights from multiple data sources, where the back-end data environment is quite complex, we're in the driver's seat there. When your information application requires security across a high volume of users and their devices; and finally, the proven scalability to millions of users.

So here on one slide, if you're looking for personalized analytics and insights, with these 4 key metrics in mind, then we're the ideal solution provider for you, and we can back that up with the statistic of greater than 200 million customers, partners and employees today receiving personalized insights from Actuate applications.

Moving on to the next slide. You'll see the Actuate target markets. And this is sort of a follow-up from our earnings call just 90 days ago where I talked about segmentation of the sales force doing different things for different markets. When we pursue the markets, we really see the markets as 3 distinct forward-going markets. One is the pursuit of the 3 million plus BIRT developers that are primarily building customer-facing applications and OEM applications. What we really bring to them and what they're seeking is a world-class interactive development environment with a scalable, secure deployment platform. As you know, BIRT is the world-class IDE and the BIRT iHub is that deployment platform with which we make the majority of our money. Also they require seamless integration with enterprise applications, as well as OEM applications, where they continue to debut their brand versus alternative brands and that is one of the paramount reasons why these customer-facing and OEM applications turn to Actuate.

Second market, Big Data analytics. And here is for business users. So this is a bit of a difference where we're not pursuing the 3 million BIRT developers, but again, still drives iHubs because underneath all 3 of these markets is indeed iHubs that fuel the deployment of these applications. But here, it's a business user looking for visual data mining software, wanting to predict customer behavior for better leverage and revenue, and rapidly analyze real-time and near real-time big data. So here we have our new product, BIRT Analytics, again that sits on top of the BIRT iHub for its performance, scalability and reliability.

Finally, on the right-hand side, and this was part of the Xenos acquisition that we did approximately 4 years ago, we have the Content Services and Customer Communications Management avenues that we're pursuing and markets that we're pursuing. And here it's about statement design, processing of those statements, very efficient and expedient storage and delivery of those statements as part of your overall customer communications strategy. And here again, BIRT iHub is the foundation for that solution set to that market, and it includes BIRT for Statements and BIRT Content Services, which is a service associated with the BIRT iHub.

So again, we have our sales organization, basically broken down in pursuit of these 3 very distinct markets. And then, of course, there are synergies across the 3 markets for 1 of our customers that I'm not going to go into right now. I want to keep this rather simplistic today and make sure that the shareholder understands that we have 3 avenues and 3 very distinct real markets that we are pursuing aggressively in order to drive iHub license and overall iHub business revenues.

Moving on to Slide #9, which will be my final slide. I'd like to focus a little bit on the growing BIRT iHub business. And you see here, as I said before, that in Q3, the license portion of that business grew at 56%. However, the overall business, including the maintenance renewal, training and professional services associated with those licenses, increased 38% year-over-year within the confines of Q3.

The other thing that's outstanding is we've really done a great job at growing the community of developers. And today, we sit with over 3 million developers using BIRT on a worldwide basis. And again, as you know, our aspirations are to get to 4 million to 5 million developers. But this is great strides, and we didn't think we would break through the 3 million barrier this quickly, but indeed, we did within the confines of Q3. And also today, we have over 110,000 total registrations on BIRT Exchange, and that is up from 95,000 a year ago.

Again, an important part of any transition is that you keep your eye on the pieces of the business that are most relevant to your future success. For Actuate, clearly, that is the BIRT iHub business. Thus, when we look at the BIRT iHub growth and its portion of overall revenues, in its current Q3 outcome this year and our year-to-date outcome, it is above our expectations. That is great news. Any planned shortfalls are solely on the legacy side of the business, which is less relevant to our future.

And with that, I'm going to hand it over to Dan.

Daniel A. Gaudreau

Thanks, Pete. So I'm on Slide 10. Just as an introductory comment, I would categorize this quarter's performance as more of the same but with improved year-over-year revenue growth rates versus those reported last quarter. That is license revenues, up 8% this quarter versus up 3% last quarter. Services revenues, down 5% in Q3 versus down 9% in Q2. And total revenues are flat year-over-year versus 4% down in Q2.

So let's go on to Slide 11 and look at more of the details of the Q3 P&L. License revenues totaled $14.3 million, up 8% from Q3 2012. It's up 18% when excluding the $1.2 million Oracle settlement out of the Q3 '12 license number. This performance was driven by a 56% year-over-year growth rate in iHub license revenues. We closed 2 $1 million-plus iHub license deals in Q3 '13. The iHub growth was partially offset by a 49% decrease in the legacy iServer license revenues.

Q3 2012 for iServer was a tough comp with 2 license deals exceeding $1 million compared with 0 in Q3 '13. As we have said before, iServer license revenues should continue to decline over time and will be lumpy depending on the timing and size of deals.

Maintenance revenues totaled $16.6 million, down 3% year-over-year. This year-over-year percent decrease compares favorably with 9% year-over-year declines in Q1 and Q2. Our overall maintenance renewal rate of 87% is the highest we have seen since Q1 of 2011.

In addition, the dollar value of contract cancellations in Q3 was the lowest also seen since Q1 2011. These facts are all positive indicators that maintenance revenue growth in 2014 will turn positive. Professional services revenues in Q3 were $1.4 million, down $300,000 or 18% from a year ago. The whole decrease came from the iServer product line. In summary, total revenues were $32.3 million for Q3 '13, flat with last year. iHub total revenues increased 38%, while the legacy iServer revenues decreased 30%.

Operating expenses for Q3 '13 totaled $27.2 million, up $700,000 or 3% from a year ago. There was a $1.7 million increase in sales and marketing costs, primarily headcount related, that was partially offset by decreased operating expenses in cost of services and G&A.

Operating margin for Q3 was 16% compared with 18% last year. Earnings per share for Q3 '13 was $0.07 down $0.01 or 12% from a year ago primarily as a result of increased investment in sales and marketing.

Slide 12. This slide shows the year-over-year growth rates with Q3 '13 broken down between our modern iHub technologies and our legacy iServer products. As I mentioned on the previous slide, total iHub business experienced a strong 38% growth rate in Q3 driven by license growth of 56%. These strong growth rates were partially offset by declines in iServer license and services revenues primarily related to fewer large deals, as well as the loss of the $1.3 million quarterly Oracle settlement revenue stream that ended Q1 2013.

Specifically regarding services revenues, the mix of legacy services revenues, which is currently greater than 50% of total, will have less weighting over time and therefore, the negative overall services revenue growth rate will eventually turn positive.

Slide 13. The North America/international split of revenue was 80%/20%, respectively for Q3. Total revenues in North America and EMEA grew 2% and 6%, respectively on a year-over-year basis, but APAC declined by 34%. Correspondingly, license revenues -- the license revenue growth was strong in North America and EMEA at 10% and 41%, respectively, but weak in APAC at negative 45%.

In addition, besides a weak macro, it appears that the sales force reorg may have caused some disruption in our foreign subs. We booked orders greater than $100,000 with 63 customers. This compares with 66 a year ago. We booked 2 license transactions greater than $1 million, the same as a year ago. The important fact, however, is that the 2 deals this quarter were iHub, while the 2 deals last Q3 were iServer.

We ended Q3 with 596 employees, that's up 19 from a year ago, and the increase was primarily driven by the Quiterian acquisition. Our sales rep count was 68 at the end of the quarter. We were at 66 reps a year ago. The sales force reorganization is complete, but we still need to add 2 reps to get to our plan level of 70.

Balance sheet, next slide. Cash ended the quarter at $71.9 million, down $2.7 million from 9/30/2012 but up $5.4 million from December '12. The increase from year-end 2012 was primarily due to $12 million of operating cash generation, plus $9 million of cash received from option exercises, offset partially by $16.2 million of stock repurchases. Accounts receivable totaled $30.4 million at September 30, 2013, up $10.3 million from the prior year, but down $2.7 million from year-end 2012.

Q3 '13 was an unusually large back-end loaded billings quarter with about 80% hitting in month 3 compared with 66% in Q2 '13. The back-end loading resulted in higher-than-normal DSOs at 87, that was up 29 days from a year ago and up 2 from year-end 2012.

Deferred revenue consists primarily of maintenance contracts that will be taken to revenue in the future. Deferred revenue totaled $44 million at September 30, 2013, up $5.6 million or 15% from a year ago. This metric is another strong indicator that maintenance revenues in 2014 will turn positive at some point.

Cash flow from operations totaled $12 million for the first 9 months of 2013. The large AR balance at the end of Q3 indicates that Q4 '13 will be a strong collections quarter that should push total fiscal year 2013 cash flow from operations to over $20 million.

Slide 15. Just some concluding comments. The BIRT iHub business showed strong growth in Q3. We continue to invest in this part of our business because this is our future. We saw a good license and overall growth in North America and EMEA. We are addressing the weakness in APAC through additional sales resource and increased management attention. Most of the variables that make up maintenance revenues have been trending positive. That is renewal rates, maintenance bookings and deferred revenue are all up.

In our press release last quarter, we announced another large $40 million share repurchase program to be executed over a 12-month period. During Q3 '13, we repurchased $6.2 million worth of shares. The buyback will be increased to $10 million per quarter starting in Q4 '13. The management and board of Actuate continue to believe that our stock is undervalued.

And my final slide relates to some upcoming events. There's 3 events over the next 3 months. We have 2 customer days coming up, 1 on November 7 in San Francisco and 1 in New York City on December 4. These are great events for investors and analysts to get a firsthand view of our products and services, as well as to get the customers' viewpoint as to our importance in the market. Finally on January 14, we will once again be attending the Needham conference in New York City. We encourage your attendance and look forward to seeing you at these events.

With that, we open it up to Q&A.

Question-and-Answer Session

Operator

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

Greg McDowell - JMP Securities LLC, Research Division

I wanted to ask about the 2 deals over $1 million that were iHub versus iServer from a year ago, and if you could just maybe talk us through the case study or the business case for those iHub deals and what -- and maybe the protocol and also the geographical area.

Peter I. Cittadini

All right. Let me see. One was an OEM of ours and one was a large financial services institution. So, Greg, no particular magic there other than they're clients that have made a substantial commitment to BIRT and the BIRT iHub is the foundation to various applications and modules that they bring to market. And they had made such a commitment and have already experienced positive results, where they just purchased more of the technology.

Greg McDowell - JMP Securities LLC, Research Division

Great. And then one -- maybe one for you, Dan. I just want to make sure I understand your maintenance commentary that on an absolute basis in '13, you expect maintenance to be up, or was that in '14 that you expect it to be up on an absolute basis.

Daniel A. Gaudreau

'14.

Greg McDowell - JMP Securities LLC, Research Division

'14. Okay, so in '13, it still might be slightly down? I guess [indiscernible] slightly down.

Daniel A. Gaudreau

Well, it will definitely be down. It will be definitely down for the year, there's no doubt. I've always said that. I've always said that '14 appears to be the crossover point. I don't know where it will cross, but for the year I believe it will be positive.

Greg McDowell - JMP Securities LLC, Research Division

And then one last question, if you don't mind me slipping one in here. The Quiterian product, I know that was primarily a European-based product. But I was wondering if you could comment on the success of moving that data visualization product into the United States and other geographic areas.

Peter I. Cittadini

Yes. That was primarily actually just a Spanish market product, but I wouldn't even say it was European. It's been well integrated into the suite of products. It's doing extremely well in proof of concepts where I believe that it is approximately 10% of our overall going-forward pipeline. So as you know, analytics has really gone beyond the hype of what it brings to bear. People are actually vigorously pursuing analytics associated with various aspects of what they're trying to accomplish. With us, we're much more big data-oriented because of the power of the back end that the iHub brings to this analytics product. But it is highly differentiated. It is a nice sort of crossbreed between more easy-to-use visual data mining products, as well as sort of the heavy-duty SaaS-type back-end analytics. So we actually have high hopes for it, and we deem that it's going -- it's moving very well.

Operator

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

Kevin Liu - B. Riley Caris, Research Division

Getting to the deals that have slipped out and the fact that you closed 80% of your bookings towards the final month of the quarter. Could you just talk a little bit about what you're experiencing in your sales cycles, how do you kind of -- how the experience was across geographies and whether you're seeing any improvement in the pace of these sell cycles moving into Q4?

Peter I. Cittadini

Yes. I mean, Q3, as you know, is seasonally down. But it seems like it was originally the French who would take the 2 months off and then other Europeans. And it's actually moved to be a global phenomenon. Everyone wants balance in life. I don't quite understand it, but it's a reality. There was really no one around to sort of sell to and conclude arrangements with in July and August. Everything sort of happened within the confines of September. Having 32 years of experience with Q4s, I can clearly tell you that an October to December quarter will be much more progress-oriented for ourselves and our customers in doing business. So this will be a typical uptick in Q4 associated with enterprise software companies. But Q3 was really not a lot there to go pursue until September, and that was the reality for us.

Kevin Liu - B. Riley Caris, Research Division

Got it. And 2 -- or a handful of 7-figure deals that you said may have slipped into Q4, could you just talk about whether those were for the iHub product or the legacy stuff? And then maybe where you are in terms of the actual contracting phase with the sell cycle.

Peter I. Cittadini

Several transactions, I would say, are both. There are some iHub ones and there's some legacy ones and some are rather imminent. So I think we have good possibility of closing our fair share of those slipped transactions and potentially getting more of the large transaction pipeline closed within the quarter as well.

Kevin Liu - B. Riley Caris, Research Division

Got it. And just one last one for me. When you look at the declines on the legacy side of the business, did you feel like that was primarily a result of the difficult comp? Or did you also feel like some of the sales force realignment issues really did play a role because I would think just having more people focused on it should hopefully help mitigate some of those declines?

Peter I. Cittadini

Yes. Again, I think when we had all 70 people chasing everything, certainly you're going to find more of that legacy stuff. But the reality is the legacy stuff has to find us because if there is an increment in legacy product, we're the only place that people can go get it, so it's sort of a timing issue. But the reality is, and we've always said this, that the legacy part of our business will go to 0 over some period of time. We experienced a bunch of lumpiness associated with the maintenance over the last couple of years, and it's just a matter of time when we experience the same amounts of lumpiness associated with the license portion of that business. And so I think it's a multi-variable phenomenon. It's inevitable that it will continue to decline.

Operator

[Operator Instructions] Mr. Cittadini, there are no further questions at this time. I would like to turn the floor back over to you for closing -- I'm sorry, we do have a question coming from the line of Frank Sparacino from First Analysis.

Frank Sparacino - First Analysis Securities Corporation, Research Division

Pete, I want to go back to your comment you just made a few minutes ago. So it doesn't sound like in terms of the deals that slipped out of the quarter that there was pricing issues, customers asking for deep discounts. Is that accurate?

Peter I. Cittadini

Yes, that's right. I mean, we just couldn't conclude the transaction during the course of the quarter.

Frank Sparacino - First Analysis Securities Corporation, Research Division

Okay. And then with respect to 2014 in terms of around giving guidance for BIRT, what are sort of the factors that give you comfort that you've got a little bit better visibility into the business today than maybe 12 months ago?

Peter I. Cittadini

It's literally just the critical mass that we have, the go-to-market strategies as far as the 3 markets that we're pursuing where we're seeing good progress in activity and people understanding exactly the solution that BIRT and the BIRT iHub bring for that particular market. It's really time to act as if the transition has concluded and completely focus on what's relevant to our future. Not that we're going to just disband any focus on the legacy side. As you know, and we discussed this last quarter, there is a very small boutique-ish sales force focused on the legacy stuff, but the legacy stuff is really there for continued cash flows. It's really not there as a relevant piece of the revenue picture at Actuate Corporation. And I want to solely focus on the relevant piece of revenue to us and our shareholders on a going-forward basis, and I think I have enough critical mass associated with the relevant piece of revenue. So I'm deeming that the transition to reporting that way in 2014 is the right thing to do.

Operator

Ladies and gentlemen, that is all the time that we have for questions today. I would like to turn the floor back over to Mr. Cittadini for closing comments.

Peter I. Cittadini

Okay. Ladies and gentlemen, thanks for your participation, and we look forward to either seeing you at the Customer Days, the Investor Conference and/or approximately 90 days from now with our next earnings call. Thank you, again.

Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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Actuate (BIRT): Q3 EPS of $0.07 misses by $0.02. Revenue of $32.3M misses by $1.4M. (PR)