Pervasive Software, Inc. (NASDAQ:PVSW)
F2Q10 (Qtr End 12/31/09) Earnings Call Transcript
January 26, 2010 5:00 pm ET
Randy Jonkers – CFO
John Farr – President and CEO
Sarkis Sherbetchyan – B. Riley & Co.
Good afternoon. My name is Tracy and I'll be your conference operator today. At this time, I would like to welcome everyone to the fiscal year 2010 second quarter financial results conference call. All lines are placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator instructions) Thank you.
I would like to turn the call over to your host Mr. Jonkers, the Chief Financial Officer of Pervasive Software.
Thank you. Good afternoon and thank you for joining us. I'm Randy Jonkers, Chief Financial Officer of 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 investments, 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 and 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 December 31, 2009 and 2008 exclude the amortization of purchased intangibles and stock-based compensation expense and presents income taxes at a statutory 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 a 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 second fiscal quarter. Then John will update you on our plans and operations.
Now, for the financial results. Today, we released financial results for the second quarter of our fiscal year 2010. Revenue and earnings were consistent with our updated guidance provided on January 5. Pervasive revenues totaled 11.6 million in Q2, which is an increase of approximately 400,000 as compared to Q2 of last fiscal year. Our GAAP basis net income was approximately 1 million in Q2 and diluted earnings per share were $0.06, which is consistent with Q2 of last fiscal year.
Our effective tax expense rate in Q2 was 32% as compared to a tax rate of 12% in Q2 of last fiscal year which included a year-to-date rate catchup based on legislative renewal of the R&D tax credit in Q2 of last fiscal year. Our non-GAAP net income in Q2 before amortization at purchase intangibles and stock-based compensation expense and tax of 34% was 1.3 million consistent with Q2 of last fiscal year. Our non-GAAP earnings per share was $0.07 also consistent with Q2 of last fiscal year.
We ended the quarter with approximately 41.7 million in cash and marketable securities and had approximately 17.7 million shares issued in outstanding. Also during the second quarter we repurchased approximately 200,000 Pervasive shares on the open market at a total cost of approximately 1 million or approximately $4.97 per share. We generated approximately 2.2 million of positive cash flow from operations. Our DSOs, or days sales outstanding were 59 days, down from each of the past two quarters. By geography our Q2 revenue is as follows.
Domestic revenue totaled approximately 8 million in Q2 down 10% from Q1 and up 5% from Q2 of last fiscal year. Our international revenue principally Europe and Japan totaled 3.6 million in Q2 up 10% from Q1 and consistent with Q2 of last fiscal year. At a product level our database products represented approximately 60% of our business while our integration and business exchange products represented approximately 40% of our business respectively in Q2.
Turning to operating expenses, our operating costs and expenses totaled 10.2 million in Q2, including stock-based compensation expense and amortization of related to acquired intangibles in the approximate amount of 0.6 million, or non-GAAP expense of 9.7 million as compared to non-GAAP expense of 9.5 million in Q2 of last fiscal year. We had 234 employees at the end of Q2 which represents a decrease of four employees from the end of the first quarter and an increase of 13 from Q2 of last fiscal year due primarily to the acquisition of ChanneLinx in July of 2009.
Now, looking forward we expect revenues in our third quarter of fiscal year 2010 to be in a range of 11 to 12 million compared to 13 million in Q3 of fiscal year 2009 which included a compliance related deal in the amount of 3 million. And we expect GAAP basis diluted earnings of 3 to $0.06 per share compared to GAAP basis diluted EPS of $0.10 in Q3 of fiscal year 2009. We anticipate that our effective tax rate for the third quarter will be approximately 32%.
Non-GAAP profitability is expected to exclude stock-based compensation expense and amortization of acquired intangibles representing approximately $600,000 in the third quarter of fiscal year 2010. With that we expect non-GAAP and fully taxed diluted earnings per share in our third quarter of fiscal year 2010 to be four to $0.07 compared to GAAP – non-GAAP diluted and fully taxed EPS of $0.11 in Q3 of fiscal 2009.
Both of our GAAP and non-GAAP guidance is consistent with the guidance we provided on our earnings update on January 5. Our non-GAAP effective tax rate for comparative purposes reflects the statutory rate of 34% on pre-tax non-GAAP income. We anticipate cash flows from operations between one and 2 million for the third quarter of fiscal year 2010. Also, as in prior quarters we're not providing specific guidance beyond Q3.
For EPS calculation purposes, we expect our GAAP basis and non-GAAP fully diluted share counts for the third quarter fiscal year 2010 to be approximately 17.5 million and 18.3 million shares respectively. Note that the share count estimate excludes the impact of any future share repurchases.
Now, let me turn the call over to John Farr, our CEO of Pervasive Software.
Thanks, Randy. The highlights for our December quarter include the completion of our 36 consecutive quarter of profitability representing now consistent profitability for the last nine consecutive years. Quarter over prior year quarter revenue growth for the ninth time in the past ten quarters, quarter over prior year quarter operating income growth for the eighth consecutive quarter, advancement of the agenda of our Pervasive DataRush initiative, and we completed our 15th consecutive quarter of active share repurchases in the open market in which we have in the aggregate invested approximately $32 million repurchased approximately 7.9 million of our shares 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 primary elements of our business. First of all the database business. For you new listeners and as a reminder our Pervasive PSQL version 10 database is designed to help ISVs, VARs, and OEMs successfully embrace new technologies, including the Windows Server 2008 Operating System from Microsoft, as well as take advantage of the latest in 64-bit technology for accelerated database performance.
Our database engineering team is continually focused on keeping our product up-to-date with the ever-changing environment and the known or anticipated needs of our ISV customer base. During the December quarter the team released our Pervasive PSQL version 10 SP3 which is an update for compatibility with Windows 7 Desktop Operating System released by Microsoft.
In addition, our 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 multicore enhancement of our database engine for a future release that being version 11 to support the latest and rapidly proliferating multicore hardware. Version 11 is presently scheduled for release in the second half of calendar year 2010.
Next, let me update you regarding our integration business. Our investments in the integration business enabled us to achieve year-over-year revenue growth of 8 and 6% in the fiscal years ending June 2009 and June 2008 respectively, by both expanding existing relationships within large companies, as well as continuing to develop new ISV, SaaS and Systems Integrator partnerships.
Our integration revenues in this second quarter of fiscal 2010 were actually quite good representing an increase of several hundred thousand dollars from each of the preceding four quarters. In November, we hosted another successful IntegratioNEXT User Conference in Austin attended by both existing and perspective users of data integration technology as well as by key analysts and influencers.
The success of Pervasive's integration solutions are the result of more than 20 years of solving real world integration problems. Pervasive Data Integrators spans with the range of both cloud and on-premise data and application integration scenarios including one-time data migration, extract transform and load, bidirectional interfaces between diverse applications and complex data exchange both inside and beyond the firewall between multiple entities with data and multiple formats and applications.
And in December, we announced that we were positioned in the visionary section of Gartner's Magic Quadrant for Data Integration Tools. According to Gartner for vendors to be included in the Magic Quadrant, they must possess within their technology portfolio the subset of capabilities identified by Gartner as the most critical firm within the overall range of capabilities expected in data integration tools.
These capabilities including software products to enable the construction and implementation of data access and delivery infrastructure for a variety of data integration scenarios including data acquisition for BI and data warehousing, creation of integrated master data stores, data migrations and data conversions, synchronization of data between operational applications, creation of federated views of data from multiple data stores, delivery of data services in a service-oriented architecture context and unification of structured and unstructured data.
But, what is missing from this in previous Gartner evaluations of the data integration market is the inclusion of price in the evaluation criteria. In this year's report however Gartner did note that vendors in the data integration tools market experienced increasing scrutiny from buyers with regard to pricing, cost models, time to implementation and quality of service and support. Customer organizations reacted to imperatives to reduce costs and derive a new interpretation of value from their investments. And Pervasive is committed to being a value leader.
We are pleased that Gartner's report has recognized in our opinion Pervasive's role as a visionary in the data integration space. We are gratified by what we believe is the recognition of our vision for configure once and deploy anywhere platform for cloud, on-premise and how distributed integration. We continue to push the boundaries of cloud, SaaS and on-premises integration with pioneering capabilities such as universal connectivity, self-service pre-packaged integration, and cloud-based data services all with a value orientation to the market.
Now, an update on Pervasive's DataRush initiative. Pervasive DataRush is groundbreaking technology that addresses the gap between available hardware processing power, excluding volumes of data and what the software industry has been able to deliver in terms of commercial applications to exploit multicore hardware and efficiently extract useful intelligence from massive data sets.
In 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 and a company willing and able to invest significant resources in the market development effort.
In January 2009 almost a year ago, we began to invest in Pervasive DataRush sales and marketing ending this recent December quarter with now eight technical personnel and four in sales and marketing. In the December quarter, these investments resulted in three transactions which together contributed close to 100-K U.S. dollars in revenue for the quarter. As it is with just about any new business, the hardest revenue is the first revenue. And we'll be focused on building upon this initial success in the quarters to come.
On a related note, we have recruited a great addition to the DataRush team in the form of Ray Newmark who will be joining us as VP of DataRush Sales and Marketing. Ray was most recently VP of Worldwide Sales at RapidMind and RapidMind as many of you may recall was a player in the federal processing space for how performers computing and was acquired by Intel in August of 2009. And Ray was with RapidMind during a period of time that from a revenue growth perspective near as closely what I believe we can achieve in the coming 12 to 24 months.
And I believe strongly that with all the great things that our DataRush team has achieved and continues to achieve combined with the addition of Ray Newmark our progress will begin to proceed at a faster clip. So to those Pervasive perspective investors and Pervasive listening in on our call today let me pose a few what if as I did in last quarter's conference call. But we do like to look at this list from time to time and just imagine what if in the coming 12 to 24 months, we complete another large database revenue transaction, which for those of you who had followed us recently have seen us close several large database transactions in recent quarters.
What if multicore becomes relevant and valuable to our large database customer base and therefore provide us good opportunities with our pending version 11 release. What if Microsoft Windows Server 2008 and Windows 7 on the desktop becomes a real catalyst and packaged application serving SMB serving the small to mid sized business. What if our integration business continues to grow with increasing and more leveragable channel and other recurring revenue? What if consolidation of competitors or potential competitors in our markets continues? What if our DataSolutions business which I didn't speak about a lot today, but we do invest there and if that business continues to scale as it has been doing so with more aggregator channels as I call them.
What if DataSolutions the division establishes creditability in the cloud and in new media, which they have continued to do. What if we achieve synergies with our 2009 ChanneLinx acquisition, which we closed a little bit earlier this summer 2009? And what if we complete our next acquisition if and when appropriate candidate is identified?
What if DataRush achieves its first million dollars in revenue and what if we established creditability in the next-generation analytics and data mining markets? What if we continue to increase our shares and or increase our cash and reduce our shares outstanding and to across all of those things what if the economy improves. I know there is a lot of word if there by they are all exciting to us and if we achieve a degree of success and any of those I think that it is a powerful future for Pervasive. We are investing and focused on all of them as a way to create shareholder value. We are bullish on Pervasive and continue to buyback our outstanding shares as we have consistently for the last 15 consecutive quarters.
A quick Investor Relations note, we are scheduled to present a T. Wiesel Partners Investor Conference in San Francisco on February 8 and the America's Growth Capital Conference also in San Francisco on March 2. We have to see many of you at these events and other events in the near future.
I'll now open the floor for questions. Operator, if you will?
(Operator instructions) Your first question comes from Sarkis Sherbetchyan from B. Riley & Co. Your line is open.
Sarkis Sherbetchyan – B. Riley & Co.
Hi, guys how are you doing today?
Good. Thanks a lot.
Sarkis Sherbetchyan – B. Riley & Co.
Just couple of quick questions if you don't mind. First of all, congratulations on the quarter and it's great that the company has recognized its first DataRush license revenues this past quarter. Is it fair to expect sequential growth in the DataRush revenues over the next several quarters?
You said here several -- a couple of questions maybe I was going to get them all and then…
Sarkis Sherbetchyan – B. Riley & Co.
Oh okay great, yeah absolutely. And also you had announced a partnership with Tiara Consulting and SuccessFactors, have they contributed anything to the Integration business and as far as the ISV customers, have you seen any demand driven by the latest installments of the Windows 7 and the Windows Server offerings?
Sarkis Sherbetchyan – B. Riley & Co.
And also the database compliance deals compared with at this time last year, how is the pipeline look, and do you think there is at least one large deal of this nature that gets closed in the latter half of this fiscal year?
Got it. Okay, I am not going to catch out there, do you have anymore.
Sarkis Sherbetchyan – B. Riley & Co.
Not, that's it, actually.
Okay, I got it. All right. So the first question was about our DataRush revenue that we just, that we broke the ice with [ph] if you will here this quarter and the potential for sequential growth. The first thing I'd say and what I did not say in my prepared remarks is that we are already working on a services a particular booking on Pervasive DataRush that involve services for a delivery this quarter the March quarter. And provided that those services are completed by the end of the quarter and that the, the result is accepted by the customer which we have no reason to believe there won't be then I will with that one transaction already have come close to meeting that the totality of our DataRush revenue in the December quarter.
A lot of is there, but as a basis for your question, yes I believe that in the coming quarter, we will match or beat the December quarter, and now of course our plans are to grow henceforth and forever more. And that's why the timing of the hire of Ray Newmark is VP of Sales and Marketing for DataRush is really good time to come, I mean I can't over stress the fact that that we are a company our DataRush is a team with great technology, great technologist, great engineers, great sales people and we just added one, and so its – it's a great business to be in, in the emerging part of the market that's really exciting. And we have some first mover advantage here that we want to make sure that we are in where we are in a good position to go capture. So yes, I believe that certainly our goals and everything we are investing and we are investing fairly heavily here just to grow Pervasive DataRush revenue in sport.
You mentioned couple of partners, SuccessFactors and Tiara Consulting. I would say the question was if they contribute meaning or materially to the results of the quarter. The bottom-line is we have so many customers in our database and in our data integration business that there is not a real tremendous amount of concentration in those businesses by anyone customer, by particular market, by any particular deal [ph]. So I'm not aware of any specific deals or transactions or large amounts of revenue for those two. But certainly we are happy and thrilled and support all of our remaining customers as if they are our only one and give them the proper support that they need.
Your next question was with respect to our database business and what are we seeing in adoption rates traction with respect to our ISVs delivering their packaged solutions, packaged business software solutions in the new OS world of Microsoft that is Windows 7 on the desktop and Server 2008 on the server. We are – we are certainly selling Pervasive version 10 into environments that are running on Windows 7 and running on the Server - on Server 2008.
We are not yet seeing massive large installed base upgrades – upgrade programs run by our ISV customers to try to get their entire base up to the new OS from Microsoft. And as you probably followed the company for sometime our contention is that – that when Microsoft releases a new operating system the – the adoption of that new system takes – takes sometime, I mean it takes – it takes years, it can be – its probably been five or six now six years since Microsoft's last OS revision if you don't count this time in that particular list.
So small businesses in general we'll not rush out and buy at a new OS when it's first released, they'll wait until their next natural refresh of their hardware in which to upgrade to the operating systems to zero [ph]. And when they do so they would be calling then on the ISVs that serve their – their application needs and get upgrades for those applications to run on Windows 7 and Server 2008. And in doing it will generate database upgrade sales for us.
The last question was regarding the database compliance deal pipeline. And for new – new listeners we have – if you look back at the last five or six quarters we've had a few quarters where we've announced relatively large transactions I mean seven digit kinds of transactions for our database business which is unusual for us and of course we didn't have one announced in the December quarter that we do from time-to-time. And the question was with respect to our compliance deal pipeline if you will going forward I would say to you I think – your question was relative to this time last year that probably the list of opportunities maybe a little bit longer, but as I've said consistently over the last couple of years these things are possible to size and they're possible to time.
And so we therefore do not count on them. And we approach them with the sensitivity that they require and take our time about closing them in the optimal way possible for Pervasive and our customers. And in many cases where you're talking about these compliance situations, our customers are probably more anxious even than we are for them to become compliant. They respect software business and want to be compliant. So we let them take their natural course, and so I feel good about what we have coming out but we're certainly not planning our spend budgets around closure of any of those compliance opportunities.
Other than Sarkis, if there are any others?
Sarkis Sherbetchyan – B. Riley & Co.
No. Thank you very much.
All right. Thanks.
There are no further questions at this time.
All right, well, I appreciate everyone's involvement in the call today. We look forward to the things to come for Pervasive. We're excited about the results in the December quarter especially in the database or rather in the DataRush team and in the Integration team, all of the various teams performed well, but those two in particular had really exciting things happening in the December quarter. Thank you for joining in the call and have a good evening.
This concludes today's conference. You may now disconnect.
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