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Progress Software Corporation (NASDAQ:PRGS)

F1Q 2014 Results Earnings Conference Call

March 27, 2014 05:00 PM ET

Executives

Brian Flanagan - Investor Relations

Phil Pead - President and CEO

Chris Perkins - Chief Financial Officer

Analysts

Steve Koenig - Wedbush Securities

Mark Schappel - Benchmark

Greg McDowell - JMP Securities

Aaron Schwartz - Jefferies

Eugene Fox - Cardinal Capital Management

Matt Sullivan - Fiduciary Management

Operator

Good day, and welcome to the Progress Software Corporation Q1 Investor Relations Conference Call. As a reminder, today’s call is being recorded. At this time, I’d like to turn the conference over to Mr. Brian Flanagan. Please go ahead, sir.

Brian Flanagan

Thank you, John. Good afternoon, everyone and thanks for joining us for Progress Software’s fiscal first quarter 2014 earnings call. With me today is Phil Pead, President and Chief Executive Officer; and Chris Perkins, our Chief Financial Officer.

Before we get started, I’d like to remind you that during this call, we may discuss our outlook for future financial and operating performance, corporate strategies, product plans, cost initiatives or other information that might be considered forward-looking. This forward-looking information represents Progress Software’s outlook and guidance only as of today and is subject to risks and uncertainties. Please review our Safe Harbor statement regarding this information, which is available both in today’s press release, as well as in the Investor Relations section of our website at progress.com. Progress Software assumes no obligation to update the forward-looking statements included in this call, whether as a result of new developments or otherwise.

Additionally, on this call, we may refer to certain non-GAAP financial measures such as operating margin and diluted earnings per share. You can find a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP numbers in our earnings release issued today.

Today, we published our financial press release on our website and also furnished the information to the SEC in an 8-K filing. These documents contain the full details of our financial results for the fiscal first quarter 2014, and I recommend you reference these documents for specific details. Today’s conference call will be recorded in its entirety and will be available via replay on our website in the Investor Relations section.

With that, I’ll now turn it over to Phil.

Phil Pead

Thank you, Brian, and good afternoon, everyone. Thank you for attending our first quarter earnings call. Over the last year, we have accomplished a great deal in refocusing our company around our core competencies. Everyone at Progress has contributed to this accomplishment and the excitement and energy around our future has never been more positive.

Despite all the changes we made in our transition towards becoming a leading application platform as a service company, we kept our focus on the fundamentals. We reenergized our OpenEdge partners and customers; we introduced our Pacific platform as a service; we released more new functionality over the last 12 months in the previous 5 years; and we made our company more efficient, significantly increasing our operating margins.

So, it is with disappointment that we had to announce recently that our first quarter results would fall short of our expectations. While the timing of a number of opportunities contributed to the miss, it also exposed for us a need to sharpen our focus on some of those fundamentals.

When the timing of opportunities negatively affects revenue expectations, it is almost always due to an insufficient pipeline of opportunities to cover any delays in timing. Reviewing the reasons for this, we noted that the bright news is that we are generating a higher level of interest across all our solutions. But the not so bright news is that we did not see this translate to actionable pipeline. In part, this was due to internal lead routing and follow-up issues and in part due to a poor design in our go-to-market sales coverage. The products most affected were DataDirect and Corticon; and the region most affected was North America as the majority of the revenue derived from these products is from our North American market.

We’ve made changes to our sales coverage for DataDirect and Corticon as well as lead routing system enhancements. And I believe these changes will result in significantly increasing our pipeline opportunities as well as our conversion to revenue. Much as we guard against these kinds of events during a business transition, these weaknesses sometimes only manifest themselves during a stumble which clearly occurred in our first quarter.

That said however, it is important to note that our OpenEdge market remains vibrant. While revenues were down over the prior quarter due to the delay in closing some large deals, bookings were up in the quarter year-over-year, despite some stiff comparisons and our renewals remain solid. Our 1,400 OpenEdge ISVs are selling more of their solutions to their customers. Their solutions are made more competitive by utilizing new technologies from Progress and their execution is improved as we assist them with their go-to-market channel activities.

We have great confidence in our OpenEdge business and therefore our focus for execution lies in improving our DataDirect and Corticon revenues. I know that I have spoken many times about the market leading competitiveness of DataDirect and how the growing number of data sources increases our opportunities to sell this solution.

While OEM opportunities contribute to occasional lumpiness in revenue recognition, this should be offset by better field coverage of our direct customers and partners. The level of customer interest that leads the DataDirect is very positive, which validates the need for this product in the market. Corticon is also a market leader and is used by some of the largest companies in the world to manage complex roles. eBay for example uses Corticon to help manage its online marketplace. More than 20 U.S. states use Corticon to determine eligibility for healthcare cost subsidies.

Again, we were not organized sufficiently to take advantage of the market demands for this solution. And we’ve made changes to resolve these issues. So while our core channel business remains strong, we need to execute better not only on our data connectivity and rules solutions, but also on our direct end users who represent a substantial market for all of our products.

Our Progress Pacific platform has enabled us to engage much more strategically with our direct customers and we have increased our attention to this important segment of our future revenues. Progress Pacific is gaining momentum. While this momentum is still not meaningful to revenue and earnings, I’m very encouraged by the increased traction.

Our digital strategy which has been a significant focus for us since we announced our Pacific platform, it is executing well, resulting in a dramatic increase in interest and leads being driven to our websites, as well as the addition of new customers.

Progress is positioned as a visionary in the Gartner Magic Quadrant for application platform as a service is helping to create significant interest in our platform, expanding awareness of Progress in the market. We’re beginning to see more of our OpenEdge partners take advantage of Pacific’s cloud development capabilities to open up opportunities for them to sell additional applications in their marketplace.

We are adding new functionality to the Pacific platform which will further enrich the user experience, with several major releases due this year. These releases will include many exciting new features including a mobile application development platform, which will enable mobile application builders to take advantage of functionality, which we believe is unique to Progress.

So, in summary, our core on-premise channel business remains solid and we continue to nurture, maintain and grow this core business. We need to execute better on our DataDirect and Corticon solutions for which demand remains strong by building appropriate pipelines to support our revenue objectives. And we are excited about the growth prospects of our Pacific platform as we add new customers and help our existing channel partners compete in the rapidly growing SaaS market.

While we remain very optimistic about our future growth opportunities, we also recognize that it will take some time for the changes we are making in our sales coverage to bear fruit. And as a result, we are taking a more cautious view about our financial expectations for the year.

I will now turn it over to Chris to review in more detail our Q1 performance, as well as our expectations for Q2 and for the full year. Chris?

Chris Perkins

Thank you Phil and good afternoon everyone. As a reminder, and consistent with our previous earnings calls, all of the financial metrics I will talk about today are related to our continuing operations and include results from product lines that were divested in 2012 and 2013, which were reflected in the press release as discontinued operations for all periods presented.

Total revenue for the quarter was $75 million compared to $84 million in Q1 2013, which represents a decline of 11% at actual exchange rates, and a decline of 10% on a constant currency basis. This was below our guidance range of $80 million to $82 million. The decline was primarily due to license revenue which was $22 million in the first quarter, down 26% from Q1, 2013 at actual exchange rates and down 25% on a constant currency basis.

The license decline was in North America and EMEA, primarily related to sales of our DataDirect and Corticon products and to a lesser extent, sales of OpenEdge to direct end users. Also, the first quarter of 2013 included a net impact of $5 million of license revenue related to open orders. Again, we expected our bookings and revenue performance to be better this quarter which would have somewhat offset this Q1, 2013 impact from open software license orders.

Maintenance and services revenue was $52 million, down 3% from Q1, 2013 at actual exchange rates and down 2% on a constant currency basis. The decline in maintenance revenue was primarily in Latin America due to the impact of moving to a distributor model in certain markets and in EMEA where we experienced lower renewal rates than in our other region. Overall however, our maintenance renewals were in line with our expectations with renewals rates above 90%.

On a constant currency basis, first quarter year-over-year revenue declined by 6% in OpenEdge; 18% in DataDirect; and while currently a relatively small portion of our total revenues, 67% in Corticon. The decline in all of the product lines was primarily due to a shortfall in license sales in the quarter.

We anticipated closing a number of North America and EMEA deals including several in the $500,000 to $1 million license range that did not close in the first quarter. As Phil mentioned previously, when the timing of some of these opportunities change, unlike in past quarters, we did not have the breadth and depth of pipeline coverage to make-up the shortfall.

For our Q1 revenue by geography, North America was $35 million for the first quarter, down 12% compared to the same quarter a year ago. EMEA first quarter revenue was $29 million, down 12% on constant currency. And Latin America first quarter revenue was $6 million, down 14% on constant currency. APJ revenue for the quarter was $6 million, up 21% on constant currency.

Non-GAAP operating margin in the first quarter was 29%, 3 percentage points higher than the first quarter of 2013. This reflects non-GAAP operating expenses of $53 million, down $9 million from a year ago and down sequentially from $57 million in the fourth quarter of 2013.

The net reduction in operating expenses year-over-year is primarily the result of executing on our margin improvement initiatives during 2013. These initiatives lowered our operating expenses and it allowed us to continue to invest in product development and marketing programs to support our growth plans. Product development expenses increased 13% in Q1 2014 compared to Q1 2013.

Adjusting for the impact of software development cost capitalized in Q1 2014, total product development investment increased by 20% over Q1 2013. We planned to continue making investments in product development and marketing programs as we build out and enhance our Pacific platform in other products throughout the year.

The sequential decrease versus Q4 is due to lower selling and marketing cost related to Q4 revenue seasonality and cost associated with our annual user conference during Q4.

Our first quarter non-GAAP earnings per share from continuing operations was $0.28 compared to $0.24 in the first quarter of 2013, an increase of 17%. This was below our guidance range of $0.29 to $0.31 due to the revenue shortfall I previously discussed.

We continue to make the investments in our products to support future growth, which is reflected in the increased level of our product development and marketing program cost. The certain cost being closely went to revenues, as well as active operational management of our cost structure, the impact of the revenue shortfall on EPS was somewhat mitigated by lower operating expenses.

Operating cash flow was approximately $25 million for the quarter compared to an outflow of $25 million in Q1 2013. Adjusted for cash used for restructuring charges of $1.6 million, resulting from our margin improvement initiatives, operating cash flow for the first quarter would have been approximately $27 million.

The cash outflow in Q1 of last year included approximately $42 million in tax payment made for the gains on divestitures on our non-core product line. Under GAAP, these tax payments are required to be reflected in cash flows from operating activities, while gains on the divestitures are reflected in cash flows from investing activities. Q1 2013 operating cash flow also included restructuring charges of approximately $6 million associated with our margin improvement initiatives.

Adjusting for cash flow used for tax payment on the divestiture gains, and the restructuring charges resulting from our margin improvement initiatives, operating cash flow for Q1 2013 would have been approximately $22 million.

Adjusted free cash flow was approximately $21 million for the first quarter compared to adjusted free cash flow of $22 million in Q1 2013. Our Q1, 2014 free cash flow included capital investments of $6.5 million compared to $900,000 in Q1 2013.

Q1 2014 investments included $4.5 million to license cloud-based technology for building enterprise mobile applications, which includes digital development tools and integrated back-end services. This technology is being integrated into our Pacific platform. Also included in Q1, 2014 our capitalize software development cost of $800,000 which represents the ongoing software development cost of our Pacific platform. As discussed in our fourth quarter conference call, we did not begin to capitalize software development cost until Q4 2013, so there were no development costs capitalized in Q1 of last year.

We repurchased 409,000 shares of our common stock in the first quarter at a cost of $9.8 million as part of the $100 million share repurchase program authorized by our Board in January. The company ended the quarter with the strong balance sheet, with ending cash, cash equivalents and short-term investments of $248 million and no debt.

Net DSO from continuing operations for Q1 was 71 days, up five days from 66 days in Q4 2013 and up six days from Q1 2013.

The quality and aging of our receivables is very good. The increase in DSO both sequentially and year-over-year was mainly driven by a higher number of deals closed and invoiced in the latter part of the quarter.

We ended the quarter with just over 950 employees, up 2% from the fourth quarter. As Phil mentioned, we are lowering our revenue expectation for 2014, since it will take some time for us to fully implement the changes we are making toward building our direct end user pipeline primarily for DataDirect and Corticon. Also, the 54% of our revenue stream outside of North America will continue our cautious outlook due to macroeconomic uncertainty in some regions where we operate.

For fiscal 2014, we expect revenue to be between $331 million and $338 million, a year-over-year change of between minus 1% and plus 1%, and non-GAAP earnings per share of between $1.37 and $1.43, a year-over-year increase of 15% to 20%. We expect non-GAAP operating margin for 2014 to be between 33% and 34%, free cash flow to be between $79 million and $83 million and a non-GAAP effective tax rate of between 32% and 33%.

Our guidance is based on our revenue for fiscal 2014 being derived primarily from our on-premise business. We do expect a modest revenue contribution from Pacific, where near-term revenue growth is somewhat lower due to the impact of the subscription revenue recognition for cloud-based applications. As the revenue contribution from Pacific becomes meaningful, we will provide metrics to help our investors better understand the momentum we are achieving.

For operating margins, our guidance includes investments we will continue to make in product development and marketing to support our future growth. Our earnings per share guidance includes the impact of shares repurchased in the first quarter, but does not include the impact of any share repurchases in the remainder of 2014. Any future share repurchases would have minimal impact on earnings per share in the quarter which they occur, but we will continue to provide updates each quarter on any repurchase activity and its impact on future earnings per share.

Our fiscal 2014 second quarter guidance, we expect revenue to be between $78 million and $80 million and a year-over-year decline of between 2% and 5%. And non-GAAP earnings per share of between $0.32 and $0.35, a year-over-year increase between 19% and 30%. We expect Q2 year-over-year revenues to decrease due to lower license revenues as we continue to build our pipeline.

Similar to the first quarter, the second quarter of 2013 revenues benefited from approximately $4 million of open software license orders that were booked in Q1 2013, but were not recognized until the second quarter.

In summary, while we’re disappointed with our financial results, we remain confident in our strategy and products. We are committed to executing on our long-term growth opportunities in both on-premise and cloud-based application development. We expect our first half revenues to be down on a year-over-year basis, but do expect that we will deliver year-over-year revenue growth in the second half of the year that will reflect the positive growth opportunities we are seeing in our business.

With that I’d like to hand it off to Brian for the Q&A.

Brian Flanagan

Thank you, Chris. That concludes our formal remarks for today. I’d now like to open up the call to your questions. I ask that you keep your remarks to your primary questions and one follow-up. I will now hand over to the operator to conduct the Q&A session.

Question-and-Answer Session

Operator

Thank you, Mr. Flanagan. (Operator Instructions). Our first question comes from Steve Koenig from Wedbush Securities.

Steve Koenig - Wedbush Securities

Hi gentlemen thanks for taking my question. One housekeeping question and then one more substantial question. I apologize if I missed this, but did you gave -- do you have multi-year licenses for ending for the Q1 and the open orders number for ending of Q1, this just finished quarter?

Chris Perkins

Multi -- you help me understand the question; do we have multi-year license agreements at the end of Q1?

Steve Koenig - Wedbush Securities

Sorry Chris. Do you have the backlog composition including the multi-year licensing arrangement and the software license that was received, but not shipped?

Chris Perkins

Right. We do not have any open orders or unrecognized orders at the end of Q1 2014.

Steve Koenig - Wedbush Securities

Okay. And then what about -- so that’s the open orders line, what about the multi-year licensing arrangement backlog which had started ‘13 at $19 million in Q1 and then ended, you ended the year I believe at $13 million?

Chris Perkins

Correct.

Steve Koenig - Wedbush Securities

Yes. And what about -- do you have that number for Q1?

Chris Perkins

Yes, it’s approximately $10 million.

Steve Koenig - Wedbush Securities

It’s $10 million, okay thank you. I’m sorry if I missed that. Okay. And then I want to ask you guys a question about DataDirect Connect here, it’s all kind of related, so sorry it’s a little bit of a multi-part. But I wanted to verify the weakness, the weakness was more direct, it wasn’t as much OEM. And the OEM deal -- I understand the real chunky, so you can’t have, you can’t draw their conclusions just looking at one quarter. But it seems like for the last several years, gone back several years now the trend in DataDirect connect has been pretty unmistakably down. And I'm wondering if you can -- is there something structural in the business? And in particular I'm wondering are the OEMs more aggressively trying to bundle their own products as well, has the OEM trend been down? So, any comments you can give there would be helpful.

Phil Pead

Yes. Sure Steve, this is Phil. I don't disagree with you that historically as you look at the performance of DataDirect, it definitely exhibits lumpiness in the revenue recognition. I will tell you that on the OEM front that still remains a very strong market for us. Remember that we are always competing with three. And when you mentioned them bundling their own products, that's not what we are seeing.

And I think that as more and more data sources are being requested for software applications in order for them to get access to data it's a great opportunity for us. It is an area that clearly the two market drivers for us are in OEMs and direct end users for DataDirect. And by the way, similarly with Corticon our two primary markets would be systems integrators and direct end users.

So, our go-to-market sales coverage for both of those products really needed a much more technical bias in our sales approach. When we went off into and executed on the strategy, where we believe that we could do a lot more cross selling over -- since we are existing customers, we found that the technical element of our sales approach got diluted in that effort. And so, as part of our refocus on both of these areas, both of these solutions, as well as the direct end users, we are refocusing those technical resources, so that our go to market sales coverage includes the element that we believe caused this to have lower than appropriate pipelines to support our revenue objectives.

Steve Koenig - Wedbush Securities

Okay, thanks. I may jump back in the queue, I appreciate it.

Phil Pead

Okay.

Operator

Our next question comes from Mark Schappel from Benchmark. Please go ahead.

Mark Schappel - Benchmark

Hi, good evening. Thanks for taking my call. Phil just building on the earlier question on DataDirect that business has always been a lumpy business. I was just wondering, what you are doing actually to improve visibility in that business and also maybe split up the lumpiness going forward?

Phil Pead

Yes, I agree. Now clearly the lumpiness comes from doing some substantial OEM deals which of course we get very excited about; it does of course make it hard for comparisons for future periods. But it’s still a very strong area for us to pursue and we are going to continue to do that. Where I think we can somewhat smooth that lumpiness is by being really focused in our direct end user base not only with existing customers, but really a lot of net new customers. And we are excited, refocused on the decisions that we have made with our sales organization, as well as changes that we have made to our internal lead routing systems, we think will certainly improve the pipelines and as we sell more to our direct end users, I think that will accomplish the -- hopefully will accomplish the revenue more even revenue profile for that product going forward.

Mark Schappel - Benchmark

Okay, great. Thank you. And then on the project Pacific business, now moving over to -- excuse me, move to Progress Pacific, would you be introducing any new metrics around the Pacific any time soon, help us gauge how that business is moving forward?

Phil Pead

Yes. We’re looking forward to doing that. I think that the question for us is going to be that of course as soon as we release metrics, first of all, we want to make sure that they’re meaningful, because it’s still a relatively new platform in the marketplace. I can’t tell you that we’re really excited about the early stages of the release of Progress Pacific.

We’re engaging with new segments of the marketplace which we haven’t previously been able to approach because we didn’t have a solution for them and then more specifically talking about solutions providers who are looking to OEM a platform in order for them to create value for their solutions and services, as well as direct end-users who are wishing to modernize their existing applications or create new ones. And when we get to that threshold I think that is meaningful for investors, for us to provide those metrics, we’re looking forward to doing that. I would hope that if we continue to see the traction that it would either be late in this year or early next year before we would release those.

Mark Schappel - Benchmark

Okay. Thank you.

Operator

Our next question comes from Greg McDowell from JMP Securities.

Greg McDowell - JMP Securities

Hi guys. Thanks for taking my questions in time. Phil, one for you first, you mentioned not being organized efficiently in your prepared remarks. And I was just wondering some of the steps you’ve taken to organize the sales force more efficiently to improve on execution? Thanks.

Phil Pead

Yes, sure Greg. It was I kind of gave overview of that previously, but essentially the changes we made related to being more specialty focused, both DataDirect and Corticon require more technical sale and in our effort to increase cross-selling and that technical effort was really diluted from the direct sales effort.

Those resources are being refocused to those products and we are increasing our sales efforts in our direct end user base. So we think that those changes in our go-to-market sales coverage will be very focused on both DataDirect and Corticon in a way that I think was diluted in our previous design of our organization.

In addition, we had lead routing issues where we -- because we had a much broader sales organization, selling those Pacific products, leads that we generated weren’t necessarily reaching the sales folks to follow-up on them. And this is really blocking and tackling but I think you have to remember that some of the systems that we have implemented at Progress over the years have changed substantially in their functionality, I mean not necessarily the functionality, but the rules necessary for us to route leads appropriately as our strategy changes.

Some of those rules became complex and what we found is leads that should have been routed to sales people, weren’t routed to sales people and it was difficult for them to follow-up on. So making those lead routing system enhancements and changing our go-to-market sales coverage, we think is really going to have a strong impact on us in the second half of the year and going into 2015.

Greg McDowell - JMP Securities

That’s helpful, thank you. And Chris, maybe one for you, you mentioned lower renewal rates in EMEA and I was just hoping you could give us a little more color on sort of what’s behind the lower renewal rates in that particular region? Thanks.

Chris Perkins

Sure. We, in our EMEA market, we had several customers that were still working through some of the renewals that they had due in the first quarter, we’re continuing to work through those. They had a very moderate impact on revenue in the quarter. But again, we’re still working with those customers. I think we will get those resolved and work through those, so that on an adjusted basis, our renewal rates in EMEA will be back on track. But nothing systemic, it is just working through some of our customers as far as that contracting process.

Greg McDowell - JMP Securities

Great. Thank you very much.

Operator

Our next question comes from Aaron Schwartz of Jefferies.

Aaron Schwartz - Jefferies

Good afternoon. Thank you. Phil, at the end of your prepared remarks, you sort of acknowledged that it’s going to take a little bit of time to push through some of these go-to-market changes. And if we look at the guidance, it still implies, it seems like pretty healthy sequential growth on the license side here into Q2. And I’m just wondering if you could sort of reconcile it to and talk about some of the things that would bring about that sequential change here. Is it some of the deals that, larger deals that you alluded to that flipped out of the quarter or do you just had better visibility on that or can you just sort of walk through those two comments, one seems like it’s longer term to fee change and the other on the guidance seems like it’s a little sooner?

Chris Perkins

Hey, and just to correct one thing, the guidance for Q2 implies that our license revenues will be down sequentially, but down…

Aaron Schwartz - Jefferies

Yes, I was looking, I guess sequentially the change.

Chris Perkins

Correct.

Phil Pead

Yes. So, the -- my view on that Aaron is that our sales organization actually does a really good job generating in quarter pipeline. Some of the sales cycles that we have particularly for DataDirect aren’t very long. And so we expect given the visibility that we have got in pipeline [dues] that we have today, that we will be able to close those deals in order for us to achieve the quarter’s objectives, and also be able to generate new pipeline within the quarter that could close in the quarter.

Aaron Schwartz - Jefferies

Okay.

Phil Pead

Does that help?

Aaron Schwartz - Jefferies

Yes, it does. And the second question I had is, I know you spent most of your prepared remarks talking about Corticon and DataDirect, but it did sound like OpenEdge was maybe now that not where you wanted it to be either and was there a common denominator on that side of the business? It seemed like you really spent a lot of time last year ensuring the visibility into that business was a little bit better and it seemed like you were quite optimistic about OpenEdge coming into this year, and I am just wondering if you could just spend a minute or two on the OpenEdge business? Thanks.

Phil Pead

Yes. Actually, we are still really happy with the channel performance for OpenEdge. The revenue decline was really in our direct end user base, which again as I said in my prepared remarks, we’ve really got to focus and do a much better job in our direct for our direct end users. They’re just substantial opportunity with our customers. We have some really great marquee marking customers. And I think in our efforts to reenergize and focus on our channel and our partners, add new more functionality to help them resell their products has certainly paid off for us. And that remains vibrant as does of course our renewal rates. But, I think that we could execute better going forward on taking care of our direct end-users and generating new ones.

It also by the way gives us validation for ISVs who are selling their products. When you mentioned some of the names like I just did with eBay, when you mentioned some of the direct end users that we have, it’s a very impressive list. And for us to engage better and be able to share with them some of the new solutions we have and to talk about the Pacific platform which is a story we’ve only recently been able to share with them, gives us I think a great opportunity in the balance of this year to generate the revenue for us to drive the growth that we’re looking for.

Aaron Schwartz - Jefferies

Terrific. Thank you.

Operator

Our next question comes from Eugene Fox of Cardinal Capital Management.

Eugene Fox - Cardinal Capital Management

Thanks. As it relates to your growth by product, could you repeat those numbers again, want to make sure I heard them, OpenEdge et cetera?

Chris Perkins

Sure. On a constant currency basis, OpenEdge declined, from a revenue perspective, declined 5.5% in the first quarter; DataDirect declined 18%; and Corticon down 66%.

Eugene Fox - Cardinal Capital Management

Do you have those same numbers for the first quarter of last year, so we could at least see what the comparisons you’re up against were?

Chris Perkins

Sure. Yes, I am just looking for the percentages. Yes. First quarter last year, Brian, do you have those handy with, the growth by product? I’m sorry; I will follow-up in a moment. Just let me grab those for first quarter of last year.

Eugene Fox - Cardinal Capital Management

Sure. No problem, couple of other questions. The $5 million of incremental license that you booked last year, could you tell us which products those were recognized against last year?

Chris Perkins

Sure. It was primarily related to OpenEdge and Corticon that was in our open orders that affected the first quarter of 2013.

Eugene Fox - Cardinal Capital Management

So those two products; any idea of order of magnitude?

Chris Perkins

It was probably about two-thirds OpenEdge and about a third Corticon.

Eugene Fox - Cardinal Capital Management

In the $4 million number that you’ve given us for the second quarter last year, would it be similar, sort of similar to say what we experienced in the first quarter?

Chris Perkins

It’s about -- as you implied, it’s about $4 million and it is split out, about $3 million OpenEdge and a $1 million DataDirect.

Eugene Fox - Cardinal Capital Management

Okay.

Chris Perkins

And back to your question on the product line trends for Q1, I apologize, in the first quarter OpenEdge was up 4%, Corticon 10% and DataDirect down 18%.

Eugene Fox - Cardinal Capital Management

Okay. Thank you, guys. I appreciate it.

Operator

Our next question is from Steve Koenig of Wedbush Securities.

Steve Koenig - Wedbush Securities

Hi. Thanks for taking my follow-up here. Look, here I just wanted to expand on your explanation as you guys were talking about Aaron’s question there on OpenEdge and doing a better job in direct channel. I’m wondering thoughts here, what specifically you could do to execute better in the direct channel. And more specifically, what do you guys need to do, not so much from a product perspective, but more on go to market and sales perspective to be able to compete with the license Salesforce and Force.com as their platform business, is it more and more important part of their strategy for getting growth here?

Phil Pead

So, if you take the direct end users, Steve, that have purchased OpenEdge for an application, many of those direct end users would benefit from the new technologies that we’ve released over the last 12 months. For example, we’re in conversations right now with direct end users who would benefit from the business process management, the work flow functionality that we’ve integrated now within OpenEdge.

They are also benefiting from the mobility application development platform that we added to OpenEdge. Similarly, we integrated Corticon now with OpenEdge. So, that many of our customers who bought the -- built the application using OpenEdge, many years ago didn’t have that opportunity to externalize their rules.

So, there is a lot that we can engage our existing OpenEdge direct end users with that we couldn’t have that conversation 12 months. So…

Steve Koenig - Wedbush Securities

But.

Phil Pead

Go ahead.

Steve Koenig - Wedbush Securities

I’m sorry to interrupt, Phil. So just to put a point on my question now. Products, I understand that you have got new capabilities, but the products don’t sell themselves. I am wondering what you need to do with the sales force to enable them to achieve better results and selling these capabilities.

Phil Pead

Yes. So we have a direct sales organization that has been focused on managing that direct end user base, but a lot of it I will tell you has been more of a relationship build because the story that I just gave you with the integration of the functionality that we have released, has only been relatively recent since we put all that together on in a single platform and all that together for OpenEdge as a product.

And our opportunity to go back to our existing users with our direct end user sales force, I think is a really positive one. And we have got a really strong plan for us to engage with our direct end users, not just obviously adding the functionality to OpenEdge but because we now have an opportunity to have a conversation about Progress Pacific, which was your follow up question regarding our ability to compete with Force and so on.

We believe that our platform as a service is equal to if not better than any of the competition that we have in the marketplace today. There are lots of different positives that we can address with any direct end user. And if they do the comparisons and if they are really looking for a platform as a service which many of these direct end users are, they will find that the Progress Pacific platform is very competitive. If they pull the Gartner Magic Quadrant, they will see us as a visionary above many of the established players that you just mentioned. Obviously, Force is --Salesforce.com is a great competitor. But nevertheless, there is a huge opportunity for us to market our Pacific platform to our direct end users.

I think that overall, the refocus that we have with our direct end user base, the story that we can now give with regards to the solutions that we sell and how competitive they are and the functionality that we have in our products, gives me great comfort that I think -- I am very optimistic that we can generate the kind of revenue opportunities that we need to generate for the growth in the second half of this year.

Steve Koenig - Wedbush Securities

Thank you very much.

Operator

Our next question comes from Matt Sullivan from Fiduciary Management.

Matt Sullivan - Fiduciary Management

Hey guys, can you hear me?

Phil Pead

We can Matt.

Matt Sullivan - Fiduciary Management

Hey. Phil, I wanted to ask you quick question. You’ve talked in the past about your belief that there will be a hybrid on-premise and cloud environment sort of have the patience for many years to come. And I guess I am curious as to what leads you to believe that? And what happens if that transition to cloud applications is faster than you anticipate? I mean doest that put your legacy business, your legacy OpenEdge at risk if people are kind of transitioning to cloud solutions faster than anticipated?

Phil Pead

Well, I think that if you just think about the large number of applications that are out there that have been built to manage on-premise solutions that have been written, I think that it’s very unlikely that the changeover to cloud development is going to occur at a pace that would seriously negatively affect frankly anyone’s business. I think that there is a definite movement and I think everyone can see that to adopting cloud solutions. But I think that there are large numbers of systems of record for example that will remain an on-premise application for many years to come.

As far as our OpenEdge ISVs, remember that they have built a lot of those on-premise applications that they resell in the marketplace. And they are going to continue to nurture, maintain and grow those on-premise applications, because they generate frankly a lot of good maintenance revenue and those -- and a lot of them are systems of record like CRM or ERP systems or many different industries like manufacturing, retailing and so on. But they are also seeing competition from cloud vendors coming in to pick-up certain elements of their functionality particularly with ERP, but that will be additive to them. They will maintain and support and grow their on-premise business and at the same time they will take advantage of our Pacific platform, which enables them to build new applications to compete with cloud vendors who are offering those similar solutions to the market.

So we see an opportunity to maintain our on-premise business for many years to come. We are supporting and maintaining the channel activities for ISVs, who also have a vested interest in maintaining that on-premise business. But at the same time, we recognize that we have an opportunity to take advantage of cloud development.

So, there will be a combination of pure on-premise, there will be a combination of those on-premise applications that will take advantage of cloud development adding for example, HR functionality to ERP, or there maybe some back end financials or expenses that they will add or time management systems, there will be slices of functionality that will be offered on a cloud basis. And then there will be just pure cloud applications out there that are growing very rapidly today.

But, if you look at those cloud applications, they tend to be very specific kinds of functionality versus a large integrated transaction processing based system of record. So, we are excited about all the various permutations of this. And the good news is for us that we’ve got, I think an answer for almost every part of that.

Matt Sullivan - Fiduciary Management

Great. Thanks very much.

Phil Pead

You’re welcome.

Operator

(Operator Instructions). Our next question comes from Eugene Fox from Cardinal Capital Management.

Eugene Fox - Cardinal Capital Management

Just a couple of follow ups. You don’t have an estimate for what your CapEx is going to be for the year?

Chris Perkins

We’ve given details on our free cash flow in total but we haven’t provided details on our specific CapEx estimate.

Eugene Fox - Cardinal Capital Management

Okay. Second question, you guys were not particularly active on share repurchase in the first quarter; given the decline in the share price, should we assume you will be somewhat more active in the second?

Chris Perkins

Well, what -- the way that we’ll address that is again, we’re always evaluating our capital deployment opportunities. We have looked at share repurchase as a clear positive contribution of value to our shareholders. So that will continue to be part of our active evaluation process. Again, we will report each quarter the level of repurchases that we achieve. But that’s the way that we’ll continue communicating going forward.

Eugene Fox - Cardinal Capital Management

Thank you.

Operator

At this time, we have no additional questions.

Brian Flanagan

Thank you all for joining the call today. As a reminder, we plan on releasing financial results for our fiscal second quarter of 2014 on Thursday, June 26, 2014 after the financial markets close, and holding the conference call the same day at 5:00 pm Eastern Time We look forward to speaking with you again soon. Have a good day.

Operator

Ladies and gentlemen, that does conclude our conference for today. We do appreciate your participation. And have a great night.

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