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Actuate (NASDAQ:BIRT)

Q2 2014 Earnings Call

August 06, 2014 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 and Senior Vice President of Operations

Analysts

Greg McDowell - JMP Securities LLC, Research Division

Frank Sparacino - First Analysis Securities Corporation, Research Division

Sarkis Sherbetchyan - B. Riley Caris, Research Division

James N. Gilman - Drexel Hamilton, LLC, Research Division

Operator

Greetings, ladies and gentlemen, and welcome to the Actuate Corporation's Second Quarter 2014 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Tom McKeever, General Counsel. Please go ahead, sir.

Thomas E. McKeever

Thank you, operator. Good afternoon to everyone, and welcome to Actuate Corporation's quarterly conference call. Joining me to discuss our Q2 2014 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 Q2 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 that show our reconciliation from GAAP to non-GAAP financial measures.

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

Peter I. Cittadini

Okay. Thanks, Tom, and welcome, ladies and gentlemen, to our Q2 earnings call, and our first update since our accelerated entry into a subscription licensing model at Actuate. For those of you following along with the slides, I'm moving on to Slide #4.

I'll talk a little bit about the facts behind Q2 of 2014. License revenues came in at $7.3 million. Subscription bookings were $1.6 million. Our non-GAAP maintenance revenues were $17.2 million, and non-GAAP EPS of $0.02.

A couple of comments on these numbers, and then I'd also like to give a little additional color on the license number. These numbers are in line with what we expected for the quarter. And when you drill into the $7.3 million of license revenues and look at the units that they came in through, let's look at the enterprise direct group first, again, selling to direct global companies around the world: 17% of the enterprise direct license revenue numbers came from new customers, 46% of the enterprise direct revenues came from project expansions at current customers, and 37% of the enterprise direct revenues came from new projects as current customers. So the breakdown was 17% new customers, 46% expansion of current projects, and 37% brand new projects, but at current customers allowing us the ability to land and expand. I will tell you, I'm very pleased with the breakdown of the enterprise direct revenues. They broke down with good percentages of new customers coming on board, really good expansion of current projects, which mean people are getting good return on investment from the current application and are spending more on the embellishment of that solution. And we're earning the right by doing great work on current projects to win new projects at current customers. So it really, really is positive.

On the OEM side of the license revenue formula, we did 46% from brand new customers and 54% from the renewals and expanded royalties where they've gone through the prepaid portion of the OEM agreement, and now were paying us on an expanded royalty basis, typically 1 quarter in arrears.

So again, the breakdown of the revenues and the performance were in line with what we expected. The breakdown of the license revenues looked extremely, extremely positive to me.

Moving on to Slide #5. Here's sort of a sample of the second quarter transactions from a logo standpoint. And I will tell you, we've been in the Open Source business now as an adjunct to our enterprise software model for quite a time period, but it's really gratifying to see the benefits of Open Source clearly kicking in. When you look at the logos here, you'll see that we are much more horizontal in our customer base, which makes our business less reliant on any one sector turning negative in any one period. So you'll see lots of travel, you'll see lots of new OEMs. You'll still see financial services firms and government agencies and things of that nature, but you'll see dramatic horizontal expansion in usage of our product, which basically ensures less potential downside associated with one -- any one particular sector. And of course, Actuate Corporation, having done so much in the past within the financial services sector, for those of you who have been holders since '08, '09, you know how that was sort of a blip for us because we were doing 60%-plus out of the financial services sector. And again, a lot of this is driven by Open Source, which is part of the new strategy at Actuate Corporation.

Moving on to the next slide, Slide #6. The caption here is Actuate is a subscription business. I mean, clearly, we committed to a very accelerated embarkment on the subscription business at Actuate Corporation. And let me review some of the sort of rules of engagement that we're adhering to internally.

Subscription licenses, only for new opportunities identified after July 1. So there's a new hand raise that happens after July 1. The only thing that we will be bidding is a subscription license framework for that project. We will be incenting sales reps to convert any perpetual license opportunities that are in their pipeline that was identified and put in their pipeline prior to July 1 to a subscription transaction. Now I know a lot of you have created models and we have our own model. I will give you one caveat with that second bullet, in that there is some license revenue risk, but I would characterize it as extremely modest. And that's because, again, we are incenting sales representatives on a global basis if they have a perpetual license opportunity that was in the pipeline prior to July 1, which we will give them until December 31 of '14 to close that perpetual license transaction. We are incenting them to change that into subscription. We believe that, that is the right thing to do for the business because of all of the benefits of subscription licensing frameworks for enterprise software companies like Actuate. But again, we do expect that a sizable amount of the ones that are in the pipeline today as perpetual will close as perpetual even with the incentives there. But I wanted to give you that caveat.

And as I've said, prior to the third bullet, just basically says that any perpetual license offers made prior to July 1 will expire on December 31 of this year, thus, the sales reps have to close it or resell it as a subscription starting January 1 of '15.

And of course, existing customers with perpetual license projects will be able to add additional perpetual licenses to those existing projects from an expansion standpoint.

Again, we, in the future, may incent sales representatives to try to move those perpetual projects that are pre-existing to subscription. But only time will tell as far as what is going to happen there.

So Q2, clearly, was a hybrid quarter for us. However, you still must -- have to understand that Q3 and Q4, even though not as much of a hybrid type of quarter at Actuate Corporation, they're still hybrid because we do have that perpetual pipeline where we have the right to close it as a perpetual deal through the end of the year. So once we enter into 2015, there will be no new business that will have outstanding bids on that new business on a perpetual basis. So really, the cleanliness of the subscription model at Actuate happens January of 2015. Q2 was definitely hybrid where both models were in play. And for Q3 and Q4, the perpetual model is in play, but only for opportunities that were in the pipeline prior to July 1, thus, making it still somewhat of a hybrid environment for us, but subscriptions should certainly throttle up much, much more substantially than it has in the past few quarters starting with Q3 moving into Q4 and then 2015.

Moving on to the next slide, which is Slide #7. We did indeed launch the BIRT iHub F-type on July 10. And as you know, the reason why we're doing this is to really create ubiquity of the complete BIRT stack for the marketplace. As you know, we have 3.5 million developers that use Open Source BIRT, but as far as the iHub and their exposure to the iHub, it hasn't been there in the past years, thus, the product had evolved to a point where it's been easy enough to use now, where we've created F-type, F for freemium, so people can freely download it for small applications, primarily workgroup and small departmental applications and pilot projects. They can very quickly and easily expand the capacity where they can buy data out on a 50-megabyte increment. The product will make developers more agile and productive, allowing them to create content more quickly and efficiently as part of their web and mobile application infrastructure. And ultimately make users more self-sufficient because of F-type's interactive content capabilities that you don't get with Open Source BIRT, but you do get with F-type.

Thus far, in almost 4 weeks, we've gotten over 1,000 registrations for F-type in downloads, which has been running at 10x greater than the iHub Eval downloads that we used to have prior to F-type. And that, also, has basically been done in stealth mode meaning that we're currently not using all of the social and download sites that will be available to F-type like SourceForge and DZone and Mashable and download sites such as those. You'll be seeing them come online more rapidly during the course of Q3, which we believe will greatly accelerate registrations and downloads for F-type. But we want to do it in a managed way. We want to make sure that the product is receiving great accolades by the developers that are downloading it and working with it, and maybe make some real-time modifications to the product if indeed necessary. So it has the best avenue for success at the source code level within the community of developers.

So again, very pleased with the launch of F-type, and very pleased with the registrations and downloads thus far. And we actually have, within a short month of the product being out there, several pipeline line items that started out with an F-type download and want to look at more commercial iHub.

Moving on to page -- or Slide #8. A little bit more about the F-type. We've really been getting great applause from industry analysts and industry watchers applauding our innovative move to a strategy that incorporates Open Source layered by freemium, layered by commercial technology. It quite -- it really is quite an innovative business model in the marketplace today. And again, I won't read all of the accolades, you could read them for yourself now or later. But we really believe that F-type will be attractive to all developers, regardless of whether that they're BIRT developers or not, in creating new age web- and mobile-based customer-facing applications. However, you must understand, it will have a complete advantage in the pursuit of substantial market share within the Open Source BIRT developer market. So that will be the low-hanging fruit for F-type and where we will be pointing it and marketing it heavily in the early years associated with F-type being digested by the market.

Moving on to Slide #9. The caption here is a solid foundation for the next chapter for Actuate. I'm going to change that real time, so I would say Q2 was a telling and positive cornerstone toward building a solid foundation for the next chapter for Actuate. The keywords being telling and positive. We've really gleaned a lot of information associated with subscription licensing, the appetite for it; freemium, the appetite for that; and how those 2 strategies really create a very substantial -- potential revenue stream at Actuate Corporation over the coming years. So we really think our first cornerstone or building block, which was Q2 2014, was a very, very telling and positive one for Actuate Corporation.

Again, some of the highlights, the 1,000 downloads in less than 4 weeks, really positive. Approximately 60% of those were downloaded by new, named registrations. So we are getting to know more and more of those Open Source BIRT developers that are out there that we don't know who they are. So now they are registering. We get to know who they are and we get to understand what they're doing with that side, and sort of see when they're ready to become a commercial type of project.

And as I said, we've already identified a number of opportunities and proof of concepts with F-type in a very short 4 weeks. We continue to see a steady increase in our subscription business even before a formal transition to it. As I said, this quarter is a more formal transition to the subscription business as will be Q4. The ultimate formality and transition happens January 1 of 2015.

We've delivered to markets some very exciting new products. They are the accessibility appliance, which allows PDFs to be remediated to universally accessible PDF, which is a big legislative move for very large global companies. BIRT Analytics 4.4, again, higher degree of ease of use and more power for the business analyst, really looking at customer analytics.

And finally, the last acquisition we did, BIRT PowerDocs which has a customer correspondence capability that's quite universal, but PowerDocs itself is more of a salesforce.com additive customer correspondence solution, of which, is gaining great traction within the SFDC community.

The other great thing about these new products is that they're all subscription-based, and they're all very customer-oriented solutions. Thus, our legacy and flagship of customer-facing applications are all aligned very nicely and enhanced very nicely with all of the new products coming down the pipe from Actuate Corporation.

As I said earlier, the diversification of industries is extremely gratifying to us, and that has really always been part of the Open Source strategy, but indeed is kicking in, in a very big way right now, where not only are we getting the horizontal expansion, but we're getting really good traction from closure of projects from that expanded horizon of sectors.

And we're also seeing an increase in customer-facing applications. As you know, when we started the year, we said that there were third parties like Forrester and Gartner that predicted customer-facing applications would increase. We didn't see much of that during the course of Q1, but we did indeed see some evidence associated with increasing expenditures and automation initiatives associated with customer-facing applications, which is extremely unique to Actuate Corporation.

Again, those customer-facing applications were focusing on the 3.5 million BIRT developers globally, driving great innovation and very impactful solutions associated with customer-facing apps.

So that's a wrap for me. I'm going to hand it over to Dan right now for a more granular look at the numbers.

Daniel A. Gaudreau

Thanks, Pete. As most of you know, and as Pete has mentioned, we're heading full steam towards becoming a full subscription company. During the initial year of this transition, comparisons against pre-transition periods have become less meaningful. Therefore, we have modified our standard quarterly financial results to show sequential comparisons, as well as other metrics relevant to progression as a subscription company.

So with that, I'm going to go into my first slide, Slide 11. Total revenues for the first 6 months of 2014 totaled $51 million and were in line with our internal projections. Q2 revenues of $26.7 million increased 10% sequentially. License revenues increased 18% or $1.1 million Q2 versus Q1.

The transition to subscription pricing is gaining momentum. We secured 25 subscription deals worth $1.6 million annually in the second quarter, up 23% compared with Q1. We closed 42 subscription or SaaS deals in the first half of '14 at an average annual revenue rate of about $70,000 each. As BIRT becomes more ubiquitous amongst Java developers, we're finding and closing subscription business outside of the financial services sector, which, as you may know, has been the foundation of our historic revenues.

During the first half of this year, approximately 50% of subscription bookings came from computer hardware, telco, and health care sectors. Second quarter for 2014 maintenance revenues increased 1% year-over-year and 4% sequentially, and our internal projections seem to support continued growth as long as maintenance renewal rates stabilize around 90%. The second quarter MR rate was greater than 90%.

Professional services were $2.2 million in the second quarter, up $700,000 or 47% from Q1, primarily from implementation work on customer communication product applications.

During the first half of 2014, approximately 70% of our total revenues were recurring. This compares with about 50% in the first half of 2013. Recurring revenues are defined as subscription, SaaS or rental arrangements, as well as product maintenance contracts that are taken ratably to revenue over in a negotiated term. The further we progress in the transition to full subscription, recurring revenues will become more predominant and our revenue streams will become more predictable.

Next slide, 12. This chart shows the breakdown of Q1 and Q2 revenue splits between our legacy iServer business and our modern iHub business. Overall, iServer revenues were flat sequentially, while iHub revenues increased 18%. As we mentioned on the Q4 '13 and the first quarter 2014 calls, we were planning for a significant falloff in iServer license transactions because we do not proactively sell that product. This happened in Q1 and again in Q2. However, our primary focus is on growing iHub revenues. We were pleased with the 38% iHub sequential license revenue growth Q1 to Q2.

Services revenues grew sequentially in both product lines. This growth is the result of increasing maintenance renewal rates over the past several quarters, as well as higher level of pro service activities, professional service activities.

Slide 13. This slide shows the breakdown of revenues between North America and international for Q1 and Q2 this year. The overall mix in Q2 was 74% North America and 26% international. We saw improvement in the spending environment in North America in Q2. Overall, revenues in North America grew 14% sequentially driven by a 26% increase in license revenues.

IT spending, however, internationally, continued to be sluggish, and as a result, our revenues were flat. Next slide.

Cash ended the quarter at about $59 million, down $5 million from Q1 '14. This decrease was the result of $2 million of negative cash flow from operations and $3 million of stock repurchases during the month of April. We still believe that cash flow from operations for the full year will be positive, albeit at a small number.

Days sales outstanding were 56 days at June 30, 2014, down 10 from Q1 '14, and down 22 from year end 2013. Deferred revenues totaled $39.3 million at June 30, 2014, down about $6 million from Q1 and down $2.4 million from 12/31/13. Both decreases are due primarily to the early booking and billing of over $4 million in maintenance renewal contracts, plus higher second quarter '14 revenues.

We ended the quarter with 518 employees. That was down 106 from a year ago. This is the primary reason why operating expenses have dropped over $7 million in the first 6 months of this year compared with 2013.

Next slide. As we mentioned on the Q1 call, we started the move to subscription-based pricing in late 2013, and we have accelerated this transition across all product lines this year. Although the majority of this year's license revenue will still come from perpetual transactions, revenues from subscriptions will continue to increase as a percent of total revenues in the future.

To repeat what we have said before, the move to a subscription pricing model provides the following benefits: greater customer acquisition due to lower upfront costs; lower initial costs should also increase our penetration into more projects, as well as shortened sales cycles; revenue streams will be smoother and more predictable so that large transactions are not required to make quarterly forecasts; and customer retention beyond 3 years results in more revenue than a perpetual sale.

On our last call, we provided some limited guidance for 2014. This guidance has not changed. We believe that total revenues would be in the range of $100 million to $105 million. And because we will still have a mix -- a high mix of upfront perpetual license transactions, we should produce non-GAAP operating income and positive cash flows, but not to the level of the past few years. As we have mentioned numerous times in the past, the legacy portion of our business will continue to experience decline both in licenses and in service revenues.

To sum up, Q2's overall performance was in line with our expectations. And we are excited as we head into the second half of 2014 with the launch of the F-type, increasing subscription pipelines, and very strong interest in our accessibility product.

That concludes the formal remarks. We now open it up for 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

My first question, Pete, with the F-type, I was wondering how you guys are going to measure success in the first year that product is out. Because it's something we probably won't be able to see on -- at the P&L level. But how internally are you going to measure success of that product launch?

Peter I. Cittadini

The primary purpose of it in the short term is to, again, surface more of the 3.5 million developers that are out there that we don't know who they are and thus we can't do marketing and sales campaigns to them. So I would say, success is based on a dramatic increase in registrations associated with what used to be called birt-exchange.com, which is now called actuate.developer.com (sic) [developer.actuate.com].

Greg McDowell - JMP Securities LLC, Research Division

Great. And then one follow-up for Dan, especially now that we're starting to think about 2015. I was wondering, sort of the mechanics of converting an existing perpetual license customer who's happy on maintenance and wants to continue on maintenance -- wants to convert that agreement over to a subscription-based model, will you allow the customer to do that? And would that imply that moving forward, we should start to see that maintenance line shrink?

Peter I. Cittadini

Well, let me take the first crack at that, Greg. The answer is yes. And the technique of getting them over there depends on where they stand in writing off their perpetual asset that they purchased from us. Because there could be certainly a situation where if it's a brand new perpetual license, and people do want to get over to subscription. We could potentially give them some credit for the portion of the perpetual license that they're using that hasn't been written off at their firm. And as you know, most firms we do business with write off that perpetual license as an asset over 3 years. To us, it would be great, because then it would become more mainstream with us. And if you look at the numbers, the maintenance that they are currently paying us, which is 20% of the net license value, would indeed go up for Actuate Corporation. So we would like that to happen. The recurring revenue amount would go up, because you're buying license and maintenance as part of that annual subscription fee. So it would be great win for us. Now we're not seeing -- or really pushing that to happen, as I said in my prepared remarks right now, but that could be another avenue that we pursue when indeed it makes sense.

Daniel A. Gaudreau

To answer the second part of the question, the perpetual -- the maintenance contracts that are from perpetual transactions will continue to decline for the rest of our lives. If that answers the question. Because we're just not refilling that bucket. The maintenance will be bundled with the subscription transaction going forward. Now obviously, the net of that should be that the subscriptions and the amortization and the revenue, that increase will be greater than the loss of perpetual contracts

Greg McDowell - JMP Securities LLC, Research Division

Got it. And I'm going to slip in one more here. I think I heard 42 subscriptions at $70,000 each. When you guys talk about that sort of average $70,000, are we talking on an annual basis or sort of a TCV basis? And can you remind us sort of the average contract length when you guys are doing a subscription. Are these 1-year deals or 3-year deals? Just -- I think just a helpful reminder would help us.

Peter I. Cittadini

Yes. Average 1-year deal and average $70,000 per year.

Operator

.

Our next question comes from the line of Frank Sparacino with First Analysis.

Frank Sparacino - First Analysis Securities Corporation, Research Division

Just wanted to go back, Pete, just to understand exactly going forward and since the majority of the revenue is going to come from the existing customers...

Peter I. Cittadini

You're garbled, Frank.

Frank Sparacino - First Analysis Securities Corporation, Research Division

And since the majority of the revenue going forward is going to be from the existing base, how is that going to play out in terms of subscription versus license, Peter, Dan?

Peter I. Cittadini

Well, again, if someone comes in to the queue right now and raises their hand with interest in Actuate, and want to engage in purchasing a license, the only thing as of July 1 that we would do with new people in the queue of our pipeline, is offer them subscription licensing. As I said...

Frank Sparacino - First Analysis Securities Corporation, Research Division

No. I understand that part, Pete. I'm trying to look more at the existing streams next year, right? So the way you classified it into the 3 buckets. So in the future, it's an existing project expansion, or it's a new project at a current customer, do they have an option to buy under a perpetual license in 2015?

Peter I. Cittadini

Yes. If it's an expansion of a current project, they do. If it's a new project, they will only be offered subscription for new projects at that current customer.

Frank Sparacino - First Analysis Securities Corporation, Research Division

So we're going to have a -- going forward, we'll still have a meaningful license revenue contribution of, it could be a couple of million dollars a quarter. Is that the right way to think about it?

Peter I. Cittadini

Yes. For '15, you're probably right, but it will drop-off pretty dramatically, I believe. I mean, I have my own internal model, Frank. Obviously, we have great visibility into the second half of this year by looking at the pipeline. As you go out in time, it becomes a little hazier. But I would say, we're modeling a decent drop-off '15, '16. And then effectively, it goes away in '17, no perpetual licenses. I mean, that's a conservative view.

Daniel A. Gaudreau

Brand new customers will be subscription-only, brand new projects within current customers will be subscription-only, but expansion of current projects can be perpetual.

Frank Sparacino - First Analysis Securities Corporation, Research Division

Okay. And Dan, I know you'll share your internal model with us.

Daniel A. Gaudreau

I absolutely will. It's already being passed to you as we're speaking.

Frank Sparacino - First Analysis Securities Corporation, Research Division

So one last one. Just in terms of headcount, how are you looking at headcount going forward over the next couple of quarters?

Peter I. Cittadini

There are several openings, I would say. That -- so we're looking for an increase. I think we said to The Street that we're trying to get to a level of about 550 by the end of the year. I don't know if we'll get there because we're reassessing new organization based on the subscription pricing. But I think we'll be maybe halfway there. So I think we'll be adding 10, 20 people by the end of the year.

Operator

Our next question comes from the line of Sarkis Sherbetchyan with B. Riley and Co.

Sarkis Sherbetchyan - B. Riley Caris, Research Division

So first question here. Were there any catch-up maintenance payments in the services line item this quarter?

Peter I. Cittadini

Very few. I think there were just $200,000 of back maintenance transactions. So the -- I mean, we were really, really happy with the maintenance growth, to tell you the truth. If you listened to our prior calls from last year, I've been predicting a crossover point in maintenance growth and it has finally come and it's from baseline maintenance and high renewal rates. And so we're really happy about that number.

Sarkis Sherbetchyan - B. Riley Caris, Research Division

Okay, that's helpful. And then just for the next one. What was the total annual contract value for the subscription deals that you guys had signed?

Peter I. Cittadini

$1.6 million in Q2.

Sarkis Sherbetchyan - B. Riley Caris, Research Division

Okay. And that number would theoretically grow as you add more subscription folks each quarter?

Peter I. Cittadini

Correct.

Daniel A. Gaudreau

That's right. Yes, we did $1.3 million in Q1, $1.6 million in Q2.

Sarkis Sherbetchyan - B. Riley Caris, Research Division

Okay, that's helpful. And then how aggressively will you invest in sales and marketing? Specifically how much cash flow are you willing to dedicate to get to larger levels of this subscription revenue model you're aiming for?

Peter I. Cittadini

Well, the primary thing we'll be doing is adding inside sales heads, because a lot of the F-types that indeed convert to paying F-types with our new subscription model associated with data out, the lowest annual transaction there could be somewhere in the range of $5,000 to $6,000, which is quite modest and something that you don't want the direct sales reps pursuing. So I think we will be making quite an investment in inside sales versus outside salespeople. Now, we won't have to make an evaluation as to what is the right balance of outside salespeople versus inside salespeople. So from a budget standpoint, it could be a modest increase, but from a headcount and organizational standpoint, it could be somewhat of a decrease on the direct side with direct-selling people, with a lot more inexpensive inside-selling people. So we are committed to spending what we need to spend in order to do the right thing for transitioning into this new model.

Daniel A. Gaudreau

What we've also stepped up in a large way is our marketing spend, online marketing, search marketing. And Greg will be happy with this, if you're still listening, we now have almost 10,000 Twitter followers and 39,000 Facebook likes. So we have pushed hard in the social media and I think it's going to pay off.

Sarkis Sherbetchyan - B. Riley Caris, Research Division

Okay. Thanks for that color. And then I know you did mention it earlier that you're modeling a decent drop-off in fiscal '15 and '16 for the licensing line. Can you provide us with the flavor, maybe of the level of license revenues you would expect on an annual basis from the legacy customers?

Peter I. Cittadini

I'd rather hold off on that to see how the second half of this year goes. I think we'll be able to give you a lot better color as we approach the end of this year to give you some better guidance on '15. It's -- I just don't want to commit to that right now.

Sarkis Sherbetchyan - B. Riley Caris, Research Division

Okay, no worries. I tried at least. And then with regards to the iHub F-type, what are you seeing in terms of the opportunities in the pipeline from the release about 4 weeks ago? And maybe if you can speak to the developer activities since the launch.

Peter I. Cittadini

Yes. Again, since they're registering, we're able to communicate with them primarily through e-mail to see if there's anything we can help them out with. We're getting a lot of thumbs up on the product. I would say it's working well. It's not working flawlessly. So we're committed to make the right real-time investments to make it work as flawlessly as possible. So the developer community is very appreciative of the -- of freemium product. There are a number of people that have hit their limits, and I don't know if you've been paying attention to the details of our launch, but during our launch, we did indeed tell the developer community that the first upgrade is on us. So we have done multiple upgrades for people who had hit their limit and wanted more data out capacity, which is a good sign. And when we look at the pipeline of opportunities, it breaks down to a very healthy sort of 60%, our potential new OEMs for Actuate Corporation that are leveraging F-type as primarily an evaluation device for their future embedded BI analytics and dashboarding capabilities. And 40% of the pipeline opportunities are with direct, large corporate accounts that would be buying either through a telesales organization if they want to stay with the data out model or transitioning over to the direct sales organization if they want to move from F-type to commercial BIRT iHub and buy it on a subscription basis, but on limited data out, if you will.

Operator

[Operator Instructions] Our next question comes from the line of James Gilman with Drexel Hamilton.

James N. Gilman - Drexel Hamilton, LLC, Research Division

I have several questions for you. I might have missed it, but do we -- did you provide a sales headcount? I know you had a total headcount, but a sales headcount?

Peter I. Cittadini

Sales ended the quarter at 63 and we have several open racks we're aggressively trying to fill.

James N. Gilman - Drexel Hamilton, LLC, Research Division

Okay, great. Dan, a follow-up on a comment you made about maintenance. You felt really good about maintenance. One of the things I look at is, let's say, the change in deferred, and we had a substantial drop-off this quarter versus last year at the same time. So my question would be is that might -- it could be maintenance line in the future period, help me appreciate your confidence in the maintenance line there.

Peter I. Cittadini

Yes. The sole reason of that maintenance drop-off -- or the primary overwhelming reason, is because of contracts that we pull forward -- pulled forward in prior periods that we did not pull forward in Q2. So if you compare with either year end or March, there were well over $4 million, $4.5 million of maintenance pull forwards that did not recur in Q2. And that was because, very well, several reasons. But the primary reason is we are trying aggressively to lock down the iServer maintenance contracts, so we're doing -- we're booking them as far in advance as we can. We're trying to do multiyear transactions. This is not a secondary reason why the balances in prior year -- prior periods were up versus Q2. So we're trying to do multiyear, sooner MR bookings to lock that revenue stream down in the future. That's the primary reason, James.

Daniel A. Gaudreau

Okay, so I still feel good about maintenance. But as I said before, going forward, it's going to get a little convoluted, right? Because we aren't going to be -- as we progress more and more into subscription, those maintenance contracts will be bundled in the subscription pricing. So maintenance revenues will start to decline and will continue to decline, because it will just be existing perpetual MR pool that will just go -- shrink over time based on declines. And so the metric could get a little foggy, but I was very happy with the growth, and still feel good about the MR pool that exists going forward and the decline rate. The decline rate or renewal -- on the contrary, the renewal rate has been in excess of 90%, which is great. And it's been that way for the last 2 quarters and we haven't seen that in many, many years. So it's been pretty good.

James N. Gilman - Drexel Hamilton, LLC, Research Division

Okay. Moving on to license, I know there's been some questions around, let's say, the actions [ph]. My question around that would be the sales force incentive. Is the incentive that you mentioned, Pete, in the -- I think it was Pete, that you mentioned the incentive that the sales force to convert the perpetual deal to a subscription. Will that incentive remain in place going forward in -- throughout '15 and '16 and beyond?

Peter I. Cittadini

They'll be -- the appropriate incentive for '15, I don't know exactly what that will be right now. But there will be a continued incentive to drive the subscription business the way we'd like it to be driven.

James N. Gilman - Drexel Hamilton, LLC, Research Division

All right. Pete, you also, I think, in the fourth quarter, you talked about receiving a patent around converting documents. In the quarter -- at the beginning of the quarter, you released that product, if I understand correctly, the document accessibility clients. I was led to believe that, that could be a substantial opportunity. I might have missed it in the call here, but did you talk anything about it, if not can you share with us some of the things that are current around that, with let's say, the uptake or whatever with that product.

Peter I. Cittadini

Yes, absolutely. We didn't want to get ahead of ourselves with any of the emerging businesses, but it is a very intriguing and very unique product in the marketplace, which quite frankly, doesn't exist. Today, there is a lot of rulings that have been made thus far by the government on companies that their websites and that their customer documents and correspondence need to be universally accessible without, say, a consumer of a bank sort of indicating that they're visually impaired. So ultimately, everything that institutions do, and I think it will hit the financial institutions first and foremost, because they really have lots of consumers as well as the telecommunication industry, everything to be universally accessible regardless of who it is that comes in. Today, the way they're handling it is someone will complain, they'll make a determination of spending money on a project-by-project basis in creating accessible information flows for that individual when they sort of claim that they need another requirement for different types of information flows from that institution. Once the rules that are really sort of creating some litigations right now with some very large global firms turn into legislation, where it's sort of mandatory, we think we have a potentially very big opportunity because this appliance will allow you to design your correspondence and documents day 1, where everything is universally accessible. Now, that's sort of the ultimate strategy of where we're heading. But the cool thing about the accessibility appliance today is as people sort of surface, saying, I need universally accessible correspondence from you, my institution that I'm doing business with, the appliance is able to remediate what is already pre-existing in either PDF or AFP, which is a print screen technology, and sort of remediate those set of documents to be accessible documents so these firms don't have to bite off on the big strategic change in the way they create documents day 1. We think it's really smart that technology is really on-the-money technology. It runs reliably. It's very innovative, as I said. We're sort of -- we have the first mover advantage in doing such technology, and we think the timing is right. So it could be something that picks up steam really, really quickly, but that is also dependent on how litigious visually impaired people get. And with a lot of law firms coaxing them to be litigious, we think we'll do some great revenues based on the remediation phase of universally accessible PDF. And once it becomes legislation, if we've been the one chosen to remediate certain documents, we'll certainly be the incumbent to get the business associated with all sort of websites, documents and correspondence being universally accessible, because we've already been in there with the accessibility appliance doing remediated universal PDF. So very exciting stuff, that's patented technology that we've invented. And a little premature in getting super excited about it, but if the market creates and appears itself where there is a software solution that they're pursuing versus a professional services solution, which is primarily what they're using today, we'll be in the driver's seat to get quick, immediate market share.

James N. Gilman - Drexel Hamilton, LLC, Research Division

Okay. A follow-up question on that is when do you -- timeframe, when do you think that shift will occur, that -- the drive some of the sales for that appliance?

Peter I. Cittadini

Well, I think we'll have a decent second half of '14. I think we will have a very good '15, and it looks like legislation may be on the docket for '16, so it could really accelerate dramatically in '16.

James N. Gilman - Drexel Hamilton, LLC, Research Division

Okay. One last question and that would be, that there's some -- you've provided some characteristics for the 1,000 downloads for the F-type product. I was wondering if you could provide any more, maybe whether they were from your current installed base or are they brand new to the Actuate pipeline? And maybe a geographic split there, as well? And maybe any other characteristics you might provide, maybe like engaging [ph] around the business model, whether OEM or not, but whether you could say whether it's a large company or not?

Peter I. Cittadini

Okay. Yes. I did give some of that color. You must have missed it but 60% of the downloads are to the net new developers and companies that we have not done business with before. The pipeline is broken down, 60% OEM, 40% global companies, and several of them have made the pipeline for discussions with Actuate Corporation on a more commercial type of relationship and all within a little less than 4 weeks. So it's a good start. We've learned a lot from it because it's actually quite telling when you get the registrations and you get the feedback going back and forth with people who use the product. And everything that it's telling us is that we've done an okay-to-good job. It will get better as we get more and more feedback from that market. And it should be a very positive part of our arsenal for revenue growth in the future.

Operator

I would now like to turn the conference back to Peter Cittadini for any closing comments.

Peter I. Cittadini

Okay, ladies and gentlemen, we appreciate your time on our earnings call today, and we will have another data point for you in approximately 90 days. Thank you.

Operator

Thank you, ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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Source: Actuate's (BIRT) CEO Peter Cittadini on Q2 2014 Results - Earnings Call Transcript

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