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Pervasive Software Inc. (NASDAQ:PVSW)

F2Q11 Earnings Call

January 25, 2011 5:00 p.m. ET

Executives

Randy Jonkers - CFO

John Farr - President & CEO

Analysts

John Fichthorn- Dialectic Capital Partners

Sarkis Sherbetchyan – B. Riley and Co.

Operator

My name is Melissa and I will be your conference operator today. At this time, I would like to welcome everyone to the fiscal year 2011 second quarter financial results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you. Mr. Randy Jonkers, Chief Financial Officer, you may begin your conference.

Randy Jonkers

Good Afternoon and thank you for joining us, I am Randy Jonkers, Chief Financial Officer of Pervasive Software, while we wait for others to join I will go over to standard disclaimer regarding remarks on this call.

This conference call may contain forward-looking statements within the meanings 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 can 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, 2010 and 2009 exclude the amortization of purchased intangibles and stock-based compensation expense and present 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 those 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 strengths, 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 will 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 current operations.

Now for the financial results. Today we released financial results for the second quarter of our fiscal year 2011. Revenue and earnings were at the high end of our guidance provided on October 19. Pervasive revenues totaled $11.7 million in Q2, compared to $11. million of Q2 of last year. Our GAAP basis net income was approximately $400,000 in Q2, and diluted earnings per share was $0.03. Our effective tax expense rate in Q2 was 29.2%. Our non-GAAP net income in Q2, before amortization of purchase and tangibles and stock bid compensation expense, and taxed at 34% was approximately $800,000, and our non-GAAP earnings per share was $0. 05.

We ended the quarter with approximately $37.2 million in cash and marketable securities, and had approximately 16 million shares issued and outstanding. Also during the second quarter, we repurchased approximately 57,000 Pervasive shares on the open market, and the total costs were approximately $300,000, or approximately $5.12 per share. We generated approximately $1.5 million of positive cash flow from operations, our DSOs, or day sales outstanding, were 66 days, which was a decrease from our prior quarter.

By geography our Q2 revenue was as follows: domestic revenue totaled approximately $7.8 million in Q2, or 67% of our revenue. Our international revenue, principally Europe and Japan, totaled $3.8 million, or 33% of our revenue in Q2. At a product level, our database products represented approximately 55% of our business and our integration products represented approximately 40% in Q2. While our business exchange, data solutions, and DataRush products accounted for the remainder.

Turning to operating expenses. Our operating costs and expenses totaled $11.1 million in Q2, including stock-based compensation expense and amortization related to acquired intangibles in the approximate amount of $600,000 for non-GAAP expenses of $10.5 million. We had 239 employees at the end of Q2, which represent an increase of 11 employees from the end of the first quarter and an increase of 5 employes from the Q2 of fiscal year 2010.

Now looking forward. We expect revenues in our third quarter of fiscal year 2011 to be in the range of $11 to $12 million, compared to $11.7 million in Q3 of fiscal year 2010. With that we expect GAAP basis diluted earnings of $0.00 to $0.03 per share. We anticipate our effective tax rate for the third quarter will be approximately 30%. Non-GAAP profitability is expected to include stock-based compensation expense and the amortization of acquired intangibles, representing approximately $600,000 in the third quarter of fiscal year 2011. With that, we expect non-GAAP and fully taxed diluted earnings per share in third quarter to be $0.02 to $0.05. Our non-GAAP effective tax rate for comparative purposes reflects a statutory rate of 34% on pre-tax, non-GAAP income. We anticipate cash flows from operations to be between $1 and $2 million for the third quarter of fiscal year 2011. Also, as in prior quarters, we are not providing specific guidance beyond Q3.

For EPS calculation purposes, we expect our GAAP basis and non-GAAP fully diluted share caps for third quarter of fiscal year 2011 to be appropriately $16 million and $16.5 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, CEO of Pervasive Software.

John Farr

Thanks, Randy.

I am obviously pleased to present our 40th consecutive quarter of profitability. Pervasive as a company focuses largely on indirect channels for product distribution. More than 80% of total corporate revenue is recurring in nature, coming from both contractually recurring and what I call “practically occurring” revenue streams, including channel partners who invest their own sales and marketing activities, creating demand that Pervasive ultimately benefits from month after month after month. It is the predictability and leverageability of this channel model that allows us to be consistently profitable while also investing in innovative products and services for new markets.

Now I'd like to highlight a few key developments in our business during the December quarter. Recall that in September, we released the latest version of our embedded database, Pervasive PSQL v11 for multicore. We have seen good uptake in v11 in its first full quarter of availability. In the December quarter, 60% of our revenue for shrink-wrapped units of English version PSQL was from the new version 11. The remainder was for our prior version, version 10, which will continue to be available for one year following the release of v11. And, we already have 30 out of our OEM partners active on our OEM portal, generating v11 product keys while our support call volumes have remained relatively unchanged from previous quarters. Now these numbers are a great testament to the backwards compatibility and overall product quality built into our newest v11 PSQL product. The hallmarks of our inventive database development have always centered on performance and simplicity, and v11 delivers both with increased speed offered by multicore as well as simplifying the complexity of multicore in development, deployment, and use in our database customers.

Our integration products group executed very well again in the December quarter, achieving a new record revenue for the quarter. This represents our fourth record revenue result in this business over the past five quarters and our fifth consecutive quarter of year-over-year quarterly revenue growth. Our (inaudible traveling/trailing) fourth quarter revenue growth in this business is now 14%.

In November, we announced continuing innovation investment with a major release, Pervasive Data Integrator version 10 Cloud edition running on the new Pervasive DataCloud 2, Fall release. The host of integration platform offers a new, rich browser-based design interface and extensive cloud connectivity. We are also providing all users of Pervasive Data Integrator version 10 Cloud edition full access to Pervasive connectivity with no incremental per-connector fees. Pervasive DataCloud 2 Fall release provides enriched platform extensibility and performance monitoring as well as multiple availability zones, queuing services, and a no-cost SDK to allow partners and users to write new connectors. Pervasive Data Integrator Version 10 on the Pervasive DataCloud extends Pervasive's broad stack of offerings on a cloud, including Pervasive Datasync, Pervasive Data Profiler, and Pervasive DataRush, giving customers the speed, economics, and scalability of cloud-based delivery with the breadth and power of more than 25 years of data integration and connectivity experience. Pervasive Data Integrator version 10 on the Pervasive DataCloud allows for management and monitoring from any browser-enabled device and features an enriched user interface and an extensible service-oriented architecture.

In November, we hosted over 170 of our customers and prospects here in Austin for our annual integration users conference. The conference featured a highly interactive setting in which attendees participated in breakout sessions led by both Pervasive technologists and Pervasive customers. The event is designed for sharing best practices and innovative approaches to data integration challenges. We are holding a similar event in London in early February for our European customers and prospects and have more than 100 registrations for that event with more than a week to go. We will then host another similar event in the San Jose area in late April. Attendees to these events gain insight in Pervasive's integration road map and receive updates on our technical advancements and future plans around Pervasive DataCloud, DataSolutions, and DataRush. More importantly perhaps, attendees learn how to accomplish more faster, using our products to successfully solve their persistent data migration and data integration headaches. And in November, we were proud to announce our positioning in the Visionaries Quadrant in Gartner's Magic Quadrant for Data Integration tools. It's a significant accomplishment to be reflected at all in a magic quadrant, even more so to be positioned as a visionary.

And finally an update on our Pervasive DataRush business. As we have said in prior quarters, we see a increasing gap between available hardware processing power and the exploding volumes of data versus what the software industry has been able to delivery in commercial applications to exploit multicore hardware and efficiently extract useful intelligence for a massive data set, aka big data. The gap widens daily as volumes of raw data accelerate and hardware offerings continue to improve. Pervasive DataRush is an embedded parallel data flow platform that helps eliminate performance bottlenecks in data-intensive applications. Its expanded capabilities enable a broader range of users to cost effectively address the growing challenge and complexity of big data, providing dramatically reduced run times for data preparation and analysis and enabling the consumption of very large data sets without having to rely on sampling, all on commodity multicore hardware. Dynamically scaling to fully utilize multicore technology, Pervasive DataRush-enabled applications can quickly overcome data preparation bottlenecks in cleansing, aggregating, or deduplicating data. Pervasive DataRush recognized its first license revenue now almost a year ago in the December 2009 quarter and has closed new transactions in every quarter since, now five quarters in a row. We continue to expect 2011 to be the year in which Pervasive DataRush generates it's millionth dollar in revenue. And, our DataRush innovation teams have been busy, successfully running DataRush with Hadoop on distributed multinode clusters. Stay tuned for announcements in the coming weeks regarding our newest version of DataRush, DataRush version 5 and its capabilities with Hadoop, extending the high performance, applicability, and scalability of DataRush beyond the multicore CPU to all those multicore nodes available in a cluster.

To ensure we're making strategic investments and are well positioned to benefit from important trends driving the market today and for the foreseeable future while also maintaining our intense focus on profitability. I continue to speak routinely on our many opportunities for success, including but not limited to, multicore becoming relevant and valuable to our large database customer base and Microsoft Windows Server 2008 and Windows 7 on the desktop ultimately becoming a real catalyst in packaged applications serving SMT. About our integration business continuing to grow, as it has in particular over the past five quarters with increasing in more leverageable channel and other recurring revenue. About Pervasive's growing business in the cloud, about our data solution business, continuing to add subscribers and new solutions. About our acquired business exchange business, being set up for a solid 2011, following our first year post-acquisition focus on technology feasibility or stability and organizational scalability. About our DataRush business, successfully building an enviable leadership position in an emerging market and about establishing credibility in the next generation of analytics and data-mining markets or the big data opportunity.

We are bullish on Pervasive and continue to buy back our outstanding shares as we have consistently done now for the past 19 consecutive quarters. Pervasive continues to enjoy many competitive advantages including solid and prudent product lines, and well-developed channel and operating leverage, a strong balance sheet, a furious focus on innovation, and consistent profitability and positive cash flow. On a quick investor relations note, we are scheduled to present at the America's Growth Capital Seventh Annual Emerging Growth Conference in San Francisco on February 15. We hope to see many of you at this or other events in the near future, and I'll now open the floor for questions.

Operator

(Operator Instructions). Your first question comes from the line of John [ph] Bosch from Dialectic. Your line is now open.

Question-and-Answer Session

John Fichthorn- Dialectic Capital Partners

Hi guys, this is John Fichthorn as well as James. Just kind of curious as to your thoughts with a little more clarity with regards to DataRush this year and kind of what your aspirations were. I mean, we're at version five with our millionth dollar of revenue. You know, is this something where we should expect to see an inflection at some point this year? Can you just give us a little more about your vision there?

John Farr

Well, we obviously continue to, we have tremendous technology here and we do continue to feel our way, if you will, to the brightest star to point things at. And I say it that way because, you know, at some level the revenue that we've achieved thus far with our DataRush offering have to some extent been data quality types of solutions and that's a very good business to be in and it takes us upmarket a bit, but it can arguably be considered part of the normal ATL process, and allows us to, again, go upmarket a bit and with increasing price points on a much enriched ATL solution combined with our Data Integrator probably a little over half of the business we have done thus far happens to be that kind of work. Now finding that niche of, that pocket of pure DataRush opportunity, we continue to sell into the environments that have really large data and have been successful there but I'd say that in this quarter versus the last time I talked to everybody, the whole notion of bringing the power of parallel processing on multicore to multinode clusters a la Hadoop how to do is very exciting to us, and it that may be the path that we find can be our best, and that's relatively new. We only started getting into the labs with Hadoop maybe something like 90 days ago. Before that, we would have been talking a lot about breaking into the analytics and data-mining space specifically and have had a bit of success there but that is a relatively crowded market. DataRush and multicore especially coupled with Hadoop and parallelized clusters is a much newer market and one that we might be able to step into and create a name for ourselves.

John Fichthorn- Dialectic Capital Partners

Two more quick ones. If you could help me understand from a broad perspectivef what's preventing you guys from growing with the broader market? We've had a pretty decent economy for software spending here for the last 12 months and you all just have been a little bit stuck at the $11 to $12 million a quarter run rate. What do you think it's going to take to show that accelerating growth and/or what's really preventing you guys from showing a higher top line growth number?

John Farr

John, that's a great question. I've often said that the beauty and bane of having an as interactive channel as does Pervasive is that in the best of the times, we're good but rather muted, and in the worst of times, we're not as bad, i.e. muted. So if you look back at the '07 and '08 time frames when things were admittedly pretty rough for everybody out there, Pervasive did just fine, and in fact, grew the business. We grew the business in fiscal '09 and '010 versus '07 and '08, and that part of '09 and '010 were tough years. So the channels will forever mute the high ends and the low ends as we participate with the market. Now what you're looking for I think is something more like a DataRush where as that business matures, then it would be more the type of business that will ebb and flow more directly with the broader market.

John Fichthorn- Dialectic Capital Partners

Okay, and one final question. As you think about the medium-term future of the company, given that the top-line growth has been muted, you've got some exciting products out there that probably passed some of the lines in the sand, or at least they're getting close, that we've discussed over the years in terms of spending versus showing revenue growth. What is the thought in your mind at this point, John, of the company acting independently and on its own and trying to grow organically versus maybe becoming part of a larger company and putting itself up for sale? You've done a good job of building asset value, maintaining asset value, you've been great to shareholders, but how do you think about that? We are in a good M&A environment and I'm sure people knock on your door. Give us a little bit of your framework if you would.

John Farr

Alright, you bet. So we are in a very good M&A market. I see some of my competitors being acquired for handsome multiples. Private company examples so I have to believe what I read in the same kinds of articles that perhaps you guys read as well, but Boomi was acquired by Dell back in September or October at an arguably 10x revenue multiple or higher. Cast Iron was acquired by IBM for a similar multiple in May. Both of those businesses are very similar to our integration business, one was a little bit larger, one was a little bit smaller. So that's an interesting environment. And quite frankly the environment on the database side is interesting as well. There was a product division sold out of IBM called the U2 database that was sold to Rocket Software probably what, about a year, year and a half ago now. I don't know the exact multiple there but it was interesting nonetheless. So it's an interesting M&A market.

But we're not looking to sell the company. We are healthy, we are growing in the right areas, we are profitable, we have a view into the opportunities that lie ahead of us and you always look at the opportunities ahead versus the execution risk associated with those, and in my mind the business is absolutely a glass half full as opposed to a glass half empty. As a public company, obviously if those kinds of offers come to bear, we have to consider them. That's part of our job on behalf of the shareholders. But a wise man once told me that good software companies are bought not sold, and so the best thing that we do for our independent future here is to continue to execute in the good ways that we have. Of course we want greater revenue growth than we've achieved thus far, and we continue to invest for that very thing and continue to keep our heads down and do a good job for our shareholders.

John Fichthorn- Dialectic Capital Partners

And just as a followup to that, and I promise I won't ask anything else, what's the process if somebody does approach you?

John Farr

Well, as it be the case always, the process would probably start with me and then if it was something serious, then I would honestly engage with my board of directors and we would have the appropriate conversation at that level.

John Fichthorn- Dialectic Capital Partners

Okay, thanks a lot guys.

John Farr

Alright.

Operator

(Operator instructions). Your next question comes from the line of Sarkis Sherbetchyan from B. Riley and Company. Your line is now open.

Sarkis Sherbetchyan – B. Riley and Co.

Good afternoon.

John Farr

Hey Sarkis.

Sarkis Sherbetchyan – B. Riley and Co.

How are you guys?

John Farr

Alright.

Randy Jonkers

We're good.

Sarkis Sherbetchyan – B. Riley and Co.

Moving along with, I actually have some questions on DataRush. Are the DataRush pilots turning into larger deployments?

John Farr

I'd say actually that a lot of the DataRush business that we've done thus far, probably half or more, has as part of a larger integration opportunity. What we have found is DataRush is designed to attack the bottleneck, that one spot in a process flow that is just crippling the processing time and speeds for a particular process or program. Just about every opportunity for DataRush or big data processing starts out with a ETL prop and action, so I'd say that every DataRush opportunity has an ETL opportunity somewhere associated with it. It's not necessarily true that every ETL opportunity has a DataRush problem. They don't all involve the biggest of data and the most crippling of big-batch jobs. So we are finding that our DataRush opportunities do allow us to bring the rest of our products to bear, i.e. our integration products, and so with that combination, yes they do end up being parts of larger transactions, larger jobs for us. I'd also answer that question by pointing out that a lot of our target market, if you will, for DataRush will be systems integrators who themselves have larger projects, larger deployment type opportunities, and with DataRush we're simply helping them with one bottleneck piece of their larger solution.

Sarkis Sherbetchyan – B. Riley and Co.

Okay, just to think about it, looking at Q3 guidance, have you had any levels of assumptions for revenues from DataRush?

John Farr

We've had some revenue from DataRush for each of the last five quarters, so yes, we have some expectations for DataRush revenue. I think that if you look back at the guidance we gave coming in to the September quarter in the 10.5 to 11.5 range and we did alright at the $11 million mark, we lifted that range a bit coming into the December quarter up to 10.8 to 11.8, and we ended up at the higher end of that 10.8 to 11.8, and going into the March quarter, we're saying 11 to 12, so we are communicating with that a continued increasing confidence in the revenue results of the combined set of products, and yes, DataRush is a part of that.

Sarkis Sherbetchyan – B. Riley and Co.

Great, and so does it seem like it's more of an attached type of product for now until it really gains some steam and your customers see the value of DataRush stand-alone?

John Farr

Yeah, there's some truth to that certainly. It's certainly easier selling it with our other products to customers who already know us, so you're not having to introduce yourself and introduce your capabilities. There is some level of credibility that comes in that current customer base with our current products and adding something to the mix. Certainly that's an easier sale than the brand new customer buying Pervasive DataRush stand-alone.

Sarkis Sherbetchyan – B. Riley and Co.

Thanks for the comment on that, and how has the customer or partner reception been to the latest version of the integration and database offerings.

John Farr

As I said on the scripted part of the call on database in its version 11 of the database we released in September, that's actually been very good there. Close to 60% of our shrink-wrapped units have been on a new version in the first full quarter of shipping version 11. That 60% in first full quarter, by the way, compares to roughly 50% in first full quarter several years ago when we released version 10 for the first time. And so that is a good statement on the uptake on version 11 and as I've said, the product quality is certainly there as our customer support lines have continued to be at their pre-release volumes. So that's going quite well. The version 10 of the integrated product now, just to clarify, that is the Cloud edition, so this is version 10. We were previously shipping version 9, this is version 10 Cloud edition. So what we haven't yet released would be version 11, I think we'll call it version 11.2 possibly, or 10.2, that would be the full on-premises version of our Data Integrator. So one of the things that cloud allows you to do is to release cloud-based products soon than you might otherwise be able to release full on-premises product because of the reduced testing required is more of a controlled environment in the cloud, and when we sell our own premises versions, we have to test for any number of thousands of configuration scenarios. So we were able to get version 10 that will be available in its own premises form later this spring, we were actually able to release that early in a cloud edition type of form. That's going well. We have close to 20 of our integration customers doing custom design, development, deployment, management of their data migration or data integration projects using our tools on our Pervasive DataCloud, utilizing the limitless scalability at Amazon. So that's 20 people doing serious integration work on our cloud, whereas some short 90 days ago, we had zero. So that's going quite well as well.

Sarkis Sherbetchyan – B. Riley and Co.

Well that's good to hear, and just to clarify, that was 60%, 6 zero, on the new version versus the 50% on the prior?

John Farr

Yes, that is correct. 6 zero.

Sarkis Sherbetchyan – B. Riley and Co.

That's great. Well congrats

John Farr

That was the database, right.

Sarkis Sherbetchyan – B. Riley and Co.

Right. Thank you. Thanks for answering my questions.

John Farr

Alright Sarkis.

Operator

There are no further questions at this time.

John Farr

Alright, well thank you all for joining us today and have a great evening.

Operator

This concludes today's conference call. You may now disconnect.

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