Randy Jonkers – CFO
John Farr – President and CEO
Kevin Liu – B. Riley & Company
Pervasive Software Inc. (PVSW) F2Q2011 Earnings Call Transcript April 19, 2011 5:00 PM ET
Good afternoon. My name is Simon and I will be your conference operator today. At this time, I would like to welcome everyone to the Pervasive Software Inc. fiscal year 2011 third 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. I will now turn the call over to Chief Financial Officer, Randy Jonkers. Sir, you may begin your conference.
Thank you, Simon. Good afternoon and thank you for joining us, I’m Randy Jonkers, Chief Financial Officer of Pervasive Software. While we wait for others to join, I will go over the standard disclaimer regarding remarks on this call.
This conference call may contain forward-looking statements within the meaning of the federal securities laws, including statements regarding the company's or management's intentions, hopes, beliefs, expectations and strategies for the future. Forward-looking statements may include, without limitation, statements regarding the following; future investments, sales, market growth and direction, competition, revenue growth, operating margin, and profitability.
A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in Pervasive's most recent filings with the Securities and Exchange Commission. Pervasive does not undertake any obligation to update forward-looking statements to reflect events or circumstances after the date of this conference call.
Also, and as a reminder, our non-GAAP results for the quarters ending March 31, 2011 and 2010 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 our 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 for our third fiscal quarter. Then John will update you on our current operations.
Now for the financial results. Today we released financial results for the third quarter of our fiscal year 2011. Revenue and earnings exceeded our guidance provided on January 25. Pervasive revenues totaled $12.1 million in Q3 compared to $11.7 million in Q3 of last fiscal year.
Our GAAP basis net income was approximately $800,000 in Q3 and diluted earnings per share was $0.05, including $0.01 per share attributable to a favorable income tax adjustment. Our non-GAAP net income in Q3 before amortization of purchased intangibles and stock-based compensation expense and tax at 34% was approximately $900,000 and our non-GAAP earnings per share was $0.06.
We ended the quarter with approximately $37.5 million in cash and marketable securities and approximately 16.1 million issued in outstanding. Also during the third quarter, we repurchased approximately 98,000 Pervasive shares on the open market at a total cost of approximately $535,000 or approximately $5.42 per share. We generated approximately $825,000 of positive cash flow from operations. Our DSOs or days sales outstanding were 68, which was an increase of two days from our prior quarter.
By geography, our Q3 revenue was as follows. Domestic revenue totaled approximately $7.4 million in Q3 or 67% of our revenue. Our international revenue, principally Europe and Japan, totaled $4.7 million or 39% of our revenue in Q3. At a product level, our database products represented approximately 57% of our business and our integration products represented approximately 38% in Q3, while our Business Exchange, DataSolutions and DataRush products accounted for the remainder.
Turning to operating expenses. Our operating costs and expenses totaled $11.3 million in Q3, including stock-based compensation expense and amortization related to acquired intangibles in the approximate amount of $600,000 for non-GAAP expenses of $10.7 million. We had 247 employees at the end of Q3, which represents an increase of 8 employees from the end of the second quarter and an increase of 9 from Q3 of fiscal year 2010.
Now looking forward, we expect revenues in our fourth quarter of fiscal year 2011 to be in the range of $11.2 million to $12.2 million compared to $11.7 million in Q4 of fiscal year 2010. With that, we expect GAAP basis diluted earnings of $0.01 to $0.04 per share. We anticipate that our effective tax rate for the fourth quarter will be approximately 25%.
Our non-GAAP profitability is expected to include stock-based compensation expense and amortization of acquired intangibles representing approximately $600,000 in the fourth quarter of fiscal year 2011. With that, we expect non-GAAP and fully taxed diluted earnings per share in our fourth quarter to be $0.03 to $0.06.
Our non-GAAP effective tax rate for comparative purposes reflects a statutory rate of 34% on pretax non-GAAP income. We anticipate cash flows from operations to be between $1 million and $2 million for the fourth quarter of fiscal year 2011. Also, as in prior quarters, we are not providing specific guidance beyond Q4.
For EPS calculation purposes, we expect our GAAP basis and non-GAAP fully diluted share counts for the fourth quarter of fiscal year 2011 to be approximately 16.2 million and 16.8 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.
Thanks, Randy. I’m obviously pleased to report our 41st consecutive quarter of profitability. Pervasive, as a company, focuses largely on selling our products and services to and through independent software vendors and other indirect channel partners. These channel partners invest in selling and marketing their applications and services creating demand that Pervasive ultimately benefits from month after month after month.
In fact, more than 80% of our total corporate revenue is recurring in nature, coming from both contractually recurring support and maintenance revenue and a growing subscription revenue base, and what I call practically recurring revenue sources, that is revenue from our many, many channel partners. It is the predictability and leveragability of this channel model that allows us to be consistently profitable while also investing in innovative products and services for new markets.
Now, based on the improved trading volumes in the Pervasive stock over the last 20 days or so, it is very likely that we have some new listeners on the call today. So welcome to you all. Now I’d like to highlight a few key developments in our business during the March quarter. Recall that in September, we released our latest version of our embedded database, Pervasive PSQL version 11 for multi-core. We have seen good uptake in v11 units in its second full quarter of availability.
In the March quarter, 70% of our revenue for shrink-wrapped units of English version Pervasive SQL was from the new version 11. And that 70% number is from 60% in the December quarter. And we now have about 50 of our OEM partners, up from 30 last quarter, active on our OEM portal generating version 11 product keys while our already low support call volumes had remained relatively unchanged from previous quarters. And these numbers are a great testament to the backwards compatibility and overall product quality built into our newest version 11 PSQL product.
One quick note on Japan. As you may know, we get a meaningful amount of revenue from Japan for the Japanese version of our PSQL database. Certainly we are watching the after-effects and recovery efforts closely following last month’s earthquake and tsunami. Our long-term partner in Japan, AG-Tech Corporation, was the source of approximately 10% of our total revenue in both fiscal year 2009 and 2010.
AG-Tech’s recent business as measured by its weekly royalty reports to us appears thus far to have been largely unaffected. AG-Tech reported a customarily strong March month and its first two weekly results in April are consistent with older patterns in the first month of other quarters. So, so far, so good, revenue-wise. And we continue to work directly with the AG-Tech engineering team for the upcoming release of the Japanese version of Pervasive PSQL v11 product. PSQL version 11-J is scheduled to release in this June quarter. We will continue to monitor closely and assist our long-term Japanese business partner AG-Tech in any way that we can.
Our integration products group executed very well again in the March quarter, achieving record quarterly revenue bookings, which is represented in a new record for deferred revenue on our balance sheet. This is the sixth consecutive quarter of year-over-year quarterly revenue growth. Our trailing four-quarter revenue growth in total for this business is now 11%.
We previously announced continuing innovation investment with the release of Pervasive Data Integrator version 10 Cloud Edition running on the new Pervasive DataCloud 2 fall release. And in this June quarter, we are scheduled to release the summer update for Pervasive Data Integrator version 10 Cloud Edition as well as the Data Integrator Version 10 for on-premises.
Our customers routinely tell the Pervasive story on our behalf. On April 27 and 28, we will host our annual invitation-only Metamorphosis 11 Cloud Integration Summit in Redwood City, California. We have invited ISVs and SaaS providers and systems integrators to hear our value proposition from us as well as from industry analysts and our customers and partners, including speakers from Intuit, Salesforce, Microsoft, Pegasystems, NetSuite, RightNow Technologies, and Eucalyptus Systems.
And attendees will hear about real world experiences plus leading edge approaches to SaaS and cloud-based integration. Registrations to date are for more than 330 individuals representing more than 230 unique companies, which far surpasses pre-registrations for any of our past Metamorphosis events. These events continue to be very productive in advancing the sales cycles with new partner profits.
Now with respect to Pervasive DataCloud platform, our Pervasive DataSolutions team continues to enhance our own 24/7 multi-tenant Pervasive DataCloud. Initially created to simplify and speed deployment and management of our own subscription-based on-demand solutions, Pervasive DataCloud is now also levered by integration products team to host the design, development and deployment of data migration and integration solutions created by our partners and our customers.
Now, with more than 350 subscribers presently utilizing our Pervasive DataSolutions running on Pervasive DataCloud, our cloud is gaining momentum, utilizing the near limitless capacity offered by our cloud infrastructure partner Amazon Web Services. Many of those 350 subscribers are using our Pervasive DataSynch service, QuickBooks to Salesforce edition. We continue to work our relationships with Intuit, Salesforce and Microsoft. Salesforce and Microsoft will each have a participant on an expert panel called to solve the Great Cloud Debate at our Metamorphosis 11 event next week, while Microsoft also provides a presentation on Windows Azure cloud strategy and Intuit makes a presentation titled Web 3.0 that Matters: Apps to Power the Fortune 8000000. Our Pervasive DataCloud platform and our cloud-based integration capabilities contributed to Information Management’s recent decision to name Pervasive among its 40 Companies to Watch list for the second year in a row.
And finally, an update on our Pervasive DataRush business. As we have said in prior quarters, we are seeing an increasing gap between available hardware processing power and exploding volumes of data versus what the software industry has been able to deliver in commercial applications to exploit multi-core hardware and efficiently extract useful intelligence from massive datasets, a.k.a. Big Data. The gap widens daily as the volumes of raw data accelerate and the hardware offerings continue to improve.
Pervasive DataRush is an embedded parallel Dataflow platform that helps eliminate performance bottlenecks in data-intensive applications. Its expanded capabilities enable 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 datasets without having to rely on sampling, all on commodity multi-core hardware.
Dynamically scaling to fully utilize multi-core technology, Pervasive DataRush-enabled applications can quickly overcome data preparation bottlenecks in cleansing, aggregating or de-duplicating data. Pervasive DataRush recognized its first license revenue in the December 2009 quarter and has closed new transactions in every quarter since now six quarters in a row.
One example from this quarter, a multi-state restaurant chain is implementing Pervasive Data Integrator along with DataRush-based data matching and merging capabilities, to aggregate data about its corporate catering accounts across multiple store locations into a single master record in Salesforce. With an aggregated view of its largest customers, the company hopes to strategically grow sales in their key accounts.
With our February release of Pervasive DataRush 5.0, we enabled developers to quickly harness multi-core servers and clusters to tackle Big Data challenges. In addition to its inherent ability to automatically scale across all cores on mainstream and monster multi-core servers, Pervasive DataRush now also scales across clusters, including the ability to accelerate every node in a Hadoop cluster offering unmatched speed and economics. Whether searching through log files to detect intrusion patterns, doing fuzzy matching across vast datasets, analyzing data streams from thousands of industrial sensors, processing patient healthcare and claims records, or powering a recommender system for ecommerce sites, Pervasive DataRush blows through performance bottlenecks in data preparations and analytics.
The Austin-based VC-backed Infochimps is a DataRush customer and is on mission to democratize the world’s access to structured data by indexing and connecting the world’s data and making it searchable. Their technology allows them to host and distribute that data from a single destination in a variety of formats and at a variety of price points with a focus on making lists, spreadsheets and dataset easy to find and consume.
Infochimps is putting Pervasive DataRush 5.0 to work inside of Wukong, their open-sourced tool, for executing Ruby tasks on Hadoop clusters, which they use to drive Infochimps’ production jobs on Amazon’s EC2. Pervasive DataRush improves computational efficiency, allowing Infochimps to get the largest jobs done using fewer resources in the cloud, which translates to hard dollar cost savings.
In short, we are 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 about our many opportunities for success, including, but not limited to, multi-core becoming relevant and valuable to our large database customer base in Microsoft Windows Server 2008 and Windows 7 on a desktop ultimately becoming a real catalyst in packaged application serving SMB; about our integration business continuing to grow as it has in particular over the last past six quarters, with increasing and more leverageable channels and has recurring revenue; about Pervasive growing business in the cloud; about our DataSolutions business, continuing to have subscribers and new solutions; about our acquired Business Exchange business, being set up for a solid 2011 and 2012, following our first year post-acquisition focused on technology stability and organizational scalability; and about our DataRush business, successfully building an enviable leadership position in an emerging market and about establishing credibility in next generation analytics and data-mining markets or the Big Data opportunity.
And we are bullish on Pervasive and continue to buy back our outstanding shares as we have done now for the last 20 consecutive quarters. Pervasive continues to enjoy many competitive advantages, including solid and proven product lines, a well-developed channel and operating leverage, a strong balance sheet, a furious focus on innovation, and consistent profitability and positive cash flow.
One quick Investor Relations note. We are scheduled to present at the Benchmark Company’s 2011 One-on-One Investor Conference in Milwaukee on May 12; B. Riley & Co.’s 12th Annual Investor Conference in Santa Monica on May 24th and 25th: and Three Part Advisors’ East Coast IDEAS Investor Conference in Boston on June 1. We hope to see many of you at these or other events in the near future.
I'll now open the floor for questions.
(Operator instructions) Your first question comes from the line of Kevin Liu with B. Riley & Company. Your line is open.
Kevin Liu – B. Riley & Company
Hi, good afternoon, guys.
Kevin Liu – B. Riley & Company
I guess first question here and coming off a nice strong quarter for you guys and certainly with solid deferred revenue growth here. Just wanted to get into the guidance a little bit. It looks like it’s calling for flat to slightly down. And I know you guys are typically conservative here, but just wanted to get some additional color as to what sort of risk might be present in the quarter and why we should not be assuming I guess more sequential growth considering some of the investments that have been made over the past year?
It’s – I guess I’ll start by saying guidance is a bit of art and not so much science. But it is a tool for us to demonstrate our confidence since I would suggest that you look back at our guidance patterns over the last several quarters, and we have actually lifted our guidance range a little bit on each end for each of the last three quarters, I believe, maybe four. So we came into the March quarter with $11 million to $12 million. We’re going into the June quarter with $11.2 million to $12.2 million. So we have lifted our revenue guidance range a little bit to reflect our confidence in the norm. Now there are things that could push us to the top end of that and perhaps over the top end of that as we experienced in the March quarter, which is all good. With Japan being in the state that they are in although everything looks good so far, the conservatist in me says that I can’t ignore what’s going on in the Japanese – in the country and know that I’ve got 10% of my total revenue coming out of Japan. So if I find ourselves in the lower end of that revenue range, then I think it’s because something we’re not seeing today, in fact, occurs in Japan.
Kevin Liu – B. Riley & Company
Got it. That’s helpful. And regarding your comments on the solid deferred revenue growth that you guys have seen over the past few quarters, how much of that is driven by the integration business versus some of the innovative solutions like the QuickBooks to Salesforce synching. And then along those lines, I was also curious as to the integration piece of that. How much of that is – what you would consider subscription revenues versus, say, project-oriented revenues that might be there in this particular quarter but could come out as you guys finish up on various projects?
Great question. Great questions. So, the first part of that question is, essentially all of the growth in deferred revenue has come out of the integration business. And of the growth here in the most recent quarter, half of that growth in deferred revenue was from increased subscription and half of that growth in deferred revenue is related to PSG products and services. They are being delivered that we can’t recognize until sort of this is complete or accepted in some cases.
Kevin Liu – B. Riley & Company
Got it. And as you look at – certainly you guys have gotten a lot of positive press from the industry analysts, particularly with respect to your integration products. How has that translated into pipeline growth, if you could provide any sort of metrics around that? And then also just how do you expect that to drive growth in kind of the on-premise versus subscription-based offerings that you guys have?
Both are growing well. I’d say, as a subscription-based business should, our subscription, our gap level, advertised subscription revenue has grown now 14 quarters in a row consecutively. That’s how subscription businesses are supposed to work. So that’s great. And the other license business in integration has grown as well for on-premise type license used typically. And it’s a little bit up and down from quarter to quarter, but overall it’s grown translating into – I think we’ve had four out of last six quarters had been record revenues for the integration business. And then this quarter it was record bookings. So I’m very pleased with how the integration business is growing.
I can always demand more, but that doesn’t necessarily make it true. And so the pipelines, we monitor them closely, but we had deals that closed in the March quarter that we didn’t have identified coming into the March quarter. So sometimes they are fairly quick coming into the pipe and converting to revenue. So, a little bit hard to answer your question without – with very much future in mind other than to say all of the aspects of the revenue in the integration business are growing and growing nicely. And in large part due to the great sales and marketing engineering support efforts here at Pervasive, but also there are, as you say, a lot of influencers out there who are in fact helping us tell our own story. And sometimes the best story heard is one told by someone other than the creator. So it’s all good.
Kevin Liu – B. Riley & Company
And have you guys actually seen any customer preference shifting away from perpetual to subscription-based offerings? Has it stayed relatively stable for you, guys?
I don’t know that there is a particular dynamic there other than we have been growing the amount of business on subscription. It’s hard for me to get a good view into how much of that was previously traditional license and maintenance business that just opted to be subscription at some point along the way or if in fact it was business we might not have otherwise had that came into the business as a subscription business because in fact there is a little bit less upfront investment that that new subscriber has to make. So I don’t have a tremendous view there. I would surmise based on what I hear that a lion’s share of the subscriptions are in fact new businesses.
Kevin Liu – B. Riley & Company
Great. And then just a couple final questions on DataRush. Could you talk about some any sort of additional traction you’ve gotten here with new projects or maybe follow on business with some of your initial customers there? And then also an update on how many sales reps you have in that group now.
As far as sales reps go, I’ve got three dedicated sales reps in the DataRush team here at Pervasive. But I’ve got a whole group of 20-plus integration division salespeople that are all capable of and mindful of selling DataRush and/or DataRush-based products like Data MatchMerge and data manager. So we have a lot of people that can and do look for opportunities. Traction – I'm happy that we had bookings in each of the first six quarters since we broke revenue. Of course, I want more and more and more. And we’re continuing to invest in putting ourselves in a position where we can have more and more and more. And we all are very confident that that is in fact coming. But I do want it more faster, and we’re trying to make sure that we have our eyes all set on that goal.
Kevin Liu – B. Riley & Company
Has the release of Version 5 and the enhanced features there, especially with the ability to leverage clusters, has that helped build pipeline or engaged customers further relative to what you had seen before?
Absolutely. It has helped grow pipeline opportunities and more importantly, here in the first two months following release is that it’s increased visitor awareness of Pervasive in a big way. And so we’re very happy about that. We look to continuing to leverage DataRush’s role inside the growing role of Hadoop in clusters.
Kevin Liu – B. Riley & Company
All right. Thanks for taking my questions, and nice quarter.
There are no other questions at this time. I turn the call back over to our presenters.
All right. Well, once again, thank you for your valuable time on this Tuesday afternoon, and have a good evening.
Ladies and gentlemen, this concludes today’s conference call. You may now disconnect.
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