Pervasive Beats Its Numbers and Raises Guidance

| About: Pervasive Software (PVSW)

Revenue of 12.1M and earnings of 5-cents per share exceeded Pervasive (NASDAQ:PVSW) management's guidance. This was its second straight quarter of sequential and year-over-year growth. Of even greater importance, its growth rate accelerated once again, reaching 3.4% in the March period. Though this seems like a small number on the surface, keep in mind that the company has been transitioning its integration business to a subscription model, which resulted in a 10% revenue decline in the September quarter. Clearly the negative effects of this transition are behind them, while the positive effects are just starting to unfold.

If its hiring patterns are any indication (and they usually are), revenue growth could hit double digits sometime in the coming quarters. Pervasive increased its headcount for the second straight quarter, adding 8 net employees to reach 247 at the end of the March quarter. Its 6-month headcount growth represents a 17%+ annualized pace. This is significantly higher than its current top line growth rate, which can be interpreted as a sign of things to come.

With its high-teens hiring growth rate and more than 80% of total revenue coming from recurring sources, one can argue that PVSW's current fair value is over $10 (with significant upside to come with continued growth). Management seems to agree. The company bought back over $500,000 of its own shares during the quarter, with the CEO stating on the call, "We are bullish on Pervasive and continue to buyback our outstanding shares, as we have done now for the last 20 consecutive quarters."

As usual, guidance was conservative, setting the company up for another possible beat-and-raise in the June quarter (which is its fiscal Q4). CFO Randy Jonkers confirmed the stock process on a call stating, "… we have actually lifted our guidance range a little bit on each end for each of the last three quarters at least, 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."

Consistent with my initial thesis, the company's PSQL and integration upgrade cycles both showed solid momentum in the quarter. With new products scheduled to be released in the coming months, investors can expect this momentum to continue. Some of this momentum will be on display at its upcoming Cloud Integration conference, where speakers from Intuit,, Microsoft, Pegasystems, NetSuite, and RightNow will be presenting on Pervasive's behalf.

Additional positives included the following:

  • Bookings and deferred revenue both reached multiyear highs
  • Domestic revenue growth accelerated for the second straight quarter and appears poised to turn positive in the near future.
  • Despite the catastrophe in Japan, international growth continued, with revenue reaching a multiyear high.
  • All three of the company's major product lines showed accelerating growth in the quarter, confirming my belief that it's to upgrade cycles and up-and-coming DataRush offering are all moving in a positive direction, fueling the company's ramping growth rate.
  • Despite spending over half a million dollars on its stock buyback program, the company's book value increased for the second straight quarter. This is another sign that its investments in transitioning to a subscription model are now bearing fruit.

On a final note, only one attendee asked a question on the conference call. This can be interpreted as a sign that the company remains under the radar screen. With continued success in the coming quarters, investors can expect PVSW to attract increased institutional coverage, propelling the stock to new highs.

Disclosure: I am long PVSW.