Valence Technology, Inc. (VLNC) F4Q 2011 Earnings Call July 26, 2011 5:00 PM ET
Randy Jonkers – Chief Financial Officer
John Farr – President and Chief Executive Officer
Sarkus Sherbetchyan – B. Riley & Company
Good afternoon. My name is Christen and I will be your conference operator today. At this time, I would like to welcome everyone to the Fiscal Year 2011 Fourth 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 our host, Mr. Randy Jonkers, CFO. Please go ahead sir.
Thank you. Good afternoon and thank you for joining us. 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 margins, 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 June 30, 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 provide some additional financial metrics from our fourth quarter fiscal quarter to supplement those already provided from our press release today. Then John will update you on our current operations and our plans looking forward into our next fiscal year. Today, we’ve released financial results for the fourth quarter of our fiscal year 2011. The results were consistent with our updated guidance provided on July 13.
By geography, our Q4 revenue was as follows. Domestic revenue totaled approximately $10 million in Q4 or 73% of our revenue. Our international revenue, principally Europe and Japan, totaled $3.7 million or 27% of our revenue in Q4. At a product level, our database products represented approximately 61% of our business and our integration products represented approximately 35% in Q4, while our Business Exchange, DataSolutions and DataRush products accounted for the remainder.
We had 252 employees at the end of Q4, which represents an increase of 5 employees from the end of the third quarter.
Now looking forward and to supplement the Q1 guidance provided in today’s press release. We anticipate cash flow from operation to be between $1 million and $2 million for the first quarter of fiscal year 2012.
For EPS calculation purposes, we expect our GAAP basis and non-GAAP fully diluted share counts for the fourth quarter of fiscal year 2012 to be approximately 16 million and 16.5 million shares respectively. Note that this share count estimate excludes the impact of any future share repurchases. Also as in prior quarter, we’re not providing specific guidance beyond Q1.
Now, let me turn the call over to John Farr, CEO of Pervasive Software.
Thanks, Randy. The corporate level highlights for our June quarter include the completion of our 42nd consecutive quarter of profitability representing consistent profitability now for the last 10 consecutive fiscal years.
Our database team closing a significant transaction near the very end of the quarter for $900,000, allowing us to exceed both our previous revenue and earnings guidance and what was already shaping up to be a nice quarter. Our integration team taming within a mere $44,000 of a new total revenue record resulting in our seventh consecutive year-over-year quarterly revenue increase in our integration business.
Our Business Xchange team achieving a new quarterly record revenue level albeit on a relatively smaller revenue base. And the advancement of our emerging businesses Pervasive DataCloud, with some very exciting work, we are doing with Intuit and Pervasive DataRush, with the recent announcement of Pervasive TurboRush for Hive and with very good visibility of recent Bay Area big data events including speaking new versions for two of Pervasive’s leading technologist.
We continue to invest in strategic opportunities to emulate in a rapidly evolving market as reflected by over 25% of our revenues invested in research and development. And we completed our 21st consecutive quarter of active share repurchases.
Now we turn more specifically to the June quarter highlights and updates within the various product groups. Our investments in the database business have enabled us to maintain annual revenue levels for this relatively mature and very profitable product line at the $26 million to $29 million level in each of the past five fiscal year plus the various larger compliance related transactions we have disclosed from time to time.
Compliance related transactions are those in which we will do some additional royalties for unreported or under reported license fees and then working with those customers to limiting any, in that advertent compliance matters. The news in Q4 for our database business was the closing of one of these compliance related situations resulting in the large $900,000 transaction near to the end of Q4 of fiscal 2011.
Recent followers of Pervasive may recall that we closed two similar transactions in each of the two prior fiscal years, one for $2.4 million in Q1 of fiscal 2010, and one for $3 million in Q3 of fiscal 2009. And these quarters when we close one of these larger transactions let be careful not to let them all shatter the great work our database team does day in and day out, serving our active customers with a high performance database product and high quality technical support, always current with support for the latest in Microsoft operating systems, the latest in 64-bit technologies, the latest in multicore parallel processing capabilities, as well as the latest in electronic licensing systems to help customers avoid compliance issues before they occur in the first place.
Recall that last December we released the latest version of our embedded database Pervasive PSQL v11 for multicore. We have seen good uptake in v11 in the first of its three full quarters of availability. In the June quarter more than 95% of our revenue for shrink-wrapped units of English version PSQL was from the new version 11. And close to 60 of our OEM partners have now setup accounts on our OEM portal in order to generate v11 product keys while our already low support ticket volumes have remained relatively unchanged from previous quarters. These metrics are a great testament to the backwards compatibility and overall product quality built into our recent version 11 PSQL product.
As for the near-term product roadmap, we are preparing to release Pervasive SQL v11.1 BX with improved support and pricing for use in certain virtualized environments. This product version is scheduled to release later this summer or early fall.
Our integration products group executed very well again this June quarter, resuming the quarter with a near 34k (inaudible) new quarterly revenue record and achieving our seventh consecutive of year-over-year quarterly revenue growth. Our trailing four-quarter revenue growth in this business is now 9%, while it’s up from 8% in each of the two prior fiscal years.
However, as I’ve said in prior calls, our integration team has been increasingly successful in building a book of recurring business in the form of subscription revenue resulting in a more predictable revenue stream and an increasingly significant amount of deferred revenues on our balance sheet.
Our customers routinely tell the Pervasive story on our behalf. On April 27 and 28, we hosted our annual invitation-only Metamorphosis 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.
Attendees heard about real world experiences plus leading edge approaches to SaaS and cloud-based integration. We set a new record for attendees in 2011 with more than 250 up from our previous record of 150 at our (inaudible) in the previous year. These events continue to be very productive in advancing the sales cycles with new partner prospects.
I’d like to highlight a few recent and notable integration partner engagements, ADP. ADP is arguable one of the earliest pioneers of on-demand cloud-based services. ADP’s tax and compliance division has recently selected Pervasive services to provide rapid and repeatable integrations between ADP’s cloud-based suite of CFO products with three main third party ERP systems in order for ADP to reach new customers and expand into new markets.
CIS GmbH, CIS is a German business service provider or BSP managing large accounts and co-ops. Today they are using manual efforts to import unstructured data about retail catalog information to load into their cloud based e-commerce and BI solution offering. They chose Pervasive over BizTalk and Custom Card for ease of use, ability to unwrap customers quickly and for our DataCloud offerings Data Profiler and Data Match Merge.
And finally Intuit, Intuit has announced releasing a more tightly integrated version of QuickBooks to Salesforec.com. At our Metamorphosis event in April, Intuit demonstrated early phase application of Pervasive’s integration technology to provide the tighter integration. Intuit will be selling a bundled package of QuickBooks on-premises or QuickBooks online, bundled and integrated with Salesforce.
In architecture currently in development Pervasive DataCloud integrates three other clouds to complete the solution. Force.com, the Intuit partner platform or Intuit data services private cloud and a provisioning application on Microsoft Azure. We intend to continue working with Intuit toward the successful culmination of this project and deployment of the Intuit Solution.
Like ADP, CIS and Intuit and increasing number of our partner prospects are turning to Pervasive in large part due to our cloud based integration capabilities, whether deployed in concert with the partners owned, established cloud platform or on our own Pervasive DataCloud platform. The host, the design, the development, deployment and management of data migration and integration solutions created by our partners, our customers and Pervasive professional services.
We have hundreds of subscribers already utilizing our own data solutions offerings running on our own DataCloud, our cloud is gaining momentum. Utilizing the nearly limitless capacity offered by our cloud infrastructure partner Amazon Web Services plus the ability to support hybrid and private cloud environments by teaming with Eucalyptus.
Our solid historical results have allowed us to capitalize on acquisition opportunities such as our asset purchase of Greenville-based channelings back in August of 2009. We acquired business now operating as Pervasive Business Xchange as the opportunity to add value and/or benefit from each of our other businesses. For example, we previously announced the availability of (inaudible) technology to allow Pervasive Business Xchange users to easily select QuickBooks invoices and attachments to generate and send electronic EDI-compliant invoices via the Pervasive WebDI business-to-business interchange. This is the first as many last known integration scenario that ChannelLinks was not able to offer prior to the acquisition.
Notable highlights for our Business Xchange business during the June quarter include; one, the replacement at the beginning of the quarter; two Greenville-based pre-acquisition sales and marketing resources; three Austin-based sales and marketing talents promoted from within our Austin-based integration business.
Two, the Business Xchange business setting a new record for quarterly revenue in the June quarter, its fourth quarter record in a row and increased sales and marketing activities have only just begun.
Three, we have now completed the migration of Pervasive Business Xchange customers to the Microsoft Windows Azure Cloud platform providing Pervasive Business Xchange service with enhanced scalability and stability.
And finally, we recently announced that Pervasive WebDI is one of the first applications selected and validated to go live on the Microsoft Windows Azure marketplace resulting in increased visibility for Pervasive. The Windows Azure marketplace is an e-commerce enabled cloud store for high-quality information such as cloud applications and services, which Microsoft announced in conjunction with the Microsoft World Partner Conference in Los Angeles earlier this month.
Our technology investments to provide Pervasive Business Xchange with enhanced scalability and stability, our recent revenue momentum and recent upgraded sales and marketing function combine to set up Pervasive Business Xchange for a solid fiscal 2012.
And finally, an update on our Pervasive DataRush business. As we have said in prior quarters, we see an increasing gap between available hardware processing power and the exploding volumes of data versus what the software industry has been able to deliver in commercial applications to exploit multicore 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 hardware offerings continue to improve.
Pervasive DataRush is an embedded parallel Dataflow platform that helps to 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 datasets 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 duplicating data. 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.
With our February release of Pervasive DataRush 5.0, we enabled developers to quickly harness multicore servers and clusters to tackle Big Data challenges. In addition to its inherent ability to automatically scale across all cores on our mainstream and monster multicore servers, Pervasive DataRush now also scales across clusters, including the ability to accelerate every node in a Hadoop cluster offering unmatched speed and economics.
And in June, we announced Pervasive TurboRush for Hive, a product that makes Hive queries run faster on less hardware and with DataRush system both on top of the two. Pervasive TurboRush for Hive accelerates Hive by using the Pervasive DataRush data flow engine on the back-end providing faster execution of Hive programs without meeting the modified (inaudible). It provides the power to Pervasive DataRush parallelism to the full spectrum of sequel and high developers.
We previewed TurboRush for Hive at the Yahoo Hadoop Summit 2011 last month. And it will be available through an early access program in the coming weeks. For those with TurboRush for Hive, is the first series of big data accelerators currently being developed or powered by Pervasive DataRush.
And our strategy and our DataRush team enjoyed tremendous visibilities, with our leading technologists presented high profile events during the month of June, as well as, hosting the Bay Area Hive user group meeting.
At the Yahoo Hadoop Summit 2011, which took place June 29 in Santa Clara, Pervasive Integration Chief Technologist, Paul Dingman, hosted a session titled Hadoop on a Personal Supercomputer, which use scenarios where running Hadoop on smaller clusters of high-core-count machines with large disk arrays can deliver faster results more cost effectively than larger clusters of low-core-count machines.
Pervasive also presented at the Big Data Camp on June 28 on the eve of the Yahoo Hadoop Summit. Pervasive DataRush Chief Technologist, Jim Falgout, presented a lightening talk session that covered best practices in tuning and integrating with Hadoop and Hive.
In addition Pervasive presented at the AMD Fusion Developer Summit on 2011 held June 13 and 16 in Bellevue, Washington. At AMD Summit, Jim hosted a session titled, “Leveraging Multicore Systems for Hadoop and HPC Workloads,” discussing how to take advantage of multicore processors, offering examples of workloads running on clusters and single multicore servers, detailing the performance and energy gains.
Pervasive DataRush recognized its first licensed revenue back in December of 2009 and has closed new transactions every quarter since now, seven quarters in a row. However, we can do better on revenue front than we have done this far.
So similar to the sales and marketing adjustments we made recently in our Pervasive Business Xchange sales and marketing team, I’m also making changes in Pervasive DataRush sales and marketing leadership and one additional DataRush sales resource.
Our recent DataRush sales and marketing leader was based in Boston and a dedicated sales rep, who is based in Los Angeles. The remote location of this two key positions was set optimal for other concern and get in the process of looking for talent facilities to open positions preferably to be located here in Austin with the rest of their outstanding technical and marketing DataRush team.
We’re positioning Pervasive to benefit from a number of powerful trends. The rapid pace of data growth, Big Data, due to the explosion of digital data, as well as increasing data complexity due to the use of cloud services, is creating a need for integration platforms that are capable of capturing new data streams and better aligning them with the key business initiatives. So the businesses can effectively leverage the value of their data assets.
In short, we were 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.
That brings to the close of fiscal year 2011 and we already look forward to fiscal 2012. We are nearing completion of a variable and exercise of developing our operating plans for fiscal year ending June 30, 2012. Our annual operating plan will be submitted to our Board for approval later this summer. While we do not publicly communicate the details of our financial plans, I can’t say that we remain committed to the strategic balance of investment in both our flagship and emerging products while also maintaining a tenacious focus on profitability.
We’re bullish on Pervasive and continue to buyback our outstanding shares as we have done now for the last 21 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 serious focus on innovation, and consistent profitability and positive cash flow.
I’ll read quick Investor Relations note. We are scheduled to present at Three Part Advisors Midwest IDEAS Investor Conference in Chicago on August 31. We hope to see many of you at this and other events in the near future.
I'll now open the floor for questions.
(Operator instructions) Our first question comes from Sarkus Sherbetchyan with B. Riley & Company.
Sarkus Sherbetchyan – B. Riley & Company
Hi, good afternoon, guys.
Sarkus Sherbetchyan – B. Riley & Company
How are you guys this quarter?
Good, thank you.
Sarkus Sherbetchyan - B. Riley & Company
So, just moving on to my questions, I think the large database transaction, it actually looks likes the database license revenues lines appear to grow lastly. Do you expect the year-over-year growth from this segment to be sustainable going forward or maybe give some color on that?
Once I said in my prepared remarks, I mean we have maintained this business for the last five fiscal years. I'm speaking exclusive of the three large transactions we’ve disclosed over the course of the last three years, but besides those large transactions, the rest of the database business has been consistently in the $26 million to $29 million level for each of the last five years. Sometimes less, sometimes down, some of that depends on where we are version life cycle and during that five year reference period time here we had version 8, we had version 9, version 10 and now version 11, so we’re seeing ups and downs through the course of that five year period of time.
So the point here is that we are investing in this business, so it maintains its vibrancy with respect to the current customer base, we’re not investing in this business to win new customer. So that’s an important distinction to make and that would suggest that, we believe it will continue to be in that kind of range for the foreseeable future.
Sarkus Sherbetchyan – B. Riley & Company
And now that the company has rolled out some WebDI offerings. Can you talk about the traction that you’ve been receiving with regards to this and maybe some commentary on how customers are responding thus far?
So, WebDI, that’s the acquired Channel Links business, now known as Business Xchange. The WebDI service is not new, I mean, the service has been out there for a number of years prior to our 2009 acquisition. And what’s new there is that we [afforded] the WebDI1 users to now WebDI2 for increased stability and functionality, while also now completing our migration to Microsoft Azure, also for increased scalability and stability. So from the users’ perspective that’s what they see, is minimal downtime and a more solid service offering.
The other things that I was referring to in my Business Xchange comments is that the Business has done well since we acquired it some close to two years ago, it’s our four record revenue quarters in a row. Again they’re timed at a relatively smaller revenue base, I mean an annual revenue of $2 million to $2.1 million.
But still that’s been going well, and despite the fact that we didn’t have tremendously active sales and marketing activities and so have made some changes and I expect that to change. And so the guys that are assigned to the business, the sales and marketing guys assigned to the business, three in total, based here in Austin will first and foremost continue to expand the WebDI footprint inside. Already nice and vertical concentration inside oil and gas types of companies. And once they get a little bit more growth going in that particular vertical (inaudible) to expand. So things have been going well in WebDI, Business Xchange and I expect with changes we’ve recently made that they will grow even better.
Sarkus Sherbetchyan – B. Riley & Company
Okay, great. Thank you for that. And with regards to DataRush, what are your expectations on when that DataRush will become profitable?
Well, the profitability will be in some time now. I mean, we are as I’ve said publicly in the past, we are investing $2.5 million close to $2 million a year net on the DataRush business. As I said in my prepared remarks, I am not happy with the extent of our sales progress to date and I’ve made change. One half of the change in rate there and I'm looking for any replacement talent in sales and marketing side, mostly on the sales side, they would be based here in Austin, to help if they get that kick-started. I'm very pleased with what’s been happening inside DataRush from a technology perspective. I'm very pleased with what our marketing add to that team has been doing for the last six months or so plus the other marketing resource in that group. We absolutely – combination of their efforts and our technology and the efforts of our corporate marketing group and analyst relations, we’ve absolutely raised the visibility of our Pervasive DataRush technology and capability.
So I’m happy with all of that and I'm not as happy with sales and where we are today. So I’m not predicting the point at which that becomes profitable. We get the revenue going and likely increase the investments. So you could do a net investments for some period of time. But we’re more focused today on getting the revenue stream kick started. And I'm not looking to increase the investment in that particular product line right now. I mean I’d say $1.5 million to $2 million that’s plenty of net investment. And by the way, a lot of that investment is on the technology side and it was part of our 25%, nearly 25% of our revenue being invested in R&D.
Sarkus Sherbetchyan – B. Riley & Company
Okay, great. And with respect to these investments, I mean the business, so it sounds like most of it is going to be in the R&D line, and you’re going to make some additional headcount, if I'm looking sales is that correct to DataRush and the WebDI integration? Is that right or?
We have tried to follow all the multiple pieces in that question. So as I add resources to DataRush they will initially be probably two replacement folks on the sales and marketing side that get emphasis on sales, and probably one, however, the course of the coming year probably one on technology side and one on the two marketing side. So we’re balancing what I would add and replace for more (inaudible) and DataRush.
WebDI, the Business Xchange business that you referred to, the additional investment there would be primarily on the sales and marketing side. The group of developers and support, technicians and technologists that we have based in Greenville, great bunch of developers and they’re doing great job and so there is no reason to change any of that. Hopefully with the additional sales and marketing capacity and resources we’ll get sales and marketing, sales going in more interesting direction up and they we will look at adding additional technology talent – these new talent to support future products.
Sarkus Sherbetchyan – B. Riley & Company
Okay. Great. Sounds like its pretty balanced and that will be all from me. Thank you.
All right, thanks Sarkus.
There are no further questions at this time.
All right. Well, I appreciate everyone’s attention to the call today, participation in the call and everyone has a busy schedule in the second and third weeks of earnings release month. So thank you again, and everyone have a great evening.
Ladies and gentlemen, this does conclude today’s fiscal year 2011 fourth quarter financial results conference call. You may now disconnect.
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