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Pervasive Software Inc. (NASDAQ:PVSW)

F1Q2012 Earnings Conference Call

January 24, 2012 5:00 PM ET

Executives

Randy Jonkers - Chief Financial Officer

John Farr - President and Chief Executive Officer

Analysts

Kevin Louve - B. Riley & Co.

Operator

Good afternoon, my name is Jessica and I will be your conference operator today. At this time, I’d like to welcome everyone to the Fiscal Year 2012 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.

Randy Jonkers, you may begin your conference.

Randy Jonkers

Thank you. 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’ll go over the standard disclaimer regarding remarks on this call. This conference call may contain forward-looking statements within the meaning of this Federal Securities Laws, including statements regarding the company’s or management’s intensions, 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’ 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 reminder, our non-GAAP results for the three and six months periods ended in December 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 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 provide some additional financial metrics from our second fiscal quarter to supplement those already provided with our press release today. Then John will update you on our current operations and plans.

Today, we released financial results for the second quarter of our fiscal year 2012. The results were consistent with our previously updated guidance provided on January 16. By geography, our Q2 revenue was as follows. Domestic revenue totaled approximately $7.9 million in Q2 or 66% of revenue. Our international revenue principally Europe and Japan totaled $4 million or 34% of our revenue in Q2.

At a product level, our database products represented approximately 53% of our business and our integration products represented approximately 43% in Q2. While our Business Xchange, DataSolutions and DataRush products accounted for the remainder.

We had 252 employees at the end of Q2, which represents an increase of five employees from the end of the first quarter. Now looking forward into subsequent Q3 guidance provided in today's press release. We anticipate cash flows from operations to be between $1 million and $2 million for the third quarter of fiscal year 2012. We also anticipate that operating expenses will increase in Q3 and Q4 based on our planned marketing events in those quarters and the effect of the new calendar year on employer payroll taxes.

We anticipate that our effective tax rate for our third fiscal quarter, GAAP earnings will be approximately 15%. For EPS calculation purposes, we expect our GAAP basis and non-GAAP fully diluted share accounts for the third quarter fiscal year 2012 be approximately 16.2 million and 16.8 million shares respectively. Note that this share count estimate excludes the impact of any future share repurchases.

Also, as in prior quarter we are not providing specific guidance beyond Q3. Now, let me turn the call over to John Farr, CEO of Pervasive Software. John?

John Farr

Thanks, Randy. We are energized each and every day knowing that the software market as a whole are going through rapid and disruptive change. The emergence and mainstreaming of cloud-based infrastructure and applications is testament to the increasing demand for scalability and rapid deployment provided by the SaaS delivery model.

Organizations increasingly demand software that provides ease of use, reusability, interoperability with widely adopted technologies and the flexibility to be deployed on-premises or in the cloud, all in a cost effective manner. In this environment, delivering flexibility and performance with high return on investment becomes increasingly critical.

In addition, the rapid proliferation of commodity hardware along with exploding data volumes, aka, Big Data, provides opportunities for companies to leverage affordable multi-core servers and clusters of servers to extract value from large volumes of the data. But only if they have the software, they can effectively scale on the new hardware.

As these disruptive market trends will continue, we believe infrastructure software will be a key ingredient for all businesses as they seek to integrate and streamline their back end systems and eliminate delays in the management and execution of critical processes and seek to gain business insight and value from their vast data assets being generated in this increasingly digital business world.

In this context, Pervasive represents a uniquely well-positioned combination of assets. We are a data innovation leader, delivering software to manage, integrate and analyze data in the cloud or on-premises throughout the entire data lifecycle. Each of Pervasive’s investment areas produced in fiscal year 2011 and continued to produce in the first half of fiscal 2012 with our database products maintaining solid revenue levels and generating positive cash flows to fund many of our activities and our integrations products growing revenue consistently in the here and now.

While we invest significant resources, approximately 25% of our revenues in technology and product development for the future. We now find ourselves in the midst of a rapidly evolving market with a combination of assets uniquely well suited to take advantage of trends in cloud-based infrastructure and applications markets and the Big Data explosion. We are also positioned to effectively address the integration and data quality challenges and opportunities posed by each.

Now, I would like to provide a quick overview and update of our primary product areas and strategic initiatives. First, database. Representing a bit more than half of our revenue, our database business is the most mature and profitable of our product lines. Annual database revenue has been solidly in the $26 million to $29 million range in each of the past five years, excluding the occasional relatively large one-off transaction that we disclosed from time-to-time.

In fact, our database revenue in the first half of this fiscal year grew 13% from the first half of last fiscal year. Our variability from year-to-year is influenced in part by where we are in our version lifecycles. Our database engineering team continues to do a tremendous job of keeping our database technology current and relevant to our large installed-base of loyal customers.

Pervasive PSQL v11 released in fall of 2010 makes more efficient use of commodity 2, 4 and 8 core servers with throughput gains of up to 4x that of earlier versions. Its performance benefits the full range of vendor applications whether or not those applications are multi-core optimized. And Pervasive is said to launch Pervasive PSQL Vx, an addition of our v11 product for our partners who make extensive use of virtualization techniques enabling them to better deliver on the cloud with load balancing, fail over and multi-instant scalability.

Pervasive is also introducing a capacity-based license model based on in data end-use and active sections to accommodate changing infrastructures for SaaS and cloud-based ISVs in our database business. Pervasive PSQL Vx is available today for our OEM partners with a broader commercial launch scheduled for later this quarter.

Now integration. Representing approximately 42% of revenue in the December quarter, our integration products are well received by our existing and new customers including end users and commercial cloud and on-premises software developers alike. We grew our integration product revenue to new record levels in each of the past four fiscal years and have grown quarter over prior year quarter revenue in each of the past nine quarters, achieving a new record revenue result in this December quarter.

Our growth in integration revenue comes from an increasing mix of contractually recurring revenue and what I’d like to call practically recurring partner-based revenue. Our integration subscription revenues, support and maintenance revenue and license revenue through partners represented over 70% of our record integration revenue results in calendar 2011 and we have increased this mix percentage in each of the past four calendar years.

The record performance in the December quarter by our integration team also contributed to the new record deferred revenue amount on our balance sheet, a portion of which will be recognized in the March quarter adding to our confidence level, our high confidence level in this business.

On January 31, we expect to host over 100 of our customers and prospects at our Integration World Europe event in London. The conference features a highly interactive setting in which attendees participate in breakout sessions led by both Pervasive technologists and Pervasive customers. The event is designed for sharing best practices and innovative approaches to the data integration challenges with specific conference tracks for data quality, cloud solutions and Big Data. The platinum sponsor for this event is RightNow Technologies and we will host a similar event here in Austin in late April.

Attendees at these events gain insight into Pervasive's integration roadmap and receive updates on our technical advancements including Pervasive PSQL Vx and future plans around our Pervasive DataCloud and Pervasive Big Data products and solutions. 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 October, we were proud to announce our positioning in the Visionaries Quadrant in Gartner's Magic Quadrant for Data Integration tools. And it is a significant accomplishment to be reflected at all in a Magic Quadrant, even more so to be positioned as a visionary.

And I would like to highlight one of our new integration customers signed in the December quarter, Onpoint Health Data. Onpoint is a data analytics healthcare organization that aggregates tens of millions of healthcare claims daily in order to provide analytics to Medicare/Medicaid. To do so Onpoint has licensed our full integration product stack including Pervasive Data Integrator v10, our Data MatchMerge and Data Profiler, data quality offerings and our Pervasive DataRush and Big Data processing engine.

Upon deployment by Onpoint, we plan to promote this exciting customer win in our lead regeneration activities. Now, our Pervasive Business Xchange business, which we acquired back in September of 2009, turned in a good quarterly result for December, but more importantly, perhaps our Business Xchange team has set itself up for an even better calendar 2012.

Pervasive Business Xchange managed service provides trading partners with actionable insight into their cash flow related business documents including purchase orders and invoices. In fiscal 2011, we completed migration of Pervasive Business Xchange customers to Windows Azure and became one of the flagship partners featured on Windows Azure marketplace.

In the June quarter last summer, we expanded the Business Xchange marketing and sales efforts investing for better penetration of existing markets and accounts primarily in the energy industry and proactively developing additional markets for managing integration as a service. The result in the September quarter was the signing of a new service agreement with a Fortune 500 oil and gas company to handle of a subset of their non-standard electronic invoice communications. This was the first such win for our Business Xchange business in years while the initial engagement may start out relatively small, it does give our Business Xchange team an expandable total within a $5 billion plus oil and gas company.

The Business Xchange team then followed up that win with another in the December quarter. In December, the Business Xchange team signed up one of the top five private sector energy companies in the world. On-Boarding of new end points for this new customer begins this month. These two customer wins combined; they are expected to result in significant six figure revenues to Pervasive in calendar 2012.

On the innovation front, our solid results in our core product lines have allowed us to continue to fund our commitment to innovation. We intend to continue investing in innovation by allocating dedicated funds for research focused on new ways to serve our existing customers and attract new customers.

Our innovation efforts over the past few years resulted in the introduction and further development of several exciting product and service offerings, Pervasive DataSolutions and Pervasive Galaxy to take advantage of market trends and integration as a service and either on-demand data solutions and to provide an integration community platform for and with our partners and Pervasive DataCloud to provide a scalable cloud-based platform for development and deployment of both Pervasive and partner developed on-demand services and Pervasive Big Data to support development and deployment of high throughput applications by capturing the parallel processing capabilities of proliferating multi-core technologies.

First, Pervasive DataCloud, Pervasive DataSolutions and Pervasive Galaxy. We began several years ago as an innovative way for us to deliver our deep integration capabilities to a different less developer-centric segment of the market, i.e., subscription based integration as a service delivered on-premises or as a multi-tenant service hosted by Pervasive.

Pervasive DataSolutions and DataCloud are attracting a growing number of ISV and systems integrated partners, meeting a secure and reliable on-demand services platform for Pervasive or partner cloud developers to rapidly create on-demand data and application integration, on-demand analytics and on-demand data profiling.

Meanwhile, Pervasive [Vendor] our partners now offer more than 150 templates, plug-ins, connectors and other integration solutions in the increasingly dynamic Pervasive Galaxy marketplace. We continue to invest in and enrich Galaxy to make it a destination of choice for innovative integration partners and their customers.

Intuit recently deployed a tighter integration service for QuickBooks and Salesforce CRM with Pervasive DataCloud platform and Pervasive DataSynch technology at its core. Our Intuit in Salesforce and DataCloud implementation continues to mature as we work closely in both Intuit and Salesforce.

Intuit and Salesforce expectations are high as are ours. We have a few more tests to pass, before Intuit cranks up the marketing on this service. We are very proud of our cloud-based work in concert with Intuit and many other ISVs in the market and look for leverage in these relationships in the years to come.

And second, Pervasive Big Data products and solutions, utilizing Pervasive DataRush, our software development platform has let developers rapidly build parallel applications that deliver exceptionally high throughput on Big Data with low CapEx and OpEx costs. We will allow developers to fully leverage payroll processing capabilities of multi-core processors on appliances or Hadoop clusters to deliver unmatched performance.

Our Pervasive DataRush initiative began in earnest several years ago as a relatively raw technology. We have methodically been advancing the technology to achieve increased ease of use and adoptability by our customers. We are an active ecosystem for Big Data and intend to increase our visibility in that community.

Variety of potential partners and customers looking for cost effective solutions hit through the challenges and opportunity posed by ever increasing data volumes, a growing range of data sources and types and the accelerating speed of business inherent in today’s Big Data landscape.

And as you may remember from our call in October, we have now combined Pervasive DataRush and our Innovation Labs groups into one team, Pervasive Big Data products and solutions to focus aggressively in our market in partnering opportunities in that area including the Hadoop ecosystem.

And Mike Hoskins, our EVP and CTO assumed the role of General Manager of this new team. Mike and his Big Data team have developed a robust roadmap to apply our highly scalable Pervasive DataRush technology to the target and set Big Data field business problems that fall into what Gartner and Forrester call extreme information management. And I expect to see several of these offerings rollout throughout the calendar year and the big data team will be participating in the O'Reilly Strata Conference in late February and the predictive analytics world in early March where more of this information will be shared.

I look forward to an exciting year ahead. Every single product group in the company is poised to do something really special in the March quarter and beyond. Our database team with its continued marketing of Pervasive PSQL v11 and its launch of PSQL Vx. Our integration team with continued record setting revenue with a focus on highly recurring revenue sources.

Our Business Xchange team with a complete on-boarding of its largest customer wins to-date. Our DataCloud team with the maturing of its QuickBooks, Salesforce cloud-based integration service and our Big Data products and services team with a focus on the next generation of data infrastructure.

In short, we have had a solid and exciting start to fiscal 2012. We are making strategic investments and are well positioned to capture significant opportunities in the future while also maintaining our intense focus on profitability are personally observed over the past year in particular, the increasing value of our customers, partners and employees based on Pervasive’s unique combination of operational stability and the ability to innovate.

The investments we are making in innovative new products and in innovative new features for existing products are positioning us incredibly well for intriguing trends in Big Data and the cloud. These are clearly exciting times to be a part of Pervasive Software. We are bullish on Pervasive and continue to buy our outstanding shares on the open market as we've done now for the last 23 consecutive quarters.

Pervasive continues to enjoy many competitive advantages including solid and proven product lines and a well-developed channel in 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 Stifel Nicolaus Investor Conference in Dana Point, California on February 9. We hope to see many of you at this and other events in the near future. I will now open the floor for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Kevin Louve with B. Riley & Co. Your line is open.

Kevin Louve - B. Riley & Co.

Hi, good afternoon, guys.

John Farr

Hey, Kevin.

Kevin Louve - B. Riley & Co.

Starting from the integration business, last quarter you talked about some attrition causing some service delivery issues. And how are you guys able to turn that around so quickly, what steps have you taken, how much more is there to go. And then, as you look forward, what are your expectations in terms of being able to continue the success you had this quarter?

John Farr

Well, the first part of that question is, we hired some really good people since last summer and it wasn’t all about people capacity, a lot of it was about engagement management, engagement architecting on the front-end. A number of things went into us getting a little bit behind in the September quarter, but to come out of it so quickly in the December quarter remains with everyone do work together and came to a good result and sales is continuing to fit more into the pipes.

So, I think going forward that the good quarter that we had in December will continue. I believe we have already got a very high percent of our expectations for professional services already contracted for the March quarter.

Kevin Louve - B. Riley & Co.

And given the demand that you guys are seeing or your ability to add more to the pipeline, I mean, how do you feel about your capacity in terms of what you have to pay and bench strength. Do you feel like you will need to add more as we kind of move into next few quarters there?

John Farr

We have always tried to make sure we had enough bench strength whether it's in professional services or in sales or support everywhere you look, it is something that we as Manager of the business have to always worry about and continue to try to achieve that right mix of people. And so, with the demand, we will have resources as we deem are necessary. I've said many times that we are not a services-led shop, we are not occurring to be an extreme services organization.

We are a software company and our services team help enable our new customers to get onboard with our software quicker and do more things faster with the software. So, I hope to not ever have our professional services be a gate if you will for future license revenue, but we will add to the team as necessary to make sure that we satisfy the demand that the sales guys come up with.

Kevin Louve - B. Riley & Co.

Got it. And on the Business Xchange side, it sounds like you guys had a couple of nice wins so far. I mean, with these six figure type contributions to the calendar year, how should we think about around third as a more – does it kind of come in pretty consistently over the course of the year or is there particular periods where they ramp more?

John Farr

Yeah, I think given where we are right now with that fledgling sales and marketing team, the new sales and marketing team has only been in place since early summer, so less than a year. And two big wins like this one, the second one being bigger than the first and we were talking about on-boarding now, potentially thousands of end points, customer end points. And so, this is another capacity question and our services team, our support team really in this case for our Business Xchange business is full out implementing and on-boarding these new customer end points between now and early next quarter. Imagine there will be a few developers also working on from the end point.

So, being a software company with a lot of technology people in the building, there are many places that we can turn to for capacity when we need it, whether it’s in professional services, whether it's in on-boarding or new oil and gas customers in Business Xchange. When we have something that needs to be done and there is a peak period of demand for our services and then guess what? We all pitch in and we get it done. So, we need to work through on-boarding this significant new customer and make sure that it is as successful as we expect and the customer expects and then, we will be ready to land our next one, not that sales ever stops working on our products for the next one. But we have [measured] capacity that’s available in the Vx team with this particular win right now.

Kevin Louve - B. Riley & Co.

And then, just lastly from me, looking on the database side, can you just kind of talk a little bit about where you think you are on the v11 lifecycle. Microsoft is obviously talking about the next version of their operating system coming out. Do you think we are kind of the latter stage this year or do you think there’s still a couple more quarters there where things might get back a little stronger, I know first half has also been pretty good in that business?

John Farr

Yeah, the database business has to be one of the most resilient and vibrant businesses I have ever been associated with a vendor of or a customer of and so, we have some larger quarters and some less large quarters and a lot of that is driven based on the renewal cycles of some of our customers. It is driven in part by where we are in the release cycles as well, but v11 continues to produce nicely here where we are now at one full year past v11. In the past, we have been on 2.5 to 3-year release cycles for major version releases.

So, I’m glad Microsoft is ready to try again with the OS and release new versions and that will allow us to have more reasons to continue to upgrade our products and in the case of new OSs from Microsoft potentially even a major release, we will wait and see just how major all the new releases coming from Microsoft would be, but it is very resilient and if Microsoft gives us a reason to upgrade here within what would otherwise be a 2.5 to 3-year development cycle, version cycle, then I’m thrilled.

Kevin Louve - B. Riley & Co.

All right, thank you.

John Farr

Thank you, Kevin.

Operator

We have no further questions at this time. I will turn the call back over to the presenters.

John Farr

All right. As always, thank you for your time this evening. Have a great night. Thank you.

Operator

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

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