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Pervasive Software Inc. (NASDAQ:PVSW)

F3Q12 Earnings Call

April 24, 2012 5:00 PM ET

Executives

Randy Jonkers – Chief Financial Officer

John Farr – President and Chief Executive Officer

Analysts

Kevin Liu – B. Riley & Co.

Operator

Good afternoon, my name is Steve, and I will be your conference operator today. At this time, I’d like to welcome everyone to the Pervasive Software Fiscal Year 2012 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 Randy Jonkers, Chief Financial Officer. Please go ahead.

Randy Jonkers

Thank you Steve. 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 the 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’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 reminder, our non-GAAP results for the three and nine month periods ending March 31, 2012 and 2011 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 third 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 our third quarter of our fiscal year 2012. By geography, our Q3 revenue was as follows. Domestic revenue totaled approximately $8.5 million in Q3 or 66% of our revenue. Our international revenue, principally Europe and Japan, totaled $4.3 million or 34% of our revenue in Q3.

At a product level, our database products represented approximately 58% of our business and our integration products represented approximately 38% in Q3, and our Business Xchange, and Big Data products accounted for the remainder.

We had 259 employees at the end of Q3, which represents an increase of seven employees from the end of the second quarter. As expected, Q3 operating expenses were higher than Q2 and Q3 of last year. Due to a larger employee base, the effective payroll taxes and increase in commission expense, higher group medical claims, timing of marketing events and continued legal defense costs relating to our disclosed patent litigation.

Now looking forward and to supplement Q4 guidance provided in today's press release. We anticipate cash flows from operations to be between $1 million and $2 million for the fourth quarter of fiscal year 2012. We also anticipate that operating expenses will be consistent with Q3. As we expect while 70 elevated expense categories in Q3 may decrease in Q4, we also expect to add net headcount, and hold our [inaudible] in Q4.

We anticipate that our effective tax rate for our fourth fiscal quarter earnings will be approximately 19%. For EPS calculation purposes, we expect that our GAAP basis and non-GAAP fully diluted share accounts for the fourth quarter of fiscal year 2012 to 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 Q4. Now, let me turn the call over to John Farr, CEO of Pervasive Software.

John Farr

Thanks, Randy. Let me too lay some foundation once again for the benefit of our newer listeners. We believe software markets overall are going through a rapid and disruptive change. Through emergence and mainstreaming of Cloud-based infrastructure and applications is testament to the increasing demand for storability 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 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 the exploding data volumes, a.k.a, Big Data, provides opportunities for companies to leverage affordable multi-core servers and clusters of servers to extract value from large volumes of data. But only if they have software, they can effectively scale on new hardware.

As these disruptive market trends 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 have continued to produce in 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, I mean 25% plus 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 also are 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, the 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 last past five years, excluding the occasional relatively large one-off transaction that we will disclose from time-to-time.

Variability from year-to-year is influenced in part by where we are in our version release 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 which was 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 the earlier versions. Its performance benefits the full range of vendor applications whether or not those applications are multi-core optimized. And in February we announced the release of Pervasive PSQL Vx Server 11, the hypervisor-friendly edition of Pervasive PSQL v11, designed for customers who need support for highly virtualized environments, enabling live migration, fault tolerance, high vulnerability and cloud computing.

Consistent with the new edition, we expanded support for VMware, Microsoft or Citrix hypervisor platforms, to have migration support allowing virtualized Pervasive PC users to move easily from one physical machine to another, improve license management ensuring that Pervasive PSQL Vx authorization and validation happens in accord with the hypervisor’s configuration, flexibility deployment licenses allowing both [inaudible] of Pervasive Software PSQL Vx to coexist in a similar environment, and hosting-friendly licensing that embraces various software as a service models.

More and more of our customers are using virtualized [inaudible] for Pervasive PSQL in development, test and production environments as the adoption of cloud technology based on utilization in virtualized environments increases. For our customers, this release ensures that Pervasive PSQL Vx has been extensively tested for reliable operation in fully loaded conditions, and is optimized for long-term investment in virtualization technology.

Now for integration. Representing approximately 38% of our revenue in the March 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 revenues to new record levels in each of the four past fiscal years and have grown quarter over prior year quarter revenue in each of the past ten quarters. From April 29 to May 1, we expect to host well over 200 of our customers and prospects at our Integration World Event here in Austin. The conference features a highly interactive ten days, participate in breakout sessions led by Pervasive technologists, industry analysts, 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, card integration, and data innovation. Diamond sponsor for this event is Oracle right now, and platinum sponsor is Zuora. Presentations include speakers from Intel, Oracle, Jason’s Deli, Planview, Constellation Research among others.

Attendees to the events will gain insight into Pervasive’s integration roadmap and receive updates on technical advancements and future plans around our Pervasive datacloud and Pervasive Software 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.

In February, we were proud to announce our positioning as a strong performer in Forrester’s Research report, The Forrester Wave

Enterprise ETL, Q1 2012. In the report, Forrester notes that, “Although ETL is still used extensively to support traditional scheduled batch data feeds into data warehouse and business intelligence environments, the scope of ETL has evolved over the past five years to support new and emerging data management initiatives, including data virtualization, cloud integration, Big Data, real-time data warehousing, data migration and application retirement, and master data management.

According to the report, “Forrester expects the ETL market to grow significantly in the coming years, especially as data volumes continue to grow and organizations start to leverage Hadoop and the cloud. For over 29 years, Pervasive Data Integrator has provided cost-effective extraction, transformation and flow of nearly any kind of data between sources throughout the organization on a continuous, event-driven or scheduled basis in any usage scenario that might be needed.

In addition, the unique Pervasive Data Quality Suite process utilizes Pervasive products and partner content libraries to work together as a part of the integration process to rid organizations of dirty data and achieve a 360 degree view of the customer making it a perfect fit for ETL and other data integration projects.

And our partners know as well. To name a few, Intuit, salesforce.com, and NetSuite, [inaudible], Safeguard, and Pfizer. These parties know that Pervasive invests aggressively in research and development to provide our customers and partners with the most innovative, reliable, and scalable integration solutions. We are proud of our strong performance rating in the Forrester ratings, and remain deeply committed to having our partners and customers efficiently and cost effectively extract maximum business value from their data.

Now onto BusinessXchange. Pervasive’s Business Xchange business, which we acquired back in summer of 2009, turned in a solid March quarter as expected, representing the second best quarterly revenue since the acquisition. The Pervasive Business Xchange managed service provides training partners with actionable insight into their cash flow enabled business documents, including purchase orders and invoices.

In fiscal 2011, we completed migration of all Pervasive Business Xchange customers to Windows Azure, and became one of the flagship partners featured on the Windows Azure marketplace. Last summer we expanded Business Xchange marketing and sales efforts, investing for better penetration of existing markets and accounts, primarily in the energy industry. The update for this call, if you will remember, from our conference call in January, I discussed our recent business Xchange win, in which the team signed one of the top 5 private sector energy companies in the world, onboarding of the most complex new endpoints for this new customer began in the March quarter, and is now essentially complete.

We will now turn our attention to the larger number of simpler implementations, as always subject to the customers’ own internal calendar and training constraints. The BusinessXchange team has continued its vertical focus on the oil and gas industry with the March announcement of its membership in the Petroleum Industry Data Exchange, or PIDX, an organization that provides a global forum for delivering the business process, information and technology standards that facilitate seamless, efficient electronic business within the oil and natural gas industry and its trading community.

Now PIDX recently appointed Pervasive Business Xchange Senior Account Executive, Theo Kambouris, as its Western Hemisphere Events Coordinator. In this role, Theo will be responsible for directing event and conference planning, as well as speaker recruitment for all Western Hemisphere PIDX events, including the PIDX event the U.S. Spring Conference, which was held in Houston on April 12.

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 Galaxy to take advantage of market trends and integration as a service and other on-demand data solutions and to provide an integration community platform for and with our partners, 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 and Pervasive Galaxy. Now, it 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, subscription based integration as a service delivered on-premises or as a multi-tenant service hosted by Pervasive.

Pervasive DataCloud is attracting ISV and SI partners, meeting a secure and reliable on-demand services platform for Pervasive and partner cloud developers to rapidly create on-demand data and application integration, on-demand analytics and on-demand data profiling.

Often those applications are being offered in an increasingly dynamic Pervasive Galaxy marketplace. Pervasive and our partners now offer more than 200 templates; plug-ins, connectors, and other integration solutions in Pervasive Galaxy. That’s up from about 150 in our call back in January. 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 Salesforce and DataCloud implementation continues to mature as we work closely with both Intuit and Salesforce. Now the cloud update for this call, you can now begin to see marketing activities appearing on Intuit phone website for Intuit’s privately branded Salesforce for QuickBooks application.

You can go to www.quickbooks.com/CRM, and you will be directed to a site where with one more click from a page for those “already using QuickBooks and Salesforce,” and you will see a two-minute overview video of this solution that includes the integration capabilities of Pervasive’s data integrator on the cloud. We are very proud of our cloud-based work in concert with Intuit, and many other ISVs in the market, and look to leverage these relationships in the years to come.

And second, Pervasive Big Data products and solutions, utilizing Pervasive DataRush, a parallel data flow software platform has lets developers rapidly build Big Data applications that deliver exceptionally high throughput with low Capex and Opex costs will allow developers to fully leverage the unutilized processing capabilities of multi-core servers or Hadoop clusters to deliver unmatched performance.

Our Pervasive DataRush initiative began in earnest several years ago as relatively raw technology. We have methodically been advancing the technology to achieve increased ease of use and adoptability by our customers. We are active in the Hadoop ecosystem for Big Data and intend to increase our visibility in that community to act with potential partners and customers looking for cost effective solutions through the challenges and opportunities presented by ever increasing data volumes, a growing range of data sources and data storage and accelerating speed of business inherent in today’s Big Data landscape.

The Big Data update for this call, in February, we announced the availability of Pervasive RushAnalyzer, a product designed for data scientists, business analysts, and Big Data developers for building and deploying end to end data preparation and analytic solutions on most of the platforms, including Hadoop clusters, high-performance servers and desktops.

Pervasive RushAnalyzer is a visual environment that lets users rapidly discover data patterns, build operational analytics, and continuously monitor multiple predictive models, all without the need for programming skills. I invite you all to visit our Big Data website at BigData.pervasive.com to hear Mike Hoskins, our CTO and General Manager for Pervasive Big Data Products and Solutions in a taped interview, describing in further detail the power of RushAnalyzer.

The software is compatible with Apache Hadoop, giving users the ability to read and write data from Hadoop distributed file systems, HDFS, and HBase, as well as conventional SQL databases. Regardless of hardware platform, the product delivers extreme performance by parallelizing I/O flows, as well as leveraging all available [inaudible], maximizing performance and enabling rapid throughput on extremely large data sets. Data analysts and scientists using other tools and putting HDFS, [inaudible], can leverage the Pervasive RushAnalyzer to extend and accelerate their performance.

Now in April, we announced the certification of Pervasive RushAnalyzer as a Cloudera certified technology. The Cloudera Certification process validates product compatibility with Cloudera’s Distribution Including Apache Hadoop, which provides a streamlined path for putting Apache Hadoop to work harnessing Big Data to solve business problems.

Similarly, Pervasive RushAnalyzer provides a simplified route for users to get immediate value out of their Hadoop implementations. The Big Data has a busy quarter ahead with scheduled industry events, including Cloud Analytics Summit in Mountain View this week. Then in May we have the CIA Tech Expo in Virginia, and Hbase in San Francisco, followed by the Hadoop Summit 2012 in San Hose, and Predictive Analytics World in Chicago, both in June.

And lastly, I’m happy to say that the Big Data team recently closed a multi-year partnership with one of the world’s leading Big Data predictive analytics companies providing both commercial and custom analytics solutions for large enterprise. Now more on this new relationship in the future, we will make further announcements following initial deployments as our Pervasive Big Data products and solutions by our newest partner.

I look forward to an exciting year ahead. As we have seen, the product group in the company is poised to do something really special in the June quarter and beyond. Our database team with its continued marketing of PSQL v11, and PSQL Vx and the integration team with continued revenue growth with the focus on highly recurring revenue sources, our Business Xchange team with the complete onboarding of its largest customer win today, our Data Cloud team with the maturing of its QuickBooks Salesforce cloud-based integration service, and our Big Data products and solutions team with its focus on the next generation of data infrastructure and analytics.

In short, we have had a solid and exciting start to calendar 2012. We are making strategic investments, and we are well positioned to capture significant opportunities in the future, by also maintaining our intense focus on profitability. The investments we are making in innovative new products and innovative new features for existing products are positioning us incredibly well for the increasing trends in Big Data and the cloud. These are truly exciting times to be a part of Pervasive Software. We are bullish on Pervasive, and continue to buy back our outstanding shares, as we have now done for the past 24 quarters in a row.

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 flows.

And a quick Investor Relations note, we are scheduled to present at the B. Riley Investor Conference in Santa Monica, on May 22; the Benchmark Company Investor Conference in Milwaukee on May 23; and the Three Part Advisors Investor Conference in Boston on June 5. We are looking to resolve some calendar conflicts for potentially two other conferences as well. We hope to see you at these and other events in the near future. I will now open the floor for questions.

Question-and-Answer Session

Operator

(Operator instructions) And your first question comes from the line of Kevin Liu from B. Riley & Co. Your line is open.

Kevin Liu - B. Riley & Co.

Hi, good afternoon guys, and nice quarter.

John Farr

Hi, thanks Kevin.

Kevin Liu - B. Riley & Co.

I wanted to talk a little bit more about this Big Data partnership you announced, obviously I know you guys haven’t started closing deals, or it didn’t sound like you have, wondering if this is more of a near-term marketing type opportunity, whether you see this starting to contribute material revenues sooner rather than later?

John Farr

So, the difference is that DataRush and Big Data revenue have been more often in single instances, end-user instances, the importance here is we are talking about a partner. So a channel if you will. They will -- they have solved many customers that would benefit from our Big Data products and solutions. And so we are really excited about it.

Now that said, we are focused on adoption first, revenue second. There is committed revenues on this deal, and the deal is for a three-year period of time. For our earliest channel partners, we were obviously encouraging their uptake of the product, and focus on adoption. So, it is a great partner, and I am anxious to tell you who they are when the time is right, and that would be after the first few implementations.

Kevin Liu - B. Riley & Co.

Got it. And many more generally on kind of the Big Data opportunity, you talked about a number of things you needed to do to make the products easier to use and deploy for end customers. But you know, how far along do you think you are in terms of productizing your Big Data solutions and making it easy enough for you guys to sell it on a larger scale?

John Farr

I think we’re getting better at each and every release. And RushAnalyzer was case in point that it added in fact, certainly relative to where we were three or four years ago, night and day difference as far as usability of the product. So I think we are there now with our products. We have more products to bring, RushAnalyzer being just one example. And so I think it is onward and upward from here.

Kevin Liu - B. Riley & Co.

Turning to the integration business, you know, as I look at kind of the growth rates between database versus integration, obviously integration has tough comps with kind of a record performance over the past year. But wondering why we’re not seeing that growth continue to accelerate further given what you described as kind of these increasingly complex IT environments?

John Farr

Well, we’re not going to apologize for the growth that we have. Yes, we would like it to be higher. We also focused on channels, and channels tend to draw out your growth curves a bit, and as we probably said before, we have also been very focused on building recurring revenue streams with our subscription revenue models, which subscription revenue component of the integration revenue has continually increased over the last several years in every single quarter. So we are happy with the -- while we certainly love a higher growth rate, we are very happy about the recurring nature of the revenue base that we are building.

Kevin Liu - B. Riley & Co.

Got it. And then one last one from me on the database side, you know, obviously one of the strongest squares [ph] in database in a while didn’t sound like there are any sort of large unusual transactions that drove that. So given where you are in the current cycle and some of the interesting releases like the Vx version 11 product, curious as to how sustainable this performance is over the next few quarters.

John Farr

I think it is quite sustainable. I think we have a very good pipe both in integration and in database, and that is considered when saw us in this press release with our typical revenue guidance range for the June quarter up a bit. The caution there would-be in the September quarter, which always has a little bit of seasonal influence, but I think -- I’m very pleased with what our pipes look like at this particular moment, both for Q4 and potentially going into Q1.

Kevin Liu - B. Riley & Co.

All right. Great. Thanks so much.

John Farr

Thanks.

Operator

I am showing there are no further questions at this time.

John Farr

All right. I appreciate everyone’s time this evening. Thank you for joining us, and have a great night.

Operator

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.

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