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Actuate Corporation (NASDAQ:ACTU)

Q4 2007 Earnings Call

January 31, 2008 5:00 pm ET

Executives

Thomas McKeever - General Counsel and Vice President, Corporate Development

Peter I. Cittadini - Chief Executive Officer and President

Daniel A. Gaudreau - Senior Vice President of Finance and Operations and Chief Financial Officer

Analysts

Kevin Liu - B. Riley & Company

Justin Cable - Global Hunter

Frank Sparacino - First Analysis

Patrick Walravens - JMP Securities

T.J. Leverte - Talkot Capital

Operator

Good afternoon, my name is Heather and I will be your conference operator today. At this time I would like to welcome everyone to the Q4 and Financial Year 2007 Actuate Corporation’s Earnings Conference Call. (Operator Instructions)

I would now like to turn the call over to the General Counsel, Vice President of Corporate Development, Mr. Thomas McKeever.

Thomas McKeever

Thank you very much, and welcome everyone to Actuate’s fourth quarter and fiscal year 2007 financial results conference call. I’m Tom McKeever, Actuate’s General Counsel. Joining me today is Pete Cittadini, our President and CEO; and Dan Gaudreau, our CFO.

Before I turn the call over to Pete, I’d like to remind everybody that the statements contained in this presentation that are not purely historical are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. These include statements regarding Actuate’s expectations, beliefs, hopes, intentions, or strategies regarding the future.

All such forward-looking statements in this presentation are based upon information now known by Actuate, and Actuate disclaims any obligation to update or revise any such forward-looking statements, based on changes and expectations or the circumstances or conditions on which such expectations may be based.

Actual results could differ materially from Actuate’s current expectations. Factors that could cause or contribute to such differences include, but are not limited to:

The general spending environment for information technology products and services in general, in business intelligence, rich Internet application and performance management software in particular;.

Quarterly fluctuations in our revenues and other operating results;

Our ability to expand our international operations;

Our ability to successfully compete against current and future competitors;

The impact of acquisitions on the company’s financial or operating conditions;

The ability to increase revenues for indirect distribution channels;

General economic and geopolitical uncertainties;

And other risk factors that are discussed in our Securities and Exchange Commission filings, specifically Actuate’s annual report on Form 10-K for the 2006 fiscal year that was filed on March 20, 2007, and quarterly reports on Form 10-Q that were filed on May 10, 2007, August 9, 2007, and November 9, 2007.

I would also like to advise everyone that during this call we’ll be discussing certain financial measures that have not been calculated in accordance with Generally Accepted Accounting Principles or GAAP. These non-GAAP financial measures, such as non-GAAP operating margin percentages, non-GAAP net income, and non-GAAP net earnings per share are presented as a supplement to, but not a substitute for, our GAAP financial results.

This afternoon’s press release contains a complete set of GAAP financial results as well as a reconciliation between our GAAP and non-GAAP results. That press release is posted on the Investor Relations section of our website at actuate.com.

I’d also like to note that this call is being webcast live on our Investor Relations website, accompanied by a set of slides and will be available on an archived basis following the call. Now I’d like to turn the call over to Pete.

Peter I. Cittadini

Thank you, Tom, and good afternoon ladies and gentlemen. Welcome to our Q4 and FY 2007 earnings call. Why don’t we jump right into it, and if you’re following along with the slides, I am currently on slide number 4.

Talking about Q4, overall revenues, $39.2 million, that’s up 7% year-over-year. License revenues, $13.7 million, that is down 3% year-over-year. Non-GAAP EPS, a record level at $0.11 that is up 38% year-over-year, with $5 million of cash flow from operations.

We are pleased with the overall positive results for the fourth quarter and the year. However, our fourth quarter license revenue of $13.7 million was somewhat disappointing. I’d like to dig into it a little deeper and give you additional color on that performance.

Certainly no surprise to anyone as far as what’s going on within the financial services industry. Negative psychology in the financial services sector surfaced to Actuate late in this quarter. These conditions basically led to a normal 50% plus in our business being done in that financial services sector, to 35% financial services sector contribution to Actuate Corporation within the fourth quarter.

The bottom line is, that over $17 million of Q4 pipeline flipped forward into 2008. We hope that a report from McKinsey & Company published earlier this month is correct when it says, “while global banking short-term movements are highly uncertain, the underlying long-term trends are encouraging,” and that, “in the longer-term, the global banking industry’s revenues and profits − poised to continue to grow faster than the rate of GDP growth − will double by 2016.”

We believe that once the short-term issues in financial services are resolved, the industry will once again lead in the adoption of Rich Internet Application, a new type web application with rich visualization and interactivity for both inside and outside the firewall types of application. And I will be giving you a bit more of a purview on Rich Internet Applications later in my presentation.

However, getting back to financial services, in the long-term, our continued proactive focus on financial services remains the right strategy for Actuate Corporation. The only uncertainty is the length of the downturn, and we will be carefully tracking the state of the financial services industry throughout 2008.

In light of the circumstances, our execution remains strong in the fourth quarter, particularly within our international operations. Overall, it was a record-setting year for Actuate in 2007. If you’d now move forward to slide number 5, I’ll give you a caption on the year’s results.

The revenues for 2007 ended up at $140.6 million. Again, that’s per our guidance and up 12% year-over-year. Annual license revenue of $53.2 million, once again, per our guidance, and up 13% year-over-year.

Non-GAAP EPS of $0.33, this is slightly above our guidance, and up 43% year-over-year, with a total of $22.9 million of cash flows from operations, which is a company record for Actuate.

Moving on, you’ll see that the blue chip client base remains intact for us. As a matter of fact, it’s expanding as one would imagine with Open Source and the slowdown in spending in the financial services sector, a lot of blue chip names outside of that sector are now in the Actuate fold, again, utilizing our technologies for Rich Internet Applications, both inside and outside the firewall. So again, very impressive with the blue-chip customer list on a going-forward basis.

When we move to slide number 7, you’ll see our technology stack and the culmination of two categories of Rich Internet Applications, without limits, that Actuate brings to the marketplace.

You’ll see at the bottom of the stack, it’s all about the ubiquity and the standardization of BIRT as the appropriate toolset and framework for these Rich Internet Applications that are basically Web 2.0-based web applications.

Then you have the Actuate information platform, or our iServer, which allows those BIRT-based applications the ability to scale, perform, be secure and run reliably. And then of course, there’s the visualization layer, or the Rich Internet Application layer, again, which is a complete Web 2.0 application which allows rich visualization and interactivity through its user interface to both employees inside the firewall and consumers outside the firewall.

And at the end of the day, the two solutions that are spawned from this are Enterprise Performance Rich Internet Applications as well as Customer Loyalty Rich Internet Applications. Again, Enterprise Performance being intranet, traditional BI and performance and management applications; Customer Loyalty being extranet, customer self-service types of applications.

And again this technology stack is extremely highly differentiated, because it’s one stack for both types of applications and solutions.

Next moving onto slide number 8, a little bit more on BIRT, again BIRT is essentially an Eclipse-based framework with which Eclipse developers, Java developers, J2E developers work with Web 2.0 techniques, including AJAX and Flash, to create these Rich Internet Applications.

It is a development environment which Actuate has a ubiquity strategy through Eclipse developers and Eclipse.org in order to give freeware to a large growing sector of developers who are building these types of applications. And again the applications are without limits.

Moving on, let’s talk a little bit about BIRT and its attributes associated with our business. Not only is it a great development environment, it really has exceeded our expectations.

During the course of Q4 we exceeded the 2 million total download number of the BIRT product in the marketplace. That is enormous for us in our future in the mere fact that we’ve broken by the 2 million range. I was always excited about 1 million, but the million turns into 2 million in a fraction of the time.

What’s even more exciting, is we did give ourselves a range of $5 to $7 million of open source driven revenue in 2007, and we exceeded $8 million of BIRT-based business or Open Source driven business in 2007. So again, we set a goal and exceeded that goal for the BIRT business in 2007.

Looking at BIRT Exchange it’s been a complete success. As you’ll remember, we launched it around September 24 so it’s been up and available for all of Q4. Over 20,000 accesses to DevShare. DevShare is a highly trafficked part of BIRT Exchange because that’s where you get the free tips and tricks, and free downloads of commercially available product.

60% of the registered users have downloaded software, which is extremely, extremely encouraging and it just continues to move in the right direction. So again, we encourage you to take a look at BIRT Exchange if you haven’t been to that website as of yet.

Most exciting for our future, is we’re setting a new goal for us which is 100% growth of Open Source-driven revenue for Actuate Corporation in 2008. So, we expect to exceed $16 million of BIRT-based business in 2008.

Now that is extremely, extremely important because we will be the fastest growing market share of Rich Internet Applications, primarily outside-the-firewall Rich Internet Applications, of any business intelligence company.

So we are growing market share faster than all alternative BI companies when it comes to an outside-the-firewall Rich Internet Application, which is very, very substantial in setting the appropriate foundation for the large opportunity in front of us.

Moving on to slide 10, slide 10 just acknowledges the decade plus of platform technology and depth in that platform technology with which BIRT-based applications gets their ability to scale, perform, secure and run reliably. Again, as I said, it has more than a decade worth of depth to it. It is an extremely valuable piece of IP for Actuate Corporation and is unrivalled in the marketplace today.

Moving on to slide 11, a luxury that we’ve never had in our past, but an enormous luxury for our business in the future, we have one of the largest Rich Internet Application based business application developer communities available to our clients.

With over 2 million downloads to date, going after an initial Eclipse community of 3 million developers, with the ability to reach much beyond Eclipse to Java and PHP developers, any client looking to build a Rich Internet Application with BIRT, has limitless access to resource on a global basis because of this strategy.

Again, an enormous, enormous luxury for our company and for our customers, ultimately transpiring into tremendous value for shareholders.

Moving on to slide 12, you’ll see exactly what a typical scenario within an enterprise would be. It’s one development environment with one deployment technology stack allowing for a myriad of different types of applications, both allowing for BI and performance management capabilities internally and customer self-service and customer loyalty capabilities outside the firewall.

And you’ll see the numerous types of application categories that we participate in, everything from sales management to strategy management to BI and reporting to wealth management etcetera. Again, the company and its product set has never been as well positioned as it is.

Moving on to slide 13. This is really essentially the crux of our future opportunity. We, as well as others, believe that extranet self-service applications are the blueprint for the future of business intelligence and performance management.

Thus, it’s very important as I said in one of my previous slides, that we become the fastest grower of market share in outside-the-firewall types of applications with BIRT and the enabling technology called iServer behind BIRT.

Essentially, we believe that that paradigm will be shifting to what business intelligence applications and performance management applications look like in the future.

And everyone continues to contend that BI spending will be solid for a number of years. Thus if you show up with the right paradigm, which is dramatically different than the paradigm of the past, which has been the interactive data access and mining tool, versus what we have, a Rich Internet Application which is extremely intuitive and easy to cruise content with, you are the winner of that very substantial opportunity on a going-forward basis.

Slide 14, we also introduced the software-as-a-service offering at Actuate rather recently. It’s based on our industry-leading; Performancesoft Views product. And as you know, that was an acquisition we did a couple of years ago with a company called Performancesoft. Today, very well integrated into the Actuate family, both from a company and a product standpoint.

We wanted to show the versatility that exists within Actuate, not only from a product standpoint, but from a business plan standpoint. We believe that we may actually have a tiger by the tail with this offering.

It’s especially attractive because, as you know, performance management applications are extremely costly, extremely difficult to get up and running, and with varying degrees, sometimes very negative returns on investment for the amount of time and expense put into the solution, especially if you’re looking to pursue a perpetual license oriented solution with heavy consulting.

What we have here is 100% web based hosted environments in a secured facility. It also comes with a dedicated professional services resource as part of the offering to ensure success. You basically get it up and running in literally a matter of days, and it’s all offered for as little as $60 per user, per month.

And I will tell you that we don’t have an awful lot of revenue associated with this offering included in our objectives for 2008; thus, it’s nothing but upside as far as we can tell, not only from a revenue standpoint, but from a business opportunity standpoint for Actuate.

Moving on to a chart that I’m sure all of you are familiar with, and as the basis for a revolutionary new business model at Actuate that capitalizes on an Open Source conduit into a very large and important market of developers for us.

We remain committed and optimistic about our revolutionary new business model built around our Open Source Initiative, and the ubiquity of the BIRT technology. We believe our strategy will expand our market share and accelerate revenue at a lower cost, resulting in higher earnings growth over time. We also anticipate continuing growth of our international business from this strategy.

However, in the short term, we anticipate the macro-economic conditions will have an impact on our business, and we are prudently planning for such an impact, including lower license revenues during the first half of 2008.

Nevertheless, our solid business foundation and financials will allow us to continue to invest in pursuit of the large market opportunity that sits in front of Actuate as we navigate through what we hope to be short term issues in the financial services market.

As we move to my final slide, which is our 2008 guidance, the year in a nutshell from a planning standpoint is basically flat. Total revenues should be around approximately $140 million. License revenues could potentially be down as much as 10%. Non-GAAP EPS at approximately $0.33, which again is what we did this year, and our non-GAAP operating margins, again, in the range of 20% to 21%.

So with that I will hand it over to Dan Gaudreau for more on the numbers.

Daniel A. Gaudreau

Thanks Pete. 2007 was another record-setting year for Actuate. Some of our achievements are shown on slide 18. Specifically, total revenues totaled $140.6 million that was up 12% year-over-year. Non-GAAP services margins hit almost 73%, one of the highest in the software industry, we believe.

Non-GAAP operating margin was 20.6% and was at the high end of our guidance range of 19% to 21%. Non-GAAP net margin hit 16%. Non-GAAP earnings per share totaled $0.33, one penny above our guidance and up 43% year-over-year. We reported GAAP EPS at a record $0.29, and we generated a record $22.9 million in cash flow from operations.

Slide 19. License revenue totaled $13.7 million in Q4; that’s slightly down from Q4 of ‘06 but slightly up sequentially. As Pete mentioned, during the last two weeks of the year, we experienced an abrupt shift of pipeline out of Q4 and into 2008. This shift was predominantly felt in the U.S..

Like many other tech companies, we experienced strong year-over-year growth in our international markets, with license revenue growth of 20%. But in our specific case, the lower international mix of 31% was not enough to offset the 14% decline in U.S. license revenues.

Total Q4 revenues hit a record $39.2 million up 12% year-over-year. U.S. total revenues were up 7% while international revenues were up 23%. As a result of the strength in our international operations, we realized a huge benefit to operating income and especially GAAP earnings because the majority of international profits, that is those that are consolidating in our Swiss operations, are essentially tax-free.

So we reported record quarterly GAAP EPS of $0.16. In addition, non-GAAP operating income and earnings per share growth rates were also strong at 43% and 36% respectively.

We closed two transactions in excess of $1 million, one was a license deal and the other was a services transaction related to catch up of back maintenance. International revenues, as I mentioned, were up 23% for the quarter and 22% year-over-year.

The mix of international revenues for us hit a record 29% for the year 2007, but there is still significant opportunity for growth to more closely align us with other software companies. Non-GAAP services margins were 76% for the quarter and 73% for the year, both rates increased by 600 basis over 2006.

Non-GAAP operating margins were 26% for the quarter and 21% for the year, again both metrics up 600 basis points. Non-GAAP net margins were 20% for the quarter and 16% for the full year.

Slide 21, cash ended the year at $68.4 million, that’s up $8 million for the last 12 months. We generated sufficient cash flows to more than offset the $20 million we used on our stock buy-back program and the $5.6 million earn-out payment to conclude the Performancesoft acquisition.

Accounts receivable ended the year at $38.6 million, up $7 million from December of 2006 and up $9 million from last quarter. Q4 was somewhat more back-end loaded than normal. Deferred revenue ended the year at about $44 million, up 7% from a year ago and 12% sequentially.

Slide 22. Cash flow from operations totaled $5 million for the quarter and almost $23 million for the year. Day sales outstanding were 91 days at December 31, 2007; that was an increase of 9 days from a year ago.

As I mentioned, revenues were somewhat more back-end loaded than normal; however, the quality of our receivable remained pristine. As we mentioned on the Q3 call, we increased our stock buy-back program to a quarterly spend level of over $6 million. During the quarter, we repurchased 773,000 shares to bring the total year buy-back to 3.1 million shares.

Slide 23. We believe we will be able to achieve total revenues of $140 million in 2008. The potential license revenue decline of as much as 10% should be offset by increased services revenues.

We believe there are several positive factors that will benefit Actuate in 2008 and beyond. Our technology allows for the development of mission-critical, customer-facing Rich Internet Applications. This is very high value to our customers, therefore, we believe we are a high priority spend item within our customer base.

Forrester continues to forecast an increase of approximately 5% in IT spending, although we believe that it may be second-half loaded. Despite this potential deferral in spending from the financial service companies, our pipelines continue to be more than adequate to make the $140 million plan.

We believe that we will continue to see growth in our international markets. However, because of this continued concern over the financial services, we are planning for a soft first half for license revenues, primarily the result of weakness in North America. Financial services sector headwinds will probably continue for at least the next six months.

Despite soft first half license revenues, we believe, we can hold non-GAAP earnings per share flat. We also intend to maintain our non-GAAP operating margins within the range of 20% to 21%.

That concludes the financials. The last chart really talks about some of the conferences we’ll be attending in Q1 and early Q2. We’ll be at the Securities Research Associates Conference in San Francisco on February 11.

There are two CSFB conferences in Boston on February 13, and then again in early March. There is a B. Riley conference in Las Vegas on April 12. We hope that all of you can attend one or more of these so that the Actuate team can articulate our strategy and vision to you again.

That concludes the formal remarks and we open it up to Q&A.

Question-and-Answer Session

Operator

Your first question comes from the line of Kevin Liu - B. Riley & Company, Inc.

Kevin Liu - B. Riley & Company

Solid Q4 all around. But looking out towards the guidance, you have already mentioned that some of the Q4 pipeline got pushed out. Just curious, how much of that do you anticipate being able to close within this year or have your financial service customers pretty much indicated that spending will be relatively weak for most of the year?

Peter I. Cittadini

It varies, Kevin, to tell you the truth. We do anticipate that most of it will be closable within 2008. However, the datapoints are varied and point to a weaker first half of 2008 than a second half of 2008.

So, again, when you look at the slippage, it is indeed that, it’s slippage. It’s not web-based applications that they do not intend on doing, it’s a timing issue, and I would hope that most of the slippage would be achievable to secure within the confines of 2008.

Kevin Liu - B. Riley & Company

And then in terms of the receivables climbing a bit from Q3 to Q4, was that just primarily the late closing of some of these deals?

Peter I. Cittadini

Yes. There were some large billings right at the end of the year.

Kevin Liu - B. Riley & Company

And then going to your performance management offering, the SAS offering. Just curious what type of initial response you’ve gotten in the marketplace? And I know you aren’t baking in too much for 2008, but I just want a general sense for what the feedback has been like, and maybe what the timeframe is for you during the season traction of the product?

Peter I. Cittadini

Yes. Very exciting. We’ve already done some marketing campaigns. We’ve obviously launched it to the industry analyst’s community. It’s being extremely, extremely well received.

As a matter of fact, you’d be hard pressed to really find a high-quality, large, public-oriented company with a SAS offering for performance management; so as I said, I characterize it as a potential tiger by the tail, the initial reaction very positive.

Kevin Liu - B. Riley & Company

And then just lastly, given the sound growth coming from the BIRT channel, what verticals are picking up the slack for financial services right now?

Peter I. Cittadini

Interesting question, and the one that rose highest on the list, specifically in Q4 where we had the financial services revenue deficit, was healthcare. The OEMs are back in a very big way, and we actually even had a decent showing, believe it or not, from the travel industry and some of the online systems that they have, and web-based systems that they have.

So a lot of this is due to, again, the category that we’re in, which is Rich Internet Applications for both internet and extranet usage, but it’s also really spawned by the strategy of BIRT being so ubiquitous and everywhere, and people really enjoying working with that technology in creation of these types of applications.

So it’s very gratifying to have a strategy that allows you to throttle up another industry if your main industry goes sideways for a little bit.

Operator

Your next question comes from the line of Justin Cable - Global Hunter.

Justin Cable - Global Hunter

Curious to know on the financial services customer base, obviously they’re involved with building these applications and are wanting to deploy with some kind of deployment package. And it sounds like obviously there are delays with that. At what point do they decide to pull the plug entirely and the deals go away or ultimately come back to the table to say, “Hey, we’re ready to go?” What are you hearing on that front?

Peter I. Cittadini

I think it would be virtually impossible to pull the plug on these web-based applications. This is rather different than what we experienced in 2000 and 2001 where this category of application just went away for almost half a decade. This is absolutely not that type of situation.

A lot of these applications are already up and running. A lot of these applications are already up and running with Actuate, and as you know, with a lot of the outside-the-firewall types of applications, they’ve been getting over the past year-and-a-half to two years, lots of facelifts, if you will, that also drive revenues for Actuate Corporation.

So it’s not an issue of this category of application going away in any circumstance. It’s just a matter of when they continue to be invested in. To me, my personal opinion is it’s just a delay. It’s an unpredictable delay. We are optimistic that it is short-term, and we’ll see the delays obviously coming back to fruition in the second half of 2008.

And don’t forget we did do 35% of our business from that sector, so it’s not shut off like a faucet, it’s just that people are being rather prudent with their spending, and it’s primarily due to the psychology that they need to get over because of the credit crunch in the industry.

I really do believe it’s nothing more than a psychology pinch that is delaying the inevitable that they have to move forward with this whole cadre of web-based applications.

Justin Cable - Global Hunter

And in terms of budgeting, have you seen budgets go away or are budgets flat year-over-year, or what are you hearing in terms of their overall IT spending budgets for this?

Peter I. Cittadini

It’s harder to tell you about the budgets; easier to tell you about the spending against the budgets. Clearly we saw just some shutdowns in spending. But as far as the budgets, I’m assuming the budgets are there.

And again, a lot of our clients are very large global banks. And within the umbrella of that very large global bank and/or financial institution, there could be lack of spending in the U.S. but accelerated spending internationally, even though it’s all under the umbrella of XYZ Corporation, if you will.

It’s really tough to decipher. I don’t really think it’s a budget issue; it’s more of a short-term, letting loose of those budget dollars issue.

Justin Cable - Global Hunter

Just a couple questions more on BIRT. Obviously some good traction with the downloads being over 2 million. Any idea what the new estimate is for the number of developers that that might actually represent? And with that, how many developers have you identified that are actively using BIRT?

Peter I. Cittadini

I don’t have the number of actual developers that we’ve identified. We can identify them now through BIRT Exchange, and I don’t have the number. But the number that we will continue using is 10% of the download number. So today, we would estimate 200,000 BIRT developers.

Justin Cable - Global Hunter

And in terms of the guidance related to BIRT revenues, obviously a doubling is very nice. What exactly is driving that? And obviously there’s adoption of BIRT, but also is there a way to break that down by industry?

Peter I. Cittadini

There probably will be, but there’s no way that we can break it down by industry right now.

Justin Cable - Global Hunter

Then is there a way that you can give us some more granular details as to what goes into that $16 million number?

Peter I. Cittadini

Could you give me a little bit more specificity there? You mean what types of applications? We believe the lion’s share of the $16 million that is BIRT-related business in 2008 will be outside-the-firewall extranet applications.

But again, it could be associated with the financial services industry. It could be associated with the travel industry. I think what you’ll see is a much more horizontal showing of this category of application coming in the doors at Actuate Corporation.

I still think you’ll see the bulk of it coming out of the financial services sector.

Justin Cable - Global Hunter

Last question I have is just on the service margins. The services segment continues to grow nicely; had a nice bump in the quarter; margins hitting record levels. What do you think is the normalized or go-forward gross margin you can see on the services side for in the long term and for 2008?

Daniel A. Gaudreau

It just keeps going up, Justin. I have to be cautious though. There is an end point. We’re at 73% overall right now. I would think that that has got to be approaching the high-end of the potential.

Although it keeps climbing. I keep saying that, and it keeps going up.

Justin Cable - Global Hunter

And that’s primarily just the maintenance bookings, correct? How is your professional services organization?

Daniel A. Gaudreau

Professional services margins actually improved. That also helped it. That has been depressing the overall services margin significantly. If professional services were to go away completely, needless to say that overall margin would skyrocket.

But we’re also seeing improving margins in customer service, and I think it has to do with the quality of the product, the efficiency of the people, and more automation of the systems down there, etcetera. So I think there’s more upside, but it’s got to be at a much lower rate of growth.

Operator

Your next question comes from the line of Frank Sparacino - First Analysis.

Frank Sparacino - First Analysis

I just wanted to focus more on forecasting. I don’t know if this is a fair statement, Pete, but it seems like you were a bit surprised at the fall-off in financial services relative to maybe a couple months ago. And I don’t know if it’s a fair statement, but, secondly, is what gives you comfort around the forecasting ability heading into 2008? I assume the close rates in Q4 were quite different from what you expected.

Peter I. Cittadini

Yes. It was something that obviously we were not expecting; however, when you look at the pipelines, the pipelines continue to be more than adequate to make the 2008 business plan that we’ve shared with you.

There’s no question about that, and I will tell you, if you know anything about sales organizations, is when this amount of slippage happens that quickly, they actually at times will get quite conservative, scrutinize everything hundreds of times more than they normally would.

So if the pipeline under that level of scrutiny continues being an adequate number, that gives us the ability to feel good about the forecast that we’re giving you.

Operator

Your next question comes from the line of Patrick Walravens - JMP Securities.

Patrick Walravens - JMP Securities

Can you remind me when was your last quarter where you had, I think it was September, where you had a miss on the license line?

Peter I. Cittadini

It was Q3 of 2004, Pat.

Patrick Walravens - JMP Securities

And what was going on then?

Peter I. Cittadini

I think we actually asked you that last time you were here, but...

Daniel A. Gaudreau

You told us to look up your old research.

Peter I. Cittadini

Right. I don’t know, but it was a pretty dramatic scenario for us. I don’t believe it was a financial services industry turmoil issue, however. I don’t remember specifically what happened.

Patrick Walravens - JMP Securities

Yes. So that’s not a good touch point for us here, huh?

Daniel A. Gaudreau

My recollection is that it was a more widespread shutdown of the purchasing departments in Q3 of 2004; we didn’t miss Q2 like everyone else did, because we had sufficient backlog to get us, but I think it was a much more widespread shutdown of purchasing behavior back then.

Peter I. Cittadini

More of a cross-industry.

Daniel A. Gaudreau

Yes. Cross-industry, everywhere.

Patrick Walravens - JMP Securities

We just had the Informatica call this week right, and I think they said their financial services revenue had slowed but still, I want to say it was plus 6%, I might be wrong about that, but that ballpark. Are you more sensitive to this than some of these other vendors for some reason? It seems like you are, but the question is why?

Peter I. Cittadini

You’re talking about from a product offering standpoint?

Patrick Walravens - JMP Securities

Your drop off for North American financials was a lot stronger than theirs was and I’m just wondering why that would be?

Peter I. Cittadini

I don’t know other than we’re more of the solution itself that gets unveiled if you will. Whereas if you look at an ETL product or something along those lines it’s much further under the covers, and who knows Pat, maybe we’re just seeing it first. You just don’t know.

Patrick Walravens - JMP Securities

Yes. And then last question, are you open to selling this business?

Peter I. Cittadini

We don’t make those types of decisions. That’s a Board of Directors’ decision. And I would assume the Board would look at all alternatives that were in the best interest of the shareholder.

Operator

Your next question comes from the line of T.J. Leverte - Talkot Capital.

T.J. Leverte - Talkot Capital

Has the stock buyback philosophy changed given the temporary slow down in financial services? Perhaps maybe you can tell us if we’re price sensitive as far as the stock price is concerned? The company did buy back substantial stock in Q4 and I’m just wondering on the philosophy moving forward, given a slightly slower outlook in the first half?

Peter I. Cittadini

The philosophy at the Board level, in conjunction with management, would be to continue the buyback at the same level.

T.J. Leverte - Talkot Capital

And second question is, how many $1 million-plus license deals were there, if any, in Q4?

Peter I. Cittadini

There was one.

T.J. Leverte - Talkot Capital

Are the number of $1 million-plus potential deals in the pipeline shrinking or are customers looking at smaller amounts to purchase or maybe you can get a feel for what’s actually in the pipeline.

Peter I. Cittadini

The big deal pipeline is a steady-state pipeline, it’s always there. It’s a matter of getting them wrangled to the ground, if you will. So I would say that there hasn’t been a substantive change in the large transaction pipeline.

And again, we only did one in Q4, so if you look back at some of the previous quarters, we’ve done more I believe in Q2 and Q3 than we did in Q4. And just to add another level of color on the seven figure-plus transaction, it was a non-financial services oriented company that we got it from.

T.J. Leverte - Talkot Capital

Are sales people now focusing more attention on non-financial service leads at this point? Has there been a conscious effort to perhaps dig a little deeper on those opportunities?

Peter I. Cittadini

No, we believe the financial services sector is rather resilient; they will always outspend and outpace in innovation other sectors from an automation initiative standpoint. So we continue to be proactively focused on the financial services sector.

However, because of our Open Source strategy, there’s a lot of other industries that are surfacing themselves to us, at virtually no cost in pursuit of them, other than creating the technology and getting it out as freeware which looked quite interesting to us in the future. But what we will proactively continue to invest in from a sector standpoint is financial services.

T.J. Leverte - Talkot Capital

And Peter, you went around talking to CIOs in the beginning of this year, getting a pulse for spending in early 2008. Was it like always the existing customers but also new customers were really holding back from looking at Actuate-related products?

Peter I. Cittadini

During the course of 2007?

T.J. Leverte - Talkot Capital

In early December you were pretty optimistic, somewhat, that 2008 was going to be okay for financial services. Then it sounded like late in December and perhaps the beginning of this year you’ve got more cautious and I’m just wondering was this conversations with existing customers or new customers?

Peter I. Cittadini

It was primarily with existing customers. There were conversations at the CIO level and it was ‘can’t do this now; are going to absolutely do it’ with varying ranges of when they intended on doing it.

Didn’t get anything that said ‘forget about 2008,’ got stuff like ‘we’ll definitely do it in 2008,’ ‘we’ll possibly do it in the first half,’ ‘we’ll definitely do it in Q1,’ a lot of scattered data points that now all have to be diligently followed up on so we can really surmise for ourselves what is truly happening within the IT organizations of the financial services sector.

Operator

Your next question is a follow-up question from the line of Frank Sparacino - First Analysis.

Frank Sparacino - First Analysis

Dan, this is for you, maybe I missed it. Just the licensed deals north of 100K was what number?

Daniel A. Gaudreau

Oh, I didn’t even mention that, there were 95.

Frank Sparacino - First Analysis

Okay, and then at the end of the year the number of quota-carrying sales reps?

Daniel A. Gaudreau

70 and that just overlays, so that was flat.

Frank Sparacino - First Analysis

Unchanged.

Daniel A. Gaudreau

Yes.

Operator

There are no further questions at this time, are there any closing remarks?

Daniel A. Gaudreau

I would just like to thank everyone for attending this call and do look forward to seeing you at one of the conferences that I had mentioned earlier. Thank you for attending.

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Source: Actuate Corporation Q4 2007 Earnings Call Transcript
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