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Actuate Corporation (NASDAQ:ACTU)

Q2 2008 Earnings Call

August 4, 2008 4:30 pm ET

Executives

Peter I. Cittadini - President and Chief Executive Officer

Daniel A. Gaudreau - Chief Financial Officer

Thomas McKeever - General Counsel

Nobby Akiha - Senior Vice President, Marketing

Analysts

Nathan Schneiderman - Roth Capital

Greg McDowell - JMP Securities

Operator

Before I turn it over to Pete, I would like to remind everybody that the statements contained in this presentation that they 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 in 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 and 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 or future competitors, the impact of acquisitions on the company’s financial and/or operating condition, the ability to increase revenues through our indirect distribution channels, general economic and geopolitical uncertainties, and other risk factors discussed in Actuate’s filings with the Securities and Exchange Commission, specifically Actuate’s Annual Report on Form 10-K for 2007 which was filed on March 17, 2008, and the quarterly report on Form 10-Q that was filed on May 9 2008.

I would also like to advise everyone that during this call we will 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 earnings per share are presented as a supplement to, and 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 www.actuate.com.

I would also like to note that this call is being web cast live on our Investor Relations website, accompanied by a set of slides and will be available on an archive basis following the call.

Now I would like to turn the call over to Pete.

Peter I. Cittadini – President and Chief Executive Officer

Okay. Thank you, Tom, and welcome ladies and gentlemen to our earnings call at the Red Rock. So, you’re going to forward the slides for me, if you could forward, I do, okay. Now on by the Safe Harbor Statement -- my part of the presentation and we are going to keep it fairly crisp in to the point, I think the numbers will speak for themselves.

Revenues associated with the quarter at Q2 of ’08, $34.6 million. License revenue increased dramatically from Q1 at $12.3 million. Non-GAAP EPS of $0.08, $4.6 million in cash flow from operations giving us a record cash flow for the first half. And to me the most exciting metric is BIRT-based revenues of $4 million within the confine of the quarter. Again, this last one is the most impressive testifying to the opportunity and that’s really having a good handle on that opportunity within the marketplace associated with open source as a very exciting supplement to our company and more importantly our business model.

If you look at the Q2 transaction, you’ll once again see numerous blue-chip customers in the financial services arena but as you can tell here much more horizontal. Military, healthcare, OEM continues to utilize our products, this really across their enterprise software applications that they sell to market. It is good to see that the blue-chip topography associated with Actuate’s business continues.

As far as BIRT, as we said 4 million downloads during the quarter, no I am sorry not during the quarter, we exceeded the million downloads for the quarter giving up $4 million live to-date, which is the number that is staggering to us. We would have never been able to forecast this level of download. So again we entered into 2008, and we’ve had two 1 million download quarter already to offset staggering. When you look at the revenue for the first half combined with the 4 million and 2.5, we did in Q1 a total of 6.5 million, so we’re well on the way to our forecast to the street of 16 million for the year. And again, put that in perspective Actuate Corporation has a very exciting business that still embryonic; however doubling and at 16 million for the year, this is going to be greater than 10% of the overall company revenue number so again, substantial, substantial progress that we are excited about.

Moving right on to guidance with Q2 behind us hopefully the set of numbers continues to make sense for our shareholders and perspective shareholders. We were very focused on attaining the 140 to -- 48 million of license revenue, a non-GAAP EPS number of $0.33 with operating margins -- non-GAAP operating margins associated with our business in a 20% to 21% rate.

With that I will hand it over to Dan.

Daniel A. Gaudreau – Chief Financial Officer

Okay. So, total revenues for the quarter were $34.6 million that was essentially flat with the second quarter a year ago and up 17% sequentially, license revenue were $12.3 million up 61% sequentially. BIRT services revenues totaled $22.3 million and that’s an 8% year-over-year growth rate. Non-GAAP operating income of $6.6 million equated to approximately 19% operating margin, non-GAAP earnings per share of $0.08, that’s the same as the second quarter a year ago and GAAP earnings of $0.04. As Pete pointed out, we have the good cash flow quarter at $4.6 million bringing the first half to a record $16.9 million of cash flow from operation.

On the left side of this chart you’ll see a history of our total revenue growth and you can see that we’ve grown 2%, 21% and 9% for the years ’05, ’06 and ’07 respectively. At our last conference call because of the malaise in the financial services sector, we told the public that we anticipated total revenues to be flat for ’08, with a weak first half and a stronger second half. We experienced that weakness in the first quarter and if you recall our first quarter conference call we’ve down 8% total revenues year-over-year. However, performance in Q2 was stronger with what I said there was a 17% sequential growth, so that for the first half, we’re down 4%.

We also continued to see international revenues grow in double digit and that the economic issues continue to be primarily in the US. The international growth of 15% essentially offset the decline in the US on a year-over-year basis. This is a chart for services revenue growth of our history. On the left side you will see the three year history again. Our services revenues in total grew 12%, 17%, and 7% for ’05, ’06, and ‘07 respectively. More importantly the product maintenance and support revenues have grown 16%, 20%, and 13% over that same time period. On the right side of the chart for the second quarter of ‘08 professional services dropped slightly year-over-year while product support revenues continued to grow nicely at 11% growth rate year-over-year.

As I mentioned before, international revenues grew 15% year-over-year that totals up 29% of our total revenues. Maintenance revenues grew 11% as we continue to experience high customer renewal rates. We closed transactions over $100,000 with 72 customers indicating good base line business and we closed one transaction within the financial services sector over $1 million and it actually accounted for greater than 10% of our Q2 license revenue. Non-GAAP services margin amounted 73.7%, a 180 basis point improvement over a year ago and non-GAAP operating margin as I stated came in at 19.1% slightly down from the 19.7% reported Q2 ’07.

Actuate continues to be the best in class with software companies as shown on this next slide from an operating margin perspective. The slide isn’t here, it’s out of order, I will show you that slide later, but we are best in class.

From a balance-sheet perspective, cash and investments ended the quarter at $74.9 million as of June 30, an increase of $6.5 million from year end ’07 and sequentially up about a little over $2 million from March. AR ended the quarter at $24 million down almost $15 million from year end ’07, despite AR being somewhat high at year end they had to do with the back-end loading at year end ’07, we’ve experienced great cash collections as I will show by way of the DSO numbers.

Deferred revenue totaled $41.7 million as of June 30 that was down $2.2 million from year end ’07 but up 8% from a year ago. As we said before cash flow from operations for the second quarter was $4.6 million and a record $16.9 million for first six months. Again I also mentioned that the first half cash collections were very good resulting in DSOs down from both March and from December. We ended the quarter at 63 days down 28 days from December 31, and down 4 from March 31, ’08.

We repurchased another $2.5 million worth of stock during Q2, the first half purchases of $12.5 million are inline with the previously board authorized $50 million buyback over the two year period. And we ended the year at 557 employees at the end of the quarter, excuse me, down from 584 at the end of March.

And just to reiterate the guidance, total revenue approximately $140 million with license revenue being approximately $48 million plus, the combination of our backlog, deferred revenue and pipelines continued to give us confidence that we will achieve our revenue targets. We will continue to control headcount and operating expenses assuring a non-GAAP operating margin in the 20 to 20% range and non-GAAP earnings per share in approximately the $0.33 range at the $140 million level.

Now we had a couple of choice that didn’t make the presentation as to that, that concludes our presentation and I will open up the Q&A.

Question-and-Answer Session

Operator

As you know this is a live earnings call. So, we are going to let everyone in the room to ask questions first and then we’ll actually open up the call to the folks that are listening on the phone lines. So, with that we will be happy to take your questions.

Analyst

Congratulations on a strong quarter. I am just curious with the trends you have seen in Q2 and the license revenue picking up significantly and I know some of that is also due to seasonality, but as you look towards Q3 have those trends started to carry over in terms of their early activity that you are seeing and also your comments on the last quarter, where that the back half should be a pretty nice pick up from the first half of the year, so I just wanted to make sure that’s still the case?

Peter I. Cittadini

That should be a positive pickup over the first half, but still indeed. As far as comments on Q3, the pipelines entering into the quarter very adequate for what we intend on doing and achieving the reiterated guidance, we feel very positive about that as well.

Analyst

And then just on the restructuring charges mentioned in the non-GAAP earnings, just curious if you could remind us kind of what those are around and what type of the potential cost savings, can I know that?

Peter I. Cittadini

I believe it was the consolidation of our Toronto facility reducing it by one floor. Cost savings are fairly small within counter.

Nathan Schneiderman

Hi, Nathan Schneiderman, Roth Capital. Nice job on delivering the quarter congratulations.

Peter I. Cittadini

Thanks.

Daniel A. Gaudreau

Thank you.

Nathan Schneiderman

A handful of questions for you. One is Q3 seasonality for software companies tends to be sequentially down versus Q2 given weakness in Europe vacations etcetera, is that the way you envision your business in Q3 without, I guess you don’t want to get into this business except Q3 guidance but is that a logical way to model it?

Peter I. Cittadini

Historically for us we have been bit of an anomaly but as we have grown enterprise software we are getting more normalized if you will. So, to us we typically represent Q3 as flat or slightly down, as sort of a macro level descriptor. But it’s typically not been a dramatic step function down for Actuate Corporation if you look at some of the previous years’ performances.

Nathan Schneiderman

Okay, continuing on with that seasonality do you, how should we think the BIRT revenue slow in terms of any seasonality and in that business as a logical to think that would actually be up given where you are in the growth trajectory or not?

Peter I. Cittadini

Well I am assuming you are defining the BIRT business as the revenue portion of that business. There of course, there is seasonality because at the end of the day it has to be the first seedling that sort of fosters the project and if everyone on vacation or not spending as rigorously during Q3 associated with those projects that really doesn’t matter whether it’s a BIRT project or any RD project for us. There would be macro-level seasonality associated with that aspect of the business. And as you know that aspect of the business is still primarily being driven by larger transactions within our current customer base that are churning to BIRT.

Nathan Schneiderman

Okay, and then, final one for you, I’ll just make it a two part. If we do model slightly down Q3, it does suggest quite a strong Q4 this year and even if looking at it compared to last year etcetera. So, what can you share with us to give us kind of incremental comfort that this isn’t just, it’s kind of middle of the fairway rather than a big stretch goal here and then, I was hoping you could also comment any changes in the financial services vertically you’re seeing, are things trying to get a little bit easier there, just what are the dynamics you’re seeing in US and abroad?

Peter I. Cittadini

Right. Well, first of all, the flats are slightly down, it isn’t a commitment on our behalf or forecasts, we don’t forecast on quarterly basis though, you will have to wait for October to see what we actually do. That being said the financial services sector remains a challenging environment to do business with. However, as I’ve previously said and continued to believe that if you’re blessed with 4,200 clients on a global basis. And clients such as you thought in the presentation that are blue-chip status continue to automate and continue to enhance and evolve their automation initiatives associated with, had a minimum currently existing application and your good operators of your business. I think its going to be a fine year given the circumstances in 2008, be really, really tough if you are small starting up and you needed to do the majority of your business by opening up net new accounts with net new technologies being introduced into their accounts, that’s clearly, not the scenario that Actuate has. So, you could see it is just a advantage that we have because of the topography of our customer base and a long jeopardy that we’ve been doing business within that customer base.

Analyst

Couple of question here, the large transactions closed in the quarter, what vertical was that in?

Peter I. Cittadini

International services, you’ll find, they are still spending, yes, indeed.

Analyst

Second question is on the buyback, should we expect that you’ll be back in the market, when the window opens probably next weeks based on history?

Peter I. Cittadini

We, tend to buy.

Analyst

Okay, thank you.

Analyst

Dan, can I just get the ending quarter sales breakdown or sales headcount?

Daniel A. Gaudreau

Sales rep?

Analyst

Yes.

Daniel A. Gaudreau

It was approximately 65, I believe.

Analyst

And that includes inside as well as direct rep, is there any change meaningful change in that composition?

Daniel A. Gaudreau

Nothing meaningful, its been about that level for a while, 60 to 70 range.

Analyst

Okay, that’s all I had.

Daniel A. Gaudreau

Okay.

Greg McDowell

Greg McDowell for Pat Walravens, JMP Securities. Congratulations on the nice quarter first of all. Since raised the conference could you just speak on the statistics of the attendance versus last year?

Daniel A. Gaudreau

Yes, as a matter of fact, Nobby you can probably help me out, I think we are down somewhere in the range of 50 to 70 attendees year-over-year, that’s an accurate range.

Peter I. Cittadini

About 60.

Daniel A. Gaudreau

Right around 60.

Greg McDowell

And then one quick second question, the large that was closed that accounted for greater than 10% was this the same deal you spoke about on the last earnings call?

Daniel A. Gaudreau

That is correct, that’s the deal that we walked from the end of Q1.

Greg McDowell

Okay and Pete I think you mentioned at the time that some larger firms may have been taking advantage of the macro situation do you sense any change in how are your customers are trying to negotiate with you?

Peter I. Cittadini

When you are dealing with large financial institutions and their sourcing departments there is a just a wealth of experience to how to take advantage of virtually everything that happening around here. So, we anticipate that will continue at the end of the day if your business partner utilize your products strategically as our clients do, reason sort of set in and you are able to move forward with an appropriate transaction given the time. So that is not a concern of mine specifically.

Daniel A. Gaudreau

There is a little bit more work to bring in the deal.

Nobby Akiha

Any more questions from those in the room before we open up to the phone lines, right, operator will open up the telephone lines for the questions as well please now.

Operator

Alright. [Operator Instructions]. There are no questions in queue at this time.

Peter I. Cittadini

No questions online. I guess it’s all of you that run the phones normally.

Nathan Schneiderman

Hi, this is Nathan Schneiderman again, I’ll sneak in with a couple of questions since we didn’t have any on the line. Can you talk about your strategy of going after under license usage of your software, what, are you trying in BIRT technology to go, to help you identify this and what in general is the opportunity you see here? How much under license usage you think you are related in?

Peter I. Cittadini

Under license usage meaning people utilizing the product that they are not entitled to?

Nathan Schneiderman

Right.

Peter I. Cittadini

Okay. Yeah, we are formalizing the pursuit of that within the market most of them we had in the past. And I will tell you that compliance revenue or entitlement oriented revenue has always been part of the numbers that we’ve reported in the past, they’ve always been there. However, I do believe that there is a potential to accelerate that portion of our annual numbers with in the confines of 2008 and 2008 will be sort of foundation year for getting an appropriate methodology in process, in place, that may be even throttle that up and become more effective pursuit of that type of revenue on a going forward basis. Its just a natural cycle as to when you become mature enough in order to pursue that sector in avenue into your customer base, I truly believe that Actuate is there and ready to go. We are doing some things within our software license keys that will dramatically review the ability to not be entitled to something that is sold. However, we were not taking it to the empts [ph] degree because we are very customer focused and centric and want the experience to be quiet easy in taking delivery of software and getting it up and running efficiently so you can start development and/or deployment of your Actuate based application. So, there are some techniques, but we are not going to go crazy if you will and incorporate a full blown license manager at the time which some clients have a very, very difficult time with.

Nathan Schneiderman

Okay. And a few quick housekeeping, on the revenue breakdown could you give us the percent North America, Europe A-Pac offer the direct, indirect in the percent extranet intranet?

Peter I. Cittadini

Direct indirect of the 70:30, the US international 71:29, with in that 29 I would venture to guess that 80% of that has been Europe, what was the other one?

Nathan Schneiderman

The intranet, extranet?

Peter I. Cittadini

65% extranet. Those are very strong showing with that type of application and again as you know, we are very unique facet of what Actuate brings to you on table, especially if you consider [FBI] company.

Nathan Schneiderman

Yes, you maintain a healthy business or strong balance sheet as you look at this environment either more or less M&A opportunities in general and other things out there that makes sense for you. If you can get a deal done?

Peter I. Cittadini

As far as pursue of acquisitions ourselves with the strong cash balance that we now have, we think we are going to be able to potentially do some very exciting things over the next year and a half. Very solid types of technologies there were just sort of breath to market and born at the wrong time. We do believe we have enough cash to do that with cash owing transactions does not having to use our stock as currency in pursuit of those companies, which is a good thing for us. But, yeah, we are very excited to pursue acquisitions within the market place because as I said if you are the small innovative company that has great stuff, but unfortunately we are not blessed with the customer base that you can go back into and readily continue to business with because you have reputation intact with them. They are good, could be some tremendous opportunities for Actuate Corporation on a going forward basis.

Nathan Schneiderman

Can you please comment a little bit more about the quality of the pipeline and particular versus last year, this time and also the verticals, verticals within the pipeline?

Daniel A. Gaudreau

Yes, I don’t know the exact specifics of that but it’s approximately the same as our revenue kind of mix where we see 50% being financial services. And then, the next figures one would be government, OEM business and then government probably thereafter in medical. Think about the BIRT I’m telling you, Pete mentioned that the dollar value but if you look at the individual industries that where they are coming from again, I am really surprise all the different industries that these BIRT revenues are coming from, gas and oil, hospitality, retail, automotive manufacturing.

Nathan Schneiderman

And, the comments on the quality of pipeline, if I may. Since we’re focused on the entitlement part of our business, already they are being used into the highest quality pipelines you can imagine, after you necessarily get it each and every time because of sort entering the arena taking the gloves off but its fantastic add on, you’re revenue trajectory in 2008 many years to come in my opinion.

Daniel A. Gaudreau

The quality of the pipeline I believe here versus perhaps other questions is good question because the process has been developed over the years as that Pete being the CEO and I know for sales. So, making sure what goes into that pipeline is pristine it is in fact closeable business, it is in fact Actuate’s business and important and that’s the pipeline gets scrub every week, even more frequently by the sales reps, but we review it every week. I don’t think you see the rigor in other companies perhaps that you will see here actually, in terms of making sure the pipeline is qualified and valid. When we see it slip like we did in December that was an external economic issue had nothing to do with the quality of the pipeline at all, that was an abrupt move.

Nathan Schneiderman

If you look at (inaudible)?

Daniel A. Gaudreau

I thought we said it was going to be rougher path pretty specifically and we sort of delivered on that I think we are on target and now what we told just at the beginning of the year and this is lot of pretty good forecasting if it culminates this way that it would be up second half and we’re again reiterating guidance because we today have confidence that it will a much better second half then what you thought throughout the first half.

Nathan Schneiderman

And maybe lastly there is some who have talked about back end spending in Q2 being sort of false pretends in the sense that people will have budgets or spending budgets now because of the fear that they will go away as the year progresses, any comments there?

Daniel A. Gaudreau

I haven’t sense that, but you would be in a situation of spending as a matter of fact by saying probably the offset if we were concerned about the second half we wouldn’t be pulling the trigger on many budgets at all for more aggressively than normal during the course of Q2, we would be hunkering down in a very, very big way. So, I’ve what you’re saying it’s not intuitive to me and I haven’t seen it myself in many of the business that I have made in the field during the course of the quarter.

Nobby Akiha

Anyone else?

Daniel A. Gaudreau

Can we try the phones one more time or is that it?

Nobby Akiha

Operator, can you pull for questions one more time please.

Operator

Yes. [Operator Instructions]. There are no questions in queue at this time.

Nobby Akiha

Okay. Great. Well, thanks everyone for joining us for Actuate live Q2, live from Vegas I should say Q2 earnings call. And we look forward to talking to you next quarter. Thanks.

Daniel A. Gaudreau

Thank you.

Peter I. Cittadini

Thanks everybody.

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