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Pervasive Software Inc. (NASDAQ:PVSW)

F4Q08 Earnings Call

July 22, 2008 5:00 pm ET

Executives

Randy G. Jonkers – Chief Financial Officer

John E. Farr – President, Chief Executive Officer and Director

Analysts

Brian Schwartz – Piper Jaffray

Naha Bargasa – Red Ship Company

Bryan Wallis – Broadpoint Capital

Edward Ching - B. Riley & Company, Inc.

Patrick P. Walker – Walker Smith

Welcome to the fiscal year 2008 fourth quarter financial results conference call. (Operator Instructions) Randy Jonkers, you may begin your conference call.

Randy G. Jonkers

While we wait for others to join I will go over the standard disclaimer regarding remarks on this call. This conference call may contain forward-looking statements within the meaning of the Federal Securities laws including statements regarding the company’s or management’s intentions, hopes, beliefs, expectations and strategies for the future. Forward-looking statements may include without limitation, statements regarding the following: future investment, sales, market growth and direction, competition, revenue growth, operating margin 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 & Exchange Commission. Pervasive does not undertake any obligation to update forward-looking statements to reflect events or circumstances after the date of this conference call.

Also, and as a reminder our non-GAAP results for the quarters ending June 30, 2008 and 2007 exclude the amortization of purchased intangibles and stock based compensation expense and represents income taxes at a statutory tax 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 operation and to assist the investor community in comparing Pervasive’s non-GAAP results from period-to-period as well as comparing our results with that 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 strength, develop budget, 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’ll cover two primary agenda items. First I will recap Pervasive’s financial results for our fourth fiscal quarter and John will update you on our plans for fiscal year 2009. Now for the financial results.

Today we have released financial results for the fourth quarter of our fiscal year 2008. Revenue guidance in our earnings on a GAAP and Non-GAAP basis were at the high end of guidance issued on April 22. Pervasive’s revenues totaled $11.2 million in Q4 which is an increase of $883,000 as compared to Q4 of last fiscal year. Our GAAP basis net income was $837,000 in Q4 and diluted earnings per share were $0.04, representing the decrease from GAAP basis net income of $1.9 million and diluted EPS of $0.09 from Q4 of last year. Our effective tax expense rate in Q4 was 30% as compared to a tax benefit of 38% of Q4 of last fiscal year. Prior Q4 results were impacted by both a favorable tax adjustment and the benefit of higher interest income due to a more favorable rate environments in the prior year. Our non-GAAP net income in Q4 before amortization of purchased intangibles in stock based compensation expense and tax of 34% was $1.3 million compared to $1.4 million in Q4 of last fiscal year. Our non-GAAP earnings per share were $0.07 consistent with Q4 of last fiscal year. We ended the quarter with a positive $44.9 billion in cash in marketable securities representing $2.35 per issued in outstanding share of Pervasive. During the fourth quarter, we repurchased approximately $164,000 Pervasive shares on the open market at a total cost of approximately $740,000 or approximately $4.50 per share and we generated approximately $2.1 million of positive cash flow from our operations. Our DSOs or Days Sales Outstanding were an excellent 45 days and down four days from Q4 of last fiscal year.

Now let’s turn to the quarterly revenue details. By geography our Q4 revenue was as follows: domestic revenue totaled $6.5 million in Q4 down 5% from Q3 down 6% from Q4 of last fiscal year. Our international revenue, principally Europe and Japan totaled $4.7 million in Q4 up 20% from Q3 and up 37% from Q4 of last fiscal year. From a mixed standpoint our international revenue was 42% of total revenue up from 33% in Q4 of last fiscal year. At a product level our data base products and our integrations products represented approximately two thirds and one third of our business respectively in Q4.

Turning to operating expenses, our operating costs and expenses totaled $10.2 million in Q4 and includes amortization of acquired intangibles and stock based compensation expenses of approximately $700,000 combined or non-GAAP expenses of $9.5 million which is approximately $500,000 higher than in Q3, approximately $7,000 higher than in Q4 of last fiscal year as we continue to increase our investment and our integration business and our innovation projects. We had 219 employees at the end of Q4 which represents an increase of 2 employees from the end of the third quarter and an increase of 41 employees from Q4 of last fiscal year.

Now looking forward, we expect revenues in our first quarter of fiscal year 2009 to be in the range of $10.5 to $11.5 million and GAAP basis diluted earnings of $0.02 to $0.05 per share as stated in our press release earlier today. Our anticipated effective tax rate for GAAP purposes for the first quarter will be approximately 34%. Non-GAAP profitability is expected to exclude the amortization of purchased intangibles and stock based compensation expense together representing approximately $700,000 in the first quarter of fiscal year 2009. With that we expect non-GAAP and fully taxed diluted earnings per share in our first quarter fiscal year 2009 to be $0.04 to $0.07 compared to non-GAAP diluted employee tax EPS of $0.05 in Q1 of fiscal year 2008. Our non-GAAP effective tax rate for comparative purposes reflect a statutory rate of 34% on pre-tax non-GAAP income. We anticipate cash flows from operations to be between $1 and $2 million for the first quarter of fiscal year 2009. Also, as in prior quarters we’re not providing significant guidance beyond Q1. For EPS calculation purposes we expect our GAAP basis and Non-GAAP fully diluted share counts for the third quarter fiscal year 2009 to be approximately $19 million and $19.5 million shares respectively. Note that this share count estimate excludes the impact of any future share repurchases.

Now let me turn the call over to John E. Farr CEO of Pervasive Software.

John E. Farr

We are pleased to report our results for our fiscal fourth quarter and our fiscal year ending June 30, 2008, representing our 30th consecutive quarter and 7th consecutive year of profitability. We are also pleased to report year-over-year revenue growth in the quarter of 9% and for the fiscal year of 4%. Our increased revenues are the result of new product version releases and improved execution in both through the core product offerings. Our recent revenue growth has resulted in our ability to exceed our own revenue guidance for the past two quarters in a row. We have also increased our next quarter revenue guidance range for two consecutive quarters as we have grown increasingly confident in our business. Our solid core business results have also allowed us to continue to find our commitment to innovation. Our Pervasive Data Solution’s team completed development work on a new integration solution. Pervasive DataSynch for QuickBooks and Microsoft Dynamics CRM and in May, our Pervasive DataRush team enjoyed a great public showing of our people and technology at the 2008 JAVA1 Conference in San Francisco as we participated with AMD in our key note presentation and exhibit, demonstrating our respective technologies to help software developers to have the power of multi-core processing.

Now, in this call I will give you an update on the significant elements of our business as well as the summary of the items when we focus on fiscal year 2009. First, the data base business. The fourth quarter highlights for our data base business were:

The continuing positive channel adoption trends for Pervasive PSQL Summit Version 10 in the first nine months since its launch.

Our release in June of PSQL Version 10.10 which is Microsoft-Certified for Windows Server 2008.

And as a reminder, Version 10 is designed to help ISPs, VARs and OEMs successfully embrace new technologies including the new Vista and Windows Server 2008 operating systems from Microsoft as well as to take advantage of the latest in 64-bit technology for accelerated data base performance. With lead gen we continue our proven 25-year track record of delivering low TCO, reliability, scalability, performance, ease of use, and embedability in a secure environment. In total, we now have more than 50 of our largest ISP partners, those currently active in our early-in program reporting royalties to us related to their delivery of our Version 10 embedded database and licenses of their applications. Our ISP customers are the best source of validation. Profit Systems, Profit Professional 11.3, and ERP application that helps furniture retailers more effectively manage their supply chain was recently released with Pervasive PSQL Summit V10. Since 1999, Profit Systems has relied on the stability and ease of use of Pervasive database. The release of PSQL V10 carries on that tradition. Profit Professional leverages the robustness of PSQL V10 to help manage inventory levels by offering up-to-date information for instant reporting, automatic ordering, and forecasting to make key decisions. Pervasive’s Extreme IO, a new feature in Version 10, contributed to improving the performance on key processes from eight minutes to 30 seconds. Result of fast, self turning and self optimizing installation makes Pervasive PSQL Summit V10 well suited for package applications and because PSQL Summit V10 is embedded, it runs behind the scenes with a small footprint. Database functions are handled by the Profit Professional interface making it easy for staff to learn. ProfitSystem’s President Jeff Niskern said, “Pervasive will always be at the core of our products. It is a fit with who our customers are. Pervasive delivers everything we require to ensure that things stay on track, to ensure that our customers will be satisfied in the end.”

Next, let me update you regarding the integration business. We are presently marketing Pervasive Data Integrator Version 9 which was released in November. V9 enhancements include: significant performance improvement in the Data Mediation Service or DMS, SDK for easily extending a core integration platform with new standards-based connectors. DMS is significant because it is an open API allowing our internal engineering team to more quickly build our connectivity but also opening up the delivery of new connectivity to our professional services team, to our partners, to our ISVs or any third party wishing to enrich the Pervasive Data Integrator with direct connectivity to many data and application end points out there.

In May, we hosted our invitation-only Metamorphosis 8 Integration Summit in San Jose. We invited ISVs, SaaS providers, and Systems Integrators to hear our value proposition from us as well as from industry analysts and 12 of our most engaging customers. We had another very good event with more than a hundred attendees representing 75 unique companies. These events continue to be very productive in advancing the sales cycles with new channel prospects. Two examples founded in 1999 and based in New Orleans Selltis, LCC., LLC. offers a SaaS application Selltis Sales 5.0 specializing in sales force automation and customer relationship management solutions. Selltis will be using Pervasive to integrate their SaaS Application with a variety of back-end ERP applications. AHA software is a provider of on-demand analytics solutions that help businesses optimize their performance. AHA software licenses and embeds Pervasive’s data integrator and data profiler products into its data services component to enable quick and easy profiling, integrating, and transforming data from any source.

In addition, we continue to benefit from new and existing direct end-user accounts. Many of which are sourced initially as referrals from existing channel partners and as a channel’s oriented company we are encouraged by these and other wins and believe they align with and validate Pervasive’s strategy of winning channel relationships. They are more leverageable and profitable in nature. Our investments in the integration business has enabled us to achieve year-over-year quarterly revenue growth of approximately 10% in Q3 and in Q4 as well as approximately 6% growth in fiscal year 2008 as a whole by both expanding existing relationships with large companies as well as continuing to develop new ISV, SaaS, and Systems Integrator partnerships.

Now, an update on Pervasive’s innovation initiatives. We have talked for several quarters now about our Pervasive Data Solutions initiatives. Pervasive Data Solutions are significant and that it represents the first time we have focused on selling our integration offering as a solution as opposed to a tool. The initial solution delivered by our data solution’s team about a year ago now is called Pervasive DataSynch for QuickBooks and SalesForce CRM. This DataSynch solution, delivers users reliable, real time synchronization of data between SalesForce.com and QuickBooks whether it be for use on premise or for use on demand, delivered it be at the Pervasive Data Club our own platform for 24/7 on demand multi-tenant hosting of our Pervasive Data Solutions. With more than 20 subscribers added in the June quarter, total subscribers have grown now to more than 70 and related annual subscriptions approaching a 6-digit figure. Granted, these numbers are still relatively small but we continue to move in the right direction. We are building a subscriptions based business with beta solutions and such businesses tend to begin quite small and then build upon themselves each year thereafter as prior subscriptions are renewed and new subscribers are added. We believe we are on to something here. So much so that we recently peaked the interest of Microsoft. During the June quarter, our data solution’s team completed development work on our new integration solution. Pervasive DataSynch for QuickBooks and Microsoft Dynamics CRM. We announced this new DataSynch solution in conjunction with Microsoft’s recent Worldwide Partner Conference in early July. Microsoft is intrigued as are we about the possibilities. Now, we are starting to translate that enthusiasm into another meaningful revenue stream for Pervasive Data Solutions. There is an obvious common denominator thus far and that is Intuit in their QuickBooks application. As such we will be showcasing our data solutions offerings as a tier one sponsor at Intuit’s QuickBooks Enterprise User’s Conference in September. We look forward to promoting our various data solutions offerings directly to the QuickBooks enterprise user community both at the conference as well as in the tens of thousands of promotional emails to be sent by Intuit leading up to the event. For more information on data solutions, please visit www.pervasivedatasolutions.com.

Another of our innovation initiatives involves our work on Pervasive DataRush which is focused on solving the soon to be striking and very apparent fame in the software market. We have discussed this initiative in the past but I want to be sure that new listeners have the advantage of some background. Chip vendors such as Sun, AMD, IBM, and Intel have transformed the SMP and high performance computing landscape with their recent introductions of 4, 8 and even 32 core systems. The problem, for decades most applications built to perform data intensive processing were not architected for 8, 4 or even 2 cores in mind. Software developers must change their implementation methodologies now and get ready for the dual world of parallel programming before the disconnect between hardware capabilities and software design leads to massively under- utilized computing power and the data center. Gartner recently picked multi-core and hybrid servers as the number one most disrupted technology through 2012. They believe multi-core servers will have a broad impact on the entire computing industry affecting the speed with which data gets processed, applications deployed and so on. They believe that programmers will have to learn parallel coding or have the right applications for the unpredictability of machines leveraging multiple cores.

In our Pervasive DataRush. Pervasive DataRush is our framework that allows developers to quickly build highly parallel data intensive applications to take full advantage of the multi-core SMP platforms. Our DataRush teams announced the exciting benchmark test results in March working with HP demonstrating linear processing scale building on our 32 core HP Integrity Server. HP like other hardware vendors must demonstrate to their markets that multi core servers are effective for developing, integrating, and deploying applications to harness the complete capacity of multi-core processing. The DataRush Team also enjoyed their first customer deployment in March teaming with system’s integrator people force to deliver lightning fast fuzzy matching for a very large master data management solutions. One key step in this customer’s process realized a 490 times performance improvement reducing a three hour run time to 22 seconds using Pervasive DataRush running on an 8 core server.

Now, the primary news in the June quarter was our involvement with AMD jointly showcasing our people and technology at the 2008 JAVA1 Conference in San Francisco this May. We participated with AMD and our key note presentation and exhibit booth, demonstrating our respective technologies to help software developers tap the power of multi-core processing. We continue to work with our lighthouse customers and perspective channel partners like People Force and AMD and grow increasingly excited by the market opportunities presented by our DataRush Initiatives. So much so that we recognize the time is now to add senior leadership to the DataRush Team. We have begun the informal process of looking for that certain individual who might be ideally suited to helping us further define the go-to-market strategies in growing new business which is already blessed with proven technology, reference able customers, an outstanding engineering team and a commitment to future investment. The promise now: to hire the senior leader who will spend his or her every waking hour defining the next steps so that we can be in the best position to capture the opportunity Data Rush presents to Pervasive and its shareholders. For more information on Data Rush please see pervasivedatarush.com.

This brings to a close our fiscal year 2008 and we are looking forward to the fiscal year 2009. In 2009 we will be focused on the continued marketing as the most recent major release of embedded data base product, Pervasive PSQL Summit V10.10 which is Microsoft Certified for Windows Server 2008 continuing our recent success we have had in growing the sales of our integration product line for both direct sales and through highly leverageable and direct channels. Continuing the investment in new product and service innovation including the further advancement of our innovation initiatives from fiscal 2008, Pervasive Data Solutions and Pervasive DataRush. We are increasing our innovation investments again in fiscal 2009. And the continued focus on generating profitable results and positive cash flows while we look for opportunities to reduce our (22:48) and outstanding shares fitting to work our recently approved $10 million share repurchase program.

In closing, Pervasive continues to enjoy many competitive advantages including solid and proven product lines, a well-developed channel and operating leverage, a strong balance sheet, a reinvigorated focus on innovation and consistent profitability and positive cash flow. We remain committed to a strategic balance of investment in both our flagship and emerging products while also maintaining an intense focus on profitability. A couple of quick Investor Relation notes. We are presently scheduled to present at B. Riley’s Cash Rich Technology Stock Conference in San Francisco on August 12. Security Research Associates Growth Stock Conference in San Francisco on August 18 and then America’s Growth Capital Emerging Growth Investor Conference in Boston on September 11. We hope to see many of you at these events. I will now open the floor for questions.

Question-And-Answer Session

Operator

(Operator instructions) Your first question comes from Brian Schwartz - Piper Jaffray.

Brian Schwartz - Piper Jaffray

John, look at these results here. Looks like you have the strongest quarter here in the international markets, it is really far back as I can see my model. I was just hoping to dissect that a little bit. Maybe you could talk about where you are seeing most of the strength wasn’t it even maxed. Were you seeing it in Europe or Japan? Maybe a little more color on the international contribution in the quarter.

John E. Farr

No. Speaking back on our numbers we had good international results both in Europe on our integration business and in Europe and in Japan on our database business. Good and a lot better than what we have expected and in most cases better than third quarter and in most cases better than the prior year same quarter. Now, I would say that in Europe especially in the database business, if you recall, we priced in dollars with our channel partners in Europe and with the Dollar-Euro FX rate being what it is there was a little bit less pain for those Euro-based partners to be buying US dollar based product and I will not deny that it has probably helped us a little bit in order to get some deals done but I do not think that is everything and a lot of it has to do with simply the timing of the release cycles of our ISP partners as to when they are ready to perhaps do an upgrade install-based upgrade program with us and so I know that we do we have had in current quarters and perhaps a few more of those kinds of deals in Europe on our database business. So, it is all good and we hope it continues.

Brian Schwartz - Piper Jaffray

John, how about looking on the domestic front, on the flip side here somewhere in the Macro environment is on everyone’s mind here in, North America. Can you comment maybe on trends where you are saying in regards to the sales cycles or spending trends, ASPs, pricing and maybe so far what you were saying through the month of July also.

John E. Farr

Probably I will not be able to comment too much on where we are on the first 22 days of July but to the first part your question-No one likes to be in a tough market. We are certainly in a tough market but Pervasive given our high volume, low price point business we tend to do just fine in tough economy. When price becomes (inaudible) become more of an issue the more value oriented providers, of lower cost of ownership providers tend to do okay and that is us. So again, no one likes to be in the tough market, no one is immune to the tough market but Pervasive is doing okay in tougher markets and again it is because of our pricing, because of our channels, because of our high variance.

Brian Schwartz - Piper Jaffray

So, is it safe to say that you have not seen any real deterioration and maybe some of the metrics that you are tracking here last quarter in the domestic area?

John E. Farr

Well, no, I mean we just did the best two quarters in a row that we have had in quite some time in the integration business which is there is a lot of end-user customers in that business and they did quite well in North America and in Europe in the last two quarters. Again, on the database business it tends to be a little bit more chunky, if you will based on particular highest base release cycles.

Brian Schwartz - Piper Jaffray

And maybe moving over to the new product launch the PSQL from a Version 10.10. I know we are in really early days here probably just about six week. But could you share with us in regards to adoption trends and how they are tracking according to your plans so far?

John E. Farr

Let me answer that first in relationship to Version 10 which we released back in September, we are now at 250 of our largest ISPs who have reported royalties based on product applications [Save Ship] with our Version 10 embedded. Now our Version 10. 10 was incrementally released specifically to support Microsoft Windows Server 2008 that was released a little bit earlier in the year. Version 10.10 will not be fade upgrade from Version 10 so it will not necessarily track that. But to your adoption, great question. For Windows Server 2008 I think it is reasonable to assume that the adoption trend will be slow and long and steady and I say that because we are talking about the small, the mid-size business here and many of which tend to be a ‘lagger’ to as far as adopting new technology. They tend to not upgrade new operating systems perhaps until they have upgraded their own hardware cycles so they tend to do things over a relatively longer period of time. So, what that means for demand created by Windows Server 2008 in a way that we will be able to benefit from it i.e., packaged application serving small to mid-size business. I think it will be a long, slow, and steady positive trend.

Brian Schwartz - Piper Jaffray

Great and just one quick one for Randy out there. Just wondering was there any sort of currency benefit in the quarter from the Japanese market?

Randy G. Jonkers

Not really because we hedge our position when we get our royalty reports in and so there is some benefits – I mean Japan will continue to be steady and strong but there was no specific FX gain on our part.

Brian Schwartz - Piper Jaffray

That was really helpful. Thank you both for taking my questions today.

Operator

Our next question comes from the line of [Naha Bargasa] with Red Chip Companies.

Naha Bargasa - Red Chip Companies

Hi everyone.

John E. Farr

Yes.

Naha Bargasa - Red Chip Companies

Just wanted to ask you about the ship (30:54 unintelligible) PSQL (unintelligible) mid April 2008 as compared to PSQL V9. Do you expect the new (31:04 unintelligible) the shipment rate to exceed PSQLV10 on the trend to continue?

John E. Farr

Let me try to answer that question with a little bit more history. First of all, when we go back to Version 8 – Version 8 of our database – the enhancements of Version 8 was very much about the V3s, the navigational API to that particular version of that database as opposed to the relational API. And the significance to that in the VA timeframe was the enhancements were very applicable to a broad set of our customers. Version 9 was more about improvements always across the board but more so on the relational API and was benefiting perhaps a smaller set of our customers.

Now we come back to Version 10 and so the effort in Version 10 was again more balanced to both the V3 and API as well as a relational. Again, more relevant to the broad set of our customer base. So, yes, I expect that all PSQL, Version 10 will be performing better than the Version 9. It will have the applicability to the broad set of customer base (32:32 unintelligible). Now and I am also talking about more than five years of history here and a whole lot has changed in five years.

The future for Version 10, given our revenue history it would surmise that it is probably going to be consistent with the past couple of years, again, all else equal. The real potential for driving Pervasive PSQL on Version 10 to something other than a normal version life cycle will be dependent upon the answer to the previous question which was what the adoption trend is going to be for sequel server or rather Window Server 2008 that was released by Microsoft. If that is well received and deployed by small business and mid-size business that will be a good thing for Pervasive because that will require upgrades of applications and that end-users uses to run on Window Server 2008 and in our world if the ISP updates their application of Window Server 2008 they will have to update database as well. So, it is really hard to answer the question about the future on database trends as so much of it depends on adoption of Windows Server 2008 as well as the release cycles of our own ISP customers.

Naha Bargasa - Red Chip Companies

Okay. Could you just brief us something about the best PSQL 10J. I guess it was formally released by AG Tech your partner in Japan and (34:22 unintelligible).

John E. Farr

Right. Yes. PSQL J – for the other listeners we have our partner in Japan called AG Tech. They are our master distributor partner in Japan and they localize and support our database products into Japanese and then take back and ship versions – Japanese versions of our product and send us royalties every quarter. They did release Version 10.J in the March quarter. Too early for us to tell exactly what is the uptake is going to be in Japan. If you know the Japanese market you will know that the March quarter is always the – typically the strongest quarter as that is the typical corporate year end for many companies in Japan. I can tell you that our historical pattern has been our Japanese revenue to have a very strong March quarter followed by a slightly weaker June quarter given that traditional buying cycle in the Japanese market. In this fiscal year, our June quarter was probably strong, our March quarter is a little bit weaker than normal but our June quarter was stronger. Now if that uptake on Version 10.J, too early for me to tell but I will be traveling to Japan in a little bit later this year and participating on a Board of Director’s meeting for AG Tech and I will be in a position to learn a whole lot more about the state of the Japanese market.

Naha Bargasa - Red Chip Companies

You seem to be very fast to expand your products line. Just last – could you just add some colors about Pervasive data that I mean its alignment with HP one of the leading companies in the IT sector?

John E. Farr

So, the relationship with HP certainly when you hear me talk about our innovation efforts, Pervasive Data Solutions and in this particular question it is Pervasive DataRush. These are investments we make inside Pervasive and you should think of it basically as our own little venture capital funding mechanism inside Pervasive a Company with a lot of cash. We invest in this new businesses, new ideas, compete for funding inside our own little venture capital arm and the two that had succeeded in hitting that funding thus far have been Pervasive Data Solutions and Pervasive DataRush. Now, as with any new start-up businesses, that in the case of DataRush is free revenue where we have Beta version products have not started generating revenue dollars in fiscal ’08 but will in fiscal ’09. The focus here at this particular stage in the life cycle of Data Rush is business development and talking to the many potential partners out there that could help us dramatically in taking Pervasive DataRush to market.

It is about multi-core, it is about taking the advantage of multi-core from a developer’s perspective, you think about all the other parties out there who has hundreds of millions of dollars invested in the future viability in excess of multi-core and at the top of that pyramid you have Intel and AMD. If you move down a little a bit to the box movers, the box manufacturers, you have HP, Dell, Epson both of those levels and so we are obviously talking to all of those perspective channels from again, the business development perspective, we have business development team of One right now and we are not saying we are going to increase our investment in the coming year in our innovation activities in the case of Data Rush. It will be in the form of senior leadership that were referred to in my prepared remarks as well as additional sales and marketing talent to add to our favorite one. The engineering team is a team of seven or eight guys that are top notch and we are very happy with the engineering side of that team and just need to supplement it with a little bit more sales and marketing

Operator

Our next question comes from Bryan Wallis - Broadpoint Capital

Bryan Wallis - Broadpoint Capital

I was wondering if you could possibly articulate a little bit on what kind of marketing initiatives that you are investing again to get the word out on summit.

John E. Farr

The question is marketing around PSQL Summit V10 which was back in September but perhaps more currently Version 10.10. So, Bryan, remember that in the database business it is more about account management, about managing a large number of ISP customers that have used us for years. The loyalty of those customers is quite high and the credit – frankly the cost to change databases is also quite high so they have been with us for a long time and expect that they will be with us for a long time in the future. The bottom line is we know these guys very well. We have a number of sales account executives that manage all of these accounts. We talk to them every week perhaps some of them everyday. They know absolutely that we have got a new version out and we have had contract discussions with the bulk of them already to upgrade into Version 10 or to Version 10.10 which was recently released. So, the data base business has always been about marketing and much more about one-to-one relationships with our sales man, sales accounting executives to product manager or to CTA on ISP customer end of things. We do assist our distribution partners with their messaging to their customers giving them some assistance in crafting their marketing messages to their end-user customers. But for us it is more about sales relationships. There is certainly some trade show participation and some road shows that we have done, regional road shows where we invite ISDs that are in our customer base in particular regions in the US and Europe and make sure that we have that one-on-one communication.

Bryan Wallis - Broadpoint Capital

Also, as the business continues to evolve, do you see the business as a whole becoming more or less exposed to seasonal influences?

John E. Farr

Again, I have to answer this one- all else equal. The database business has always had a typically more challenging September quarter because so much of that business, the 30% of that business is in Europe and anyone who has a business in Europe detects some slowdown and especially in the August month. And so I think that trend will continue. However we are also in the database business on the early stage of the new version life cycles. So, we certainly hope and based on our guidance for the quarter here in September we believe that we will be fine in September and that the revenue trend associated with the stage of that version life cycle for Version 10 will help us combat the natural seasonally downward trend in the summer month. Now, in the integration business, lots of that business is in Europe. The bulk of it is actually here in the states. You still have a little bit of slow down in the summer months but I will tell you that when we look at, where we study what kind of guidance we should give for the next quarter we looked it at revenue forecast on both side of the business and license forecast is professional services engagement forecast. We would look at pipelines supporting those forecast. Otherwise just general trends and sales that we do not have to do that much to import which is the case for some portions of your revenue trends and channels business and we are quite confident with the revenue guidance that we issued today. The low-end of that guidance is lower than Q4 and it reflected of the possibility that we will have some seasonal effect.

Bryan Wallis - Broadpoint Capital

Great, and also just to follow up on the point on guidance. I know you provided cash flow guidance a couple of times in the past year. Are you comfortable providing any kind of a direction for Q1 cash flow?

Randy G.Jonkers

It is the same when you’re predicting between one and two million dollars of operating cash flow. By the way, it is consistent with the recent quarters.

Bryan Wallis - Broadpoint Capital

And also do you have the spends for where that interest income should be directionally in Q1 relative to Q4 started to drop off a little bit this quarter?

Randy G. Jonkers

This should be steady.

Operator

Our next question comes from the line of Ed Ching with B. Riley & Company, Inc .

Edward Ching - B. Riley & Company, Inc

So, Windows small business server 2008 is coming out in November. Do you guys plan to plug a new version or a change of the Version 10.10 into that and do you think that it will help from the top line at all for the quarter of going forward here?

John E. Farr

No, not necessarily. I think part of what you are referring to is a PSQL Server and the database will also supposedly be out in the late fall time frame and we do compete with Microsoft and but we also have been very good about maintaining our relationship with our dedicated ISPs at our own hard database. I tell you that in the future when you see the Service Pack 1 or Service Pack X of Windows Server 2008 as I have said many of our customers tend to be laggers in adoption of brand new technology. Server 2008 is the brand new technology and so with every service pack release for Microsoft, I think the less resistance to the adoption by our customer base so or by ISP reserve our opening customer base and so sure that should help.

Edward Ching - B. Riley & Company, Inc

And with the channel any major additions or any changes in the channel lately or do you foresee going on here in terms of partners?

John E. Farr

I will say on the data side, again, it is about managing that which we have on the integration side we had a good quarter. We signed up 12 new ISB or SAT or SI relationships during the quarter. I highlighted two of them and Q3 and Q4, as I said, feel pretty good in the integration business. We have grown it close to 10% or approximately 10% in each of those two quarters over the prior same quarter and you do not start to feel like with two quarters in a row there we are starting to hit our strike.

Edward Ching - B. Riley & Company, Inc

Great, and John the hundred attendees for Metamorphosis 8, were those ICs or who exactly were those attendees?

John E. Farr

They are predominantly all ISVs. The focus of that conference is to bring ISV prospects in to hear our stories from our other customers and at least one of the two that I have mentioned, Selltis, we actually signed that contract at Meta 8. So, it is absolutely add a positive effect on our ability to close transactions. The other one I highlighted, AHA software attended Meta 7 a year ago in San Jose and so we did not have them sign quite as quickly but still the venue or the approach to that communication with our ISP product prospects has served us quite well.

Edward Ching - B. Riley & Company, Inc

Can you give me a percentage on how many of them were new to Pervasive and how many of them had been to Metamorphosis 7 and are coming back and still listening to the story.

John E. Farr

That I would say is a majority of them are prospects and …

Edward Ching - B. Riley & Company, Inc

So, that you mean you have already spoken to them in the past quarter?

John E. Farr

Well, they are prospects i.e., they have not signed the contract with us yet. They have been in Sales Cycle, but our sales guys will bring them kicking and screaming into that event for a one day sit down with us or while they maybe going in kicking and screaming. They are going out all smiles because the are hearing about how other ISPs have been successful with our product. Now we certainly have a number of current customers, ISP customers turn in, some of them are presenting but others want to come and hear what others are saying even though they have already successfully. They want to hear what other challenges and other opportunities their peer group is saying and maybe they are not getting the nth degree of productivity out of our products. So, we have our SEs were there inside the rooms taking on the hardest of questions on the fly and so there is a value to both our current customers as well as our prospects. I would say that in all of these events the attendants were primarily from our prospective new customers.

Edward Ching - B. Riley & Company, Inc

And how many attendees were there last year at the Metamorphosis 7

John E. Farr

It was a little bit higher actually. It was in the – let me say it is a hundred – around a hundred companies with maybe closer to 130 or 140 attendees. It was also in San Jose. Its a second year in a row that we were right there in the software’s backyard. Maybe we will go back to Boston. About two years ago we were in Boston for our once a year Metamorphosis event and maybe the time is to go back to the East Coast.

Operator

Our next question comes from the line of Patrick P. Walker with the Walker Smith Capital.

Patrick P. Walker - Walker Smith Capital

Hey I heard some very thorough questioning today so I have been left with very little bit. Congratulations on the quarter.

John E. Farr

Thank you and we are glad people are listening.

Patrick P. Walker - Walker Smith Capital

I just want to clarify your answer to the previous question when you were talking about perhaps something different going on in Japan. You said JN was stronger or was I misunderstanding without just go over on direct channel that you said was …

John E. Farr

Essentially I will try to say it more succinctly. Our database results in Japan in March were similar to the results we had in June. Typically, I would expect stronger results in March and weaker results in June.

Patrick P. Walker - Walker Smith Capital

But it is the September quarter that is typically the weakest in Japan and in Europe, correct?

John E. Farr

Not so much in Japan.

Patrick P. Walker - Walker Smith Capital

European?

John E. Farr

In Japan, the dynamic is – with our partner AG Tech, their fiscal year end is September. Now it said that they have a market driven upward seasonality typically in the March quarter because of corporate year end. But then they had their own commission plans, their own objectives as an independent company, their own tax planning and they will sometimes have a little bit stronger September in Japan. Then we otherwise expect and that sometimes get offset as you surmise there with the natural headwind in Europe during the September quarter.

Patrick P. Walker - Walker Smith Capital

Sure. So, your guidance just reflects the normal seasonality that you would expect to see.

John E. Farr

It contemplates with the normal seasonality but don’t lose sight of the fact that we raised our guidance to the September quarter versus the guidance that we gave in the June quarter.

Patrick P. Walker - Walker Smith Capital

I understand. I just wanted to clarify that and I think people have asked this question in different ways but to ask you directly, how do feel your ISPs were taken to the new operating system, the Windows Operating System and their willingness to ride to that?

John E. Farr

The Windows Server 2008?

Patrick P. Walker - Walker Smith Capital

Yes.

John E. Farr

I think it is still TVD I do not think that any significant amount of out database sales on Version 10 to date have been motivated by end-user demand of Windows Server 2008. Some of the ISPs who are more forward thinking and forward leaning may already have decided to move to our Version 10 because they expect ultimately that there will be demand in our customer base for Windows Server 2008. This is about us being prepared to serve our ISPs before the demand curve happens and I will bet it was Microsoft that the demand curve will happen, the Windows Server 2008. I would not say that this is happening in small to mid size business client to any material degree yet.

Operator

There are no further questions at this time.

John E. Farr

Well, again, thank you for everyone joining the call and as Patrick said lots of good questions and we hope to hear from you again in our future calls and hope to see you in some of the three Investor Relations events we have scheduled for the coming 90 days and hope that everyone has a great evening. Thank you.

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Source: Pervasive Software Inc. F4Q08 (Qtr End 06/30/08) Earnings Call Transcript
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