Progress Software Corporation
Q4 2007 Earnings Call Transcript

Published: 20 Dec 2007

[Operator:]

Good day, everyone, and welcometo this Progress Software Corporation fourth quarter earnings resultsconference. To get us started, I am pleased to go live to Mr. Bud Robertson,CFO of Progress Software Corporation. Please go ahead, sir.

[Bud Robertson:]

Good morning. This is BudRobertson, Senior Vice President of Finance and Administration and ChiefFinancial Officer of Progress Software Corporation. Joining me today are JoeAlsop, Co-Founder and CEO, and members of the senior management team. Alsojoining me today is my cold. Hopefully, between my cold and my Boston accent, you'll be able to understandthis call. We prepared a slide presentationto view during this call. The slide presentation can be found on the InvestorRelations section of the Progress website by clicking on the "LiveWebcast" icon. The matters we'll be discussingtoday other than historical financial information consist of forward-lookingstatements that involve certain risks and uncertainties. Statements indicatingthat we expect, estimate, believe, are planning or plan to, are forward-lookingas are other statements concerning future financial results, product offeringsor other events that have not yet occurred. There are several important riskfactors which could cause actual results or events to differ materially fromthose anticipated by the forward-looking statements contained in our discussiontoday. Information on these risk factorsis included in our Securities and Exchange Commission reports, including ourreport on Form 10-Q for the three months ended August 31st, 2007. We reservethe right to change our budget, product focus, product release dates, plans andfinancial projections from time-to-time as circumstances warrant. We shall haveno obligation to update or modify the information contained in our discussionin the future when such changes occur. With respect to any non-GAAPfinancial measures discussed in this call, we have provided on our website apresentation of the most directly comparable GAAP financial measure and areconciliation of the non-GAAP financial measure to the most directlycomparable GAAP financial measure. You could access this information, which isincluded in our earnings release, at www.progress.com. We reported this morning thefollowing results for our fourth quarter of 2007, which are reflected in thefirst few slides of the online presentation. Revenue for the quarter increased12% from $122 million in Q4 of fiscal 2006 to $137 million. On a GAAP basis, we reported thefollowing. Operating income for the quarter increased 66% from $9.5 million inQ4 of fiscal 2006 to $15.8 million. Net income increased 75% from $6.9 millionin Q4 of fiscal 2006 to $12.1 million. And diluted earnings per share increased69% from $0.16 in Q4 of fiscal 2006 to $0.27 this quarter. On a non-GAAP basis, we reportedthe following. Non-GAAP operating income for the quarter increased 51% from$22.1 million in Q4 of fiscal 2006 to $33.4 million. Non-GAAP net incomeincreased 55% from $15.4 million in Q4 of fiscal 2006 to $23.9 million. Andnon-GAAP diluted earnings per share increased 54% from $0.35 in Q4 of fiscal2006 to $0.54 this quarter. The non-GAAP results in thefourth quarter of fiscal 2007 exclude after-tax charges of $3.7 million forstock-based compensation, $2.7 million for amortization of acquiredintangibles, $5.1 million for impairment of goodwill, and $0.3 million forprofessional services fees associated with the investigation and shareholderderivative lawsuits related to the company's historical stock option grantpractices. The non-GAAP results in thefourth quarter of fiscal 2006 exclude after-tax charges of $4.4 million forstock-based compensation, $2.8 million for amortization of requiredintangibles, and $1.3 million for professional services fees associated withthe investigation and shareholder derivative lawsuits related to the company'shistorical stock option grant practices. For the fiscal year endedNovember 30th, we reported the following results. Revenue for the yearincreased 10% from $447 million in fiscal 2006 to $494 million. On a GAAP basis, we reported thefollowing. Operating income for the year increased 40% from $40.9 million in fiscal2006 to $57.2 million. Net income increased 44% from $29.4 million in fiscal2006 to $42.3 million. And diluted earnings per share increased 41% from $0.68in fiscal 2006 to $0.96 this year. On a non-GAAP basis, we reportedthe following. Non-GAAP operating income for the year increased 29% from $84.7million in fiscal 2006 to $109.4 million. Non-GAAP net income increased 31%from $59 million in fiscal 2006 to $77.4 million. And non-GAAP diluted earningsper share increased 29% from $1.36 in fiscal 2006 to $1.76 this year. The non-GAAP results in fiscal2007 exclude after-tax charges of $16.6 million for stock-based compensation,$11.1 million for amortization of acquired intangibles, $5.1 million for impairmentof goodwill, and $2.3 million for professional services fees associated withthe investigation and shareholder derivative lawsuits related to the company'shistorical stock option grant practices. The non-GAAP results in fiscal2006 exclude after-tax charges of $16.3 million for stock-based compensation,$9.8 million for amortization of acquired intangibles, $1.3 million for certainother acquisition related expenses, and $2.2 million for professional servicesfees associated with the investigation and shareholder derivative lawsuits,related to the company's historical stock option grant practices. In reviewing the fiscal 2007fourth quarter, within the total revenue increase of 12% over the last year,software license revenue was up 9%; maintenance revenue increased 12%, andprofessional services revenue increased 26%. For the full fiscal year, softwarelicense revenue increased by 6%; maintenance revenue increased 10%, andprofessional services revenue increased by 31%. With regard to the impact ofchanges in foreign exchange rates during the quarter, total revenue in thefourth quarter of fiscal 2007 would have increased by approximately 6% on aconstant currency basis versus the 12% increase reported. Software licenserevenue would have increased 4% on a constant currency basis versus the 9%increase reported. Maintenance and services revenue would have increased by 7%on a constant currency basis versus the 14% increase reported. For the fullfiscal year, total revenue would have increased by approximately 5% on aconstant currency basis versus the 10% increase reported. Software licenserevenue would have increased 2% on a constant currency basis versus the 6%increase reported. Maintenance and services revenue would have increased by 8%on a constant currency basis versus the 13% increase reported. As noted on slide 10,international business was 58% of the quarterly total as compared to 55% in Q4of fiscal 2006. For the full fiscal year, international business was 57% of theannual total as compared to 54% in fiscal 2006. Revenue from the OpenEdge productline increased 8% to $90.5 million this quarter, from $84.1 million in Q4 offiscal 2006 and represented approximately 66% of the total revenue thisquarter, as compared to 69% of the total revenue in Q4 of fiscal 2006. Revenue from the DataDirectproduct line increased 20% to $23.7 million, from $19.8 million in Q4 of fiscal2006. Revenue from the EnterpriseInfrastructure product line increased 23% to $22.6 million, from $18.3 millionin Q4 of fiscal 2006. For the full fiscal year, revenuefrom the Progress OpenEdge product line increased 6% to $337 million, from $317million in fiscal 2006 and represented 68% of the total revenue this year, ascompared to 71% of the total revenue in fiscal 2006. Revenue from the DataDirectproduct line increased 19% to $73.9 million this year, from $61.9 million infiscal 2006. Revenue from the EnterpriseInfrastructure product lines increased 21% to $83 million this year, from $68.6million in fiscal 2006. Revenue from channel partners,including application partners and OEMs, accounted for 56% of our total licensebusiness this quarter, as compared to 57% in Q4 of fiscal 2006. Within theOpenEdge product line, partners accounted for 74% of our license business thisquarter, as compared to 67% in Q4 of fiscal 2006. For the full fiscal year,partners accounted for 55% of PSC license revenue, as compared to 58% in fiscal2006. Within the Progress OpenEdge product line, partners accounted for 70% ofour new license business this quarter, as compared to 69% in fiscal 2006. Our aggregate revenue backlog atthe end of fiscal 2007 was approximately $178 million, of which $147 million isincluded on our balance sheet as deferred revenue, primarily related tounexpired maintenance and support contracts. The remaining amount of backlog ofapproximately $31 million was composed of multi-year license arrangements ofapproximately $21 million and open software license orders received, but notshipped of approximately $10 million. Our aggregate revenue backlog atthe end of fiscal 2006 was approximately $160 million, of which approximately$127 million was included on our balance sheet as deferred revenue, primarilyrelated to unexpired maintenance and support contracts. The remaining amount of backlogof approximately $33 million was composed of multi-year license arrangements ofapproximately $23 million and open software orders received but not shipped ofapproximately $10 million. We do not believe that backlog as of any particulardate is indicative of future results. Quarter-end headcount of 1,662was flat with one year ago. Looking at slide 16, highlightingbalance sheet information, our cash balance was approximately $340 million atthe end of the year. Our accounts receivable days sales outstanding or DSO was62 at the end of the fourth quarter, up one day from one year ago. During the fourth quarter of fiscal2007, we repurchased approximately 585,000 shares of our stock at a cost of$18.5 million. At the end of the fourth quarter, there were approximately 9.4million shares available for repurchase under our Board authorized sharerepurchase program that expires on September 30th, 2008. A summary of ourhistorical share buybacks is reflected in slide 15. During the past few months, therehave been several significant announcements and developments. We announced thatIndependent Research Firm, Forrester Research named Progress Actional as the #1product for standalone SOA and Web Services Management in October. The reportis titled, “The Forrester Wave

[Operator:]

(Operator Instructions) Our firstquestion today will come from Brent Williams, with Benchmark Company.

[Brent Williams:]

Hi, guys. Congratulations on thequarter. Couple of questions, first housekeeping, what was the goodwillimpairment?

[Gordon Van Huizen:]

The goodwill impairment was thewrite off of EasyAsk investment.

[Brent Williams:]

I’m sorry, excuse me.

[Gordon Van Huizen:]

EasyAsk investments.

[Brent Williams:]

Okay. And then, let's see. Thedrivers of the strong performance in professional services on the quarter, isit pretty much the same as last quarter, or is there anything new going on outthere?

[Gordon Van Huizen:]

No, it's being driven by the newbusinesses, and we’ve had a couple of larger service engagements to theOpenEdge, which is consistent with rest of the year.

[Brent Williams:]

Okay. And then let's see. Noconference call would be complete without me asking about Apama. Any deal sizeboost there on the solid performance on EID coming from Apama or Sonic oranything, or so, were there large deals involved? Any comments on interest inApama and financial services, as well as interest in Apama incrementally inother markets? Can you give us any color on that?

[Rick Reidy:]

Brent, hi; this is Rick Reidy.John Bates is actually in a train now coming back from New York, so I'll fillthis for Bates. Apama had a pretty good Q4. They had roughly 38 brand newaccounts, new deployments throughout the year, 10 of which came in, in the lastquarter. Most, if not all, are in the financial services sector and capitalmarkets, but as well as in the areas of risk management and regulationmanagement.

[Brent Williams:]

Okay, great. And then anyparticular observations on Sonic, in terms of new reasons that customers arefinding to buy? How was the performance there? Was it just more of the samereasons, or can you give us some more color on Sonic?

[Gordon Van Huizen:]

Well, yeah, first just to commentabout the strength of the EI segment for the quarter. This is Gordon VanHuizen. The success of the quarter for EI was really spread evenly across allthe products. With Sonic,the growth drivers there tend to be, so it becomes more mission critical.The kind of robust scalable infrastructure we have, it's even more highlyregarded by the markets, and the wins against those of the likes of [Cisco]become even more strategic. So really it's a continuation of the curve that wesaw late last year and early this year. So it's becoming more and moreimportant, more essential to the organization and having superiorinfrastructure today.

[Brent Williams:]

Okay. And then, I think lastly,this one's for Rick, any color on the NEON, the former NEON, the Shadow stuffand the mainframe stuff? How's that doing?

[Rick Reidy:]

It's actually doing very well.Since we've acquired it, we've grown the revenue quite strongly. I'd say morethan 20% over the previous regime. We particularly had a strong Q4 and broughtin a lot of big mainframe accounts. So I think partly that might be a result ofstrong interest in the new product that we introduced and started shipping,which is Shadow 7, which was the most significant mainframe release we've had,and this is from the original NEON folks in their history. So we are pretty, wefelt pretty good about that.

[Brent Williams:]

Okay, great. And I think that'sit from me. So thanks guys.

[Operator:]

We'll go next to Terry Tillman ofSunTrust Robinson Humphrey. Terry Tillman - SunTrust RobinsonHumphrey Yeah, thanks. Good morning,gentlemen, and congratulations on the quarter as well as from me. But a coupleof financial questions, when you gave guidance for the segments, and you talkedabout $81 million to $85 million of DataDirect, that's representing 10% to 15%growth. Can you remind me, had you all talked, at least more recently talkedabout 10% to 20% growth and if this is a tighter range, and what's behind that?

[Rick Reidy:]

We have talked in the past of thenew stuff growing between 10% and 20%, and right now, the tighter range is 10%to 15%, and the other one is 15% to 25%. So the new one is still 10% to 20%,which we've talked about. Terry Tillman - SunTrust RobinsonHumphrey Okay. Well I guess the one at DataDirect, the 10 to 15is there anything related to like older products, maybe just slower growth oranything related to that or --?

[Rick Reidy:]

No. I wouldn’t read too much intoit. I think our business is very solid and we hope to do better than that. Terry Tillman - SunTrust RobinsonHumphrey Okay, that’s fair. And then, Bud,you just talked about the EI, that does seem like a higher growth rate, becauseyou had talked, I think about 10% to 20%, you are raising that range. Anythingspecifically that's kind of a needle mover, or is it just more of the same, oris there something baked in, in terms of Actional or the DataXtend SI or theApama becoming bigger pieces there?

[Gordon Van Huizen:]

Yeah. Certainly. This is Gordonagain. Certainly Actional and DSSI are core component to the growth of the EIsegment, and so the option continues. Things like SOA management really come tothe fore. We have asuperior offering in that space. We saw dramatic growth for Actional this year,and we see that continuing in to next year. Same thing for DataXtend andSemantic Integrator; Data management challenges in SOA are our big challenges,and we have a very strong offering in that space. So, they are definitelyheavily contributing to the growth of the EI segment. Terry Tillman - SunTrust RobinsonHumphrey Okay. And Gordon, since you'vejust talked about DataXtend SI, I think last quarter you guys have talked aboutclosing a large deal on Telco, and I know you are targeting all the topstrategic telco players or carriers with this offering. Is this business goingto be lumpy though over the next couple of years? Maybe it's one large deal this quarter, maybe then it's acouple of quarters before something else plays out that's large, or areyou getting all of these folks to buy a little bit initially, and then, over time,the idea is that they will make even more strategic purchases?

[Gordon Van Huizen:]

We don't see the DSSI business asbeing particularly lumpy. I think the one very large deal is something of ananomaly. And the deal flow that we've seen following that deal is more alongthe lines of what we're accustomed to with our SOA infrastructure products, ingeneral, which isn't necessarily small from all deals, but certainly smallerthan the one we were talking about. So, since there is this Q4 performancereally across all the products and I'd say a higher volume of smaller deals, ingeneral. Terry Tillman - SunTrust RobinsonHumphrey Okay. And then, Bud, in terms ofEI category, I know we'll see more details in the filing, Bud, in the 10-K. Butwith the EI business, can you comment on was there an improvement in the EBITloss in that business versus the third quarter, first? And then, secondly, whatis baked into an assumption for the EI business on the operating income linefor '08 and the guidance?

[Bud Robertson:]

If you recall last quarter, on thecall, I stated that we expected to have a 20% improvements for the year. Andthat would represent about a $6 million improvement year-over-year, and, infact, that's where we ended up. We ended up 20% improvement in the lossposition or a pickup of about $6 million. Going forward, we haven't changedfrom our thought process because which does really expect this business tobreakeven by the end of '09 and be profitable in '10. If nothing is changed,then actually you'll see continued improvement next year as we go through 2008. Terry Tillman - SunTrust RobinsonHumphrey Okay. Just my last question, I'mpleased to see the return of buybacks with $18.5 million. It's better thannothing. But I can't help but notice that even with the buyback activity startingto reoccur, the cash has built significantly again. And I'm curious what isphilosophically the stance on cash usage in '08? Are you potentially going tostart revisiting larger acquisitions or a more aggressive acquisition stance,or could we see more regular stock buyback activity each quarter or even,maybe, a greater amount?

[Bud Robertson:]

Well, in the past, other thanlast year when we had a lot of blackouts, we have historically always boughtback shares. And we bought back quite a few shares, and we continue to believethat that's a good use of our cash, if. In fact, acquisitions or technologypurchases our first use. So, right now, we continue to look at acquisitions.Whether we find it a big one or not, I don't know, but we're looking for technologiesand companies that fit where we are going. But as we said before, last yearand continuing this year, the drivers to gain more efficiencies and be bettermarket positioned in the products we have, and that's what we've been doing. Sowe are going to execute very well what we have. So next year, this year Ishould say, you can expect to see more repurchases of shares. And, in fact, ifsomething does appear that makes sense for our portfolio, we will acquire it. Terry Tillman - SunTrust RobinsonHumphrey Okay. Thank you.

[Operator:]

We'll go next to Richard Davis atNeedham & Company

[Richard Davis:]

Yeah, thanks. Gordon, this is alittle bit more of a strategy question. So, on the infrastructure side of thebusiness, I just get a sense after following you guys for a while that you'rekind of working those tools together better in terms of either, at least,marketing or presenting those to the customers and things like that. So, thequestion I have for you is, is that an accurate assessment of your strategy onthe enterprise infrastructure side of the house, and are there examples wherethis has actually been helpful? So then, in other words, you can lock and go,look, we have a more unified strategy as opposed to selling you one-off tools.Thanks.

[Gordon Van Huizen:]

Richard, this is Gordon again.Yes, as you've noticed, we've assembled a rather comprehensive portfolio of SOAinfrastructure products. This still marks as an interesting one and in somecases, the customer is trying to solve the very specific needs and they'redefinitely looking for the best product to build that sort of requirement andwe offer that. In other cases, customers arelooking for something a little bit broader. They are buying ESP along with SOA managementand in those cases we are definitely investing in product integration tosupport that, make it easier for the customer, positioning of the product, as acollective unit if you will, but we are at a position where we can address themarket through both of those branches or both of those angles.

[Richard Davis:]

Got it. That’s what I am tryingto figure out, it seems to me maybe that the SOA market is still early daysenough, that there is no consensus yet, I guess eventually your view is that asingle kind of unified platform like all software goes, to be the sellingpoint, but at this point Dell also sound like individual tools can be awfullysuccessful, is that correct?

[Gordon Van Huizen:]

That’s absolutely correct. And wehave had some cases this year where the combination of Sonic International inparticular has been a very powerful one for customers and has led to some verysignificant deals. But by and large customers select based upon individualproducts requirements in SOAs.

[Richard Davis:]

Got it. Okay, now that's veryhelpful, that's what I needed. Thanks so much.

[Gordon Van Huizen:]

You bet.

[Operator:]

Next we go to Jean Orr at NutmegSecurities.

[Jean Orr:]

Good morning, I just have a quickquestion about the outlook for 2008, is there anything in the macro outlookthat would change the outlook for Progress, if it changed significantly, slowereconomic growth in the US or Europe or something like that?

[Bud Robertson:]

Jean I missed part of thatquestion, you said [plug] changes whether --

[Jean Orr:]

I just wondered if there wasanything in the macro outlook that if they change significantly, it wouldchange your outlook for fiscal 2008?

[Bud Robertson:]

Well I mean we always run in tothe Deer and the Headlight syndrome, which is as people get concerned, wellthey stop buying, just because they are nervous, obviously if you go intorecession then all bets are off, but we believe that our products that we haveare both mission-critical, like Gordon talked about, competitive advantage orin fact they have high ROI. We are very diversified around,as you know with 45 in Europe, 45 in North America,as well as with all our verticals, so we feel that the forecast we have nowbased on the current market conditions that are out there is a reasonableestimate. The one thing we have done however, so for those putting the modelstogether, if you look at the increase, we have raised the year-over-yearguidance and revenue, that we believe based on the model of our direct sellingforce is going to fall into the second half of the year versus the first half. So, when you think about modeland the increase we're seeing that we believe is going to occur and most of ourbusinesses will be in the second half of the year, it's not dramatic, butthat's where most of that increase is coming. But we don't see right nowanything that would not allow us, based on the product suite we have to achievethis numbers.

[Jean Orr:]

In terms of, during theheadlights, have you seen any signs in any segments of concern, given what'shappening in the financial markets?

[Bud Robertson:]

Well, as you know we have,because of the verticals that we have, we don't have a high exposure to reallyany verticals, its somewhere in the single-digits, for example financialservice we look around, and we have had some of our OpenEdge business, we mighthave had a customer too that didn't buy, that would buy in a prior year. Butagain that noise gets taken away by the fact that another vertical, such asretail is up as an example, so and then the financial services that Rick dealswith in Apama.

[Rick Reidy:]

I specifically asked John Batesthis morning, and he said, because we are worried about that. That's where Apama plays. And so far, there has been zero impact calledthe credit crunch on the Apama business so far. If anything,it's waking people up to the fact they need more software to help them monitorin real-time what's going on.

[Jean Orr:]

Okay. And justone clarification, the GAAP tax rate you expect was what?

[Joe Alsop:]

35. And thenon-GAAP was 34.

[Jean Orr:]

Okay. Thankyou.

[Operator:]

Anything further Ms. Orr?

[Jean Orr:]

No. Thank you.

[Operator:]

We'll go next to Doug Crook atGlobal Crown Capital.

[Doug Crook:]

Hi. Thanks. I am not familiarwith the comment you made about the write-off of the goodwill. I am wonderingif you can give me a little more detail on that.

[Joe Alsop:]

The write-off on the EasyAsk thatI discussed?

[Doug Crook:]

Yes.

[Bud Robertson:]

Yes, we acquired the company acouple of years ago, 2.5 I think Joe said. We have to, every year, look and seewhat the bio of that is. And based on the current revenue estimate and thefuture revenue estimate and some other formula for accounting rules based onthose growth rates we actually paid and we have to write-off that investmentfor GAAP purposes.

[Doug Crook:]

Do you anticipate any additionalwrite-off in the near future?

[Bud Robertson:]

No.

[Doug Crook:]

Okay. All right, that's helpful.That's it. Thanks to all.

[Bud Robertson:]

Okay.

[Operator:]

We'll take a follow-up from BrentWilliams at Benchmark.

[Brent Williams:]

Hi. I think if I get this right,within the OpenEdge division, the percentage that came through your channelpartners and OEMs was kind of a leg-up here over normal and implying that thedirect sales was down. Anything going on there or is this random bouncingaround or is there anything going on there?

[Bud Robertson:]

No. Like you said, Brent, that'srandom bouncing. If you look at '05 number, it was 69% for the year. '06 was69%, and this is 70% for the year, the partner percentage of revenues. So ifyou look within any quarter within those yearly numbers, it is bouncing around.

[Brent Williams:]

Okay. Just a follow-up check.Thanks.

[Operator:]

And at this time, there are nofurther questions from the phones. (Operator Instructions) And no questionsfrom the phones. I'll turn it back to you for anyadditional or closing remarks, gentlemen.

[Bud Robertson:]

Okay. Thank you. Just foreveryone to know on the call, we will have our analyst conference on Tuesday,February 12, at The Ritz Carlton Hotel in Boston,and we will be sending out information on that from our IR people. So, ifanyone is interested, email me, but we will be getting to everyone on the callanyways to see if you are interested in attending. As you know, it is ouryearly conference and it is a great time to gather information on all theproducts lines as well as many industry analysts who are there. So with that, this concludestoday's conference call. I hope everyone has a happy holiday and thank you forparticipating.

[Operator:]

This does conclude today'steleconference. Thank you for your participation, and you may now disconnectyour lines.