Progress Software Corporation
Q3 2008 Earnings Call Transcript

Published: 18 Sep 2008

[Operator:]

Welcome to the Progress Software Corporation third quarter earnings conference call. (Operator Instructions) At this time I would like to turn the conference over to your host Bud Robertson.

[Norman R. Robertson:]

This is Bud Robertson, Senior Vice President of Finance and Administration and Chief Financial Officer for Progress Software Corporation. Joining me today are Joe Alsop, Co-Founder and CEO, and members of the senior management team. We have prepared a slide presentation to view during the call. This slide presentation can be found on the Investor Relations section of the Progress website by clicking on the live webcast icon. The matters we’ll be discussing today are the historical financial information consisting of forward-looking statements and involve certain risks and uncertainties. Statements indicating that we expect, estimate, believe, planning or plan to are forward-looking as are other statements concerning future financial results, product offerings or other events that have no yet occurred. There are several important risk factors which could cause actual results or events to differ materially from those anticipated by the forward-looking statements contained in our discussion today. Information on these risk factors is included in our Securities and Exchange Commission reports. We reserve the right to change our budget, product focus, product release dates, plans and financial projections from time to time as circumstances warrant. We shall have no obligation to update or modify the information contained in our discussion in the future once such changes occur. With respect to any non-GAAP financial measures discussed in this call, we have provided on our website a presentation of the most directly comparable GAAP financial measures and a reconciliation of the non-GAAP financial measure to the most directly comparable GAAP financial measure. You can access this information, which is included in our earnings release, at www.progress.com. We reported this morning the following results for our third fiscal quarter of 2008, which are reflected in the first few slides of the online presentation. Revenue for the quarter increased 4% from $122 million in Q3 of fiscal 2007 to $127 million. On a GAAP basis we reported the following

[Operator:]

(Operator Instructions) Our first question comes from Richard Davis - Needham & Co.

[Richard Davis:]

The first question is with regard to IONA and Artix and how are you integrating those two things, because to some degree they obviously were competitors? Could you just kind of talk about is there a different go-to-market strategy or how you’re going to approach that, because presumably the addition of that product family to you guys would be helpful to the whole Sonic effort?

[David G. Ireland:]

You’ll be talking about the ESP product lines, correct?

[Richard Davis:]

Correct.

[David G. Ireland:]

The way we’re positioned and the way we see it is each product has its own fit in the market and that at the account level, whether it be the Artix ESP or the Sonic ESP, depending upon the account requirements, depending upon the particular business problem they’re using, then we would propose the appropriate product to solve that problem. Although it seems like they’re competitive on the face, they actually solve the problems slightly different and they attack business issues in a slightly different way.

[Richard Davis:]

Have you integrated the sales forces? Are they working together as a team or how does that work today?

[David G. Ireland:]

We’re in the process of integrating the sales forces today. There are some cases where there’s full integration and there are some places where we’re operating, such as the IONA are still looking after the IONA customer base and the Progress people are looking after the Progress base. But by the end of the year it’ll be fully integrated.

[Richard Davis:]

Bud, this is kind of a subjective question. I’m down here in Texas visiting a bunch of private companies and to the man or the woman, 100% of them are saying that business is more difficult than the past. It’s not a disaster but everyone is reducing their internal expectations at least among private companies and you guys have done the same now for in effect two consecutive quarters. How confident are you, and you may not be able to answer it, but some quarters you feel pretty confident in terms of your outlook. On a scale of 1 to 10 is there any way that you can kind size this up? Is it bigger than a bread box so to speak in terms of your expectations of how confident you are and what your guys’ opinion is on how you’ll do over the next few quarter?

[Norman R. Robertson:]

There are a couple of parts to that question. One is [RC] integrating with IONA. We’re still sorting through that number so we’re not as confident on that number right at the moment. We are cautious as you mentioned in general because we are seeing the softness in the market place that you mentioned and we also have as you know the tremendous hit on currency that we’re taking both in Q4 and particularly 09 from where we were before, which we can’t do anything about. So pushing that aside, I would say that we’re cautious as of today. I mean the world in another quarter, if it gets worse than it is today then I’ll be looking back saying that cautious wasn’t cautious enough.

[Richard Davis:]

I know it’s an unanswerable question but I figured I’d ask it anyway.

[Joseph W. Alsop:]

You tell us when the turmoil stops and we’ll tell you when we feel better.

[Richard Davis:]

Exactly. I’ll raise the flag when we get out of the fox hole any day now.

[Operator:]

Our next question comes from Brent Williams - The Benchmark Company.

[Brent Williams:]

First off just starting in the numbers, the services line on the revenue declined for the first time in years. What’s going on there? Is that concentrated in a particular division, particular geography? Can you give us some color on that?

[David G. Ireland:]

A couple things. First, the year-over-year was something that we had forecasted. We had had a couple of very large service engagements in 2007 that did not repeat in 2008. So the year-over-year number is something that we had built in. Now this slight softness around the market in general and that affects the services business but I believe if you’re looking at year-over-year it’s primarily what happened in 07 wasn’t repeated in 08.

[Brent Williams:]

DataDirect rebounded pretty nicely from last quarter. Now is that mainly due to some of the larger shadow deals that were tough to get last quarter coming back or is there some other factor at work there?

[Richard D. Reidy:]

Yes, that’s exactly it. We had a very, very strong Q3 in the shadow mainframe business and also the OEM connect business. So that’s looking pretty good. However, going forward we too want to take a pretty cautious outlook and act prudently with respect to, because we sell a lot of our connect products into the financial services sector. But the pipes look great. The shadow pipeline looks very, very strong and the OEM pipeline does as well.

[Brent Williams:]

You called out in the subheading of your press release that Apama was gaining traction. Aside from the 4.0 release which clearly is good news going forward, is there anything on the quarter on the revenue generation that’s worth pointing out there?

[Richard D. Reidy:]

John Bates by the way is now speaking at a panel session down in New York so I’ll fill in for him. I think in general Apama’s had a very, very strong year and it’s exceeded our internal expectations, and we’ve been doing extremely well in the financial services area which as we all know has been very difficult. But because we have a product that really directly contributes to the bottom line of a lot of these companies, we’ve been doing okay. However, given the current turmoil in the financial services industry our approach right now is to not put all our eggs in one basket. So we are looking at other areas such as energy, transportation, logistics and telecommunications. And in particularly in energy we’re particularly excited about a customer we acquired last quarter which is using our product to innovate on the entire process of oil extraction, refining and distribution. So there are other areas where CEP can be equally interesting as it is in the capital markets. And it’s a very strong pipe. We’re feeling good about Apama.

[Brent Williams:]

Now a couple of housekeeping questions for Bud. The stock option investigation charge spiked up a bit versus the last couple of quarters. Anything going on there and kind of where does that look maybe in the next quarter or two?

[Norman R. Robertson:]

The spike wasn’t that big. It’s just the normal legal bills coming in. It’s continuing to go on and we really can’t tell you when it’s going to end. I wish I could.

[Brent Williams:]

Cash flow from operations in the quarter?

[Norman R. Robertson:]

$14 million which is in our range of $10 million to $30 million depending on the quarter.

[Brent Williams:]

Last question, I think the exchange rate assumption that you gave was for Q4 or was that also for fiscal 09?

[Norman R. Robertson:]

Fiscal 09 as well.

[Operator:]

Our next question comes from Joe Gajen - Atlantic Equity Research.

[Joe Gajen:]

I have a couple questions around the IONA acquisition. I noticed in the last couple of quarters with IONA’s financial statements they took some charges. One of them they put in there and said it was a $2.6 million Progress implementation fee. I want to ask on that and then I have a couple more questions, but do you know what that fee was?

[Norman R. Robertson:]

That was an advisor fee for the process of legal fees for the acquisition.

[Joseph W. Alsop:]

In other words, they undertook a process starting back in February and of course investment bankers in today’s world need their fees to keep solvent, so it was advisor legal fees associated with the process that they went through.

[Joe Gajen:]

Then they took restructuring charges in each of the first and the second quarter.

[Joseph W. Alsop:]

I don’t know what their numbers did back then. We didn’t dive into them. We’re worried about the ongoing operations so the history if you want to give me some questions later when we can go look into them, we will.

[Joe Gajen:]

I think it’s applicable because this company took a lot of charges before you bought them and now this company’s part of your total operations, so I think it’s applicable because you just bought them. So I’m just wondering why you think it’s a good thing to buy a company that took all these charges?

[Norman R. Robertson:]

Because they have restructuring costs like everyone else does when they’re shrinking their workforce because their revenue is shrinking. So we were aware of what was going on and we were aware that they were trying to stay break-even and we felt there was a great strategic fit with our products and that’s why we acquired them.

[Joe Gajen:]

What do you plan on getting for revenues from them in earnings for the coming year from specifically on the IONA acquisition?

[Norman R. Robertson:]

We don’t break out the earnings piece by the individual group so we expect in Q4 for IONA to contribute around $10 million to $14 million and for the full year we expect IONA to contribute somewhere in 2009. There are two numbers. If you say “What would it be on a full fiscal year basis”, which again 2009’s going to be a delta over the prior year, but we’d expect to have them be between $56 million and $64 million on a full-year basis.

[Joe Gajen:]

For the revenues?

[Norman R. Robertson:]

Yes.

[Joe Gajen:]

And what about the earnings?

[Norman R. Robertson:]

They’re all merged in with the rest of our operations right now so there’s no specific IONA P&L.

[Joe Gajen:]

And just one other question. Do you or any of your management talk to IONA about what charges they’re going to take before you acquire them?

[Norman R. Robertson:]

No.

[Operator:]

Our next question comes from Eugene Fox - Cardinal Capital Management.

[Eugene Fox:]

I’ve got many questions but I’ll try to do them quickly and get back in queue. For Q4 how much if any dilution are you anticipating from the IONA acquisition?

[Norman R. Robertson:]

Slight dilution. The bigger hit in Q4 is the fact that the currency is whacking us between $4 million and $5 million with the different rates from the prior forecast.

[Eugene Fox:]

If I were to quantify it but in terms of let’s say your 56 versus 60, $0.03 currency, a penny dilution? Would that be fair?

[Norman R. Robertson:]

Yes. That’s a fair one. From the prior one you mean?

[Eugene Fox:]

Yes.

[Norman R. Robertson:]

Exactly yes. $0.02 in currency and some to a penny in IONA.

[Eugene Fox:]

Given the volatility in currency, I really appreciate that you used a $1.42 number for the euro. Could you help us a little bit more in understanding the sensitivity given that the dollar is at the moment $1.44, $1.45? Help us understand a little bit how we would adjust your guidance more so for 09 than for 08 in terms of sensitivity to changes in the euro?

[Norman R. Robertson:]

Two days ago when we did this thing with the $1.42 and like you said tomorrow could be $1.40 so we used $1.42 and in our Q and our Ks we actually put in there how you do the calculation. 45% of our business is in Europe so you can probably use that kind of ratio. We can talk about this offline later on the currency but again the Qs and the Ks explain how you do the math with the currency change.

[Eugene Fox:]

I understand but it’s just sometimes it’s helpful if there’s just a simple rule of thumb given where things are.

[Norman R. Robertson:]

Like I said, 45% of the move ballpark is in EMEA so when the currency moves by 10% you can say 4.5% of the total number might move for Progress Software on revenue.

[Eugene Fox:]

Have you quantified Bud along that same line the drag in terms of EPS drag from the $1.50 or so this year to next year? Is it built into your forecast?

[Norman R. Robertson:]

Yes. The revenue line is somewhere between $15 million and $20 million, the 09 number, because of that change. And that’s probably somewhere between $0.05 and $0.07 drag on the number.

[Eugene Fox:]

What share number are you using in your 09 guidance?

[Norman R. Robertson:]

I believe it’s 42 million to 43 million, in that range.

[Eugene Fox:]

And I presume that that also doesn’t include share repurchase, correct?

[Norman R. Robertson:]

Right. Minimal.

[Operator:]

Our next question comes from Steve Konik - KeyBanc Capital Markets.

[Steve Konik:]

Just a general question. If you look across your three lines of business being OpenEdge and SOA and then the data business, putting aside for a second kind of current market conditions or current macro conditions, what’s your sense of market growth rates for beta database, SOA and then the data business? And then the second part to the question is, which of those businesses do you think are more susceptible relatively to macro conditions and to customers delaying deals or pulling back on purchases due to either discretionary nature or other factors involved in the purchase?

[Joseph W. Alsop:]

I’ll take a crack at it and see if anybody else wants to chime in. In terms of overall growth rates we normally talk about OpenEdge as being a G&P grower, couple percent per year mixture of product and maintenance and services. And a lot of that business 60% or 70% goes through our application partners, and they typically but not always sell to SME, small or medium business. To the extent that people in those areas pull back say in investments, in systems automation, manufacturing distribution which is a big segment for us, that can get impacted as much as G&P can get impacted. So the variations one way or the other are normally not that dramatic. I think if you’ve studied the company for a while know that that’s an extremely profitable line of business. The SOA infrastructure business we’ve set guidance at $15 million to $25 million for this year. We’re always looking for ways to accelerate that. I think you heard some words from Rick Reidy about the Apama business which is part of that category of products. Most of the IONA product line or I think all of the IONA products fall into that category so there’ll be an increase in the run rate of that business from that. Another product line that’s doing very well within that enterprise infrastructure grouping of products is DataXtend Semantic Integrator, DXSI, that sells primarily to Telco. So that is probably the strongest growth business in the total lineup. The DataDirect business you heard from Rick about the strong Q3 but some concerns about Q4. So we don’t see that currently as quite as strong a grower as the SOA infrastructure or enterprise infrastructure business. But we see that picking up as some of the new product lines come on board next year. In terms of susceptibility to sort of overall economic slowdown, I think you heard me comment on OpenEdge to the extent that we sell to manufacturing distribution, mid-market and those people, retrenched, there can be some retrenchment there. Within SOA that’s generally people put that in in order to improve their competitive advantage or make major restructuring so their IT application infrastructure on that is typically sort of goods news and bad news there. Those are typically pretty mission critical projects. Those deals do tend to be lumpier, larger deals, potentially susceptible to slippage if the customer suddenly freezes budgets or something like that. DataDirect like OpenEdge has a high recurring revenue component to a lot of its OEM or most all of its OEM business. The Direct business the larger deals there typically are strategic deals where customers are establishing a single uniform way to access all their data in the enterprise. Thos are big projects that we’re part of and those have some susceptibility. I hope that was what you’re looking for. I’m happy to take any further questions on it.

[Steve Konik:]

Yes, that’s great Joe. That’s very helpful. That’s exactly what I was looking for.

[Operator:]

This does conclude today’s question and answer session.

[Norman R. Robertson:]

Thank you for participating in the call and we look forward to speaking with you in December.