Progress Software Corporation
Q4 2008 Earnings Call Transcript

Published: 18 Dec 2008

[Operator:]

Good day and welcome to the Progress Software Corporation fourth quarter earnings conference call. At this time, I'd like to turn the conference over to Bud Robertson. Please go ahead, sir.

[Norman R. Robertson:]

Good morning. This is Bud Robertson, Senior Vice President of Finance and Administration and Chief Financial Officer of Progress Software Corporation. Joining me today are Joe Alsop, CoFounder and CEO, Rick Reidy, Chief Operating Officer, and members of the senior management team. We've prepared a slide presentation to view with this call. The 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, other than historical financial information, consist of forward-looking statements that involve certain risks and uncertainties. Statements indicating that we expect, estimate, believe, are planning or plan to are forward looking, as are other statements concerning future financial results, product offerings or other events that have not 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 when 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 measure 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 fiscal fourth quarter and full fiscal year of 2008, which are reflected in the first few slides of the online presentation. On a GAAP basis, we reported the following

[Operator:]

Thank you, sir. (Operator Instructions) Your first question comes from Brent Williams - The Benchmark Company.

[Brent Williams:]

The easy housekeeping question first - the amount of ARS that's on the balance sheet went up. Can you walk me through that?

[Norman R. Robertson:]

That was related to the acquisition of IONA. They had some ARSs on their balance sheet.

[Brent Williams:]

And then can you give me a sense of how the large deal business in EID in general, maybe the IONA business in particular, did during the quarter and outlook any changes in the expected pipeline or close rates for larger deals for that business going forward into fiscal 2009?

[Norman R. Robertson:]

The EI business, the pipelines have been good. The deals somewhat have been slowed a little bit because of signature requirements and people reevaluating what's in their capital spending, but so far the deals we expected to come through came through or are slightly a little bit behind where we anticipated. But as of right now we haven't seen deals being lost because of the economy, although they are being slowed down.

[Richard D. Reidy:]

I'd also add that their fiscal year ends at the end of December, so there's still a lot of business that comes in for them normally in December that we're working on now.

[Norman R. Robertson:]

Yes, Rick's addressing the IONA business there.

[Brent Williams:]

And then you had said in the subheadline to the press release that the IONA integration is nearly completed. What's left and how's that tracking relative to the schedule?

[Richard D. Reidy:]

Well, the primary thing that's left is the systems, which have to be brought over to our systems, which is going to happen in January - February, Q1. So that will be the final integration piece, as well as we're still obviously merging people and stuff. But that's the primary big left in Q1.

[Brent Williams:]

And then, let's see, traditionally I have to ask a question about Apama. You called out again in the headline on the press release that that was particularly strong. Is there any sort of color that you can give there?

[Richard D. Reidy:]

No, we were very pleased with the year we had in Apama overall and the quarter we had in Q4. Even in this rather turbulent times within capital markets, people are still looking to improve profitability and almost certainly manage risk, and that's a product that's perfectly suitable for that type of thing. In addition, we're also finding and signing up a lot of partners. I think one of them is in this press release, EQT, where we're finding more and more people are using SAS models or implementing their trading strategies through partners rather than building up the entire infrastructure themselves. And then lastly, we're finding more and more multi-product Progress deals, particularly sold into the large integration base, where CEP is an important component in that whole mix. So overall, we're pretty pleased with where Apama is and where it's going.

[Brent Williams:]

So following on that last comment, do you see the pipeline changing substantially towards nonfinancial service deals? Is it picking up? What's the sort of relative balance looking like going forward?

[Richard D. Reidy:]

Yes. Well, certainly in the multi-product deals into the Progress base, many of those would be outside the financial services base, and we are expecting and budgeting for a big pickup in that next year. But we're also looking at other verticals, such as energy, logistics, telecommunications and other areas, to focus on as well. So we will see a diversified Apama strategy next year in '09.

[Operator:]

Your next question comes from Steve Koenig - Keybanc.

[Steve Koenig:]

I'm wondering if you can help us understand a little bit in terms of our guidance, if you look at it on a constant currency basis and you look at the various business, it looks like it's down constant currency from last guidance if I'm doing my math right. I'm wondering if you could provide some color on what are the changes that you've seen and what are the net effects in terms of your business areas?

[Norman R. Robertson:]

Well, it is down on a constant currency basis from the last one due to the fact that, like the economy, we're starting to see deals slow down. We're concerned about Q1 and 2 based on most companies will be through their budget in December and then, if they get the deer in the headlight syndrome, they're going to potentially freeze in Q1, which concerns us. So when you look at the product lines, as we mentioned, the OpenEdge business is down on a constant currency basis, the DataDirect businesses are up on a constant currency basis, and obviously the Enterprise Infrastructure group is up because of IONA. And if you take IONA out, it's probably slightly up, with some groups being up more than others, but that's in general where they're up. So basically, on a constant currency basis, the two to three major groups that were up, with the OpenEdge business being slightly down.

[Steve Koenig:]

And in terms of the change you've seen over the last quarter, which of the businesses is most resistant? Which ones are you expecting a bigger impact?

[Norman R. Robertson:]

Up or down or what was the question?

[Steve Koenig:]

Yes, sorry. In terms of the change over the last three months, your outlook, which businesses have maintained the best outlook, which ones do you think have weakened a little bit?

[Richard D. Reidy:]

I think the way we think about it is we could broadly classify our businesses into three buckets and some of those, quote, business and product lines span some of these categories that we're talking about. But there are certainly some products that we have that show immediate effect, immediate profitability, immediate reduction of risk, immediate benefit that people see immediately that we're still pretty bullish on, even in tough economic climates, for example, some of our DI stuff and some of our Apama stuff. And then there's a whole class of our products that are just very sticky. We have long relationships, customers, a big installed base that we think we could manage relatively effectively through an economically troubled times, and those would be things like our OpenEdge business, for example, and some of the IONA business, some of the DataDirect, a strong OEM business, and things like that. The generic classic SOA infrastructure business is the area that we're being very cautious about in this troubled time insofar as people could delay purchasing decisions themselves a quarter or two to see how this is all shaping up. So I'd say that we're a bit more cautious about the classic SOA infrastructure business than we have been in the past.

[Operator:]

(Operator Instructions) Your next question comes from Richard Davis - Needham & Company.

[Richard Davis:]

When I talk to private infrastructure companies, some have been doing well and it sounds like you guys touch a lot of parts of the infrastructure world. The guys that are doing well are pricing inexpensively, not cutting price. But is price a driver for sales or is it just kind of natural conservatism among the buyers because they're like wow, we're under pressure? So that was question one. And then more broadly, could you just talk about your thoughts over the next year to two years or so, just about kind of your concept of acquisitions versus even potentially spinning of interesting parts of your business? For example, let's say Apama got to become a big business, would you ever spin that off or any parts, just notionally.

[Richard D. Reidy:]

I'll start off and Joe will finish. On your first question, price in and of itself is not the key driver right now in our conservatism and the perception that our customers will be conservative. Much of the cost, particularly in SOA infrastructure, is borne after the sale for a customer, so they're looking at the broader expense of implementing a SOA infrastructure. So our piece of it isn't - and the price of our piece of it isn't  it isn't the key driver. On the second question, I'm glad you brought that up because these economic times also bring us a lot of opportunity as well as a company in that, as we look through our acquisition strategy, many of the people we might be interested in are themselves, let's just say crassly, cheaper, but in general, let's say, more open to acquisition. So the good side of this whole coin right now is that I think our acquisition strategies could be accelerated as a result of the times that we're in today.

[Joseph W. Alsop:]

I think Rick stole most of my thunder. I'll just add that, although price is always a bit of a factor, I just have not seen that as a big issue. Obviously, if you're a startup company or something like that, maybe you want to use that as a lever to get in the door, whereas a more established company like ourselves is focused on the ROI. And as Rick pointed out, the total cost of implementation really only has a fraction of the cost allocated to the actual software. With respect explicitly to the question about spinning off - and I think you referred to Apama, Richard - I think one of the things that was said earlier was that we're seeing more multiproduct deals. I think Rick, if I remember correct, explicitly talked about certain deals where there's an opportunity to sell things in conjunction - you know, multiple technologies - in conjunction with Apama. I think as time goes by customers are looking for more of a complete solution from a single vendor. Certainly, we're refocusing some of our positioning and marketing efforts and are pleased that Gary Conway's joined us as Chief Marketing Officer to emphasize the business value of what we're providing and the return on investment. Typically those deals, those opportunities, will involve more than a single Progress product line. So I think our strategy at this point - not that it might change in the future - is to improve the synergies among the product lines rather than spin one off. I think also we've proven that we're pretty good at running mature product lines for profitability and have a good track record on that. And of course that generates a tremendous amount of the profitability and cash flow that drives the company. I hope that's responsive to your question.

[Operator:]

(Operator Instructions) Your next question comes from Robert Kirkpatrick - Cardinal Capital.

[Robert Kirkpatrick:]

Could you take a few moments and explain to us kind of what you're using in terms of foreign exchange forecasts in this forecast versus the previous forecast?

[Norman R. Robertson:]

This forecast we're using, as we mentioned, the euro is $1.35 and in the prior forecast, last time it was, remember from the call, $1.42. The pound, we're using $1.55 for this one and prior it was $1.85. Those are the two big major drivers of our currency.

[Robert Kirkpatrick:]

And are they both about equal or is the euro much more important to you?

[Norman R. Robertson:]

The euro's [lighter].

[Robert Kirkpatrick:]

So three-quarters, one-quarter, something like that?

[Norman R. Robertson:]

Two to one.

[Robert Kirkpatrick:]

Two to one, okay. And then any comments on your stock buyback program?

[Norman R. Robertson:]

Yes. Well, you know stock buybacks, there are a number of factors that affect our ability to buy back shares, including blackout periods, our cash position, acquisition opportunities, etc., etc. And, as you know, this quarter we spent over $100 million to acquire IONA. And during the course of the year we spent over $100 million in stock buyback, so they're about the same number over the course of the year. And every quarter's different. We did $40 million in buybacks last quarter and then we did the IONA acquisition.

[Robert Kirkpatrick:]

So the implication is that you were blacked out much of the period?

[Norman R. Robertson:]

The implication is, you know, we have so many cash resources and you have to look at the cash balances. And, you know, what are you going to do? You going to buy back shares or are you going to buy companies? And the number one priority has been the acquisition of companies and technologies to strategically grow the business.

[Robert Kirkpatrick:]

And then any comments on working capital for the year or for your forecast period?

[Norman R. Robertson:]

What specifically did you have in mind?

[Robert Kirkpatrick:]

You had, it looked like it was a bit of an outflow in 2008 and I was wondering, with the acquisition being impacted in the full year, will you have -

[Norman R. Robertson:]

Yes, I know. This year was timing; it's just a balance sheet timing issue. We have things  bonuses paid differently and different rates versus which accrue and the timing of other payables. Receivables are in line with what you'd expect, like we said the DSO is where it is. The over 90 actually about the same. So there's not really any basic change other than the timing of the payables, and that's bonus accruals versus payments, those kind of things.

[Operator:]

Your next question comes from Steve Koenig - Keybanc.

[Steve Koenig:]

I'm wondering if you can elaborate a little bit on looking out maybe next year - maybe even three if you will - on the impact of SAS adoption by your application partners on the OpenEdge business and also how does that affect the structure of the contracts and the timing of OpenEdge revenue?

[David G. Ireland:]

The events here in question - basically SAS adoption - what we've seen on our end for '08 and similar to '07 is over a 20% growth in the SAS business, and we project that to continue forward. So there's been a good strong adoption by the application partner community and the application partner community sees that as a competitive advantage. So we're pretty pleased with the results.

[Joseph W. Alsop:]

I think part of your question was sort of how do we account for it. Is that correct?

[Robert Kirkpatrick:]

Yes.

[Joseph W. Alsop:]

We basically take the revenue monthly. It's basically rental of our infrastructure as part of the partner's application. And one of the decisions that we made quite a few years ago is that we would provide our technology on the SAS model to those partners who were willing to accept the SAS or rental, well, I'll just call it the rental model - or subscription, that's the word I was hunting for - in terms of how they do business. Now, a couple of points. One, there is some potential for cannibalization. In other words, we might not get an upfront license deal and instead get a SAS deal that extends over years a month at a time under the subscription model, but strategically we felt that it was important to do it and therefore we were willing to accept that trade-off. In fact, however, I don't think the trade-off has been all that severe because most of the business that our partners have gotten under the SAS model has been incremental business, it's put them in a new, much better competitive position, potentially repositioned them in the marketplace as they go after new accounts, and I think in general has been an enormous invigorating influence on our partners. I think, if I remember correctly, I heard a quote from a year ago from some of our partners that are most heavily committed to SAS that half their business in a few years would be SAS. Now, our SAS revenues are still a fairly small fraction of our total OpenEdge license revenue. But, as Dave mentioned, it's been growing pretty quickly.

[Operator:]

And at this time we have no other questions in queue. I'd like to turn the call back to Mr. Robertson for any additional or closing comments.

[Norman R. Robertson:]

Thank you. This concludes today's conference call and we at Progress wish you a happy holiday. Thank you for participating.

[Operator:]

And again, that does conclude today's call. Thank you for your participation. Have a good day.