Brian Flanagan - Director, Treasury Phil Pead - President and Chief Executive Officer Jerry Rulli - Chief Operating Officer Chris Perkins - Chief Financial Officer.
Steve Koenig - Wedbush Securities Greg McDowell - JMP Securities Mark Schappel - Benchmark Stan Berenshteyn - Sidoti and Company Scott Zeller - Needham & Company Glenn Mattson - Ladenburg Thalmann.
Good day and welcome to the Progress Software Corporation Q3 Investor Relations Call. At this time, I would like to turn the conference over to Brian Flanagan. Please go ahead, sir..
Thank you, Shannon. Good afternoon everyone and thanks for joining us for Progress Software's fiscal third quarter 2015 earnings call. With me today is Phil Pead, President and Chief Executive Officer; Jerry Rulli, our Chief Operating Officer; and Chris Perkins, our Chief Financial Officer.
Before we get started, I'd like to remind you that during this call we may discuss our outlook for future financial and operating performance, corporate strategies, product plans, cost initiatives, or other information that might be considered forward-looking.
This forward-looking information represents Progress Software's outlook and guidance only as of today and is subject to risks and uncertainties. Please review our Safe Harbor statement regarding this information, which is available both in today's press release as well as in the Investor Relations section of our website at progress.com.
Progress Software assumes no obligation to update the forward-looking statements included in this call whether as a result of new developments or otherwise. Additionally, on this call we may refer to certain non-GAAP financial measures such as revenue, operating margin and diluted earnings per share.
You can find a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP numbers in our earnings release issued today. Today we published our financial press release on our website and also furnished the information to the SEC in an 8-K filing.
These documents contain the full details of our financial results for the fiscal third quarter 2015 and I recommend you reference these documents for specific details. Today's conference call will be recorded in its entirety and will be available via replay on our website in the Investor Relations section. With that, I'll now turn it over to Phil..
Thank you, Brian. Good afternoon everyone, and thank you for attending our third quarter earnings call. Our third quarter performance reflected continued positive momentum in key areas of our business.
Bookings from Telerik platform, which is our mobile AppDev platform and Sitefinity, our content management solution grew rapidly and as expected our data products had a strong quarter and achieved year-over-year revenue growth.
OpenEdge continued to see consistent growth from its ISV partners and sales to enterprise customers were particularly strong. Earnings exceeded our expectations even as we continue to invest in our future growth.
Organic growth was slightly lower than we expected due to challenges in a few areas and consequently our revenues were at the low end of our guidance range. To provide further details on our operational results I’d like to introduce Jerry Rulli, who is joining the call for the first time as our Chief Operating Officer.
Chris will then follow with a discussion of our financial results and I will be back after Jerry and Chris to provide more perspective on our business and the opportunities we see in our markets.
Jerry?.
Thank you, Phil, and good afternoon everyone. It’s a pleasure to join my first earnings call since becoming COO in July. As Phil mentioned in his remarks, we continue to see positive momentum in some key areas of our business during the third quarter, but there are also a few challenges that impacted our revenue.
Let’s take a look at each of our business units beginning with OpenEdge. On a constant currency basis, revenue was $81 million up 12% for the quarter compared to last year, including revenues from our acquisition of BravePoint. Excluding BravePoint revenue, organic growth was 7%.
Our partner business maintained its solid consistent growth and sales to enterprise customers were strong, particularly in APJ where we had a large license deal with an OpenEdge end user.
Maintenance renewal rates continue to be above 90% The overall revenue growth from our OpenEdge product line was strong, but we did face two challenges within the OpenEdge business unit during the quarter.
First, while we achieved moderate growth in Latin America on a constant currency basis, our performance was challenged in the quarter due to the difficult economic environment in Brazil, which negatively impacted our revenue. Second, sales of our Corticon product were also lower than expected.
While Corticon represents only small portion of our overall revenue, this is an area where we had projected growth in the quarter. Corticon is a market leading rules solution and we still have confidence in its strategic importance to both our OpenEdge modernization efforts and in next generation application development.
Corticon has had great success in the healthcare market, with 26 states utilizing Corticon technology with the complex rules required for their healthcare exchanges.
However, we realize that there would be fewer new opportunities in this market, and therefore one of our initiatives has been to expand our strategic partnerships with system integrators and consulting firms with the goal of broadening our sales effort and enabling us to sell Corticon as part of an overall solution instead of solely as a standalone product.
The pipeline of these partnership opportunities did not result in the revenue we were expecting. In retrospect, our expectations were a little aggressive, and while we are confident that this strategy will yield positive results, we have taken a more cautious approach to the timing of this strategy to deliver revenue growth.
BravePoint continues to shine not only with its modernization framework, which more and more partners are starting to take advantage of, but also with its managed database administration service offering. We added another five to six large accounts during the quarter and now maintain and manage the OpenEdge database of more than 100 end user clients.
Most of these clients are in the US, but we are now expanding in to EMEA and APJ as well and expect the growth of this offering to continue.
This service brings us closer to our customers helping to further solidify our relationships with them and providing visibility in to areas where they could potentially benefit from other solutions that we offer. Also revenue from our ISVs selling their solution in a SaaS model continued to grow.
Along with the revenue from BravePoint’s managed database service, this further increases the percentage of our revenue that is occurring in nature, a trend that we expect to continue in the future.
Turning to application development and deployment business unit, Telerik has another strong quarter in sales from our Pacific platform which includes Rollbase, DataDirect Cloud and Modulus, while still small continued to grow rapidly.
Application development revenue was $19 million compared to 300,000 in 2014, primarily due to revenue from the Telerik product lines. I still mention Sitefinity and Telerik platform are drawing high levels of interest from our customers, and both products showed strong bookings growth during the quarter.
Sales of development tools are market leading tools for creating elegant, intuitive user interfaces as well as our application lifestyle management and testing products were also solid. During the quarter we announced the latest release of Sitefinity CMS and DEC, Telerik’s web content management system and digital experience cloud.
This release features translation management, improved predictive and prescriptive analytics, mobile personalization and marketing campaign support. All of these enhancements are designed to help enterprises build their next generation websites, further engage with their customers and drive digital sales.
We are really very proud of what our teams are building. I’d like to highlight a significant win for Sitefinity CMS in the third quarter with American Financial Group, the Fortune 500 financial services and insurance firm. AFG has a large network of intranets and internal networks running primarily on Microsoft SharePoint.
Looking to create a new portal for its internal sites. AFG chose Sitefinity due to its easy integration with SharePoint along with its robust security and authentication features which met the confidentiality needs of insurance and financial services industries.
We are also starting to see the adoption for Telerik’s product in Latin America, where Telerik did not have sales resources prior to the acquisition.
As a result of progress of local presence coupled with expertise from Telerik, we have been able to establish some significant relationships within the region that will allow us to extend our sales approach.
We signed an agreement in Q3 with the Valmar Group, one of the top system integrators and consulting firms in Peru who will use an enterprise version of Telerik platform to host and develop mobile applications for large telecommunications firm.
We are extremely impressed with the functionality and capabilities of our mobile platform and plan to position it within the Fortune 500 companies they consult with in Peru. Finally, I’m pleased to announce that our data connectivity and integration business unit grew by 17% at constant currency in the third quarter.
We’ve really focused over the last year or so on getting our data business back to a growth mode, and we are now starting to see the results of those efforts. Due to our strong third quarter, we’ve now achieved growth in our DCI business unit on a year-to-date basis as well, and we are confident that this trend will continue during Q4.
Another positive indicator is the large increase in our backlog of multi-year license arrangements which has grown from 6.9 million in Q3 of last year to 19.8 million at the end of the current quarter, an increase of 12.9 million.
In early September, we released the latest version of DataDirect Cloud primarily focused on sales force Lightning Connect integration. Intuit recently implemented Lightning Connect with DataDirect Cloud in order to provide a single view of the customer to their sales and services reps through Salesforce.
The challenge for them was providing real time access for Salesforce running in the cloud to multiple on-premise applications and data residing behind their firewall.
Using Lightning Connect and DataDirect Cloud they were able to easily and securely connect their salesforce.com application to their data and are now providing real time view of their customer’s almost 10,000 internal users. In closing, I’m excited about the momentum in key areas of our business.
Our solutions are very competitive and I believe we have some of the most talented people in our industry. Together we remain very focused on meeting or exceeding the organic growth levels we are targeting. I look forward to meeting with many of you in person later this month at the upcoming investor and analyst day.
I’ll now turn it over to Chris to review in more detail our third quarter financial performance as well as our expectations with the fourth quarter and the full year. .
Thank you, Jerry, and good afternoon everyone. As we mentioned in our earnings release, we are on the low end of our revenue guidance range and exceeded our EPS guidance range for the third quarter. Total non-GAAP revenue for the quarter was 101 million compared to 79 million in Q3 2014.
This represents an increase of 27% at actual exchange rates and 36% on a constant currency basis. Non-GAAP revenue includes acquisition related revenue adjustments for Telerik, totaling $6 million.
As I discussed in our July guidance call and consistent with previous quarters, GAAP rules require us to eliminate certain pre-acquisition revenue classified by Telerik as deferred revenue. But we include this revenue in our non-GAAP quarterly reporting to better reflect our true business performance on a normalized basis.
On a year-to-date basis, our non-GAAP revenue was 32 million. Excluding the impact of BravePoint and Telerik acquisitions, third quarter revenue for our base business grew by approximately 7% at constant currency over the last year’s third quarter.
This was below the range that we had expected and consequently our total revenue was at the low end of our guidance range. As Jerry mentioned in his remarks, this lower than expected revenue was primarily due to difficult economic environment in Brazil as well as lower than expected sales of our Corticon product.
The total year-over-year revenue increase in the quarter was due to growth in both license and maintenance and services revenue. License revenue was 33 million in the third quarter, up 26% from Q3 2014 at actual exchange rates and 36% on a constant currency basis.
In addition to the incremental license revenue from Telerik, OpenEdge license sales were strong in the quarter, and included a large new license deal to a direct end user in our APJ region. Licenses for our DCI business unit also showed strong growth in line with our expectations.
Maintenance and services revenue was 68 million for the quarter, up 28% from last year at actual exchange rates and 36% on a constant currency basis. In addition to the incremental maintenance revenue from Telerik, maintenance renewals for our base business were well above 90% and maintenance revenue was in line with our expectations in the quarter.
We remain confident that we will continue to lever renewal rates in our base business above 90%. For our revenue by geography, North America was 56 million for the third quarter, up 56% to the same quarter a year ago.
On a constant currency basis, EMEA third quarter revenue was 35 million up 6%, Latin America revenue was 6 million, up 9%; and APJ revenue was 11 million, up 126%.
Excluding the acquisition of BravePoint and Telerik, North American revenue was up 3% to the third quarter of last year, while EMEA was down 3%; Latin America was up 5% and APJ was up 106%.
The increase in North America was due to the strong growth of our DCI business unit and the increase in the APJ was due to the large license deal to an OpenEdge end user during the quarter that I mentioned previously.
Non-GAAP operating margin in the third quarter was 31% 6 percentage points lower than the third quarter of 2014, but up 3 percentage points sequentially from our Q2 2015 margin of 28%.
As I discussed during our July guidance call, our operating margin for the third quarter was primarily impacted by currency translation and the acquisitions of BravePoint and Telerik, which were expected to be dilutive to our operating margin percentage in 2015, but accretive net of financing costs to our third quarter earnings per share.
Non-GAAP operating expenses were 69 million, up 19 million from a year ago and down sequentially from 73 million in the second quarter of 2015.
The net increase in operating expenses year-over-year is primarily the result of our acquisitions of BravePoint and Telerik, along with further prudent investments we are making to drive our growth strategy, partially offset by the impact of currency translation which benefits us on the expense side.
A net decrease of 4 million sequentially is due to our integration initiatives and margin improvement actions, as well as lower variable compensation. Our third quarter non-GAAP EPS was $0.39 flat when compared to the third quarter of 2014. This is primarily a result of the negative impact of currency translation.
This was above our guidance range of $0.35 to $0.38 primarily due to lower operating expenses.
As I discussed last quarter in our guidance call, because we had meaningful revenues denominated in foreign currencies, a significant strengthening of the US dollar during the latter part of 2014 and the first several months of fiscal 2015 created a strong headwind for us in 2015 related to currency translation of our non-US revenue.
Also because of meaningful portion of our cost base is denominated in foreign currencies, we get some translation benefit in our cost structure from the strengthening of the US dollar, which reduces the negative impact of currency translation on our operating impact.
This is a natural currency translation hedge in our business based on the global diversity of our cost structure. For our third quarter, the negative impact of currency translation on our non-GAAP results compared to Q3 2014 exchange rates was year-over-year revenues were negative 7.3 million, year-over-year earnings per share was negative $0.05.
Moving on to a few balance sheet and cash flow metrics, the company ended the quarter with a strong balance sheet [spending] cash, cash equivalents and short term investments of 218 million. After making scheduled principal payments during the quarter, our ending debt balance for Q3 is 144 million.
Net accounts receivable was 60.3 million in Q3, compared to 56.4 million at the end of Q2. Net DSO for the third quarter was 54 days, up four day sequentially and down 12 days from the prior year. Even though DSO was up sequentially, we are pleased with this DSO up.
Deferred revenue was 131 million at the end of the third quarter compared to 95 million in Q3 2014, an increase of 36 million. The increase was driven primarily as a result of the Telerik acquisition.
As a reminder, sales from our Telerik products and services are generally build and collected upfront, while revenue is recognized ratably over the term of the arrangements. Operating cash flow was approximately 19 million for the quarter compared to 26 million in Q3 2014.
Our year-to-date adjusted cash flow for 2015 is $74 million compared to 61 million in the first three quarters of 2014. We did not repurchase any shares in Q3, and as of the end of the quarter, we have approximately 15 million remaining under the 100 million share repurchase program authorized by our Board in January 2014.
We ended the quarter with just 1800 employees, an increase of approximately 800 employees versus Q3 2014 and flat sequentially versus Q2. The increase versus prior year is due to the incremental headcount associated with the Telerik and BravePoint acquisitions. Now I’d like to discuss our updated guidance for fiscal year 2015.
We expect non-GAAP revenue for fiscal year 2015 to be between 410 million and 415 million, representing a year-over-year increase of 23% to 25%. This includes a year-over-year negative currency impact on our 2015 revenue of between $25 million and $26 million based on current exchange rates.
Our previous annual revenue guidance was between 415 million and 425 million. The decrease in the top and bottom of the range is primarily due to decrease revenue expectations for the remainder of the year for Corticon, which Jerry discussed earlier during his remarks as well as a difficult economic condition in Brazil.
We are also taking a more cautious view due to the general economic uncertainty that is impacting other international markets. Our non-GAAP revenue guidance reflects our expectation that Telerik will grow at over 20% and the BravePoint will add approximately 6% growth to the OpenEdge business unit.
Excluding revenues from these recent acquisitions, we are lowering our expectations for organic growth from our base business to approximately 3% to 4% on a constant currency basis. Our previous estimate for organic growth was 6% to 7%. The decrease in organic growth is primarily due to the factors that I mentioned previously.
Our non-GAAP revenue guidance also includes an adjustment for acquisition related to revenue that I discussed earlier in my remarks. Our full year 2015 guidance includes our current estimate of approximately 35 million of non-GAAP revenue.
As the majority of Telerik agreements are for one year, we expect any non-GAAP revenues beyond 2015 to be minimal. We are increasing our expectations for our 2015 non-GAAP operating margins to 29%, an improvement to our previous guidance of 28%.
This margin improvement is based on lower operating expenses for the second half of the year due to cost improvements from our integration initiatives and margin improvement actions and lower than projected variable compensation expense.
For the decrease revenue expectation for the full year and based on our pay for performance compensation philosophy, we have adjusted our variable compensation expense levels accordingly.
Our full year operating margin guidance reflects our expectation to both the BravePoint and Telerik acquisitions will be accretive net of financing cost on a full year basis. Our operating margin guidance also includes investments we are making in our AppDev business unit to drive our growth strategy including a full year of Modulus expenses.
Based on the increase of our operating margin, we are increasing our non-GAAP earnings per share guidance from our previous guidance range of $1.45 to $1.52 to be increased to be between $1.51 and $1.55, which represents an increase of $0.03 to $0.06 from our prior guidance.
We continue to monitor exchange rates and based on current rates, we estimate the total year-over-year negative currency impact movement on our non-GAAP EPS guidance to be between $0.14 and $0.15, a $0.01 increase over our July guidance estimate.
We also announced today that our Board of Directors has authorized a new $100 million share repurchase program increasing our authorization to $115 million in total.
Consistent with our previous approach, because this authorization includes no specific commitments plans or timing for completing the buyback, our earnings per share guidance does not include the impact of any share repurchases in Q4.
Any share repurchases would have minimal impact on the earnings per share in the quarter in which they occur, but we will provide update each quarter on any repurchase activity and its impact on future earnings per share.
We expect our non-GAAP effective tax rate for the full year to be approximately 33% and our adjusted free cash flow to be between 92 million and 95 million, both unchanged from our prior guidance. For our fiscal 2015 fourth quarter, we expect revenue to be between 113 million and 118 million, a year-over-year increase of 15% to 21%.
Our expectation is that our base business excluding the BravePoint and Telerik acquisitions will grow by 2% to 5% in the fourth quarter at constant currency. Our guidance for the fourth quarter is also based on current exchange rates which has declined by approximately 14% versus the average rates for the fourth quarter of 2014.
It negatively impacts our revenues by approximately 6 million compared to prior year rates. We expect non-GAAP earnings per share of between $0.47 and $0.51 for the fourth quarter, flat than last year at the low end of the range and an increase of 9% versus this fiscal year 14 fourth quarter at the high end of the range.
This guidance reflects our expectation that the acquisitions of BravePoint and Telerik will be accretive net of financing costs for the quarter. A negative currency translation impact for Q4 is expected to be approximately $0.04 based on the current exchange rate environment compared to prior year rates.
In summary, while we had a solid Q3 we are taking a more cautious view of our organic revenue growth for Q4. We are seeing good year-over-year growth from our Core, OpenEdge and Data products and our acquisitions of BravePoint and Telerik are contributing positively to our strategy in financial performance.
While we expect a higher organic growth this year, our guidance of 3% to 4% organic revenue growth for the year is still a positive direction from 2014, which was flat year-over-year. We remain confident in our strategy and products and are confident that we can build momentum for higher organic revenue growth in 2016 and beyond.
With that I’d like to hand it back to Phil..
Thank you Chris. I’ve talked many times about our strength in on-premise application development through the OpenEdge platform.
Through our modernization strategy we’ve created a path for our partners to keep their applications competitive and relevant in the markets they serve, ensuring that OpenEdge will continue to serve as our foundation going forward. The applications that are being built using OpenEdge, I’ll refer to as systems of record.
These are generally back office systems like ERP applications or front office applications such as CRM and HR management. Through OpenEdge and DataDirect, we’ve been very successful in providing tools for developers to create and connect to these systems of record.
These key applications house critical business information and we believe they will remain in place for years to come and we will continue to invest in these solutions.
While we are confident that systems of record will continue to grow, which creates a solid foundation for us, our opportunity for accelerated growth and in acquiring net new customers lies in next generation applications development.
Enterprises are shifting a large portion of their development budget from their traditional systems of record to creating what I refer to as systems of engagement and systems of insight.
These next generation applications do not replace their existing systems of record; rather they operate on top of and interact with them using data from these structured systems to provide engaging experiences for their customers.
Customers in prospects want to interact digitally with companies on their own terms, in their own time and using their own devices. In response, businesses are increasingly shifting their focus to redefine the way they interact with their customers, primarily through websites or mobile apps again what I refer to as systems of engagement.
Enterprises also want to create systems of insight which allow them to personalize and optimize each customer’s experience by leveraging data from desperate data sources.
Enterprises that are not being discovered through the search process and who are unable to digitally engage and converting new customers to their products and services are severely disadvantaged in this rapidly changing digital world.
This digital transformation in a way is driving the demand for a new generation of web and mobile applications, and present significant additional opportunities for progress as we continue to build on our application platform as a service strategy.
Our acquisitions at Telerik has provided us with a fantastic opportunity to capitalize on these exciting new trends and application development.
IDC expects the mobile enterprise application development market to reach almost $4 billion by 2018, a 25% annual growth rate, and also estimate that the market for worldwide marketing technology will grow to more than $32 billion by that time.
This growth is fuelled by the digital transformation of the enterprise and what is required by the enterprise to respond to these digital needs are web and mobile application platforms together with data connectivity and rules that sit on top of their systems of record.
With our acquisition of Telerik we now have world class mobile and web app development platforms. We have leading user interface tools that help developers build engaging experiences.
Adding our data and rule solutions together with our rapid application development and comprehensive deployment platform provides us with what we believe our market leading capabilities. Based on these comprehensive capabilities, Gartner recently placed us in three of their magic quadrants.
To mobile the Telerik platform was placed in the challenges category of its magic quadrant from mobile application development platforms; a second year in a row that was included in their report.
Although our mobile AppDev platform was introduced only a year and a half ago, over 150,000 users have already created more than 37,000 apps using Telerik platform. This rapid developer adoption illustrates the competitive strength of our mobile offering.
Moving to web, in order to engage their customers in this digital world, enterprisers need to transform their websites in to digital sales channels helping to drive business results and increase customer engagement satisfaction and loyalty.
Sitefinity CMS is our platform for building next generation websites which are complex applications that leverage customer, product and employee data to create compelling personalized customer interactions online in real time. It also provides unmatched mobile support and customers love the elegant intuitive user experience.
Together, mobile and web are instrumental in building systems of engagement where digital business is focused today. The systems of insight which will increasingly become the focus in the future as businesses move through their digital transformations, we offer Sitefinity’s Digital Experience Cloud.
The Digital Experience Cloud provides an expanded 360 degree view of customer interactions by enabling the integration of third party data sources, allowing enterprisers to truly optimize and personalize the digital experience for each individual website visitor.
It also incorporates predictive and prescriptive analytics to recommend real time changes to content, helping businesses to increase conversions and drive digital sales through their websites. Sitefinity was included for the second year in a row in the niche category of Gartner’s magic quadrant for web content management.
But with a substantial up in to the right improvement in its positioning within the quadrant.
Gartner highlighted Sitefinity strength with larger multi-brand global organizations that require a centrally managed and secured infrastructure with the ability to deliver the best possible brand experience across web and mobile to consumers in multiple local markets. Telerik and Sitefinity operate in markets that are expected to grow rapidly.
Our pipeline creation for mobile development in Q3 was double what it was in Q2, and Sitefinity had its highest bookings quarter ever.
Our positioning in Gartner’s magic quadrants confirms that we have the ability to impact these growing markets going forward and the rapid growth in customer interest we are generating in both products are great indicators for our future. We now provide development technology across the full spectrum of applications that enterprisers need.
With OpenEdge we have proven solid technology for systems of record which will remain vital to enterprises in the future.
And for systems of engagement and insight the next generation of application development businesses can use the powerful features of our UI tools, Telerik platform and Sitefinity to develop the digital competency and engaging capabilities they need to succeed in the future.
We also offer world class data connectivity technology which companies need in order to share an integrate data across all of their systems and applications.
And finally, we can integrate rules to build very powerful web applications that enable enterprises to qualify mortgage applicants or to determine healthcare subsidies using just two of the many used cases we have encountered.
Not many companies can match the breadth of the solutions that Progress offers with a suite of products designed to work seamlessly together. Before I wrap up, I’d like to talk a few organizational changes we are making to ensure that we capitalize on the opportunities for growth that we see in our markets.
Last year we restructured our operations in to three distinct business units with a primary goal of providing more focused sales and go-to-market strategies for the different audiences for each of our products. This organization was designed to bring our businesses even closer to our customers.
After operating in a business unit structure for years, it’s clear that having dedicated sales, product management and product marketing teams for each unit has indeed provided increased focus and accountability and we’ve been pleased overall with the results the business units have delivered.
We also discovered over the last year that after our acquiring the Telerik asset and the need to support digital transformation in the market place, it is vital that we enable stronger cross collaboration among product management and sales and a tighter integration of the product management and product development teams while maintaining the product focus we achieve from our business units.
Appointing Jerry to the COO role in July and organizing our business units under one operational leader was the first step. Now we need to alight Jerry’s organization around a more cohesive audience centered approach and a more strategic product management organization.
To accomplish we’ve named Michael Benedict who has been the President of our DCI business unit to the newly created role of Chief Product Officer reporting directly to Jerry. All product marketing and product management resources will be aligned under Mike together with a solutions marketing team focused on our key audiences.
Within Mike’s organization we will have dedicated product teams for OpenEdge, Application Development and Data connectivity and integration. Each under the leadership of a general manager and we will continue to maintain the same segment reporting.
This will ensure alignment of our overall product marketing messaging, while ensuring that the specific go-to-market strategies for each of our business unit audiences remain focused and accountable.
To ensure a collaborative audience centered and establish tighter integration between our product management and development functions, both corporate marketing and product development will also report in to the Chief Operating Officer. And finally in Jerry’s sales organization, all sales resources will report directly in to our geographic regions.
We will however retain a dedicated business unit sales team for each of our products that have worked so well for us over the past year. Our administrative functions and the office of the Chief Technology Officer will remain centralized under my direction.
As a result of these changes we are eliminating the business unit President roles and as part of the reorganization, Karen Tegan Padir, who has been President of AppDev unit will be leaving progress. Karen has been a key contributor over the past few years and I’d like to thank Karen for her leadership and we wish her well in her future endeavors.
In summary, I am pleased to say that our future continues to be bright. We are positioned well to benefit from the future direction of applications development and I remain excited about our prospects for growth. I look forward to sharing more with you at our upcoming investor and analyst day in October and will not turn it over to Brian for the Q&A..
Thank you Phil. That concludes our formal remarks for today. I’d now like to open up the call to your questions. I ask that you keep your remarks to y our primary question and follow-up. I will now hand over to the operator to conduct the Q&A session. .
[Operator Instructions]. And we’ll take our first question from Steve Koenig with WedBush Securities. .
I want to dig into Telerik.
Can you remind me which of the solutions are licensed and not ratable or maybe hybrid you could sell either way?.
The only solution that is sold under a SaaS service model is the Telerik platform which both Jerry and Phil mentioned during the call. All of the other products are sold on a license basis that is recognized ratably. Both license and maintenance is recognized ratably over the term of the agreement, which is generally over a one year period. .
So Telerik revenue was down a bit quarter-on-quarter, and I’m wondering what was behind that? Was it certain products or reason that were weak?.
There was a portion of the deferred revenue that was added back it on a non-GAAP basis. A small portion in the second quarter that was related to the deliverable of a component of software technology. So there was a little bit of an uptick in Q2 which we expected in new based on the development schedule prior our acquisitions of Telerik.
In their contracts they did have, in some of their agreement a commitment for future technology deliverables, so revenue under GAAP is not allowed to be recognized in that. So that we stepped it up and back down to a normal level for Q3. .
If I could squeeze in one more follow-up and I will turn it over and get back in the queue. So Telerik, excluding that Q2 bump, it looks pretty flat from Q1 to Q2 to Q3, and so we are looking for growth in the order of 20%. Can you comment on seasonality or what the growth trend is here and why was it flat, I guess is the biggest single question. .
Well it depends on the timing of our bookings, and again that going in to the ratable revenue recognition. So we are seeing is Phil and Jerry commented on, we are confident number one, that we will achieve the 20% growth rate for 2015 full year, and we’ve seen an improvement or an increase in our bookings in the third quarter for those product line.
So I would say that there was some, I don’t want to say a pause or through the immediate point after the acquisition to rev up some of our bookings trajectory. So I expect that the booking trend will continue to be positive. .
Steve, I’ll tell you that Telerik solutions had the highest booking quarter in Q3. .
Can you may be give us a little color on the bookings trajectory either how it’s gone this year, how it’s comparing to prior to acquisition. .
Booking are up year-over-year versus prior to acquisitions period and again the trajectory has improved in the third quarter..
And we’ll take our next question from Greg McDowell with JMP Securities. .
I appreciate all the details on the change to the full year guidance, and I was hoping just breaking it down a little bit, you talked about Corticon, Brazil and some general conservatism because of the macro environment.
And when I think about it, it feels like one of those three things is in your control and maybe two of the three things are a little more macro related. So may be if we could start with what’s in your control, Corticon.
Does it feel like turning around that Corticon rules engine business is a short fix or what exactly needs to be done to sort of get that business back on track?.
This is Jerry. We have a tremendous amount of confidence in Corticon. I think if I look at Corticon, I would say we may have been a little more aggressive than we - looking back at the original estimate; it takes longer than we expected. We are investing in a channel relationship program for Corticon. It’s taking a little bit longer than we expected.
The pipeline has grown; we are starting to see some good activity in pipeline in CALA, Central and Latin America and also EMEA.
But the rules business by itself is a business where you need solutions and that’s where we’ve had the most success through system integrators and that’s where this is taking us a little bit longer in some pockets, but complete confidence.
We’ve also seen some new used cases in the area of Sitefinity which are pretty intriguing again through systems integrators. .
The Brazil commentary, is that more macro related or progress specific. Is there something going on with the ISVs down there that maybe we are not aware about. I would just love to hear a little bit more. .
Well, overall the Brazilian economy and the inflationary conditions down there have been pretty dramatic over the last couple of months I would say, and we are really starting to see it impacting the buying decisions for technology down there, which we have some very good distributor down there, very strong distributor who commands a very good market share.
But overall, the buying trends for technology in that market have slowed and we were expecting some real growth. We think our business year-over-year in Brazil will be down on a full year basis, and we are certainly expecting it to be strong based on our products, our customers, and the strength of those distributors. I don’t know if Jerry --. .
Yeah, actually Greg I was down there about two weeks ago to meet with our customers and our largest distributor, and I would say that it’s very disappointing given the momentum that Brazil had. We have a pretty big operation down there, and the team was excited about the solutions that we were selling.
And with what’s going on with the economy is definitely going to impact us for the year, it impacted us for the quarter. Although I will say that the distributor believes that in 2016 they are confident that the business will start climbing back up.
They also feel that the corruption that’s going on down there, it’s going to be really healthy for their political climate going forward. And so they were bullish on ’16, doesn’t help us with ’15, but I think it bodes well for our business down there in ’16..
I’ll squeeze one more in here. You’re hosting your first investor and analyst day in many years, and I don’t want you to preview too much.
But what can we expect coming out of that analyst day in a few weeks and love to hear any commentary you are willing to share today on sort of a sneak peak in to the 2016 operating plan or atleast hear a little bit about the philosophical approach to 2016. I’ll stop there..
I think it’s going to be a great day, and I would encourage everyone to come and visit us in New York. We are going to lay out the complete solutions strategy, some of which I alluded to today on the call.
I think we are also going to share with you metrics as it relates to the recurring revenues, SaaS metrics that we’ve built up over the past 18 months I would say.
So you will not only get to meet the team, understand I hope in a much greater detail of what we are doing in application development, why we think we’re going to win, but also get some metrics in the business that we haven’t previously shared..
And we’ll move to our next question from Mark Schappel with Benchmark..
Phil, starting with you R&D seemed down this quarter, and I was just wondering if there, it’s seemed down pretty significantly.
I was just wondering if you could go through to why that was?.
Well yeah, it was down certainly on a - you are talking about sequentially it was down. I would say that’s primarily related to one, our integration activity as we’ve brought our businesses together we found opportunities to leverage the strength of different areas of our R&D team. So I think that’s coming together very well.
And we’ve been able to actually drive some benefits to the organization down there. We have a meaningful amount of our development resources across the globe today. So we’ve got sizeable groups in certainly here in the United States, Sofia in India.
Those teams are producing very well, and you know on an actual reported basis, we get the benefit of certainly currency movement as the dollar strengthens. So we get that as well. .
Chris, also cash flow from operations down year-over-year, pretty meaningful as well.
Could you remind us was there something in the year ago quarter that maybe spiked it up a little bit more than normal or was there any particular reason why cash flow was down as much as it was year-over-year?.
I don’t recall anything specific from last year’s cash flow that spiked it up. And our DSOs are good. I looked at the fact that we are well ahead on a year-to-date basis of what our cash flow was on a year-to-date basis last year.
So a lot of times what happens is it depends on the timing of when we have our bookings take place for perpetual license deals that have normal payment terms. So sometimes if deals are closed at the end of a quarter, there’s still in receivables versus if they are sold in an earlier period in the quarter.
So it does bounce around but again I’m very pleased and confident in our cash flow. The fact that we are ahead meaningfully on a year-to-date basis versus last year, I think it’s very good. .
Just one final question here, share repurchases, no buybacks in the quarter, that’s an oddity for the company, any particular reason?.
Well, as you may recall, we were near the end of our 100 million authorization that was done back in January of 2014. We wanted to have a full review of our capital allocation strategy with our Board to fully assess after we had completed the acquisitions of Telerik and BravePoint.
We wanted to make sure that we had the opportunity to fully review our capital allocation strategy. And I was very pleased that our Board authorized an additional 100 million share repurchase. So really there was very little left and we wanted to take the opportunity to go ahead and have that interaction and assessment with our Board before.
So we paused until we had that review. .
And we’ll move to our next question from Stan Berenshteyn with Sidoti and Company..
Actually just a couple, can you may be provide some color looking at growth for data connectivity specifically, may be how much of the growth was coming clients versus new clients. .
It was in both areas. I think we achieved growth at both existing and new clients, but we certainly are adding new clients. I don’t know if you guys want to comment on any of those. .
We definitely added new clients in every quarter, this year and it’s not only adding new clients, it’s adding existing scope to a current client. They need access to different data sources and obviously we’ve established that relationship and we upsell that. So those are two aspects; upselling and also expansion.
But we are pretty happy with the increase in new accounts through the first three quarters of this year. This is Jerry by the way, sorry..
And just also from a capital allocation standpoint. You guys just announced a 100 million by you guys in doing buybacks. But is there any possibility of future acquisitions or is that kind of off the table. .
No, I think like any review of our capital allocation strategy stand, we would look at opportunistic acquisitions if we feel like we’ve got gaps in our strategic plan, roadmaps and so on clearly we are always accessing the opportunity to do that, and share buybacks and other ways that we can improve shareholder value.
So we still have a significant capacity to do that, but I think that you’ve seen in this management team the prudence necessary to execute on what we have. I think the assets we’ve got today are really, really competitive and I am looking forward to bringing them altogether and showing you the power of what we’ve got at our investor day. .
Great, and may be just one question on FX, do you guys employ any hedges real right now and if so to what capacity?.
We don’t hedge. We only hedge specific transactions, so we make sure that as we enter in to a transaction there will be currency moving - with a committed currency moving we actually do hedge that. So we don’t forward hedge or anything of that nature based on expectations.
So that’s really just a policy that we have and we always hedge our inner company balances. So don’t have any exposure on those areas..
And we’ll move next to Scott Zeller with Needham & Company..
Two questions, the first, I believe I heard for geographic performance, if you back that acquisitions I believe that EMEA was down 3% year-on-year.
Could you give us some color as to how that may have happened?.
Sure, I will and then Jerry or Phil can join in. First, again we saw that there were some markets I would say at the beginning. So that’s not meaningfully outside of our expectations. So we saw that there’s some market that were softer as we were going in to the year. So we made those appropriate expectations on our outlook.
Specifically in the market Jerry I don’t if there’s anything that you want to --..
Yeah I would say two things Scott, for the EMEA is up slightly, probably a couple of percentage points. So in the quarter I would say that OpenEdge had several transactions that actually slipped that would have made a difference in the outcome of Q2 in the quarter.
So I think that in effect I think would have showed more of a flat European performance year-over-year. But again for the quarter I mean. For the year, we are up in Europe by about a couple of percentage points. .
And then Chris could you help us again just reviewing the previous guidance around the acquired entities of Telerik and BravePoint. I believe there was an expectation of around $100 million for the fiscal year in the acquired revenue and how are we tracking towards that number. .
Well the guidance and the discussion that we had is, the Telerik business was at a rate trailing 12 months rate of just over $60 million around. When we acquired it was 60 million when we announced and by the time we closed a month or so later. And that’s where we said, that we expected a growth rate of over 20% off of that base.
And then we said the BravePoint business it adds about 6% in total to the OpenEdge business from a revenue growth perspective to just the pro forma impact of that acquisition. So it’s less than a 100, but I’d say our expectations for the growth and the performance of those business is on track and in line.
But as we also talked about those businesses, we are operating in a lower margin when we acquired them in the 10% range and also we need this pro forma again putting those business together again less than a 100 but approaching a 100. That’s what brought our margins down to the high 20% level from our 35% prior.
But again I’d just say that those businesses are performing from a revenue expectation and from a profitability expectation in line with our expectation. .
How would we explain the services in maintenance line being down a bit Q-to-Q when renewals on maintenance remain 90% or better?.
Are you looking at actual exchange rates Q-to-Q, I mean I’m --..
So if the currency - can you look out on a currency. I’m looking at as reported. .
I don’t see..
Or maybe I have that wrong one. .
Year-over-year it’s going to be currency, sequentially it’s right down..
Okay, I’ll take another look at that, thank you very much. .
I am sorry, sequentially it is down, I apologize about 1 million bucks or so. And I would say on the maintenance side it’s going to be based on some of the timing of the renewals, on the services side it depends on when engagements are completed and engaged upon. So there can be some watch away [sums] in that period. .
And one last question in data connectivity we’ve heard and seen that it’s been inconsistent yet you look very pleased with the performance this quarter and you mentioned the pipeline is something you are excited about.
How has it gone from a challenged unit to suddenly being a strong performer with a great pipeline?.
Well I think if Mike Benedict was here he would say it was superior leadership.
But I will tell you that the discipline that his leadership has brought and the way in which the team responded, the focus that we had on the customers building out the additional data sources that Jerry mentioned for upselling and then the other part of this if you remember Scott is the upfront revenue recognition that progress took in some of the long term deals.
We let those play out, and we let them go back to the way in which we had recognized that revenue in previous years, and that is allowing the term of the contract to dictate when we recognize the revenue.
So if it’s a three year contract, we’d recognize it over three years instead of recognizing a bigger portion in the first year and then the lower portion in the following years. And that helped build our backlog and gave us greater consistency and visibility to our business.
So it’s a combination of those things that has resulted in the growth rate that we are seeing today. I’ve always maintained I think and you’ve heard me in previous calls that I really like the data business.
It’s really strategic to our company and that we were always confident that we would be able to demonstrate that to you when we got our act together essentially, and that’s what we’ve done. I want to go back there on the previous question on the maintenance.
On one of the previous calls I talked about the fact that there was a piece of the deferred maintenance that was tied upon a deliverable for Telerik. So there was a piece that came through in Q2 that was based on the technology deliverables. So there was some revenue, it was being pinned up until that technology deliverables were made.
So that was the bump up in Q2 and therefore it caused the maintenance revenue to go down in Q3. Sorry I missed that. .
And we’ll move to our next question from Glenn Mattson with Ladenburg Thalmann..
Hi guys, I realize we are running late so I’ll try and be quick.
But just trying to balance the two negative factors, the Corticon and Latin America; I guess Corticon I think, is pretty small, like 5% of revenues, so I am wondering, was it more Brazil, and then also could you remind us what percent of Latin America is coming from Brazil?.
Sure. On the Corticon side, yes Corticon’s not a substantial of the overall revenue, but it is something that we were expecting some meaningful growth on a year-over-year basis from some license booking. And so again the quarter and the rest of the year we’ve softened that.
So it does impact our full year growth trajectory if that growth doesn’t come in. And then on Brazil, anybody have the percentage? 5% of - of total Brazil is about 5% of our total revenue..
Was there any one-off large deals in that growth this quarter?.
We always signed some large deals, by large deal it means it could be recognized over the course of a multi-year agreement. There is always some reasonable deals, but there was nothing unusual as far as the level of sizeable deals this quarter versus prior quarters. .
This is Jerry. We did sign what I would call this really solid high six figure, seven figure renewals that for us is a normal course of action as we renew these large software vendors. .
Did that provide a greater that usual bump in the third quarter or is that sustainable or?.
No it did not. It was not an unusual bump Glenn, we are just seeing - sorry Chris. .
I think again it was a very high level in the third quarter up in the high 20s on a constant currency basis. So that is not the level of growth that we are projecting that business to go on an annual, but we do think it’s a business that if we continue to execute it can be up to a 20% year-over-year growth business.
So it is a little bit higher this quarter, but again kind of in line with that we expected..
It did really help add to our backlog which we talked about earlier..
That’s right. .
And then a last real quick, I know you guys are talking about Telerik growing 20% again in the fourth quarter and that it had grown that fast in the past, but did we specifically say that did it grow that fast in Q3?.
20% growth..
Yeah, that’s kind of the bogey mark..
Probably it may have been a little bit below 20% as far as the quarter, but again we had good bookings and we are still pretty confident in the 20% for the year.
So again I talked a little bit about we had at the start of after we acquired the business, we had get the engine running and we are pleased with how the bookings are going - went in Q3 and have really gone for the whole year. But I think that this is just going to continue to be a good solid contributor. .
And there are no additional questions in the queue. I’ll turn the call back to the speakers for any additional or closing remarks..
Thank you all for joining the call today. As a reminder, we plan on releasing the financial results for our fiscal fourth quarter of 2015 on Tuesday January 12, 2016 after the financial markets close, and holding the conference call on the same day at 5:00 PM Easter Time.
As we announced today, we will be hosting an investor and analyst day on Tuesday, October 20, 2015 and we look forward to seeing many of you there. Have a good day..
That does conclude today’s conference. We thank you for your participation..