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| ACTU > SEC Filings for ACTU > Form 10-Q on 8-Aug-2008 | All Recent SEC Filings |
8-Aug-2008
Quarterly Report
The following information should be read in conjunction with the historical financial information and the notes thereto included in Item 1 of this Quarterly Report on Form 10-Q and the consolidated financial statements and notes thereto and the related Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2007 as filed with the Securities and Exchange Commission on March 17, 2008.
The statements contained in this Form 10-Q that are not purely historical are forward looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, including statements regarding Actuate's expectations, beliefs, hopes, intentions, plans or strategies regarding the future. All forward-looking statements in this Form 10-Q are based upon information available to Actuate as of the date hereof, and Actuate assumes no obligation to update any such forward-looking statements. Actual results could differ materially from Actuate's current expectations. Factors that could cause or contribute to such differences include, but are not limited to, the risks discussed in Part II, Item 1A-Risk Factors of this Form 10-Q, and in other filings made by the Company with the Securities and Exchange Commission.
Overview
Actuate Corporation ("We", "Actuate" or the "Company") was incorporated in November 1993 in the State of California and reincorporated in the State of Delaware in July 1998. Actuate provides software and services to develop and deploy Rich Internet Applications ("RIA") that deliver rich interactive content that improve customer loyalty and corporate performance. Applications built on Actuate's open source-based platform provide all stakeholders inside and outside the firewall, including employees, customers, partners and citizens with information that they can easily access and understand to maximize revenue, cut costs, improve customer satisfaction, streamline operations, create competitive advantage and make better decisions. Our goal is to ensure that all users can use decision-making information in their day-to-day activities, opening up completely new avenues for improving corporate performance. Actuate's principal executive offices are located at 2207 Bridgepointe Parkway, San Mateo, California. Actuate's telephone number is 650-645-3000. Actuate maintains a Web site at www.actuate.com. The information posted on the Web site is not incorporated into this Annual Report.
We began shipping our first product in January 1996. We sell software products through two primary means: (i) directly to end-user customers through our direct sales force and (ii) through indirect channel partners such as OEMs, resellers and system integrators. OEMs generally integrate our products with their applications and either provide hosting services or resell them with their products. Our other indirect channel partners resell our software products to end-user customers. Our total revenues are derived from license fees for software products and fees for services relating to such products, including software maintenance and support, consulting and training.
Our total revenues for the second quarter of fiscal year 2008 were $34.6 million, almost unchanged from levels reported in the second quarter of fiscal year 2007. Our license revenues decreased by approximately 13% or $1.8 million, primarily due to unfavorable economic conditions in late fiscal 2007 that continue to adversely impact the financial services industry; a key component of Actuate's customer portfolio. This decrease in license revenue was equally offset by an 8% increase in our services revenues, driven mainly by maintenance and support revenues which continues to grow as our installed base increases. For the second quarter of fiscal year 2008, we reported net income of $2.9 million or $0.04 per diluted share compared to a net income of $3.4 million or $0.05 per diluted share in the second quarter of fiscal year 2007. This marginal decrease in net income was driven primarily by a 20% decrease in income from operations led by slowing North America sales revenues and was partially offset by a lower provision for income taxes due to a decrease in income before taxes over the same period last year. Our total headcount at the end of the second quarter of fiscal year 2008 was 577 compared to 597 employees at the end of second quarter of last year.
We currently anticipate that our total revenues in fiscal year 2008 will remain relatively consistent with those levels experienced in fiscal year 2007 while fiscal year 2008 license revenues may decrease by as much as 10% from fiscal year 2007 levels.
During fiscal year 2008, we expect three additional trends to have significant impact on the results of our operations. We currently believe that corporate IT budgets will grow only modestly if at all in the fiscal year 2008 particularly among financial services companies in the United States. Second, corporations are reluctant to buy software from new vendors and we continue to witness corporations consolidating their Business Intelligence, RIA and Performance Management software purchases into fewer suppliers. Finally, we expect to experience vigorous competition in the RIA market. Several of our competitors have released products that are marketed to be directly competitive with our RIA offerings. The existence of these competitive products may require continued sales and marketing efforts to differentiate our products, which could result in extended sales cycles. We believe that competition in the RIA market will be vigorous in the near future.
For fiscal year 2008, we will continue to pursue the following strategic initiatives:
• Selling to IT Management-We are re-focusing our sales efforts on selling our products to IT managers who we believe generally recognize the technical advantages of our products. We hope this initiative will result in increased license revenue in the short term.
• Solution Selling to Line-of-Business Management-We are creating Performance Management applications and software solutions to market to line-of-business managers. These offerings are in the areas of performance management and customer self service reporting. We hope these initiatives will result in increased license revenue over the medium-to-long term.
• Investing in BIRT-We are continuing to make a significant investment in creating a new open source business intelligence and reporting tool, known as BIRT. We hope that BIRT will eventually become widely adopted by Java developers and will create demand for our other commercially available products. The BIRT project is a long-term initiative.
• Selling to Global 9000 Corporations in the Financial Services Sector-We are continuing to focus on selling our products to Global 9000 financial services companies in an effort to increase our substantive market share in this sector. We anticipate a negative impact to our operating results in fiscal 2008 as a consequence of the ongoing credit crunch on the financial services sector in 2008. However, we believe that once the short term issues in financial services are resolved, the industry will once again lead in the adoption of RIA both inside and outside the firewall.
• Delivering a Highly Differentiated Performance Management Offering-We intend to combine Actuate Performancesoft Performance Management applications and Actuate's RIA-ready information platform to provide capabilities for distributing accountability throughout the enterprise.
As of June 30, 2008, we invested approximately $16.5 million in Auction Rate Securities "ARS" at par value. ARS are investments with contractual maturities of up to 40 years. Our ARS are in the form of municipal bonds, secured by a pool of student loans or collateralized debt obligations whose interest rates are subject to reset through an auction process. At the end of each reset period, investors can sell or continue to hold the securities at par. The ARS held by us are primarily backed by highly rated municipal issuers. During the first half of fiscal 2008, substantially all auctions for ARS have "failed" as a result of the negative overall capital market conditions, meaning that there is not enough demand to sell the securities at auction. We do not believe these failures are related to a credit issue, but rather are caused by a lack of liquidity. In the event we need to access the funds associated with failed auctions, such funds are not expected to be accessible until a successful auction occurs, the issuer redeems the issue, a buyer is found outside of the auction process or the underlying securities have matured.
At June 30, 2008, our entire ARS investment balance is classified as non-current investments in our condensed consolidated balance sheet because of our inability to determine when our investments in ARS will settle. Typically the fair value of ARS investments approximates par value due to frequent interest rate resets through the auction process. While we continue to earn interest on our ARS investments at the maximum contractual rate, these investments are not currently trading and therefore do not currently have a readily determinable market value. Accordingly, the estimated fair value of ARS no longer approximates par value. We have used a discounted cash flow model to determine the estimated fair value of our investment in ARS as of June 30, 2008. The assumptions used in preparing the discounted cash flow model include estimates for interest rates, timing and amount of cash flows and expected holding periods of the ARS. Based on this assessment of fair value, as of June 30, 2008 we determined there was a decline in the fair value of our ARS investments of $929,000. We determined that 100% of this impairment was temporary and therefore the loss is reflected in the other comprehensive income section of stockholders' equity. As of June 30, 2008, the fair value of our investments in ARS totaled $15.5 million. For further discussion on ARS investments please refer to note 3 of the Notes to Condensed Consolidated Financial Statements.
If the global credit and financial markets continue to deteriorate, our investment portfolio may be impacted and we could record further impairment in the fair value of our ARS investments, or determine that additional investments are other-than-temporarily impaired. This could materially adversely impact our results of operations and financial condition.
We have a limited ability to forecast future revenues and expenses, thus the prediction of future operating results is difficult. In addition, historical growth rates in our revenues and earnings should not be considered indicative of future revenue or earnings growth rates or operating results. There can be no assurance that any of our business strategies will be successful or that we will be able to achieve and maintain profitability on a quarterly or annual basis. It is likely that in some future quarter our operating results will be below the expectations of public market analysts and investors, and in such event the price of our common stock could decline.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions.
Our significant accounting policies are described under Item 7 to the annual consolidated financial statements as of and for the year ended December 31, 2007, as filed with the SEC on Form 10-K on March 17, 2008.
In September 2006, the FASB issued SFAS No. 157 ("SFAS 157"), "Fair Value Measurement". SFAS 157 defines fair value, establishes a framework for measuring fair value, and also expands disclosures about fair value measurements. SFAS 157 is effective for periods beginning after November 15, 2007. The Company adopted this standard with respect to its financial assets effective January 1, 2008. In February 2008, the FASB adopted FASB Staff Position SFAS No. 157-2 - "Effective Date of FASB Statement No. 157" delaying the effective date of SFAS 157 for one year for all non financial assets and non financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). See Footnote 3 of the Notes to the Condensed Consolidated Financial Statements for further details regarding the impact of our adoption of SFAS 157 for financial assets. During the first half of fiscal 2008, we changed our Critical Accounting Policies as a result of the implementation of SFAS 157.
For further information about our significant accounting policies, see the discussion under Item 7 to the annual consolidated financial statements as of and for the year ended December 31, 2007, as filed with the SEC on Form 10-K on March 17, 2008.
Results of Operations
The following table sets forth certain consolidated statement of income data as
a percentage of total revenues for the periods indicated.
Three Months Ended Six Months Ended
June 30, June 30,
2008 2007 2008 2007
Revenues:
License fees 36 % 41 % 31 % 39 %
Services 64 59 69 61
Total revenues 100 100 100 100
Costs and expenses:
Cost of license fees 1 1 1 1
Cost of services 18 18 19 19
Sales and marketing 39 40 41 40
Research and development 17 16 18 17
General and administrative 13 12 15 13
Amortization of other purchased intangibles 1 1 1 1
Restructuring charges 1 - 1 -
Total costs and expenses 90 88 96 91
Income from operations 10 12 4 9
Interest and other income, net 1 2 - 2
Income before income taxes 11 14 4 11
Provision (benefit) for income taxes 3 4 (5 ) 4
Net income 8 % 10 % 9 % 7 %
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Revenues
Our revenues are derived from software license fees and services, which include software maintenance and support, consulting and training. Total revenues of $34.6 million for the quarter ended June 30, 2008 remained relatively unchanged from the corresponding quarter in the prior year. Our license revenues decreased by approximately 13% or $1.8 million primarily due to unfavorable economic conditions in late fiscal 2007 that continue to adversely impact the financial services
industry; a key component of Actuate's customer portfolio. This decrease in license revenue was equally offset by an 8% increase in our services revenues, driven mainly by maintenance and support revenues. This increase was primarily attributable to normal growth in support from our installed base.
Sales outside of North America increased by 15% from $8.2 million in the second quarter of fiscal year 2007 to approximately $9.5 million in the second quarter of fiscal year 2008. These international revenues represented 27% of our total revenues versus 24% in the same period last year. Approximately $450,000 of the increase in total revenues was due to the favorable impact of exchange rate fluctuations, primarily on Euro-based and British Pound-based transactions.
For the first half of fiscal year 2008, total revenues were $64.1 million, a 4% or approximately $2.5 million decrease over the same period last year. This decrease was primarily due to slowing license revenue growth in North America caused by weak macro economic conditions. This decrease in license revenues was partially offset by a 9% or $3.6 million increase in services revenues. This increase was primarily attributable to normal growth in support for our installed base. Total revenues derived from international regions totaled $19.5 million in the first half of fiscal year 2008 compared to approximately $16.6 million in the first half of fiscal year 2007. For the first six months of fiscal year 2008, we derived 30% of our total revenues from sales outside of North America versus 25% in the same period last year. During the first half of fiscal 2008, exchange rate fluctuations on foreign revenue transactions positively impacted our total revenue growth by approximately $830,000 when compared to the same period in the prior year.
During the first half of fiscal 2007, we booked an out of period adjustment related to deferred revenue that should have been recognized in the third quarter of fiscal 2006. As a result of this out of period adjustment, total revenues for the first six months of fiscal 2007 were positively impacted by approximately $250,000 while net income was increased by approximately $147,000. This out of period adjustment had no impact to our basic and diluted per share results for the first six months of 2007.
We currently anticipate that our total revenues in fiscal year 2008 will remain relatively consistent with those levels experienced in fiscal year 2007 while fiscal year 2008 license revenues may decrease by as much as 10% to 15% from fiscal year 2007 levels.
There was one customer that accounted for more than of 10% of our total revenues for both quarters ended June 30, 2008 and June 30, 2007.
Three Months Ended Six Months Ended
(In thousands) (In thousands)
June 30, June 30,
Variance Variance Variance Variance
2008 2007 $'s % 2008 2007 $'s %
Revenues
License fees $ 12,289 $ 14,096 $ (1,807 ) (13 )% $ 19,899 $ 26,086 $ (6,187 ) (24 )%
Services 22,311 20,604 1,707 8 % 44,222 40,589 3,633 9 %
Total Revenues $ 34,600 $ 34,700 $ (100 ) - % $ 64,121 $ 66,675 $ (2,554 ) (4 )%
% of Revenue
License fees 36 % 41 % 31 % 39 %
Services 64 % 59 % 69 % 61 %
Total Revenues 100 % 100 % 100 % 100 %
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License fees. The 13% decrease in license revenues for the second quarter of fiscal year 2008 over the same period in the prior year was primarily due to weak macro economic conditions in late fiscal 2007 that continue to adversely impact the financial services industry; a key component of Actuate's customer portfolio. We experienced most of this weakness in North America where software sales declined by 18% or approximately $2.0 million during the second quarter of 2008 when compared to the second quarter of fiscal 2007. Despite this weakness in North America, we managed to close over 70 transactions in excess of $100,000 and one transaction in excess of $1.0 million during the second quarter of fiscal 2008. One of these transactions accounted for over 10% of our total reported software sales for the second quarter of 2008. This compared to three sales transactions individually greater than $1.0 million in the same period last year. The number of orders greater than $1.0 million has historically ranged from none to three per quarter. We do not expect to rely on any one customer for our future business.
The following table represents our license revenues by region (in thousands):
Three Months Ended Six Months Ended
(In thousands) (In thousands)
June 30, June 30,
Variance Variance Variance Variance
2008 2007 $'s % 2008 2007 $'s %
License fees
North America $ 8,915 $ 10,890 $ (1,975 ) (18 )% $ 13,534 $ 19,619 $ (6,085 ) (31 )%
Europe 3,267 3,072 195 6 % 5,224 5,860 (636 ) (11 )%
APAC 107 134 (27 ) (20 )% 1,141 607 534 88 %
Total License $ 12,289 $ 14,096 $ (1,807 ) (13 )% $ 19,899 $ 26,086 $ (6,187 ) (24 )%
% of total revenue 36 % 41 % 31 % 39 %
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For the second quarter of fiscal 2008, Europe was the only region that reported an increase in quarterly license revenues over the second quarter of fiscal 2007. Of this increase, approximately $450,000 was attributed to foreign exchange gains. By region, North America accounted for approximately 73% of the total license revenue while Europe and Asia Pacific regions combined accounted for 27% of the total license revenues for the second quarter of fiscal 2008. For the same period last year, North America accounted for approximately 77% of the total license revenue while the Europe and Asia Pacific regions combined accounted for 23% of the total license revenues.
The 24% decrease in license revenues for the six months ended June 30, 2008 was primarily attributed to weak macro economic conditions in North America. As a result, our license sales were adversely impacted by 31% or approximately $6.1 million over the same period last year.
Three Months Ended Six Months Ended
(In thousands) (In thousands)
June 30, June 30,
Variance Variance Variance Variance
2008 2007 $'s % 2008 2007 $'s %
Services Revenues
Professional services $ 3,663 $ 3,870 $ (207 ) (5 )% $ 7,837 $ 7,697 $ 140 2 %
Maintenance and support 18,648 16,734 1,914 11 % 36,385 32,892 3,493 11 %
Total Services $ 22,311 $ 20,604 $ 1,707 8 % $ 44,222 $ 40,589 $ 3,633 9 %
% of Services Revenue
Professional services 16 % 19 % 18 % 19 %
Maintenance and support 84 % 81 % 82 % 81 %
Total Services 100 % 100 % 100 % 100 %
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Services. The 8% increase in services revenues was driven by the growth in our maintenance and support revenues, which continued to increase in the second quarter of fiscal year 2008. The primary contributor was continued growth in our installed base of customers under maintenance plans. This increase was offset by a 5%, or an approximately $200,000 decrease in our professional services and training revenues. The decrease in professional services revenues was primarily the result of the increase in the adoption of BIRT-based projects by our customers which do not result in professional service revenues to the same extent as the Company's traditional designer products. As a result, we experienced a 9% decrease in our services headcount in the second quarter of fiscal 2008 versus the same period last year. The success of the Company's BIRT initiative therefore results in a downward trend in the Company's revenue from professional services, as seen during the second quarter of this year.
The continued growth in services revenues for the six months ended June 30, 2008 was primarily attributed to the increase in our maintenance and support revenues driven by a continued growth in our installed base of customers under maintenance plans. We also experienced a modest increase in our professional services revenues in the first six months of fiscal 2008 as compared to the corresponding period in the prior year. Our revenue growth from professional services has slowed and has generally decreased over time as our customers have increased the adoption of BIRT-based projects which consequently has resulted in lowered demand for our professional services.
By region, Europe accounted for the highest increase in services revenues for the three and six months ended June 30, 2008. These increases were due primarily to the growth in our installed base of customers under maintenance plans in that region. During the three and six months of fiscal 2008, exchange rate fluctuations on foreign revenue transactions positively impacted our services revenue growth by approximately $190,000 and $490,000, respectively when compared to the same period in the prior year.
The following table represents our services revenues by region (in thousands):
Three Months Ended Six Months Ended
(In thousands) (In thousands)
. . .
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