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PVSW > SEC Filings for PVSW > Form 10-Q on 1-Nov-2012All Recent SEC Filings

Show all filings for PERVASIVE SOFTWARE INC

Form 10-Q for PERVASIVE SOFTWARE INC


1-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The statements contained in this Report on Form 10-Q that are not purely historical statements are forward-looking statements within the meaning of
Section 21E of the Securities and Exchange Act of 1934, including statements regarding the Company's expectations, beliefs, hopes, intentions or strategies regarding the future. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "could," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential," or "continue" or the negative of such terms or other comparable terminology. These forward-looking statements involve risks and uncertainties. See "Risk Factors" in Part II, Item 1A of this Report on Form 10-Q for a more detailed discussion of these risks and uncertainties. Actual results may differ materially from those indicated in such forward-looking statements. We are under no duty to update any forward-looking statements after the date of this filing on Form 10-Q to conform these statements to actual results, except as required by law.

Our Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) includes the following sections:

• Executive Overview that discusses at a high level our business, our operating results and some of the trends that affect our business.

• Critical Accounting Policies and Estimates that we believe are important to understanding the assumptions and judgments underlying our financial statements.

• Results of Operations that begins with a table summarizing results of operations expressed as percentages of revenues for the periods presented, followed by a more detailed discussion of our revenue and expenses.

• Liquidity and Capital Resources which discusses key aspects of our statements of cash flows, changes in our balance sheets and our financial commitments.

You should note that this MD&A discussion contains forward-looking statements that involve risks and uncertainties. Please see the section entitled "Special Note Regarding Forward-Looking Statements" at the end of Item 1A for important information to consider when evaluating such statements.

You should read this MD&A in conjunction with the Consolidated Financial Statements and related Notes.

Executive Overview

Our Business

Pervasive is a global data innovation leader, delivering software to manage, integrate and analyze data, in the cloud or on-premises, throughout the entire data lifecycle. Our Pervasive PSQL database products generated approximately 57% of our revenue during fiscal year 2012. Channel adoption trends for version 11 of our Pervasive PSQL database have been good since its launch in September 2010. Pervasive PSQL v11 delivers improvements in performance and increased simplicity of development, deployment and ease of use, including enhanced digital license management and enhanced support for IPv6 and multi-core technologies. In spring 2012 we released the Pervasive PSQL Vx edition, with improved support and pricing for use in virtual environments.

Our integration products generated approximately 38% of our revenue during fiscal year 2012 and are well-received by our existing and new customers, including end users and commercial cloud and on-premises software developers alike. And a more recent product team, Pervasive BusinessXchange™, provides a fully managed B2B integration service that works with oil and gas trading partners to enable the electronic exchange of procurement and supply chain-related documents and transactions.

Our solid results in our core product lines allow us to continue to fund our commitment to innovation. We intend to continue to invest in innovation by allocating dedicated funds for research focused on new ways to serve our existing customers and attract new customers. Our ongoing innovation efforts have resulted in the introduction and further development of various new product and service offerings:


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• Pervasive Big Data and Analytics leverage patented Pervasive DataRush technology to deliver extreme performance and scalability for Big Data. Offerings such as Pervasive RushAnalyzer™, a data preparation and analytics application, fully leverage the parallel processing capabilities of multicore processors to deliver unmatched performance on a multicore server, SMP machine, cluster or Hadoop cluster to eliminate performance bottlenecks and enable rapid analytics on a very large dataset.

• Pervasive DataCloud, originally created as a multitenant Platform-as-a-Service (PaaS) for Pervasive's packaged integration solutions, today provides a platform for a range of partner- and Pervasive-designed cloud-based offerings. The Pervasive integration sales team increasingly monetizes the Pervasive DataCloud stack by leveraging it for strategic wins with integration partners.

• Pervasive Galaxy™ is a marketplace and community that sells products designed by Pervasive, partners and other third parties allowing applications, software and clouds to interact. It offers data integration-related solutions, applications, connectors, plug-ins and templates as well as community features to allow customers and Pervasive to collaborate on the products and services.

For more than twenty-five years, Pervasive products have delivered value to tens of thousands of customers worldwide, often embedded within partners' software, with breakthrough performance, flexibility, reliability and return on investment. In addition, significant portions of our database and integration flagship product lines are embeddable into commercial applications for sale predominantly through a well-developed channel of independent software vendors (ISVs), Software-as-a-Service (SaaS) vendors, value-added resellers (VARs) and system integrators.

On July 31, 2009, we completed the purchase of assets from Greenville, SC-based ChanneLinx, Inc., a Web-based electronic data interchange (Web DI) technology company, for total consideration of approximately $2.6 million in cash. The acquired business, which operates as Pervasive Business Xchange, is complementary to the Company's other products and operations.

We develop, market, sell and support our offerings worldwide through our principal office in Austin, Texas and our Greenville, South Carolina office and through international offices in Brussels, Frankfurt, Paris and London and a joint venture in Japan.

Our Operating Results

Our comparative results for the quarter ended September 30, 2012:

• Revenue was $12.7 million, compared to $11.7 million for the first quarter of last fiscal year.

• Net income was $0.4 million, or $0.03 diluted earnings per share, compared to net income of $0.2 million, or $0.01 diluted earnings per share, for the first quarter of last fiscal year.

We ended the first quarter of fiscal year 2013 with $42.8 million in cash and marketable securities.

Market Trends

We believe that the software markets as a whole are going through rapid change. The emergence of cloud-based infrastructure and applications is testament to the increasing demand for the scalability, economics and rapid deployment provided by the SaaS delivery model. Organizations increasingly demand software that provides ease of use, re-usability, interoperability with widely adopted technologies and the flexibility to be deployed on-premises or in the cloud, all in a cost-effective manner. In this environment, delivering flexibility and performance with high return on investment becomes increasingly critical.


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In addition, the rapid proliferation of commodity multicore hardware, along with exploding data volumes, provides opportunities for companies to leverage affordable servers and clusters of servers that have multiple cores in a single box to extract value from large volumes of data-but only if they have software that can effectively scale on multiple cores. The inevitable performance gains traditionally delivered by faster processors under "Moore's Law" now must rely on a new generation of infrastructure software that can scale on ever-updating multicore hardware platforms.

As these market disruption trends continue, we believe infrastructure software will be a key ingredient for all businesses as they seek to integrate and streamline their back-end systems and eliminate delays in the management and execution of critical processes. Infrastructure software includes, among other things, application development tools, integration tools and solutions, analytics, databases, and security solutions.

Pervasive also continues to see consolidation in markets where its data management and data integration offerings compete. In the database arena, Oracle acquired the open source Sun MySQL database while SAP acquired Sybase. For ISVs who want to avoid vendor lock-in with monolithic industry giants, Pervasive PSQL remains an attractive alternative. In the data integration market, IBM acquired CastIron Systems and Dell acquired Boomi, resulting in Pervasive being one of an increasingly small number of independent data integration providers. With a stable operating history, consistent profitability, aggressive investment in innovation, a commitment to channel and the ability to provide a best-of-breed alternative to large technology stacks, we believe Pervasive holds a unique position as a stable yet innovative go-to partner for both channel and enterprise customers.

We believe these trends will favor Pervasive as the market for data infrastructure software, in particular, is experiencing significant market disruption due to the high cost of many competing, more labor-intensive solutions. We further believe well-established technology leaders who develop deep relationships with channel partners and customers tend to prevail in cost-sensitive markets, and Pervasive, with its strengths in scalable data management, data integration, and scalable cloud delivery, is well-positioned to benefit from the trends in these markets. The economic environment remains uncertain, but Pervasive's financial stability, strong value proposition for customers and partners, and diverse vertical and geographic markets have enabled the company to sustain profitability even in the face of economic headwinds. We believe that if an economic recovery accelerates and strengthens, our reputation as an established vendor with highly reliable offerings positions Pervasive to prosper even further.

Pervasive has a strong portfolio that consists both of established products with strong channels and recurring revenue and of innovative, cutting-edge technology that leverages potential market disruptors such as multicore hardware, cloud-based delivery models and the avalanche of big data. With an 11-year history of profitability, Pervasive remains committed to investing in technology innovation to deliver offerings that differentiate us from competitors, stay current with market trends, and deliver compelling customer value, today and in the future.

Risks to our Success

Risks and uncertainties include, among others, our ability to attract and retain existing and/or new customers; our ability to issue new products or releases of solutions that meet customers' needs or achieve acceptance by the Company's customers; changes to current accounting policies which may have a significant, adverse impact upon the Company's financial results; the introduction of new products by competitors or the entry of new competitors; our ability to preserve our key strategic relationships; our ability to hire and retain key employees; and economic and political conditions in the U.S. and abroad. All of these factors, as well as those discussed in Item 1A-Risk Factors, may result in significant fluctuations in our quarterly operating results and/or our ability to sustain or increase our profitability.

Going Forward

In fiscal 2013, the Company is focused on:

• the continued marketing of our embedded database product, Pervasive PSQL v11, released in 2010, and Pervasive PSQL Vx, introduced in 2012 for customers deployed in highly virtual environments;


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• growing the sales of our integration product line both through direct sales and through highly leverageable indirect channels;

• growing the Pervasive managed services business and customer base;

• continuing the investment in new product and service innovation, including the further advancement of our innovation initiatives from fiscal 2012 and earlier: Pervasive BigData and Analytics (to deliver strategic advantage to customers around the globe for many types of data mining and predictive analytics applications), Pervasive DataCloud (to provide a scalable cloud-based platform for development and deployment of both Pervasive- and partner-developed on-demand services) and Pervasive Galaxy (to provide a marketplace and community that sells data integration-related products designed by Pervasive partners and other third parties allowing applications software and clouds to interact); and

• the continued focus on generating profitable results and positive cash flows, while we look for opportunities to reduce our issued and outstanding shares, putting to work our approved share repurchase program.

We remain committed to a strategic balance of investment in both our flagship and emerging products while also maintaining an intense focus on operating profitability.

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 accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Estimates and assumptions are reviewed periodically. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following represent our critical accounting policies:

• Revenue Recognition

• Sales Returns and Bad Debt Reserves

• Goodwill and Other Intangible Assets

• Stock-Based Compensation Expense

• Taxes

Revenue Recognition - We license our software through OEM license agreements with software developers, or ISVs and through shrink-wrap software licenses, sold through ISVs, VARs, systems integrators and distributors, or direct to end users. Revenues are recognized when persuasive evidence of an agreement exists, delivery of the product has occurred, no significant Company obligations with regard to implementation remain, the fee is fixed or determinable and collectability is probable. Revenues related to OEM license agreements involving nonrefundable fixed minimum license fees are generally recognized upon delivery of the product master or first copy if no significant vendor obligations remain. Per copy royalties related to OEM license agreements in excess of a fixed minimum amount are recognized as revenue when such amounts are reported to us. Revenue from post contract support and the right to receive unspecified upgrades is recognized ratably over the contract term. We generally provide telephone support to customers and end users in the 30 days immediately following the sale at no additional charge and at a minimal cost per call. We accrue the cost of providing this support. Revenue from consulting services and training is recognized when the related services are performed. We enter into agreements with certain distributors that provide for certain stock rotation and price protection rights. These rights allow the distributor to return product in a non-cash exchange for other products or for credits against future purchases. Revenue from shipping and handling is recognized at the shipping date. Shipping and handling costs are included in costs of product license revenues in the Consolidated Statements of Income.


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Where software licenses are sold with maintenance or other services, we allocate the total fee to the various elements based on the fair values of the elements. We determine the fair value of each element in the arrangement based on vendor-specific objective evidence ("VSOE") of fair value. VSOE of fair value is based upon the normal pricing and discounting practices for those products and services when sold separately and, for support services, is additionally measured by the renewal rate. If we do not have VSOE for one of the delivered elements of an arrangement, but do have VSOE for all undelivered elements, we use the residual method to record revenue. Under the residual method, the arrangement fee is first allocated to the undelivered elements based upon their VSOE of fair value; the remaining arrangement fee, including any discount, is allocated to the delivered element. If the residual method is not used, discounts, if any, are applied proportionately to each element included in the arrangement based on each element's fair value without regard to the discount.

Sales Returns and Bad Debt Reserves - We reserve the cost of estimated sales returns, stock rotation and price protection rights as well as uncollectible accounts based on experience. We evaluate quarterly the adequacy of the reserve for sales returns, stock rotation and price protection. Because these reserves are based on our judgments and estimates, our reserves may not be adequate to cover actual sales returns and other allowances. If our reserves are not adequate, our net sales could be adversely affected.

Goodwill and Other Intangible Assets - We assess whether goodwill and indefinite-lived intangibles are impaired on an annual basis and review for triggering events on an ongoing basis. Upon determining the existence of goodwill and/or indefinite-lived intangibles impairment, we measure impairment based on the amount by which the book value of goodwill and/or indefinite-lived intangibles exceeds its fair value. The fair value of an asset is the amount at which that asset could be bought or sold in a current transaction between willing parties in an orderly transaction between market participants. Additional impairment assessments may be performed on an interim basis if we encounter events or changes in circumstance that would indicate that, more likely than not, the book value of goodwill and/or indefinite-lived intangibles has been impaired.

Stock-Based Compensation Expense - We utilize the Black-Scholes option pricing model to estimate the fair value of employee stock option compensation at the date of grant, which requires the input of highly subjective assumptions, including expected volatility and expected life. Expected volatility is based on historical volatility, while the expected life is estimated to be 4.0 years based on historical trends. Further, we estimate forfeitures for options granted, which are not expected to vest. Changes in these inputs and assumptions can materially affect the measure of estimated fair value of our stock-based compensation. The estimated fair value is charged to earnings on a straight-line basis over the vesting period of the underlying awards, which is generally four years. The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options having no vesting restrictions and being fully transferable. Accordingly, our estimate of fair value may not represent the value assigned by a third-party in an arms-length transaction. While our estimate of fair value and the associated charge to earnings materially impacts our results of operations, it has no impact on our cash position.

Taxes - Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and net operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

We estimate our income taxes in each of the jurisdictions in which we operate as part of the process of preparing our consolidated financial statements. This process involves us estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes and net operating loss and tax credit carryforwards. These differences result in deferred tax assets and liabilities. We then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not more likely than not, we establish a valuation allowance. State tax credit carryforwards are subject to potential expiration if not utilized by certain dates in the future. The valuation allowance remaining at September 30, 2012 relates entirely to estimated expiration of state tax credit carryforwards prior to utilization.


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We are subject to income taxes in the United States and numerous foreign jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes and recording the related assets and liabilities. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. We are occasionally under audit by tax authorities in various jurisdictions. Although we believe we have appropriate support for the positions taken on our tax returns, we have recorded a liability for our best estimate of the probable loss on certain of these positions. We believe that our accruals for tax liabilities are adequate for all open years, based on our assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter, which matters result primarily from intercompany transfer pricing. Although we believe our recorded assets and liabilities are reasonable, tax regulations are subject to interpretation and tax litigation is inherently uncertain; therefore our assessments can involve both a series of complex judgments about future events and rely heavily on estimates and assumptions. Although we believe the estimates and assumptions supporting our assessments are reasonable, the final determination of tax audits and any related litigation could be materially different than that which is reflected in historical income tax provisions and recorded assets and liabilities. Based on the results of an audit or litigation, a material effect on our income tax provision, net income, or cash flows in the period or periods for which that determination is made could result. Due to the complexity involved, we are not able to estimate the range of reasonably possible losses in excess of amounts recorded.

Results of Operations

The following table sets forth for the periods indicated the percentage of
revenues represented by certain lines in our Consolidated Statements of Income:



                                                   Three months  ended
                                                      September 30,
                                                   2012             2011
            Revenues:
            Product licenses                            66 %           65 %
            Services and other                          34             35

            Total revenue                              100            100
            Costs and expenses:
            Cost of product license revenues             4              3
            Cost of service and other expenses          14             12
            Sales and marketing                         40             42
            Research and development                    26             26
            General and administrative                  10             15
            Unsolicited proposal costs                   1             -

            Total costs and expenses                    95             98

            Operating income                             5              2
            Interest and other income, net              -              -
            Income tax provision                        (1 )           -

            Net income                                   4 %            2 %

Revenues

Revenue in fiscal year 2012 from our embedded database product, Pervasive PSQL, was consistent with fiscal year 2011. Our embedded database and related products represented approximately 57% of our revenue in fiscal year 2012. Our integration product revenue in fiscal year 2012 grew 4% over fiscal year 2011 and represents approximately 38% of our total revenue. A reduction in our embedded database business, or our inability to grow our integration products business, could have a material adverse effect on our business, operating results and financial condition.


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Our revenues were $12.7 million in the three months ended September 30, 2012, compared to $11.7 million reported for the comparable period in the prior fiscal year. Our product license revenues were $8.4 million in the three months ended September 30, 2012, representing an increase from $7.6 million reported for the comparable period in the prior fiscal year due primarily to an increase in license revenues for Pervasive PSQL. Our service and other revenues were $4.3 million in the three months ended September 30, 2012, compared to $4.1 million for the comparable period in the prior fiscal year.

Licenses of our embedded database software operating on Microsoft based operating systems continue to represent more than 90% of our database product license revenues. We expect the percentages of our revenues attributable to licenses of our software operating on particular platforms will change from time to time. We cannot be certain our revenues attributable to licenses of our software operating on Microsoft based, or any other operating system platform, will grow in the future.

International revenues, consisting of all revenues from customers located outside of North America, were $4.4 million and $5.2 million in the three months ended September 30, 2012 and 2011, representing 35% and 44% of total revenues, respectively. We expect international revenues will continue to account for a significant portion of our revenues in the future.

Costs and Expenses

Cost of Product License Revenues. Cost of product licenses consists primarily of the cost to manufacture and fulfill orders for our shrink-wrap software products, payment of license fees for third-party technologies embedded in our products and amortization of purchased technology. Cost of product license revenues was $0.4 million and $0.4 million in the three months ended September 30, 2012 and 2011, representing 4% and 3% of total revenues, respectively. We anticipate that cost of product license revenues in the near term will be consistent with the costs incurred during the quarter ended September 30, 2012.

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