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BIRT > SEC Filings for BIRT > Form 10-Q on 8-May-2013All Recent SEC Filings

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Form 10-Q for ACTUATE CORP


8-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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, 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, 2012 as filed with the Securities and Exchange Commission on March 8, 2013.

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, Part I, Item 1A-Risk Factors in our Annual Report for the year ended December 31, 2012 and in other filings made by the Company with the Securities and Exchange Commission.

Overview

Actuate Software Corporation was incorporated in November 1993 in the State of California and reincorporated in the State of Delaware in July 1998 as Actuate Corporation ("We", "Actuate" or the "Company"). Actuate provides software and services to develop and deploy business analytics and customer communications applications. Applications built on ActuateOne®, a suite of integrated commercial products built around the open source BIRT (Business Intelligence and Reporting Tools) project with the Eclipse Foundation, deliver more business and consumer insights to more people than all Business Intelligence ("BI") companies combined. ActuateOne was created to ensure organizations are ready for the ongoing, exponential growth of Big Data and the proliferation of mobile touch devices. With ActuateOne organizations can design applications to provide all stakeholders, including employees, customers, partners and citizens, with content that they can easily understand, access and analyze relevant information to maximize revenue, cut costs, improve customer satisfaction, streamline operations, create competitive advantage and make better decisions. Actuate's goal is to ensure that all end users can seamlessly incorporate information and business analysis into their day-to-day activities and decision-making, opening up unexplored avenues for improving corporate performance.

Actuate's principal executive offices are located at the BayCenter Campus in San Mateo, California. Actuate's telephone number is 650-645-3000. Actuate maintains Web sites at www.actuate.com, www.birt-exchange.org and www.birt-exchange.com www.birtperformanceanalytics.com, www.xenos.com, www.birtondemand.com and www.quiterian.com. The information posted on our Web sites is not incorporated into this Form 10-Q.

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, professional services and training.

Despite the ongoing global economic uncertainty, we have continued to achieve profitability and positive cash flows. Nevertheless, our business model and longer-term financial results are not immune to a sustained economic downturn. For example, the recent domestic and global economic uncertainty resulted in reduced demand for information technology, including enterprise software and services. The direction and relative strength of the global economy continues to be uncertain and makes it difficult for us to forecast operating results and to make decisions about future investments. Information technology spending has historically declined as general economic and market conditions worsened. During challenging and uncertain economic times and in tight credit markets, many customers delay or reduce technology purchases. Contract negotiations may become more protracted or difficult if customers institute additional internal approvals for technology purchases or require more negotiation of contract terms and conditions. Such economic conditions could result in reductions in sales of our products, longer sales cycles, difficulties in collection of accounts receivable or delayed payments, slower adoption of new technologies, increased price competition and reductions in the rate at which our customers renew their maintenance agreements and procure consulting services.

Over the past year we have invested significant resources to expand our sales and engineering operations. In order to expand sales, we established additional foreign operations, expanded our channel management and support organizations, hired additional personnel, recruited additional resellers and/or increased the productivity of existing resellers.


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Factors that may affect our operating results include the possibility of a prolonged period of limited economic growth or possible economic decline in and adverse effects of the ongoing sovereign debt crisis in Europe, including its expected negative impact on European economic growth versus the rest of the world; disruptions to the credit and financial markets in Europe, the U.S., and elsewhere; contractions or limited growth in corporate spending; adverse economic conditions that may be specific to information technology and the software industry; and risk that the size of the market for our products will not support more sales professionals. Please also refer to our Risk Factor discussion in Item 1A.

We continue to monitor market conditions and may make adjustments to our business in order to reduce the adverse impact that changes to the economic environment could have on our business. We expect to continue to explore both organic and strategic growth opportunities. In particular, we may acquire companies or technology that can contribute to the strategic, operational and financial performance of our business.

The Company expects that it will continue to derive a significant portion of its revenues from financial services customers for the foreseeable future. Unfavorable economic conditions in recent years have adversely impacted IT spending in the financial services industry. If this trend continues into 2013, it will likely have a material adverse effect on the Company's business, financial condition and results of operations.

For the remainder of fiscal year 2013, we expect three additional trends to continue that would have a significant impact on the results of our operations. We currently believe that corporate IT budgets will grow only modestly if at all in fiscal year 2013, particularly among financial services companies in the United States and Western Europe. Secondly, corporations are reluctant to buy software from new vendors and we continue to witness corporations consolidating their business analytics and customer communications management software purchases among fewer suppliers. Finally, we expect to experience vigorous competition in the business analytics and customer communications management markets. Several of our competitors have released products that are marketed to be directly competitive with our offerings. As one of the few independent vendors remaining, Actuate faces competition from large and well-established vendors including Microsoft, SAP, Oracle and IBM, all of which have acquired business analytics and customer communications management products to add to their technology stacks. The existence of these competitive products may require additional sales and marketing efforts to differentiate our products, which could result in extended sales cycles.

For the remainder of fiscal year 2013, we will continue to pursue our strategic initiatives to improve revenue growth related to business analytics and customer communications management markets. These initiatives are as follows:

• Investing in BIRT-We are continuing to make a significant investment in BIRT. BIRT has become widely adopted by developers and continues to drive demand for our BIRT-based commercially available products in the ActuateOne suite. The BIRT project is a core, long-term initiative.

• 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.

• Selling to Line-of-Business Management-We are creating business analytics applications and software solutions to market to line-of-business managers. These offerings are in the areas of performance management, business analytics, customer self service and statementing. We hope these initiatives will result in increased license revenue over the medium-to-long term.

• Selling to Global 9000 Corporations in the Financial Services Sector-We continue 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 of the slow recovery in IT spending in this sector through 2013. However, we believe that once the issues in Financial Services are resolved, the industry will once again lead in the adoption of business analytics and customer communications management solutions.

• Building out and delivering on the roadmap of applying BIRT to additional data sources including hard to reach print stream data by investing in the development of BIRT based customer communications management offerings.

• Building out and delivering on the BIRT roadmap of customer communications management capabilities by integrating Xenos offerings into the iHub. The BIRT iHub ("iHub") provides content generation, management and distribution capabilities for a variety of different types of content produced by BIRT Designer, Xenos Enterprise Server and BIRT Analytics.

• Building out and delivering on the roadmap of BIRT Analytics capabilities by integrating Quiterian offerings into the iHub.

It is important to note that we are transitioning from our legacy e.Reports product suite to our new BIRT iHub product offering. As our legacy products age, we have experienced higher than normal decline rates which may continue for the foreseeable future. In the mean time, BIRT is expected to become the dominant contributor to license and maintenance revenues. As this transition progresses, we expect to see our maintenance renewal decline rate improve, eventually resulting in stronger maintenance growth rates in the future.


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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 possible 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, Judgments 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, assumptions and judgments that can have a significant impact on 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. We base our estimates, assumptions and judgments on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. On a regular basis we evaluate our estimates, assumptions and judgments and make changes accordingly. We believe that the estimates, assumptions and judgments involved in revenue recognition, allowances for doubtful accounts, stock-based compensation, accounting for income taxes, restructuring and integration costs, allocation of purchase price of acquisitions, and the impairment of goodwill, have the greatest potential impact on our Consolidated Financial Statements, so we consider these to be our critical accounting policies.

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, 2012, as filed with the SEC on Form 10-K on March 8, 2013.

Results of Operations



                                                                Three Months Ended March 31,
                                                            (in thousands except per share data)
                                                    2013             2012         $ Change        % Change
Financial summary
Total revenues                                   $   34,918        $ 34,836       $      82              -  %

Total operating expenses                             32,101          28,555           3,546              12 %

Income from operations                                2,817           6,281          (3,464 )           (55 )%
Operating margins                                         8 %            18 %           (10 )%          (56 )%

Net income                                       $    3,019        $  3,877       $    (858 )           (22 )%

Diluted net income per share                     $     0.06        $   0.07       $   (0.01 )           (14 )%

Shares used in diluted per share calculation         50,514          52,681

Financial Performance Summary for the quarter ended March 31, 2013:

• Increase in license revenues of 16% or approximately $2.1 million. This increase was the result of improved license sales in North America.

• The increase in license revenues was mostly offset by lower services revenues driven by lower maintenance renewals.

• Decrease in operating margins driven by higher operating expenses. The increase in operating expenses was mainly the result of a 14% addition to our average headcount as we acquired Quiterian in October 2012 and steadily increased our sales force over the last year.


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The following table sets forth certain consolidated statement of operations data as a percentage of total revenues for the periods indicated.

                                                           Three Months Ended
                                                                March 31,
                                                          2013            2012
     Revenues:
     License fees                                              44 %            38 %
     Services                                                  56              62

     Total revenues                                           100             100

     Costs and expenses:
     Cost of license fees                                       2               1
     Cost of services                                          14              15
     Sales and marketing                                       39              31
     Research and development                                  19              17
     General and administrative                                17              17
     Amortization of other purchased intangibles                1               1
     Restructuring charges                                     -               -

     Total costs and expenses                                  92              82

     Income from operations                                     8              18
     Interest income and other income /(expense), net           1              (1 )
     Interest expense                                          -               -

     Income before income taxes                                 9              17
     Provision for income taxes                                -                6

     Net income                                                 9 %            11 %

Revenues



                                             Three Months Ended
                                               (in thousands)
                                   March 31,           Variance        Variance
                               2013         2012          $'s             %
            Revenues
            License fees     $ 15,480     $ 13,392     $   2,088              16 %
            Services           19,438       21,444        (2,006 )            (9 )%

            Total revenues   $ 34,918     $ 34,836     $      82              -  %

            % of revenue
            License fees           44 %         38 %
            Services               56 %         62 %

            Total revenues        100 %        100 %

Our revenues are derived from license fees and services. Our services revenues include software maintenance and support, professional consulting and training. Our total revenues during the first quarter of 2013 remained unchanged compared the corresponding period in the prior year. However, we did experience an increase in license revenues driven mainly by license growth in North America. North America license revenues increased 43% or $3.8 million over the first quarter of 2013 driven by sales of our BIRT iHub products. We also closed three significant transactions with license component in excess of $1 million in North America, compared to one last year. This increase in license revenues was offset by lower services revenues, lower international license sales, and a decrease in sales of our legacy products as we transition to our newer BIRT iHub products.


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It is important to note that March 2013 marked the end of the quarterly revenue stream driven by our June 2010 agreement with Oracle. The terms of the agreement called for equal cash payments by Oracle to Actuate between June 2010 and March 2013 in accordance with a pre-determined schedule. Accordingly, over the past twelve quarters, Actuate has recognized approximately $1.3 million of quarterly revenues upon receipt of payment from Oracle.

Our services revenue decreased 9% or by approximately $2 million over the same quarter last year due mainly to a continued decline in the maintenance renewal rate, especially on our legacy e.Report Designer ("ERD") product line as we transition from the ERD product suite to our open source BIRT iHub product line.

Sales outside of North America were $7.1 million or 20% of total revenues for the first quarter of fiscal 2013, compared to $10.6 million, or 30% of total revenues for the first quarter of fiscal 2012. Fluctuations in foreign currency exchange rates did not have a significant impact on our revenues for the first quarter of fiscal 2013.

License fees. The increase in license revenues for the first quarter of fiscal 2013 over the same period in the prior year was due to improved sales in North America where we closed three significant transactions with license components in excess of $1 million, compared to one last year. Most of the increase in the first quarter license revenues was attributed to a strong demand for our customer communications management products which increased 81% or approximately $1.9 million over the first quarter of 2012. We also experienced an increase in our global BIRT iHub license revenues. These increases were partially offset by weaker software sales in Europe and Asia, which combined accounted for a decrease of approximately $1.7 million in license sales. The decrease in international software revenues in the first quarter of 2013 compared to the same period last year was mainly due to the timing of several large transactions recorded in Asia and Europe in the first quarter of 2012 that carried a significant license component. We also experienced a decrease in revenues associated with our e.Report business as we transition to newer BIRT iHub products. Foreign currency exchange gain or loss attributed to international license revenues was minimal during the first quarters of fiscal 2013 and fiscal 2012. At a consolidated level, we completed four license transactions greater than $1 million and closed transactions greater than $100,000 with 66 customers during the first quarter of fiscal 2013. During the same period last year we completed three license transactions greater than $1 million and closed transactions greater than $100,000 with 71 customers.

The following table represents our license revenues by region (in thousands):

                                                      Three Months Ended
                                                        (in thousands)
                                            March 31,            Variance       Variance
                                        2013         2012           $'s             %
    North America                     $ 12,740     $  8,891      $   3,849             43 %
    Europe, Middle East, and Africa      2,367        2,780           (413 )          (15 )%
    APAC                                   373        1,721         (1,348 )          (78 )%

    Total license revenue             $ 15,480     $ 13,392      $   2,088             16 %

    Percentage of total revenue             44 %         38 %

Services. Services revenue is comprised of maintenance and support, professional services, and training. The 9% decrease in services revenues was driven primarily by a recent trend of high decline in our maintenance renewal rate. Although the maintenance renewal decline rate improved during the first quarter of 2013, the cumulative impact effect of prior declines continue to depress the maintenance renewal revenues. Maintenance renewal revenues decreased approximately $2.3 million during the first quarter of 2013 due to the fact that during the first quarter of 2012 we secured two significant international transactions that included large back maintenance components.

It is important to note that we are transitioning from our legacy e.Reports product suite to our new BIRT iHub product offering. As our legacy products age, we have experienced higher than normal decline rates which may continue for the foreseeable future. In the mean time, BIRT iHub is expected to become the dominant contributor to license and maintenance revenues. As this transition progresses, we expect to see our maintenance renewal decline rate improve, eventually resulting in stronger maintenance growth rates in the future.


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The following table represents our total services revenues by region (in thousands):

                                                      Three Months Ended
                                                        (in thousands)
                                            March 31,           Variance       Variance
                                        2013         2012          $'s             %
    North America                     $ 15,081     $ 15,386     $    (305 )           (2 )%
    Europe, Middle East, and Africa      3,406        4,515        (1,109 )          (25 )%
    APAC                                   951        1,543          (592 )          (38 )%

    Total services revenue            $ 19,438     $ 21,444     $  (2,006 )           (9 )%

    Percentage of total revenue             56 %         62 %

By region, North America accounted for approximately 78% of the total services revenue in the first quarter of fiscal 2013 while Europe and Asia Pacific accounted for 18% and 4% of the total services revenues, respectively. For the same period last year, North America accounted for approximately 72% of the total services revenue while the Europe and Asia Pacific regions accounted for 21% and 7% of the total services revenues, respectively. Fluctuations in foreign currency exchange rates did not have a significant impact on our services revenue for the first quarter of fiscal 2013.

Costs and Expenses

Cost of license fees



                                                 Three Months Ended
                                                   (In thousands)
                                       March 31,        Variance       Variance
                                    2013      2012         $'s            %
             Cost of license fees   $ 573     $ 465     $     108             23 %
             % of license revenue       4 %       3 %

Cost of license fees consists primarily of product packaging, documentation, production costs and the amortization of purchased technology. The increase in cost of license fees in absolute dollars for the first quarter of fiscal 2013, compared to the corresponding period was due to the amortization of purchased technologies associated with the Quiterian acquisition which we completed in October 2012. We expect our cost of license fees, as a percentage of revenues from license fees, to remain between 3% and 5% of revenues from license fees for the remainder of fiscal 2013.

Cost of services

                                                 Three Months Ended
                                                   (In thousands)
                                       March 31,           Variance       Variance
                                   2013        2012          $'s             %
          Cost of services        $ 4,983     $ 5,257     $     (274 )           (5 )%
          % of services revenue        26 %        25 %

Cost of services consists primarily of personnel and related costs, share-based compensation, facilities costs incurred in providing software maintenance and support, training and consulting services, as well as third-party costs incurred in providing training and consulting services. The decrease in cost of services for the first quarter of 2013, compared to the same period last year was due to lower employee compensation costs as we reclassified our compliance sales group out of cost of services and into the sales and marketing group effective March 2013. The compliance group is an internal organization established to monitor and ensure that our customers remain in full compliance with the provisions of their respective licensing agreements with Actuate. The decrease in employee . . .

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