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BIRT > SEC Filings for BIRT > Form 10-Q on 8-May-2014All Recent SEC Filings

Show all filings for ACTUATE CORP

Form 10-Q for ACTUATE CORP


8-May-2014

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, 2013 as filed with the Securities and Exchange Commission on March 7, 2014.

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, 2013 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 enabled solutions help its enterprise customers maximize revenue, cut costs, create more effective customer communications, streamline operations and create competitive advantage. Applications built using Actuate's products have delivered personalized analytics and insights to more than 200 million people. More than 3.5 million developers have downloaded open source BIRT, the open source Eclipse interactive development environment (IDE)-based project founded and co-led by Actuate. Many of these BIRT developers use commercial, value-added products from Actuate to enhance and deploy BIRT-based applications to deliver personalized analytics and insights to customers, partners and employees.

Enterprises use Actuate products to create customer-facing, Big Data analytics and customer communications management (CCM) applications with intuitive and visually-engaging experiences that provide unique insights from multiple data sources, delivered securely across high volume of users and devices with proven scalability to millions of users. Developers use BIRT and BIRT iHub™, Actuate's commercial deployment platform for BIRT-based applications, to develop and deploy high scale applications that deliver information personalized for each user to enrich the brand experience and gain competitive advantage. BIRT iHub further ensures organizations can gain effective insights from Big Data and take advantage of mobile touch devices. Actuate's BIRT Analytics™ delivers self-service predictive analytics to enhance customer engagement from Big Data. BIRT Content Services™ empowers ECM architects to easily transform, personalize and archive high volume content. Actuate's goal is to ensure that its customers can seamlessly incorporate information and business analysis into their day-to-day activities and decision-making, enabling organizations to explore new avenues for improving the bottom line. Actuate's principal executive offices are located at the BayCenter Campus at 951 Mariners Island Boulevard, in San Mateo, California. Actuate's telephone number is 650-645-3000. Actuate maintains Web sites at www.actuate.com, developer.actuate.com, www.birtondemand.com, www.quiterian.com and www.legodo.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 annual profitability and positive year-to-date cash flows. Nevertheless, our business model and longer-term financial results are not immune to a sustained economic downturn. While the global economy appears to be improving, the future 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.


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We continue to transition from our legacy e.Reports product suite to our new BIRT iHub product offering. As a consequence we are experiencing a decrease in license revenues generated by our e.Report products. We expect this decrease to be mitigated by increases in license revenue generated by our successor BIRT iHub offering over time. During this transition we may experience delays in adoption of our BIRT iHub offering by our customers which can adversely impact our license revenues. During the first quarter of 2014, we experienced a 60% reduction in our license revenues, partially driven by a sharp decline in license sales in excess of $1 million. We have also experienced higher than normal maintenance decline rates for our legacy products which is likely to continue. In the mean-time, BIRT iHub is expected to soon become the dominant contributor to license and maintenance revenues.

Furthermore, a significant portion of our revenues have historically been derived from customers in the financial services industry. The Company expects that it will continue to derive a significant portion of its revenues from these financial services customers for the foreseeable future. Unfavorable economic conditions have adversely impacted the financial services industry over the past several years. If this adverse trend were to continue, it would likely have a material adverse effect on the Company's business, financial condition and results of operations.

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; and adverse economic conditions that may be specific to information technology and the software industry.

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.

In the past Actuate has principally priced and sold its products on a perpetual model. However, the Company is actively transitioning its primary pricing model to a subscription model. We are seeing a shift in customer's purchasing behavior for enterprise software. This shift appears to favor a subscription model. Generally speaking, these subscription licenses will be recognized ratably over the subscription service period. The subscription model provides more flexibility for our customers to use our software and we believe is in line with current market trends. We believe subscription-based license should provide an easier adoption of commercial software for open source BIRT users and provide our customers with timely access to Actuate's latest product releases. We expect this transition to start in the second half of 2014 and be substantially complete by 2017.

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. On January 31, 2014, we completed the acquisition of legodo ag, a privately held software company based in Karlsruhe, Germany whose mission is to develop software for easy and rapid generation of personalized customer correspondence via any modern communication channel, including social media. Legodo products will significantly expand the Accessible Customer Communications Management solution offered by our Content Services Group (formerly Xenos).

For the remainder of fiscal year 2014, 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 the fiscal year 2014, particularly among financial services companies. Secondly, corporations are reluctant to buy software from new vendors and we continue to witness corporations consolidating their Business Analytics, Big Data, Performance Management and Customer Communications Management software purchases among fewer suppliers. Finally, we expect to experience vigorous competition in the market. Several of our competitors have released products that are marketed to be directly competitive with our offerings. We will continue to encounter customers choosing to develop information applications using programming languages such as Java. Actuate faces competition from large and well-established vendors including Microsoft, SAP, Oracle and IBM. The existence of these competitors may require additional sales and marketing efforts to differentiate our products, which could result in extended sales cycles.

For the remainder of fiscal year 2014, we will continue to pursue our strategic initiatives to improve revenue growth driven by BIRT, BIRT iHub, BIRT Content services and BIRT Analytics. 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 BIRT iHub platform. The BIRT project is a core, long-term initiative.


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• 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 customer analytics and 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 believe that once the issues with IT spending in Financial Services are resolved, the industry will once again lead in the adoption of information applications both inside and outside the firewall.

• Increasing subscription-based business both on premise and in the cloud.

• Continuing to build out and deliver 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 Content services offerings.

• Continuing to build out and deliver on the roadmap of Customer Communications Management capabilities by integrating Content Services offerings into the iHub.

• Continuing to build out and deliver on the roadmap of BIRT Analytics capabilities by integrating Quiterian offerings into the iHub.

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 Condensed Consolidated Financial Statements, which have been prepared in accordance with U.S. GAAP. 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, future expectations, 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, allocation of purchase price of acquisitions, and the impairment of goodwill, have the greatest potential impact on our Condensed 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, 2013, as filed with the SEC on Form 10-K on March 7, 2014.


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Results of Operations



                                                                Three Months Ended March 31,
                                                            (in thousands except per share data)
                                                   2014             2013         $ Change         % Change
Financial summary
Total revenues                                   $  24,086        $ 34,918       $ (10,832 )            (31 )%

Total operating expenses                            28,617          32,101          (3,484 )            (11 )%

(Loss) income from operations                       (4,531 )         2,817          (7,348 )           (261 )%
Operating margins                                      (19 )%            8 %           (27 )%          (338 )%

Net (loss) income                                $  (3,370 )      $  3,019       $  (6,389 )           (212 )%

Diluted net (loss) income per share              $   (0.07 )      $   0.06       $   (0.13 )           (217 )%

Shares used in diluted per share calculation        47,699          50,514

Financial Performance Summary for the quarter ended March 31, 2014:

• Significant decrease in license revenues across all product groups and all geographies partially driven by a decrease in transactions greater than $1 million,

• Continued momentum toward subscription-based transactions,

• Completed the acquisition of German software firm legodo ag on January 31, 2014,

• Closure of Actuate Shanghai, China on January 31, 2014.

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

                                                           Three Months Ended
                                                                March 31,
                                                           2014            2013
      Revenues:
      License fees                                             26 %           44 %
      Services                                                 74             56

      Total revenues                                          100            100

      Costs and expenses:
      Cost of license fees                                      2              2
      Cost of services                                         15             14
      Sales and marketing                                      47             39
      Research and development                                 29             19
      General and administrative                               24             17
      Amortization of purchased intangibles                     1              1
      Restructuring charges                                    -              -

      Total costs and expenses                                118             92

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

      (Loss) income before income taxes                       (18 )            9
      (Benefit from) provision for income taxes                (5 )           -

      Net (loss) income                                       (13 )%           9 %


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Revenues



                                              Three Months Ended
                                                (in thousands)
                                    March 31,           Variance       Variance
                                2014         2013          $'s             %
             Revenues
             License fees     $  6,218     $ 15,480     $  (9,262 )          (60 )%
             Services           17,868       19,438        (1,570 )           (8 )%

             Total revenues   $ 24,086     $ 34,918     $ (10,832 )          (31 )%

             % of revenue
             License fees           26 %         44 %
             Services               74 %         56 %

             Total revenues        100 %        100 %

Our revenues are derived from license fees and services. Our services revenues include software maintenance and support, professional services, subscriptions and hosting and training. Our total revenues during the first quarter of 2014 decreased 31% or $10.8 million compared to the corresponding period in the prior year as we experienced revenue decreases across all product groups and all geographies. Driving this decrease was a sharp decline in license transactions in excess of $1 million, primarily in North America. We recorded license revenue from several transactions in excess of $1 million in the first quarter of 2013 while no such license transactions were recorded during the first quarter of 2014. Included in the license revenue recoded in the first quarter of 2013 was a large legacy iServer transaction that did not recur in the first quarter of 2014 and was the driver for the 27% decrease in license revenues in EMEA.

We also experienced a decrease in compliance related transactions which typically carry a significant license component. 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.

It is also important to note that the first quarter of 2013 marked the end of the quarterly revenue stream associated with the Company's June 2010 settlement agreement with Oracle. The terms of the agreement called for equal cash payments of $1.3 million by Oracle to Actuate over twelve consecutive quarters ending March 31, 2013. Accordingly, Actuate recognized $1.3 million of associated revenues in the first quarter of 2013.

We are also seeing a shift in customer's purchasing behavior for enterprise software which appears to favor a subscription-based model. Consistent with this trend, in the first quarter of 2014, we closed $1.2 million in subscription transactions. These transactions mark the second consecutive quarter of over $1 million in subscription bookings.

Our services revenue decreased 8% or approximately $1.6 million over the same quarter last year due mainly to lower maintenance revenues driven by our legacy
e.Report Designer ("ERD") product line as we transition from the ERD product suite to our open source BIRT-based product line. We also experienced a decrease in compliance related transactions which typically include back maintenance. Back maintenance consists of the amount a customer would have paid for maintenance and support of our software if they had continued to pay the actual maintenance fees for telephone support, bug fixes, patches, and upgrades.

Sales outside of North America were $6.7 million or 28% of total revenues for the first quarter of fiscal 2014, compared to $7.1 million, or 20% of total revenues for the first quarter of fiscal 2013. Fluctuations in foreign currency exchange rates did not have a significant impact on our revenues for the first quarter of fiscal 2013.


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License fees. The decrease in license revenues for the first quarter of fiscal 2014 over the same period in the prior year was due primarily to a significant decrease in license sales in North America. This decrease was driven by a sharp reduction in the volume of transactions with a license component in excess of $1 million. In the first quarter of 2013, we closed three transactions with a license component in excess of $1 million in North America, while no such transactions were completed during the first quarter of 2014. License bookings decreased sharply from the levels recorded in the first quarter of 2013. We experienced a decrease in bookings associated with our legacy e.Report business, as we transition to newer BIRT based products along with a decrease in our BIRT iHub OEM transactions. Compliance related transactions which typically carry a significant license component also decreased during the quarter. Foreign currency exchange attributed to international license revenues was minimal during the first quarters of fiscal 2014 and fiscal 2013. At a consolidated level, we did not complete any license transactions greater than $1 million and closed transactions greater than $100,000 with 59 customers during the first quarter of fiscal 2014. During the same period last year we completed four license transactions greater than $1 million and closed transactions greater than $100,000 with 66 customers.

These negative trends in license revenues experienced during the quarter were partially offset by an increase in our subscription-based business in the first quarter of 2014 compared to the first quarter of 2013 as we secured $1.2 million in subscription-based transactions during the quarter. These transactions mark the second consecutive quarter of over $1 million in subscription bookings. We are also seeing a shift in customer's purchasing behavior for enterprise software which appears to favor a subscription-based model. Based on this shift and our recent improvements in subscription bookings, we have accelerated our adoption of a subscription based licensing model for our products. We expect this acceleration to start in the second half of 2014 and be substantially complete by 2017. As a result, we expect to derive an increasing portion of our future revenues from subscriptions for our products. The subscription model provides more flexibility for our customers to use our software and we believe is in line with current market trends. We believe subscription-based license should provide an easier adoption of commercial software for open source BIRT users and provide our customers with timely access to Actuate's latest product releases.

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

                                                         Three Months Ended
                                                           (in thousands)
                                               March 31,           Variance       Variance
                                           2014         2013          $'s             %
 North America                            $ 4,223     $ 12,740     $  (8,517 )          (67 )%
 Europe, Middle East, and Africa (EMEA)     1,721        2,367          (646 )          (27 )%
 Asia Pacific and others                      274          373           (99 )          (27 )%

 Total license revenue                    $ 6,218     $ 15,480     $  (9,262 )          (60 )%

 Percentage of total revenue                   26 %         44 %

Services. Services revenue is comprised of maintenance and support, professional services, subscriptions and hosting and training. The 8% decrease in services revenues was driven by maintenance revenues, which decreased in the first quarter of 2014 compared to the corresponding period last year. We continue to experience a decrease in our overall maintenance revenue primarily by a recent trend of high maintenance renewal declines. Although our baseline maintenance renewals continue to strengthen, the first quarter of 2013 was positively impacted by transactions with customers that were not in full compliance with the provisions of their respective licensing agreements with Actuate. These transactions which typically include back maintenance, which did not recur to the same degree in the first quarter of 2014. In addition, the cumulative impact effect of prior declines continues to depress the maintenance renewal revenues. Our maintenance renewal decline rate improved from 19% in the first quarter of 2013 to 9% in the first quarter of 2014.

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

The decrease in maintenance revenues were partially offset by higher subscription and hosting revenue in North America.

Professional services revenue decreased during first quarter of 2014 as we . . .

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