Good day, and welcome to the Progress Software Corporation Second Quarter Earnings Conference Call. At this time, I'd like to turn the conference over to Mr. Tom Barth, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Tom, and good afternoon, everyone, and thanks for joining us for the Fiscal Second Quarter 2012 Earnings Call. I just want to apologize. We had a bit of technical difficulties with Business Wire in terms of getting our release across. If you have not been able to see it yet, you should be able to access it at progress.com. You'll notice a link to that press release on the lower left side, and it should be coming out on Business Wire here shortly. So joining me today is Jay Bhatt, our President and Chief Executive Officer here at Progress Software. And before we get started, I would like to remind you that during this call, we may discuss our outlook for future financial and operating performance, corporate strategies, product plans, cost initiatives or other information that might be considered forward-looking. Please review our Safe Harbor statement regarding this, which is available on the Investor Relations section of our website at progress.com. Today's conference call will be recorded in its entirety and be available via replay on our website in the Investor Relations section. Today, we published our financial press release on our website and furnished the information to the SEC in an 8-K filing now available on our website. These documents contain the full details of our financial results for the fiscal second quarter, and I would recommend you reference these documents for specific details. With that, I'd now like to turn it over to Jay.

Thanks, Tom, and good afternoon, everyone. As mentioned in our announcement on June 7, much has happened this past fiscal quarter. I'm excited to say that we're making good progress on executing on our strategic plan, which was announced on April 25, including the initiation of our previously announced divestitures, a significant restructuring and changes to how we're organized and how we operate. While some of these actions have been disruptive and negatively impacted our quarter, it's going to position us very well to achieve our goals for next fiscal year and beyond. Today, I'd like to remind everyone of the key tenets of the strategic plan and provide some color on our fiscal second quarter financial results. However, I'd like to spend the majority of our time outlining the milestones we've achieved since the announcement and how we're managing the business in this period of transition and provide you with more color to help you better understand our business going forward. To start, as you may recall from our announcement on April 25 of this year, our new 2-phase strategic plan leverages our core strengths in creating products that enable the -- our ISV partners and enterprises to build and deploy state-of-the-art software applications. In the first phase, already underway, we're focusing on 3 major areas. First, we're investing in our core business, which is defined as our application development and deployment platform, or OpenEdge; our data connectivity environment or DataDirect Connect; and our products that drive real-time decision-oriented analytics, otherwise known as Apama, Corticon and Progress Control Tower. Second, we’ve begun the process of making all of these products cloud-ready. And third, we’ve begun to divest the 10 products which we defined as noncore and are no longer central to our strategy. In Phase 2, by unifying the…

Thank you, Jay. Regarding revenue, our consolidated revenue, including both core and noncore products, was $115 million, down 15% year-over-year and down 12% on constant currency. As Jay just mentioned, the revenue performance reflects the announcement’s negative impact on our employees, customers and our partners within both core and noncore product lines. Given the uncertainties and concern that resulted from the announcement of a global restructuring and product divestment, our go-to-market focus and momentum was disrupted, and our execution suffered as a result. In the field, we saw purchasing decisions delayed, and we saw deal slippage at a greater rate than normal, caused both by uncertainties surrounding our strategic plan and general deteriorating macroeconomic conditions primarily in Europe. I would add that there were several large direct deals closed in the second quarter of fiscal year '11 that were anomalies and not consistent with second quarter run rates. Consolidated revenues by geography were also impacted by currency. North America was $55 million, down 10%. EMEA revenues were $43 million, down 19% and 13% on constant currency. APAC revenue was $9 million, down 28% and 27% on constant currency. And Latin America revenue was $8 million, down 12% and flat on constant currency. If exchange rates had remained constant in the second quarter of fiscal 2012 as compared to the exchange rates in effect in the second quarter of fiscal 2011, total revenue generated in markets outside North America would have represented 54% of total revenue. Overall, consolidated license revenues for the second quarter were $30 million, a decline of 35% or 32% on constant currency. While maintenance and services was down $85 million -- I'm sorry, maintenance revenues were $85 million, down 5% for the quarter or down 2% on constant currency. Our maintenance renewal rate remained well over 90%…

Thanks, Tom. Although some of the disruptions are behind us and we've begun to execute against our new strategic plan, the type of transformation that we're undertaking did not happen overnight, and we expect to encounter some challenges for the remainder of fiscal 2012. However, we feel confident about the potential of our core products and expect the company to exit the year with positive momentum based on the investments and renewed focus in the core business. With regard to OpenEdge, we're focused on improving and rebuilding the OpenEdge business by cultivating existing and new partner and customer relationships. Our biggest asset in OpenEdge is our loyal partner base of over 1,400 Application Partners, as well as the over 6 million people who use our OpenEdge-based applications. We have an opportunity to help these partners and customers expand their on-premise business, as well as move them to the cloud, a direction that over 200 of our partners have already begun, with over 600 SaaS applications running today on OpenEdge. The channel programs targeted at our ISV partner base have been few and far between over the past few years and take some lead time. And so while we made good progress in reengaging the base, there's more work to be done before we see tangible financial results from this activity. We’ve recently hosted 3 global partner conferences in all 3 of the main geographies, as well as 25 regional Progress user group events, with over 800 partners and customers in attendance. I was fortunate enough to meet a large number of our ISV partners who were extremely excited about the OpenEdge product capabilities and vision. To summarize the comments of one of the attendees, which I think speaks to the positive general mood of our partners, he said that he…

Thanks, Jay. And that concludes our formal remarks for today. I'd now like to open up the call to your questions. [Operator Instructions] I'll now hand it back over to Tom to conduct the Q&A session.

[Operator Instructions] We'll take our first question from Scott Zeller with Needham & Company.

First question is around the fiscal third quarter. We understand that you're not providing revenue guidance or operating margin guidance. But could you tell us what you're targeting for an OpEx run rate, at least a raw number?

Well, I think we were pretty specific that we won't be providing guidance. So I think in terms of operating expenditures -- do you mean on a consolidated basis, Scott?

On a consolidated basis. Just what we should be looking for an OpEx number, not necessarily the margin or the revs, but an OpEx target number.

Yes, we're not -- the reason we're not providing that is because, as I mentioned, Scott -- I appreciate the question. I understand you're trying to resolve it for modeling purposes, et cetera. But as I said, the problem we have with Q3 is we announced a plan halfway through Q2. We started to put programs in place, started to do restructure, there's divestitures -- there's a lot of stuff going on that continues through the Q3 period, and we're obviously 3, 4 weeks in. So the line of sight and visibility we have to where we can guide you in terms of numbers for Q3 just wasn't at the level that we feel comfortable going public with. That's why we're talking about Q4, so we're really not able to give you that line of sight.

Okay. And then to follow up, you mentioned that your renewals for the consolidated business remained -- I believe that was -- the consolidated business was 90%. Was that just the core business or the consolidated business 90% renewal rate?

No, that was consolidated.

Consolidated. On that topic, can you tell us about pricing? And given the disruption, has there been pressure to discount in order to get people to stay with you?

There has been -- look, we're in the market -- on core products that people know we're going to be -- are going to be part of our going concern to noncore, which we're really continuing to try to drive. We've done -- we've tried to not do anything unnatural to the business, to change any trajectory. We have people that -- we've structured the noncore portfolio and the execution around it, around divestment and sales champions that are staying with the business, that are really incented to drive those products and those product lines. So generally, I would say we're trying as best we can, obviously, given the announcement and some of the confusion initially it caused, we're through a lot of that. I personally had a bunch of conversation with customers and with accounts. We're trying to be as business-as-usual as we can with the noncore portfolio. So that's kind of where we are.

And we'll take our next question from Aaron Schwartz with Jefferies.

I think a lot of us can understand sort of the uncertainty in the plan, given all the moving parts here. But the question I have is can you, as managers, sort of differentiate between this transitional uncertainty and some of the macro-based, maybe, demand uncertainty? Have you seen maybe a business come back in now that you've gotten through some of these changes that would give you confidence to see that this is a temporary disruption versus sort of a macro demand-led disruption?

Yes. I think the -- that's a good question, and what I would tell you, I don't think -- I think there are macro factors at play here, and I -- we mentioned a little bit of that in the prerelease. And so we've got, as everybody is experiencing, there's EMEA weakness, particularly in parts of EMEA. There is uncertainty in the broad-based macro economy, and we all know that. And I know I don't need to tell you that. But I don't think there -- I really fundamentally -- one of the things we've done since we came out of the planning process and got into the operational phase here is I've gotten very -- I personally have gotten very close to the sales organization. I've been out in the field with partners, with our salespeople. I just got back from Europe on a mid-year sales kickoff. I've been at all these partner conferences, talking about sales and pipeline and what we think can happen. And I really don't see a fundamental macro -- I'm sorry, I don't see a fundamental foundational problem with the business in any way. I didn't see that in the planning process, and I do not see that post-planning in the operational phase. I do think there are temporary disruptions, and I think that those -- if we were -- I think it would be -- would have been unreasonable to think those temporary disruptions would only last a month and everything would be clean for the third quarter. I think those disruptions will continue through this entire year, frankly. And I think -- but I think by Q4, and the reason I'm comfortable giving guidance on Q4, which I think is a very positive trend, it's 0% to 1% top line growth as we move to that 5% model for next year. I think that's a very positive momentum for us. The only reason I'm comfortable is because I really do think that by then the message will be much more clear, programs will be set. We'll be operating on most, if not all, cylinders at that point, so we can get into that -- I can get more confident about predicting.

There is a point around constant -- or currency impacting us as well.

Yes. That is important. I think -- we do -- we have headwinds with currency. And pretty significant headwinds. And therefore, we're trying to get people centered around -- we're going you all centered around the constant currency effects and growth rates based on constant currency. You can see that in the way we're articulating ourselves in press releases and the language we're using. And I think it's important for us to do that because that's really the health of the core foundational business. That's really what -- that's really divorcing the macro situation from the business.

Okay. And a follow-up question I had was on the OpenEdge business there. I mean, it sounds like from what you're saying, you had maybe an abnormal comp on the direct side. I was wondering if you could talk about what the mix was between direct and indirect, and then if you have any commentary on the performance of the indirect side and through the confidence on that piece of the business as you move through the year.

Yes. I think that -- so we're not breaking down the numbers direct and indirect in OpenEdge. But what I can say is we did have a bad comp in the second quarter. We had some abnormal large deals come in. And through the diligence -- and obviously, I wasn't here in that quarter, but through the diligence that I've done, we took some deals early, and we took them -- we didn't take them pro rata. So it created a difficult comparison for us. With that said, the second -- what I wanted to do over the last few weeks is get out to that partner base, that indirect base and the direct users, particularly on OpenEdge, which is a big chunk of our revenue, and understand the health of the business and the prospects. And so I have done that. I've gone out, as I mentioned. And one of the things -- when I say partner conference, it's not like a blah, blah, blah kind of training conference. This is a go-to-market business-oriented conference with most of our large Application Partners in attendance and where I had main stage and then won out lots and lots of individual meetings around health of business and business plan review, et cetera. And I think our partners -- it varies. I mean, look, it varies -- when you have a diversified partner base that are involved in multiple segments and sectors, you're going to have some partners that are feeling macro weakness and others that are really bullish about their business. And so I think, generally, I would say it's nothing different from the broad-based economy. And our partners couldn't be more thrilled, frankly. They -- for about 4 to 6 weeks, after the announcement, the -- maybe even longer, the partners didn't understand how to interpret it. Even though it looked positive for them, the company hasn't been pronouncing -- emphasizing the OpenEdge business for a while. So they were trying to understand it. In some ways it took some -- it's taken some articulation and evangelism of the plan to help the partners understand what it means to them. Ultimately, when the rubber hits the road is when these partner programs start to really season and help our partners go to market, which is not an overnight phenomenon. That takes time, and that's why I'm trying to share with you guys that lead time affects stabilization and normalization of the business, which is why sort of fourth quarter is the first time I can give you some visibility.

Okay. And just real quickly, I mean, what is the comp like in the second half of the year here on the direct side of OpenEdge? I mean, was that just sort of a one-quarter phenomenon? Or does this sort of direct comp stay tough here in the back half?

Yes. I think I'm not going to go into the details of the comps right now on Q3 and Q4. I think I'm going to hold back on that. We just -- we're not providing the detail on the comps right now on Q3 and Q4.

And we'll go next to Mark Schappel with Benchmark.

Jay, with respect to FuseSource, I realize you're not disclosing the purchase price. But did the price you received meet expectations with respect to when you first announced your strategic plan?

Yes, it did, Mark. Look, we aren't disclosing the price, but it did. I mean, I think FuseSource is a really interesting business, and it's a great fit for Red Hat. And we had an interested party. It was not a distressed situation in any way. And we feel like the terms were very reasonable, very fair on both sides.

Okay, great. And then second question, non-GAAP earnings obviously came in much higher than you preannounced earlier, and I was just curious if you can provide some color why. I mean, is this just an artifact of not having a CFO on board?

Yes. I don't know if -- I don't think it's a function of not having a CFO. We have a very effective and capable finance organization. And for God's sake, Mark, I'm the acting CFO. So you don't have to backhand me on the question.

There's no backhand -- and I was just curious, there seemed to be -- it wasn't just a penny or so that was above the range. It's seemed to be pretty meaningful above that.

I appreciate that. I think just expenses came in lower. And when you go out a few days after a quarter trying to be as transparent as you can, everything is not baked at that point. I don't think having a CFO would have changed that. We just -- we had some visibility. We wanted to share that visibility, and we did, but there were just some moving parts. So just expenses came in lower than we expected.

We'll go next to Greg McDowell with JMP Securities.

Gentlemen, my first question, I just wanted to ask a little bit about the progress with the divestitures. Obviously, great to see FuseSource. But I was wondering if maybe in your best-case-scenario environment, if you can see -- possibly see more than half of the product lines being divested by the end of this year and whether or not there might be a scenario where either a strategic buyer or financial buyer picks up 3 or 4 of these product lines in one purchase. That's my first question.

So I think the answer is I can't predict. I don't have the magic ball. So I can't predict the number this year. But I think we'll see more divestments this year. I think that there is a lot of interest. I mean, we -- when we announced April 25 and we started to field calls and proactively made calls, there's just a tremendous amount of announcements. There's a lot of MBA [ph] work and a lot of interaction with the buyer community. Buyer community spans financial buyers, strategic buyers, it spans buyers that want to buy entire portfolio to some subset of products to single products. And what we're trying to do here is, obviously, we're trying to maximize shareholder value, make sure we find the right home for the asset. We work as expeditiously as possible. So to answer your second question, yes, I can certainly foresee a scenario where multiple products go together. But I can't predict that. We're -- again, we'll do it -- we're going to try to do everything we can to balance and get the right result for shareholders.

Great. And then my other question, and I know you're not going to give us 3Q guidance, and I can appreciate that. But I was wondering if you could just comment on historically how the core business has performed from 2Q to 3Q, if there's any sort of historical pattern you can share with us. And if there is no historical pattern, if you could share that too. And I certainly understand the currency movements are not favorable for you guys or for any software company with exposure to Europe, for that matter.

So I think for most software companies that have a European business, you tend to see seasonality affect Q3 compared to Q2, and then you see a Q4 pickup. And I think -- Europe closes in August, and that's -- and we have obviously -- we have a growing Asia Pacific, but it's small. And so therefore, Americas and EMEA are the 2 biggest chunks. So I think there is some seasonality Q2 to Q3, and I think that's true for most businesses that have a European element.

And the deal slippage, just to slip in one more here, those deals that slipped, would you characterize those deals as sort of active and still in the pipeline? Or have some of them sort of moved out altogether to the next fiscal year?

Yes. I think what you saw -- there's been a little of -- the deals that have moved out, it's been interesting. On the noncore, okay, on the noncore, what we've seen -- I would have -- I was really pleased to see that -- I think the power of this technology that we're actually selling because it's not core to us, it's not strategic in terms of our singular mission, has held serve out there given the announcement. In other words, there are customers out there that really feel passionate about technology, regardless of the home. And so I've -- we've seen deals slip but not necessarily go dark. There have been some that have. On the core, I wouldn't expect to see deals go dark unless there were some extenuating circumstances. And I think there has been a population of buyers out there and partners out there that have been waiting to just sort of digest and interpret what we announced. And it's a complicated thing we announced. So it's taken some time to talk through evangelizing and get out there with people and help them understand. And especially when you sell through 2- and 3-tiered channels like we do, the message has to be overcommunicated. You can't just wake up and it's all set. It's hard enough inside of a single company, let alone when you reach your partners.

And we'll take our next question from Brian Murphy with Sidoti & Company.

Jay, so you're making investments here in OpenEdge. Just post the transition period, maybe in 2013 or 2014, how should we think about margins for OpenEdge, maybe compared to the kind of margins that we've seen for that business in prior years?

Yes, so we're not -- one thing we're not doing is we're not going to break down the components of the core on margin. But I think, historically, you've seen OpenEdge deliver a pretty high margin. It's one of the great parts of the product and the opportunity. It's incredibly relevant. I think it's -- there's both on-premise and cloud growth in it, yet it -- and on top of that, it produces a fantastic margin. So we are investing in the OpenEdge business, just to be clear. So obviously, we're increasing investment, which would imply that margins are affected by that. But we aren't going to break down specifics. But the general direction, I think, you could see -- you could imagine that OpenEdge receiving more investment would affect its margin profile a little bit. But generally, very profitable business.

Okay, that helps. And again, just general direction, how should we think about profitability for the decision analytics portfolio? I mean, is that something that can approach profitability in the near term? Or do we need to be at much greater scale there? Or what?

No, that's one thing we did. We said on the -- when we went out to investors and to all of you at the strategic planning time, and I'll say it again, is we've -- the decision analytics component of the business in Phase 1 is -- so the reason to retain those products was because we thought analytics as a component of our Application Platform-as-a-Service are going to be so critical, and we had such a capable portfolio of tools to drive that component of Application Platform-as-a-Service and application development for analytics. And we're busy migrating those components into that environment. In the meantime, we have on-premise businesses in Phase 1 that we think are extremely attractive. I've been amazed as I've traveled the world over the last 1.5 months and gotten with customers as to how powerful Apama and Corticon and the Control Tower are to the workflows they're implementing. And we also said in the discussion with investors that we would strive to drive to breakeven in profitability for the Apama -- for that decision analytics portfolio of products, and that is the goal. I think I would define that as a near-term goal. And obviously, it depends on how you define near term, but I would define it as a near-term goal. I think the goal from the business line team that’s leading that organization inside of the company and driving that business is to drive top line growth, but also to change the profitability scenario of the business. So we are working on that.

We'll take our next question from Gabe Lowy with Mizuho Securities.

Jay, can you give us a sense of how many of the partners on OpenEdge are active and some shading on the ones that are active? Is there a small percentage of them that are contributing to a majority -- sort of 80-20 contribution to revenues?

Yes, I would say it depends on what you mean by active, Gabe. If your definition of active is sort of not just mailing it in, running a lifestyle business, taking maintenance revenue, but rather out there selling, hunting or farming. A lot of those partners are actually hunting and farming, which is -- whenever you look at a partner base, and I’ve dealt with partners for a long time especially in my past company, you do tend to find a percentage -- there's a percentage of that partner base that are living off the profits, that have reached some kind of scale and are running lifestyle businesses. And that is true in this partner base. There are partners like that. There's no question. But there -- I've been amazed at the number of partners, small and large, that are very interested in driving their business. One of the things that I think has been fascinating to me, and it's very similar to what I saw 11 years ago at my last employer, is just some of these guys just don't know how to hunt and farm as effectively as they should or could because they're small businesses and they need business acumen help. And that's something I think Progress needs to help them with. So I would say, I'm sure that I think the 70-30 rule or whatever it is applies in terms of revenue breakdown, and whether it's 70-30 or 60-40 or whatever it is, where a large part of your revenue comes from a smaller percentage of your partners. But in terms of active, I think there's a way to mine that base and get close to those partners to drive some of that hunting and farming behavior that they aren't doing effectively or they are desiring to do but could use our help doing.

The next question comes from Steve Koenig with Wedbush.

Just a quick housekeeping, and then I'll ask the one question. Can you guys give us core licenses in the quarter?

No, we're not disclosing that.

We gave you the consolidated license number, but not the core license number.

Okay. Is there a reason why you guys can't tell us that?

We may in future quarters but not during this quarter.

Okay. Just makes it easier to look at your trajectory as you move forward. Let me move to -- I'll just limit it to one here. I guess I'll ask about is in terms of getting to the operating margin targets you described for next year around your core, you're going to have to eliminate a lot of additional costs clearly beyond the $55 million you've outlined this year. Can you give us some feeling for how that is going to happen? I mean, have you allocated those employees now through to all the products, so they know which products they sit in, and then that's how you'll segment out the operating margin and then those employees will go with those businesses? Or just maybe if you could help us understand how you're driving to that operating margin segmentation you're going to get to and how you're going to drive those, whatever the number is, $100 million-plus of additional cost savings that you'll need to get?

Yes. So you're on the right track. I mean, we've -- one of the things that we spent a lot of time on before we went out formally to the market on the divestment assets is identifying the champions that were going to lead those lines and then identifying employees that were affiliated or directly correlated with those product lines and those businesses. And so we've -- there is -- there was a big identification process of sort of where we tagged connected people to the assets. The other part is allocated costs. And obviously, we're running a consolidated organization right now. But at some point, it will be a different consolidated organization really around the core, which speaks to a lower-cost structure. And you have to look at allocated costs as well and what that means, and we're going to do what we need to do to get to that 35% margin exit rate out of Q4 of next year. And so there's a little of both. I mean, a little bit of -- there's an identification, a direct cost identification we've gone through, as I mentioned. And then there's an allocated cost component that we have to look at as we clean the business up to get to the final core safe.

Well, thank you, Steve, and thank you all for joining the call. As a reminder, we plan on releasing the financial results for our fiscal third quarter on Wednesday, September 26, after the financial market's close and holding the conference call the same day at 5 p.m. Eastern Time. We look forward to speaking with you again soon, and have a great day.

Ladies and gentlemen, this does conclude today's conference. We appreciate your participation. You may now disconnect.