Sybase Reports Record Third Quarter Revenue and Earnings, Driven by 32% Database License Growth and 18% Messaging Growth

Sybase, Inc. (NYSE:SY), an industry leader in delivering enterprise and mobile software, today reported financial results for the third quarter ended September 30, 2009.

Highlights:

• Historical third quarter records achieved in total revenue, operating income, operating margin, net income, EPS, and cash flow from operations
• Database license revenue increased 32% and 35% in constant currency
• Messaging services increased 18% and 23% in constant currency
• GAAP operating income up 34% to $70.9 million, representing operating margin of 24%
• Non-GAAP operating income up 28% to $86.9 million, representing operating margin of 30%
• GAAP EPS up 17% to $0.43, non-GAAP EPS up 16% to $0.63
• Cash flow from operations increased 95% to $104.9 million

2009 Third Quarter Results

Total revenue for the third quarter of 2009 was $293.4 million compared with $284.0 million in the third quarter of 2008. License revenue grew to $96.2 million versus $92.9 million in the third quarter of 2008. Services revenue was $144.4 million, and messaging revenue was $52.8 million in the 2009 third quarter.

Sybase’s third quarter total revenue reflects a 3% negative impact from foreign currency exchange rates. Absent the impact of currency, license revenue and total revenue both increased 6% year over year.

Operating income calculated in accordance with generally accepted accounting principles (GAAP) for the third quarter increased 34% year over year to $70.9 million, representing an operating margin of 24%.

For the quarter, the company reported GAAP net income of $38.5 million and GAAP earnings per diluted share (EPS) of $0.43. This compares with 2008 third quarter GAAP net income of $32.1 million and GAAP EPS of $0.37.

Non-GAAP operating income for the 2009 third quarter increased 28% year over year to $86.9 million, representing a 30% operating margin.

Non-GAAP net income for the third quarter grew 18% year over year to $56.0 million. Non-GAAP EPS grew 16% year over year to $0.63.

Non-GAAP amounts exclude the amortization of certain purchased intangibles, stock-based compensation, restructuring costs, charges related to the impairment of auction rate securities, imputed interest related to our convertible debt, gains or losses on assets held for employees in a deferred compensation plan, and the tax effect of these and related items.

Accompanying this release is a reconciliation from GAAP to non-GAAP amounts for the third quarters of 2008 and 2009.

Cash flow from operations was $104.9 million in the quarter.

Chairman, CEO and President of Sybase John Chen stated, "We are very pleased to deliver all-time third-quarter highs in total revenue, operating margin, net income, and cash flow from operations. Our performance was driven by solid growth in analytics and messaging services.”

Added Mr. Chen, "We are most encouraged by the strategic business wins we secured during the quarter with Verizon, Siemens, and IBM to build mobile applications on Sybase technology. These wins extend our position as the global leader in mobile middleware, mobile device management, and mCommerce.

"Due to our stronger-than-expected performance year to date, we are on pace to achieve our third consecutive record year, and we are again raising our full-year 2009 outlook,” concluded Mr. Chen.

Balance Sheet and Other Data

At September 30, 2009, Sybase reported $1.2 billion in cash and cash investments, including restricted cash of $18.0 million.

During the quarter, the company completed a $400 million private placement of 3.5% convertible notes. Sybase intends to use the net proceeds of this private placement to redeem its existing 1.75% convertible notes. In conjunction with the private placement, the company increased its repurchase program by $150 million and spent $70 million to repurchase its common stock and approximately $50 million to repurchase its 1.75% convertible notes.

As of September 30, 2009, $92.4 million remained authorized under the company’s current share repurchase program.

Days sales outstanding (DSO) for the third quarter was 67.

Guidance

For the fourth quarter ending December 31, 2009, management anticipates total revenue in the range of $305 million to $310 million. Management anticipates non-GAAP fully diluted EPS in the range of $0.66 to $0.68 and GAAP EPS in the range of $0.52 to $0.54.

For full-year 2009, management is raising guidance for total revenue to a range of $1.14 billion to $1.15 billion from prior expectations of $1.11 billion to $1.12 billion. Management is raising guidance for non-GAAP EPS to a range of $2.33 to $2.35 from previous guidance of $2.23 to $2.27. Management is raising GAAP EPS to a range of $1.71 to $1.73, which compares with previous guidance of $1.67 to $1.71. Management is also raising expectations for full-year 2009 cash flow from operations to at least $295 million from prior expectations of at least $275 million.

A summary of the company's 2009 guidance assumptions and a reconciliation to the company’s previous guidance assumptions are as follows:

Conference Call and Webcast Information

The Sybase 2009 third quarter conference call and simultaneous Webcast is scheduled to begin at 7:30 a.m. Pacific Time/10:30 a.m. Eastern Time on Thursday, October 22, 2009. To access the live Webcast, please visit www.fulldisclosure.com or Sybase’s Website at www.sybase.com at least 20 minutes prior to the call to download any necessary audio or plug-in software. A telephone replay will be available approximately two hours after the conference call ends and will be available until 10:00 p.m. Pacific Time on October 29, 2009. To access the replay, please dial (888) 203-1112 for domestic access and (719) 457-0820 for international callers; the access code for the telephone replay is #8110814. Additionally, the archived Webcast will be available through January 21, 2010 at http://www.sybase.com/about_sybase/investorrelations.

About Sybase, Inc.

Sybase is an industry leader in delivering enterprise and mobile software to manage, analyze and mobilize information. We are recognized globally as the performance leader, proven in the most data-intensive industries and across all systems, networks and devices. For 25 years, our information management, analytics and enterprise mobility solutions have powered the world’s most mission-critical systems in financial services, telecommunications, manufacturing and government. For more information, visit http://www.sybase.com. Read Sybase blogs: http://blogs.sybase.com.

Forward-Looking Statements

Certain statements in this release concerning Sybase, Inc. and its prospects and future growth are forward-looking and involve a number of uncertainties and risks. These statements include the financial projections included in the guidance section of the release. Factors that could cause actual events or results to differ materially from those suggested by these forward-looking statements include, but are not limited to, the performance of the global economy and credit market conditions; software industry sales trends; market acceptance of the company’s products and services; customer and industry analyst perception of the company and its technology vision and future prospects; the success of certain business combinations or strategic relationships engaged in by the company or by competitors; shifts in our business strategy; the interoperability of our products with other software products; system failures or other issues that impact our ability to deliver mobile messages; political unrest or acts of war; possible disruptive effects of organizational or personnel changes; and other factors described in Sybase, Inc.’s reports filed with the U.S. Securities and Exchange Commission, including its annual report on Form 10-K for the year ended December 31, 2008 and its quarterly reports on Form 10-Q for the three-month periods ended March 31, 2009 and June 30, 2009.

Note Regarding Non-GAAP Financial Measures

In addition to our GAAP results, Sybase discloses adjusted operating income, net income and net income per share, referred to respectively as "non-GAAP operating income”, "non-GAAP net income”, and "non-GAAP net income per diluted share”. These items, which are collectively referred to as "Non-GAAP Measures”, exclude the impact of stock-based compensation, the amortization of acquisition-related intangible assets, restructuring costs, non-cash charges related to the impairment of auction rate securities ("ARS”), the imputed interest expense on our convertible notes, gains or losses on assets held for employees in a deferred compensation plan, and the tax effect of these and related items. From time to time, subject to the review and approval of the audit committee of the Board of Directors, we may make other adjustments for expenses and gains that we do not consider reflective of core operating performance in a particular period and may modify the Non-GAAP Measures by excluding these expenses and gains.

We define our core operating performance to be the revenues recorded in a particular period and the expenses incurred within that period which management has the capability of directly affecting in order to drive operating income. Non-cash stock-based compensation, amortization of acquisition-related intangible assets, restructuring charges, impairment charges to our ARS, the imputed interest expense on our convertible notes, and gains or losses on assets held for employees in a deferred compensation plan are excluded from our core operating performance because the decisions which gave rise to these expenses were not made to drive revenue in a particular period, but rather were made for our long-term benefit over multiple periods. While strategic decisions, such as the decisions to issue stock-based compensation, to acquire a company or to restructure the organization, are made to further our long-term strategic objectives and do impact our income statement under GAAP, these items affect multiple periods and management is not able to change or affect these items within any particular period. As such, supplementing GAAP disclosure with non-GAAP disclosure using the Non-GAAP Measures provides management with an additional view of operational performance by excluding expenses that are not directly related to performance in any particular period. Therefore, we exclude these impacts in our planning, monitoring, evaluation and reporting of our underlying revenue-generating operations for a particular period.

Prior to the adoption of Financial Accounting Standards Board Statement 123 Revised "Share-based Payment” ("FAS 123R”) on January 1, 2006, our practice was to exclude stock-based compensation internally to evaluate performance and we presented investors with certain Non-GAAP Measures. With the adoption of FAS 123R, we continue to believe that Non-GAAP Measures can provide relevant disclosure to investors as contemplated by Staff Accounting Bulletin 107 ("SAB 107”) and we have presented Non-GAAP Measures that exclude stock-based compensation, amortization of acquisition-related intangible assets, impairment charges to ARS, imputed interest expense, restructuring costs and the related tax effects. While these items (other than restructuring) are recurring and affect GAAP net income, we do not use them to assess our operational performance for any particular period because (a) these items affect multiple periods and are unrelated to business performance in a particular period; (b) we are not able to change these items in any particular period; and (c) these items do not contribute to the operational performance of our business for any particular period.

We also use Non-GAAP Measures to operate the business because the excluded expenses are not under the control of, and accordingly are not used in evaluating the performance of, operations personnel within their respective areas of responsibility. In the case of stock-based compensation expense, the award of stock options is governed by the stock committee of the Board of Directors and, in the case of acquisition-related intangible assets; acquisitions arise from strategic decisions which are not the responsibility of most levels of operational management. The restructuring charges, like our stock-based compensation charges, amortization of acquisition-related intangible assets, and write-downs to ARS, the imputed interest expense on our convertible notes, and gains or losses on assets held for employees in a deferred compensation plan, are excluded in management’s internal evaluations of our operating results and are not considered for management compensation purposes.

In the case of stock-based compensation, our compensation strategy is to use stock-based compensation to attract and retain key employees and executives. It is principally aimed at long term employee retention, rather than to motivate or reward operational performance for any particular period. Thus, stock-based compensation expense varies for reasons that are generally unrelated to operational performance in any particular period. We use annual cash incentive payouts for executives and other employees to motivate and reward the achievement of short-term operational objectives.

We view amortization of acquisition-related intangible assets, such as the amortization of an acquired company’s research and development efforts, customer lists and customer relationships, as items arising from pre-acquisition activities. These are costs that are determined at the time of an acquisition. While it is continually viewed for impairment, amortization of the cost is a static expense, one that is typically not affected by operations during any particular period and does not contribute to operational performance for any particular period.

The cost of restructure charges are excluded in our Non-GAAP Measures because they are significantly different in magnitude and character from routine personnel and facility adjustments that management makes when monitoring and conducting the Company’s core operations during any particular period. We have not undertaken restructuring since 2004 and amounts included in cost of restructure in 2006 and subsequently reflect lease termination costs from previously announced restructuring efforts. Our previous restructuring activities and related expenses were not related to operating performance for any particular period, and were not subject to change by management in any particular period. Instead, the prior restructuring was intended to align our business model and expense structure to our position in the market.

The liquidity and fair value of our investments in marketable securities, including auction rate securities, have been negatively impacted by the uncertainty in the credit markets and failed auctions due to a lack of marketability of these securities. As a result, we recorded impairment charges to reduce the carrying value of our ARS investments. The impairment charges related to our ARS investments have been excluded from our non-GAAP results of operations. These impairment charges are excluded from management’s assessment of our operating performance because management believes that they are not indicative of our ongoing business operations. We believe that the exclusion of these unique charges provides investors an enhanced view of our operations and facilitates comparisons with the results of other periods. In 2009, GAAP changed to require that issuers of certain convertible debt instruments that may be settled in cash (or other assets) on conversion to separately account for the liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate. Accordingly, for GAAP purposes we are required to recognize imputed interest expense on our $460 million of 1.75% convertible subordinated notes that were issued in a private placement in February 2005 and on our $400 million 3.5% convertible senior notes that were issued in a private placement in August 2009, the "imputed interest expense.” The imputed interest expense is excluded from management’s assessment of our operating performance because management believes that this is not indicative of our ongoing business operations. We believe that the exclusion of the imputed interest expense provides investors an enhanced view of our operational performance and will facilitate the comparisons of future reported results with results from periods prior to the GAAP requirement to recognize imputed interest expense.

We maintain a rabbi trust for our deferred compensation plan that was established to allow certain employees the opportunity to defer the receipt of compensation. Plan participants elect to defer a portion of their compensation and these amounts are deemed invested in investment options that mirror the participants’ 401(k) plan investment elections. The rabbi trust for the deferred compensation plan is structured in accordance with IRS guidelines and the assets in the trust are subject to the claims of our general creditors. The gains and losses on assets in the deferred compensation plan are excluded from management’s assessment of our operating performance because management believes that they are not indicative of our ongoing business operations. We believe that the exclusion of these gains and losses provides investors an enhanced view of our operational performance and these gains and losses are unrelated to operational performance in any particular period.

Our historical non-GAAP effective tax rates differ from our GAAP effective tax rates because of (i) the exclusion of the amortization of acquisition-related intangible assets, stock-based compensation expenses, restructuring costs, and other expense and income items described above, (ii) the exclusion of certain acquired tax attributes, and (iii) the resulting impact on the realization of the Company’s other tax assets. We exclude the impact of these discrete tax items from our non-GAAP income tax provision or benefit because management believes that they are not indicative of our ongoing business operations.

Because the Non-GAAP Measures are not calculated in accordance with GAAP, they are used by our management as a supplement to, and not an alternative to, or superior to, financial measures calculated in accordance with GAAP. There are a number of limitations on the Non-GAAP Measures, including the following:

• These Non-GAAP Measures do not have standardized meanings and may not be comparable to similar non-GAAP measures used or reported by other software or technology companies.
• The Non-GAAP Measures do not reflect all costs associated with our operations determined in accordance with GAAP. For example:
  
  Non-GAAP operating margin performance and non-GAAP net income do not include stock compensation expense related to equity awards granted to our workforce. Our stock incentive plans are important components of our employee incentive compensation arrangements and are reflected as expenses in our GAAP results under FAS 123R. While we include the dilutive impact of such equity awards in weighted average shares outstanding, the expense associated with stock-based awards is excluded from our non-GAAP measures.
  
  Although amortization of acquisition-related intangible assets does not directly impact our current cash position, such expense represents the declining value of the technology or other intangible assets that we have acquired. These assets are amortized over their respective expected economic lives or impaired, if appropriate. The expense associated with this decline in value is excluded from our non-GAAP measures and therefore non-GAAP measures do not include the costs of acquired intangible assets that supplement our research and development.
  
  Restructuring charges in 2006 and subsequently primarily represent lease termination costs associated with restructuring activities that commenced in 2004 and before. Most of the charges are cash expenditures, which are excluded from our Non-GAAP Measures.
  
  While the interest imputed on our convertible notes does not directly impact our current cash position, such expense recognizes the deemed economic value of the conversion feature associated with the notes. The expense associated with this deemed economic value is excluded from our non-GAAP measures and, therefore, non-GAAP measures do not reflect a deemed expense associated with our convertible notes.
• Excluded expenses for stock-based compensation, amortization of acquisition-related intangible assets, imputed interest on our convertible debt, and gains and losses on assets in our deferred compensation plan will continue to recur and impact the Company’s GAAP results. While restructuring costs are non-recurring activities, their occasional occurrence will impact GAAP results. As such, the Non-GAAP Measures should not be construed as an inference that the excluded items are unusual, infrequent or non-recurring.

The company adjusts for these limitations by relying on these Non-GAAP Measures only as a supplement to the Company’s GAAP results.