SPSS Spss Inc. (MM)

SPSS Inc. (Nasdaq: SPSS), a global provider of Predictive Analytics software and solutions, today announced results for the quarter and six months ended June 30, 2009.

The Company reported 2009 second quarter revenues of $69.7 million, down 8 percent from $75.7 million in the 2008 second quarter. Excluding the unfavorable effects of currency exchange rates, total revenues were flat compared to 2008 second quarter revenues. License revenues were $30.3 million, down 13 percent from $34.8 million in the 2008 second quarter. Excluding the unfavorable effects of currency exchange rates, license revenues were down 6 percent year over year. Maintenance revenues for the 2009 second quarter were $33.6 million, up 1 percent from $33.2 million in the 2008 second quarter. Excluding the unfavorable effects of currency exchange rates, maintenance revenues were up 10 percent year over year. The overall increase in maintenance revenues was driven by continued strong demand for the Company’s maintenance support and product upgrades.

Operating income for the 2009 second quarter was $11.3 million, or 16 percent of revenues, compared to $10.9 million, or 14 percent of revenues, in the 2008 second quarter. The 2009 second quarter operating income and operating margin were the highest second quarter operating income and operating margin in the Company’s history. This achievement in operations reflects the benefits of cost initiatives and expense controls initiated late in 2008 and was accomplished despite a significant negative impact from foreign currency exchange rates, planned increases in marketing programs and higher professional fees. The 2009 second quarter G&A expenses included one-time transaction costs of $1.2 million primarily related to the previously announced pending merger transaction with IBM.

For the 2009 second quarter, Other Income/Expense was a net expense of $2.6 million, which was $2.0 million net higher than the same period in 2008. This change reflects significantly lower interest income due to less favorable investment opportunities and less favorable foreign exchange rates. As a result of the required January 1, 2009, adoption of FASB Staff Position No. APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (FSP No. APB 14-1), the Company recognized $1.4 million non-cash interest expense in the 2009 second quarter and also adjusted the 2008 second quarter results to reflect the retrospective application of FSP No. APB 14-1 by increasing interest expense $1.3 million for that period.

Net income for the 2009 second quarter was $6.2 million, down 12 percent from $7.0 million in the 2008 second quarter. Diluted earnings per share (EPS) for the 2009 second quarter was $0.32, down 14 percent from EPS of $0.37 in the 2008 second quarter. EPS includes non-cash expense for FSP No. APB 14-1 of $0.04 in both the 2009 and 2008 second quarters. Expenses for share-based compensation were $0.08 per share in both the 2009 and 2008 second quarters periods. The effective income tax rate for the 2009 and 2008 quarters was 29 percent and 32 percent, respectively.

“Even in more stable economic times, our second quarter is generally our softest quarter. In this continued unpredictable market, we faced an even greater challenge,” said Jack Noonan, SPSS chairman, president and CEO. “We were optimistic heading into the quarter with a very full pipeline that proved more challenging to convert in a short sales cycle when general global confidence in an improving economy slipped late in the quarter.”

Noonan continued, “Mid- and low-priced transactions of our statistical products continue to account for the majority of our license revenue and, as expected, we had a lower number of larger sales of combined products, particularly in Europe, which weakened our second quarter results. Geographically, we saw a slight decline in license revenue in the U.S. and greater weakness in Europe, offset by higher sales in Asia Pacific, with significant gains in Japan.”

Noonan added, “Importantly, we made a number of strategic marketing investments – particularly focused on new customer development – in the second quarter and first half of the year that we believe will leave us well-positioned to increase sales and market share when the economy begins to recover.”

Revenues for the six months ended June 30, 2009, totaled $141.8 million, down 8 percent from $153.9 million for the same period in 2008. Excluding the effects of unfavorable currency exchange rates, total revenues were flat compared to the first six months of 2008. License revenues were $64.1 million, down 13 percent from $73.2 million in the same period last year. Excluding the effects of unfavorable currency exchange rates, license revenues were down 7 percent compared to the same 2008 six-month period. Operating income was $28.5 million, or 20 percent of revenues, compared to $24.8 million, or 16 percent of revenues, in the 2008 six-month period.

Net income for the six months ended June 30, 2009, was $15.5 million, down 3 percent from $16.1 million in the 2008 period. In the six-month period ended June 30, 2009, the Company recognized $2.7 million non-cash interest expense and adjusted the 2008 six-month results to reflect the retrospective application of FSP No. APB 14-1, thereby increasing interest expense by $2.6 million for the period.

EPS for the 2009 six-month period was $0.80, a 5 percent decline from $0.84 EPS in the 2008 six-month period. EPS includes non-cash expense for FSP No. APB 14-1 of $0.09 and $0.08 in the 2009 and 2008 six-month periods, respectively.

Charges for share-based compensation were $0.15 per share in both the first six months of 2009 and 2008. The effective income tax rate in the 2009 six-month period was 33 percent, compared to 36 percent in the same period last year.

At June 30, 2009, cash and cash equivalents totaled $337.9 million, compared with $311.5 million at March 31, 2009, and $306.0 at June 30, 2008. The Company generated $16.8 million in cash from operations in the 2009 second quarter, up from $14.6 million in the same quarter last year. Cash provided by operating activities in the first six months of 2009 was $32.7 million, compared to $28.8 million in the 2008 same period.

Pending Merger Transaction with IBM

On July 28, 2009, the Company announced it entered into a definitive Agreement and Plan of Merger with International Business Machines Corporation (IBM). Pursuant to the terms of the merger agreement, subject to the conditions thereof, stockholders of the Company will be entitled to receive $50.00 in cash for each share of the Company’s common stock. The Board of Directors of the Company have unanimously approved the merger. The transaction is subject to Company stockholder approval, applicable regulatory clearances and other customary closing conditions. The Company has filed a Current Report on Form 8K with the Securities and Exchange Commission, which includes further details of the transaction and a copy of the Agreement and Plan of Merger.

Outlook and Guidance

“While we are not satisfied with the 2009 second quarter results, the Company remains in a financially solid position. Sales performance during the quarter reflected both the more challenging than expected economic environment and a lower level of execution. However, increased spending in marketing programs and continued focus on cost management programs have positioned the Company for future success – operationally and financially,” said Raymond Panza, SPSS executive vice president and CFO.

Panza added, “In view of the announced pending merger transaction with IBM, the Company is not providing guidance for the 2009 third quarter or balance of the year.”

About SPSS Inc.

SPSS Inc. is a leading global provider of Predictive Analytics software and solutions. The Company’s complete portfolio of Predictive Analytics Software (PASW) products – data collection, statistics, modeling and deployment – captures people’s attitudes and opinions, predicts outcomes of future customer interactions, and then acts on these insights by embedding analytics into business processes. SPSS Solutions address interconnected business objectives across an entire organization by focusing on the convergence of analytics, IT architecture and business process. Commercial, government and academic customers worldwide rely on SPSS technology as a competitive advantage in attracting, retaining and growing customers, while reducing fraud and mitigating risk. Founded in 1968, SPSS is headquartered in Chicago, Illinois. For more information, please visit www.spss.com.

Safe Harbor Statement

In addition to historical information, this press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including, without limitation, statements regarding the Company’s expectations, beliefs, intentions or future strategies that are signified by the words “expects,” “anticipates,” “intends,” “believes,” “estimates” or similar language. All forward-looking statements included in this document are based on information available to the Company on the date hereof. The Company cautions investors that its business and financial performance and the matters described in these forward-looking statements are subject to substantial risks and uncertainties. Because of these risks and uncertainties, some of which may not be currently ascertainable and many of which are beyond the Company’s control, actual results could differ materially from those expressed in or implied by the forward-looking statements. The potential risks and uncertainties that could cause results to differ materially include, but are not limited to: the Company’s ability to predict revenue, the Company’s ability to respond to rapid technological changes, a potential loss of relationships with third parties from whom the Company licenses certain software, fluctuations in currency exchange rates, the impact of new accounting pronouncements, increased competition and risks associated with product performance and market acceptance of new products. A detailed discussion of other risk factors that affect the Company’s business is contained in the Company’s Annual Reports on Form 10-K, particularly under the heading “Risk Factors.” The Company does not intend to update these forward-looking statements to reflect actual future events.

          SPSS Inc. and Subsidiaries Consolidated Statements of Income (unaudited)   For the Three Months Ended June 30, Percent % of Net Revenues     2009   2008   Change   2009   2008 (in thousands, except per share amounts) Net revenues: License $ 30,296 $ 34,823 -13 % 43 % 46 % Maintenance 33,561 33,184 1 % 48 % 44 % Services     5,888       7,694     -23 %   9 %   10 % Net revenues     69,745       75,701     -8 %   100 %   100 % Operating expenses: Cost of license and maintenance revenues 4,753 5,221 -9 % 7 % 7 % Sales, marketing and services 33,223 38,767 -14 % 48 % 51 % Research and development 9,686 11,305 -14 % 14 % 15 % General and administrative     10,772       9,495     13 %   15 %   13 % Operating expenses     58,434       64,788     -10 %   84 %   86 % Operating income     11,311       10,913     4 %   16 %   14 % Other income (expense): Interest expense (See Note) (2,504 ) (2,479 ) 1 % -4 % -3 % Interest income 681 2,339 -71 % 1 % 3 % Other     (816 )     (468 )   74 %   -1 %   0 % Other income (expense)     (2,639 )     (608 )   334 %   -4 %   0 % Income before income taxes 8,672 10,305 -16 % 12 % 14 % Income tax expense     2,492       3,279     -24 %   3 %   5 % Net income   $ 6,180     $ 7,026     -12 %   9 %   9 % Basic net income per share   $ 0.34     $ 0.39     -13 % Diluted net income per share   $ 0.32     $ 0.37     -14 % Shares used in computing basic net income per share     18,327       17,936     2 % Shares used in computing diluted net income per share     19,568       19,072     3 %           SPSS Inc. and Subsidiaries Consolidated Statements of Income (unaudited)   For the Six Months Ended June 30, Percent % of Net Revenues     2009   2008   Change   2009   2008 (in thousands, except per share amounts) Net revenues: License $ 64,066 $ 73,240 -13 % 45 % 48 % Maintenance 66,056 65,331 1 % 47 % 42 % Services     11,704       15,371     -24 %   8 %   10 % Net revenues     141,826       153,942     -8 %   100 %   100 % Operating expenses: Cost of license and maintenance revenues 9,365 10,520 -11 % 7 % 7 % Sales, marketing and services 64,360 77,927 -17 % 45 % 51 % Research and development 20,663 22,686 -9 % 15 % 15 % General and administrative     18,903       18,031     5 %   13 %   11 % Operating expenses     113,291       129,164     -12 %   80 %   84 % Operating income     28,535       24,778     15 %   20 %   16 % Other income (expense): Interest expense (See Note) (5,027 ) (4,919 ) 2 % -4 % -3 % Interest income 1,498 5,316 -72 % 1 % 3 % Gain on convertible debt retirement 356 - NM 0 % 0 % Other     (2,056 )     (168 )   NM     -1 %   0 % Other income     (5,229 )     229     NM     -4 %   0 % Income before income taxes 23,306 25,007 -7 % 16 % 16 % Income tax expense     7,761       8,943     -13 %   5 %   6 % Net income   $ 15,545     $ 16,064     -3 %   11 %   10 % Basic net income per share   $ 0.85     $ 0.90     -6 % Diluted net income per share   $ 0.80     $ 0.84     -5 % Shares used in computing basic net income per share     18,280       17,926     2 % Shares used in computing diluted net income per share     19,486       19,154     2 %   SPSS Inc. and Subsidiaries Consolidated Condensed Balance Sheets (unaudited)     June 30, December 31,     2009   2008 (in thousands) ASSETS Current assets: Cash and cash equivalents $ 337,882 $ 305,917 Accounts receivable, net 39,870 43,172 Inventories, net 651 433 Deferred income taxes 3,945 4,142 Prepaid income taxes 9,032 5,738 Other current assets     5,459       4,693   Total current assets     396,839       364,095   Net property, equipment and leasehold improvements, net 13,892 14,323 Capitalized software development costs, net 39,069 37,470 Goodwill 41,886 41,845 Intangibles, net 1,898 2,091 Noncurrent deferred income taxes 16,435 20,728 Other noncurrent assets     2,583       3,673   Total assets   $ 512,602     $ 484,225     LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 7,729 $ 6,391 Income taxes and value added taxes payable 12,764 10,877 Deferred revenues 79,992 83,638 Other accrued liabilities     21,605       22,146   Total current liabilities     122,090       123,052   Long-term debt (See Note) 128,173 128,106 Noncurrent deferred income taxes 7,384 8,509 Other noncurrent liabilities 1,578 1,937 Stockholders' equity: Common Stock 184 182 Additional paid-in capital (See Note) 170,202 164,373 Accumulated other comprehensive loss (6,817 ) (16,197 ) Retained earnings (See Note)     89,808       74,263   Total stockholders' equity     253,377       222,621   Total liabilities and stockholders' equity   $ 512,602     $ 484,225  

Note– Implementation of FASB Staff Position No. APB 14-1

The Company adopted FASB Staff Position No. APB 14-1 (“FSP” or “FSP No. APB 14-1”), “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” on January 1, 2009. The FSP requires retrospective application related to the Company’s convertible debt that was outstanding during the periods presented in the financial statements.

Consequently, adoption of FSP No. APB 14-1 resulted in the adjustment of the Company's 2008 financial statements including decrease in fully diluted earnings per share by $0.04 per share. Adoption of FSP 14-1 also resulted in adjustments to the Company’s December 31, 2008 balance sheet including decrease to convertible debt of $21.9 million, increase to additional paid-in capital of $17.3 million, increase to deferred tax liability of $7.5 million, decrease to other assets of $2.8 million, and decrease of $5.7 million to retained earnings.

  SPSS Inc. and Subsidiaries Consolidated Statements of Cash Flows (unaudited)     For the Six Months Ended June 30,     2009   2008 (in thousands) Cash flows from operating activities: Net income $ 15,545 $ 16,064 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 9,256 9,509 Convertible debt amortization 3,081 2,939 Deferred income taxes 3,459 1,413 Excess tax benefit from share-based compensation 74 (1,241 ) Amortization of share-based compensation 4,648 4,538 Gain on convertible debt retirement (356 ) - Changes in assets and liabilities: Accounts receivable 3,784 11,391 Inventories (201 ) (18 ) Prepaid and other assets (734 ) (2,053 ) Accounts payable 1,320 466 Accrued expenses (511 ) (6,288 ) Income taxes (1,372 ) (3,085 ) Deferred revenue (5,510 ) (1,504 ) Other, net     186       (3,348 ) Net cash provided by operating activities     32,669       28,783   Cash flows from investing activities: Capital expenditures (2,677 ) (2,816 ) Capitalized software development costs (6,887 ) (6,802 ) Purchase of business intangibles         (1,245 ) Net cash used in investing activities     (9,564 )     (10,863 ) Cash flows from financing activities: Proceeds from stock option exercises and employee stock purchase plan 2,434 4,204 Tax benefit from stock option exercises - 1,241 Retirement of convertible debt (3,084 ) - Purchases of common stock     -       (27,870 ) Net cash provided by financing activities     (650 )     (22,425 ) Effect of exchange rates on cash     9,510       3,571   Net change in cash and cash equivalents 31,965 (934 ) Cash and cash equivalents at beginning of period     305,917       306,930   Cash and cash equivalents at end of period   $ 337,882     $ 305,996