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Executives

Vivek Ranadivé – Chairman and Chief Executive Officer

Murray Rode – Executive Vice President and Chief Financial Officer

Analysts

John DiFucci – JP Morgan

Brad Zelnick – Banc of America

Derek Bingham – Goldman Sachs

Tim Klasell – Thomas Weisel

Brian Schwartz for Mark Murphy – Piper Jaffrey

Kash Rangan – Merrill Lynch

TIBCO Software, Inc. (TIBX) F4Q08 Earnings Call December 22, 2008 4:30 PM ET

Operator

Welcome to TIBCO’s fourth quarter 2008 conference call. At this time all participants are in a listen-only mode. (Operator Instructions)

The following conference call includes forward-looking statements which represent TIBCO Software’s outlook and guidance only as of today and which are subject to risks and uncertainties. These forward-looking statements include, but are not limited to, forecasts of revenue, margins and earnings per share for future periods.

Our actual results could differ materially from those projected in such forward-looking statements. Additional information regarding the factors that could cause actual results to differ materially are discussed in the Risk Factors section of TIBCO’s most recent reports on Forms 10-K and 10-Q filed with the Securities and Exchange Commission. TIBCO assumes no obligation to update the forward-looking statements included in this call whether as a result of new development or otherwise.

This conference call also includes certain financial information that has not been prepared in accordance with generally accepted accounting principles as we believe that such information is useful for understanding our financial condition and results of operations. For a presentation of the most directly comparable financial measures calculated in accordance with GAAP and a reconciliation of the differences between the non-GAAP and GAAP financial information, please see our website at www.tibco.com.

The participants on this call are Vivek Ranadivé, TIBCO’s Chairman and CEO and EVP and Chief Financial Officer, Murray Rode.

I would now like to turn the call over to Vivek.

Vivek Ranadive

Thank you. Hello everyone. We appreciate you joining us once again on our Q4 earnings call. On today’s call I’ll make my comments in two parts. First, I’ll briefly review our Q4 and 2008 highlights. Second, I will share some thoughts on the broader market environment and TIBCO’s position as we look to the year ahead.

Let me start with our Q4 performance. Total revenue for this quarter was $185.5 million. License revenue was $90.4 million. Non-GAAP operating margins were 29%. Fully taxed non-GAAP earnings per share for the quarter were $0.23 versus $0.18 a year ago.

In Q4 we continued to show the diversity of our business, expanding our relationship with industry leaders including BNP Paribas, CIBC World Markets, CareFirst BlueCross, Grupo Santander, Harvard Pilgrim, Merck, Microsoft, Northrop Grumman, Scripps Network, CNet, Society General, Swisscom, UNUM and the Vodafone Group.

For the full year 2008 highlights include record total revenue of $644 million representing 12% growth over 2007; record operating profit of $119 million, an increase of 19% over last year; record cash flow from operations of $152 million, a full 49% higher than last year and record non-GAAP EPS of $0.47 versus $0.38 last year, an increase of 24% over 2007.

As I reflect on the past year and look forward to 2009 several constants remain clear to me. One, the world is more competitive, not less. Companies need to work harder than ever to service their customers and win new customers. Two, it is now clear that the old model where [silos] of systems can no longer keep up with the requirements of a competitive world as the scope and velocity of business passes it by.

Today’s companies require better flexibility in how they operate their business and better accountability in the form of cost savings and ROI. Whether, for example, as a matter of compliance, a tool to manage risk or as a means by which to better service customers.

Three, there is a shift taking place away from these old request-reply database architectures and towards new event driven solutions built on in-memory data management systems. The only way to compete in the 21st century is with an event driven infrastructure software platform and TIBCO offers the gold standard products in this area. As a result, we are extremely well positioned to benefit from these trends and I have never been more confident in our position in the market.

I believe TIBCO will emerge from this environment in our strongest competitive position ever. In summary, in the past year we delivered substantial increases in revenue, profits, cash flow and EPS while also returning $150 million to shareholders through buybacks and we still maintained our cash balance position of approximately $270 million. We did all of this while making investments for the future such as dramatically increasing our sales force and bringing out a blistering array of new products including Business Events 3.0, Active Matrix 2.1, Service Performance Manager, TIBCO’s Spotfire S+, TIBCO Messaging Appliance and more.

For all of this I would like to take a moment to thank all of TIBCO’s employees for their hard world and dedication in 2008. We have some of the most committed and competent people on the planet and I am honored to work together with them.

With that I will turn the call over to Murray for more details on the financials.

Murray Rode

With my comments I’ll first provide more details on our financial performance in Q4 and for fiscal 2008 overall and then I’ll talk about our financial outlook going into next year. I’ll review our financials on both a GAAP and non-GAAP basis, a full reconciliation of which was included with our press release along with an explanation of our non-GAAP measures.

Some key performance data on our fourth quarter results are as follows: Total revenue was $185.5 million, essentially flat with last year; license revenue was $90.4 million, down 9% year-over-year; non-GAAP gross margins were 79%, up from 78% last year; non-GAAP operating income was $54 million up year-over-year by almost 8% and resulting in an operating margin of approximately 29% versus 27% a year ago.

Non-GAAP EPS was $0.23 versus $0.18 a year ago. Part of this increase was due to the non-GAAP effective tax rate for the quarter coming in at 27% versus 35% a year ago. We had such a low tax rate in the quarter due primarily to the reinstatement of the R&D tax credit and the mix of foreign and domestic income. If we apply a more normalized rate of 33%, our non-GAAP EPS would still be $0.21 or a $0.03 increase over last year.

GAAP EPS for the quarter was $0.18 versus $0.14 for Q4 a year ago. Regarding foreign exchange we believe that on a year-over-year constant currency basis total revenue was negatively impacted by 3-4%. However, there was virtually no effect on earnings.

We have been saying for several quarters that we are carefully managing expenses and our profitability this quarter is clearly a result of those efforts. Our expense reductions both this year and for next year span a variety of components including salary related costs, restricted hiring, travel, meeting and marketing program costs as well as capital spending.

Turning to our balance sheet, we ended the quarter with approximately $267 million cash and short-term investments despite also having repurchased 6.9 million shares during the quarter at an average price of $5.55.

DSO’s came in at 65 days as compared to 61 days in Q3 and 78 days in Q4 last year.

Deferred revenue including both long and short-term components totaled $152 million at quarter end. This is up 8% from both our comparable balance a year ago and the balance of last quarter. Q4 cash flow from operations amounted to $38 million versus $30 million last Q4.

As for revenue splits the geographic breakdown of total revenue was as follows: Americas 46%, EMEA 45% and Asia Pacific 9%. Total revenue by vertical was as follows: Financial services 21%, telecommunications 11%, life sciences 10%, government 10%, manufacturing 9% and energy 8%. No other industry represented 5% or more of revenue.

License revenue by product family broke down approximately as follows: SOA 57%, business optimization 33% and BPM 10%. With regards to revenue concentration our top ten customers represented 24% of revenue versus 30% a year ago and we had twenty deals of over $1 million in license revenue this quarter versus 17 last year.

We had 135 license deals this quarter of $100,000 or greater with an average deal size of $607,000. Finally, this quarter we added 66 new license customers versus 48 in the prior quarter and 47 a year ago.

Some highlights for the full fiscal year 2008 are as follows: Total revenue came in at $644 million, up 12% from 2007. License revenue was $272 million, roughly 5% higher year-over-year. We generated cash flow from operations for the year of $152.5 million for an increase of 49% year-over-year. This included approximately $24 million in Spotfire pre-acquisition receivables.

Non-GAAP operating profit for the year was $119 million, 14% higher than 2007. Non-GAAP EPS was $0.47 versus $0.38 last year and GAAP EPS was $0.29 as compared to $0.25 in 2007.

More qualitatively some notable accomplishments for the past year include continued growth in customer adoption across our business optimization product family, substantial up tick in momentum for active matrix, the release of our first Messaging appliance, substantial expansion of our direct sales force and all of this while reducing our costs and improving efficiency.

Turning to our outlook for the business, our focus for the coming year will be on the following: Continuing to ramp up newly hired sales reps, running the business profitably with expanded margins where possible, continued evolution of our platform, expanding partnerships and direct channels and targeted acquisitions.

We continue to remain positive on our competitive position and long-term prospects for growth for all the reasons Vivek mentioned earlier. However, as we look forward into 2009 visibility is a challenge in the current environment. Consequently we are providing guidance only for Q1 at this point in time. The weak macro economic environment coupled with the fact that Q1 is a seasonally weaker quarter for us anyways is causing us to take a particularly conservative view for the quarter.

So for Q1 of 2009, our outlook is as follows: We expect total revenue to be in the range of $140 to $144 million, license revenue to range between $47-51 million, non-GAAP gross margin for the quarter expected to be about 74% while non-GAAP operating margin is expected to be between 13.5 and 15%. Non-GAAP EPS for the quarter should range between $0.07 and $0.08 with an assumed tax rate between 33-35%. Q1 GAAP EPS should range from $0.02 to $0.03 and we expect cash flow from operations in a range of $22-30 million.

This guidance suggests a year-over-year decline in total revenue of roughly 2-5% but generating non-GAAP operating income that is flat to up 14%. Our revenue outlook also assumes an FX headwind of approximately 3-5% assuming current rates versus last year’s Q1 rates.

Long-term we continue to see ourselves as a growth company but we will focus on protecting margins while macro economic uncertainty remains.

With that Vivek and I will be happy to take your questions.

Question-And-Answer Session

Operator

(Operator Instructions) The first question comes from the line John DiFucci – JP Morgan.

John DiFucci – JP Morgan

I have two questions. The first one has to do with this quarter and I think the other is sort of looking out in the general environment. Both Vivek and Murray, TIBCO by some accounts anyway can be categorized as sort of a poster child for risk in this environment. You are a relatively small software company with some big deal exposure. You have big exposure to the financial services vertical but you continue to post results that are better than many would suspect or than you would expect given the characteristics of the company. Can you just address that? As you guys know there is a lot of volatility around your stock and it seems like operations are a lot more steady than would suggest by the stock volatility.

Vivek Ranadivé

I think that is a good point. If you look at us today versus a year ago we are a lot stronger company in terms of if you look at our time based revenue, revenue that is not one-time. So services revenue, maintenance revenue, term license revenue, it is about 65-70% of our revenue at this point. So if you look at our customer base, we get 60% of our license revenue, 60-70% comes from customers we already have many of whom have to renew ELAs and the new term licenses and so there is a great deal of certainty in that type of revenue.

Three, if you look at the roll that our software plays even in the financial services industry when you look companies that go out of business and then get bought they have to keep running a software even when they are turning the lights out. So, some of the deals we got were from companies that were actually out of business but they had to pay for their licenses in order to keep their trading flows running. So we tend to be not a “nice to have” but an absolute “must have” in terms of what these companies do.

Then you look at the diversity of the clients that we have in both geographic terms as well as in vertical market terms and size terms. It is pretty well spread out. I think the real clincher is the value that is delivered by the software. As you know, you know us well; this is really a very, very high value software. We are closing deals with companies that are out there avoiding in terms of just losing revenues and customers and so on. They still need our software to keep running and keep getting new customers and to keep holding onto the customers that they have.

So, you look at us and say this is risky but in many ways if you look at our multiples and counter-multiple and profit multiple or revenue multiple and you look at other companies be it Informatica, Oracle or whoever, I would say that there is very little risk in this.

Murray I will let you comment.

Murray Rode

Actually I think Vivek covered well the various points. I just would say I think people underestimate and the industries continually underestimate with TIBCO is just how deep the roots of the company run in terms of the customer base and to Vivek’s point about how sticky the software is. I think that fundamentally drives the stability of the business and will drive growth in the future.

John DiFucci – JP Morgan

The second question has to do with just the general environment out there and how it applies to you guys. Murray you talked about a level of conservatism around the guidance for next quarter. I guess if you could just give us a little more detail on that perhaps on close rates, assumed or any kind of metrics you might want to share. I also want to try to get a sense, this is the end of the fiscal year for you which is also the end of the budgetary cycle right now coming up for most of your customers. I’m wondering if your sense is if this could be a last push in a real difficult environment before customers really start to batten down their hatches here, not just for TIBCO but for the industry.

Murray Rode

First of all, in terms of our conservatism I think that giving you a little bit more color there we continue to scrub our overall pipeline so we have more confidence in the pipeline we have. Then we are assuming lower close rates as we go into Q1. I think Q1 is a seasonally more challenging quarter for us anyway so we are just rolling all that into a conservative posture. I think from what I have been hearing in terms of general environment, there is clearly some across the board tightening and re-examination of things. I don’t know if we are getting the sense that this year is going to have a typical kind of budget flush. I think that to the extent people can hold back spending they are doing that. I think we are going to see that continue as we go into 2009.

Vivek Ranadivé

I think to your point I don’t think seeing them say okay we are going to spend here and that will be sort of a last hurrah. I’m sure we [start] spending next year. So I have been involved in a number of customer situations where they have planned closures in January-March where the cycle will just play out during those months. I don’t see that effect that you described.

Operator

The next question comes from Brad Zelnick – Banc of America.

Brad Zelnick – Banc of America

I just had a couple of quick questions and one quick housekeeping item. Firstly, on services and maintenance revenue it seems that it is essentially flat sequentially and I understand from your remarks there was a drag from FX but I’m wondering can you comment on what you saw for renewal rates for the quarter versus the contribution from professional services and has anything changed materially there?

Murray Rode

Maintenance was actually quite strong in the quarter and what we expected it to be. It is up slightly sequentially. So professional services was flat to slightly down if you look at things like training. So professional services were a little bit slower in the quarter but maintenance was up and renewal rates on maintenance have in Q4 been pretty consistent in the 95% range.

Brad Zelnick – Banc of America

On large deal metrics, twenty deals over $1 million seems solid but I’m just curious if you can comment on were there any extraordinarily large mega-deals in the quarter any different than you would typically see in a fourth quarter and perhaps you could share with us the deals above $5-10 million that would be great.

Murray Rode

As you know, we have kind of shifted to viewing mega deals being kind of $8-10 million or greater and we had no deals in that range. We did, as you say, have a solid number of deals over $1 million which we would expect for a fourth quarter.

Brad Zelnick – Banc of America

Did you mention sales headcount at the end of the quarter and your thoughts on hiring?

Murray Rode

We did not. We finished the year with 179 quota heads. So basically at the target we hoped to reach. Then, we are going to continue to look at quota specific hiring on a continuing in the year but on a more targeted basis.

Operator

The next question comes from Derek Bingham – Goldman Sachs.

Derek Bingham – Goldman Sachs

Murray I was wondering if you could comment a little bit into the linearity through the November quarter and how it compared with a typical November quarter just to help us understand what you saw from a macro perspective?

Murray Rode

I think first of all the very typical pattern for any quarter for us is that the third month in the quarter is the big month for the quarter and Q4 is no different. As we came into the third month of this fourth quarter we were tracking slightly ahead actually of the prior two Q4’s or Q4 of last year and the year before. Then as we got further into November I think we saw more headwind and that ultimately played out in the last two weeks of the quarter to the largest extent. Reasonably good linearity or comparative linearity to past Q4’s until we got into the last two weeks and then things did get a little tougher. The environment I suppose felt a little tougher. That said, significant deals still closed including significant deals in the financial services. It was a bit mixed and a little bit case by case.

Vivek Ranadivé

I think if you plot it out it would be typical overall.

Derek Bingham – Goldman Sachs

Can you give me those dynamics where you have some large deals that slipped that you have either closed already or you are highly confident of closing for Q1?

Murray Rode

There were a handful of deals that slipped which we are confident of closing in the next two quarters. In some cases larger deals that fell out of the pipeline we have recapped to Q2 and I think Vivek was mentioning some of that in terms of just understanding the actual pattern that customers are expecting these deals to close on. So there was some of that. Nothing again particularly atypical for a Q4 though really.

Derek Bingham – Goldman Sachs

On cash flow, obviously there was a really big cash flow growth year for you well in excess of I think your net income growth. I was wondering if you could comment on in hindsight what were the biggest drivers of that and if you expect cash flow growth to synch up more with net income growth in 2009?

Murray Rode

A couple of major things. First of all, I do think we were very disciplined about collections this year. We had a particularly good year on collections that really helped drive cash flow. The second factor was we did, as you recall, have the pre-acquisition receivables from the Spotfire acquisition which as I mentioned in the formal remarks added about $24 million to cash flow.

Operator

The next question comes from Tim Klasell – Thomas Weisel.

Tim Klasell – Thomas Weisel

Probably the biggest leverage point as I look at your P&L was obviously on the sales and marketing line. Can you give us an idea of did you get to the sales force efficiency numbers that you sort of wanted and are starting to see some of the newer hires get productive and what do you expect throughout 2009?

Murray Rode

In terms of new hires we were actually pretty pleased with the performance of the new hires. I think if we look across the sales force as a whole we obviously on the top line didn’t hit our targets so I guess you could say overall average payment was exactly on target but the new hire performance was above target. The top end of the sales force performed well again and I think where you saw a little bit of softness was essentially in the middle.

Vivek Ranadivé

One of the things we have been talking about is the fact that we needed to tier our sales force and we needed to let people be successful at lower quotas. So this is the first year we have really grown our sales force and we are quite pleased with what we saw. So the only indications are very, very positive in terms of what we can expect these new sales people to contribute in the next year and future years.

Tim Klasell – Thomas Weisel

You didn’t really hit much on the competitive environment with IBM and I guess to a certain extent Oracle BEA, any changes out there during the quarter?

Vivek Ranadivé

No, we really competitively probably had our strongest year ever. So just about everything we went after we won. The field has narrowed dramatically so we hardly see SAP and it is mostly IBM that we are seeing. So there was a dramatic narrowing of the competitive landscape.

Tim Klasell – Thomas Weisel

Back to the sales force, Q1 has been difficult for you in the past. Often you are doing sales force reorganizations and training and stuff like that. Are you doing anything different this year to try and keep the closure rates up a little bit?

Vivek Ranadivé

We had a training session we already did. It was just based domestically so our focus this year was to train people in terms of new products and to get that done quickly. We have already put that behind us. We feel we also have a reward trip for our sales people and that is actually going to be in Q2 not in Q1. In the past both things have fallen in the same quarter. So that has changed. We are very, very focused. We have learned from the past in terms of how to time things and when to do things. So this year we think some of those things will be quite different.

Operator

The next question comes from Mark Murphy – Piper Jaffrey.

Brian Schwartz for Mark Murphy – Piper Jaffrey

I was wondering if you could comment at all on the financial services performance during the quarter? It seems to me to be a focal point of your stock and conversations and I know you haven’t commented on it in the past but could you provide any additional color how maybe the different regions performed according to your plan and maybe which products you are seeing the most up tick in this vertical?

Vivek Ranadivé

I know we keep getting hounded because people say we sell to banks and the banks are in trouble. But we also sell to a lot of other people. When you say financial services that encompasses a pretty wide range of types of companies. Retail, insurance and so on. What we are seeing is continued need, absolute necessity for our products with these types of institutions. We are also seeing some good growth opportunities in the insurance and retail sectors. So, we believe that whatever our risk people say was we were able to manage that in 2008 and we will continue to do that in 2009. They have a real need for moving to this event driven infrastructure so that is almost a must have for everyone, banks included. The whole predictive business events software whether it is for fraud detection or risk management or just for customer care kinds of things is also essential for the financial customers.

Then when you add to that things like mass data management, we are just seeing that people are very, very focused on solving these kinds of things. Murray, is there anything you want to add to that?

Murray Rode

No, other than to say honestly we have seen a bit of less focus on financial services in the numbers this quarter at 21% versus in the 30’s really in prior Q4’s so we have clearly seen some de-focusing on financial services but beyond that as Vivek said there is a critical need there that is going to continue and I think it what has carried us in financial services is the shift within that market for more of a focus on sales to the retail side of the industry.

Brian Schwartz for Mark Murphy – Piper Jaffrey

Can you comment at all how it is performing geographically and if there is more demand in one region than others?

Murray Rode

Well, I don’t necessarily think we have seen a big shift from the Americas to Europe. That past couple of quarters I think Europe has been stronger but I don’t think that is a trend so much as just the way the pipeline has fell out.

Vivek Ranadivé

Also the way we executed in some instances.

Brian Schwartz for Mark Murphy – Piper Jaffrey

I am just wondering how Insightful performed in the quarter and if you had any metrics on their contribution?

Murray Rode

Its contribution is so small at this point we are just rolling that in essentially to the business optimization number.

Operator

That will conclude our question-and-answer session. I would like to turn the conference back over to our presenters for any additional or closing remarks.

Vivek Ranadivé

Thank you. We will conclude this call. Thank you all for joining us. We wish you all happy holidays and look forward to speaking with you in the New Year. Thanks and goodbye everyone.

Operator

Once again thank you for joining us. We now conclude TIBCO’s Q4 2008 earnings call.

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Source: TIBCO Software, Inc. F4Q08 (Qtr End 11/30/08) Earnings Call Transcript
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