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Executives

Derrick Vializ - Vice President of Investor Relations

Robert E. Beauchamp - Chairman, Chief Executive Officer and President

Stephen B. Solcher - Chief Financial officer and Senior Vice President

Analysts

Matthew Hedberg - RBC Capital Markets, LLC, Research Division

Aaron Schwartz - Jefferies & Company, Inc., Research Division

Abhey Lamba - Mizuho Securities USA Inc., Research Division

Yun S. Kim - Janney Montgomery Scott LLC, Research Division

James Derrick Wood - Susquehanna Financial Group, LLLP, Research Division

Matthew L. Williams - Evercore Partners Inc., Research Division

James Wesman

Sitikantha Panigrahi - Crédit Suisse AG, Research Division

BMC Software (BMC) Q3 2013 Earnings Call January 28, 2013 5:00 PM ET

Operator

Good day, everyone. Welcome to today's BMC Software Third Quarter Fiscal Year 2013 Earning Results Conference. Today's call is being recorded. At this time, for opening remarks, I'd like to turn the program over to Mr. Derrick Vializ. Please go ahead, sir.

Derrick Vializ

Good afternoon, everyone. I'm Derrick Vializ, Vice President of Investor Relations, and I would like to thank you for joining us this afternoon.

During our call, Bob Beauchamp, our Chairman and CEO, will provide an overview of the third quarter fiscal 2013 performance of both our company and business units and update you on recent initiatives. Steve Solcher, our CFO, will then provide additional financial and operational detail. Bob will conclude our prepared comments by discussing and providing you with an update of our expectations for fiscal 2013 before we open the call to questions. These prepared comments were previously recorded. This call is being webcast, and a complete record of the call will be made and posted to our website.

In addition to today's earnings press release, we have posted a presentation that we will refer to at various times during the call. Both of these documents are available on our Investor Relations website at investors.bmc.com.

Before we continue, I would like to remind you that statements in this discussion, including statements made during the question-and-answer session regarding BMC's future financial and operating results, particularly statements and views regarding fiscal 2013, the development of and demand for BMC's products, BMC's operating strategies, acquisitions and other statements that are not statements of historical facts are considered forward-looking statements.

These statements are subject to numerous important factors, risks and uncertainties, that could cause actual results to differ from the results implied by these or any other forward-looking statements. Cautionary statements relative to these forward-looking statements and BMC's operating results are described in today's earnings press release and in our annual report on Form 10-K. All of these documents are available on our website. These forward-looking statements are made as of today based on certain expectations, and we undertake no obligation to update these forward-looking statements.

I would also like to note that the company's use of non-GAAP financial measures is explained in today's earnings press release, and a full reconciliation between non-GAAP measures and the corresponding GAAP measures is provided in the tables accompanying the press release and at investors.bmc.com.

At this time, I will turn the call over to Bob.

Robert E. Beauchamp

By now many of you have seen our third fiscal quarter results. While we had a record quarter for maintenance revenue, professional services revenue, total revenue and non-GAAP diluted EPS and saw many encouraging signs in our business, we did not meet our expectations for bookings, revenue or profitability. Most of our shortfall was a direct result of a number of large forecasted deals in our ESM business unit failing to close at the end of the quarter. In fact, we had a historically low proportion of large deals closed this quarter, as compared to the previous 15 quarters.

We believe this resulted from a combination of difficult macroeconomic conditions, some specific uncertainty related to press coverage surrounding our strategic review and the ongoing press coverage related to activist -- investor activity, as well as our own execution issues. A number of large transactions that we have booked this year and are currently pursuing are transformational in nature, fundamentally changing our clients' approaches to enterprise management and consolidation. And in the, process replacing a number of competitors products.

We continue to hear from our customers, prospects, partners, industry analysts and others, that our strategy is the right one and that our solutions are superior to our competitors. Our strategy, our market, our position in those markets and our technological leadership continued to offer what we believe are significant opportunities for our company and our shareholders. And while the macroeconomic environment will continue to be tight, we expect our performance to improve in the fourth quarter and the upcoming fiscal year.

Despite all this, the fact remains that we need to be more consistent and disciplined in how we execute and capture the opportunities we see in the addressable market. As we've demonstrated in the past, we are committed to consistently growing bookings, revenue and earnings in order to increase shareholder value.

Let me turn now to provide some additional insight in our business units, beginning with MSM. MSM continues to perform well overall, largely in line with our expectations with growth in both revenue and non-GAAP operating income. Third quarter MSM bookings were impacted by the timing of 2 large transactions that did not close during the period. Both of these transactions were with established customers we have contracts that are up for renewal in our fourth fiscal quarter. We now expect to close both transactions this quarter, as well as a number of other key renewals. It's shaping up to be a strong fourth quarter for MSM.

We're very pleased to note that our Control-M product line is doing very well among our customers and currently represents approximately 40% of MSM's total booking, as measured on a trailing 12-month basis.

In our top 15 MSM deals this quarter, we once again saw an increase in the spend rate, largely due to our success in selling more new products into those relationships. This is an indication of our solutions' continuing importance to and relevance to some of our most strategic customers. During the quarter, we added or expanded our relationships with 209 new MSM product placements, a 31% increase over a year ago. We also won a number of key competitive replacements against our major competitors. New product placements in both new and existing customers during the quarter included Amica Insurance Company, Thomson Reuters, China Construction Bank and NTT DATA.

Finally, we continue to maintain operating discipline with MSM with non-GAAP operating income increasing by 2% on a year-over-year basis. MSM non-GAAP operating margin is now 62%.

Let me now turn to ESM. As I noted upfront, our ESM license bookings were well below our expectations, directly related to slippage of a number of large deals. I'm happy to report, however, that we're off to a solid start in the fourth quarter and already closed several slip transactions, including a multimillion dollar license transaction. We are aggressively pursuing the other transactions that slipped and many of them are tracking well.

We remain positive on the underlying trends we're seeing in the marketplace and in the progress we've made in key metrics related to our sales force, including capacity, tenure and attrition rates.

During the quarter we continued to grow our SaaS business, which is now approaching 550 active customers. Over double the number of active customers we saw a year ago.

I am particularly pleased with the strong growth in our Remedyforce business, as our increased investment and strong partnership with salesforce.com is paying off. SaaS revenue more than doubled year-over-year, while our cloud business also continued to grow, with cloud licensed bookings up over 40% year-over-year. I'm also pleased to report that Remedy On-Premise total bookings were up 10% in the quarter, which is the second straight quarter of year-over-year growth.

During the quarter we won a number of ESM deals, including CARFAX, [indiscernible] Securities, DBS Bank, Deloitte and Pfizer. Additionally, after an extensive evaluation, one of the U.K.'s largest retail banks chose BMC's Remedy 8.0 On-Premise solution, over both the incumbent, HP, and ServiceNow's managed service SaaS offering.

Let me now turn to our professional services business. This business performed largely in line with expectations during the quarter, in terms of revenue and profitability. Revenues rose 16% on a year-over-year basis and non-GAAP gross margins improved substantially, growing by 9 percentage points year-over-year. The improvements we put in place in terms of process discipline, backlog scheduling and resource allocation are driving these stronger results. The healthy and growing professional service business directly supports the transformational projects we are involved with in our largest customers and it strengthens our competitive positioning. So that covers our business performance during the third quarter.

We are committed to taking the actions that are required to improve our performance and to increase shareholder value. Toward that end, I've asked Bill Miller, President of our MSM business, to oversee a company-wide operational review. Bill has done a great job of delivering consistent positive results with strong operational discipline for the past 6 years in his capacity as MSM BU leader.

This initiative will improve our operational discipline in pursuing this strategy we've set. BMC will move rapidly to sharpen our focus and improve our short-term execution, make the appropriate level of investment to grow our business and improve our operations and profitability. This review is currently underway and will position us well, as we enter fiscal year 2014.

I'll discuss our updated outlook for fiscal 2013 in a few minutes. First, let me turn it over to Steve Solcher, for a detailed financial review.

Stephen B. Solcher

Thank you, Bob. As you've heard, our third quarter results were below our expectation, mainly with the decline in bookings in both our MSM and ESM businesses. Our MSM business is inherently lumpy. Two large transactions mentioned earlier that were originally expected to close during the third quarter are now anticipated to close in the fourth quarter.

As for the ESM business, we also experienced slip deals, particularly among larger transactions. We did, however, generate healthy growth in ESM maintenance revenues as well as an increase in the maintenance renewal rates during the quarter. We also saw solid increases in key ESM growth areas, such as cloud and SaaS, improved performance around the Remedy On-Premise product line and we're pleased with the performance of our professional services business. With that, let me review our financial results for the third quarter in more detail.

Non-GAAP operating income in the quarter was $210 million, down 1% from the third quarter of last year. Our third quarter non-GAAP operating margin was 36%, down 3 percentage points from the year ago quarter. Please refer to Slide 5 in our presentation for selected non-GAAP financial information, which includes information on our ESM and MSM business units.

ESM's non-GAAP operating income in the third quarter declined to $71 million, down 7% from the year ago quarter. ESM's non-GAAP operating margin decreased year-over-year by 3 percentage points to 20%. MSM's non-GAAP operating income in the third quarter was $140 million, up 2% from a year-ago quarter and MSM's non-GAAP operating margin decreased 1 percentage point to 62%. Our non-GAAP net earnings for the third quarter were $151 million, down 4% from the third quarter of fiscal 2012. Non-GAAP diluted EPS for the quarter was $0.99, up 6% year-over-year. This reflects a non-GAAP effective tax rate for the quarter of 25%.

GAAP operating income in the third quarter was $148 million, a decrease of 9% from the third quarter of fiscal 2012. GAAP net earnings and diluted earnings per share were $106 million and $0.70, respectively. Our results reflect diluted shares outstanding in the third quarter of $153 million versus $170 million in the respective prior year quarter.

Turning now to bookings. Total bookings for the third quarter were $514 million, a decrease of 2% compared to the year ago quarter, on both a reported and constant currency basis. Trailing 12-month bookings were $2.1 billion, down 6% as reported and down 5% in constant currency year-over-year.

The weighted average contract length for total bookings on a trailing 12-month basis was 2.1 years, down 8% from the year ago period. This reduction in contract length is attributable to MSM's contract went returning to its historical average of approximately 3 years.

After normalizing for contract length, trailing 12-month annualized bookings for the third quarter were $993 million, up 2% from the year ago period. Please refer to Slide 7 in our presentation.

Now let me turn to the performance of each of our business units. Total ESM license bookings were $116 million in the third quarter, down 8% from the year-ago quarter. As Bob mentioned earlier, cloud related license bookings were up 44% on a year-over-year basis. We also achieved solid growth in our SaaS business. Two key measures of our SaaS business, our monthly recurring revenue, our MRR, and SaaS subscription revenue. MRR represents the combined monthly value of subscription fees associated with our active customers.

As of December 31, our SaaS MRR totaled 3 million, a 114% increase compared to the year-ago quarter. SaaS subscription revenue for the third quarter was $7 million, which grew 166% over the year-ago quarter. SaaS subscription revenue is reflected within maintenance revenue in our income statement.

Turning to the MSM business unit. Trailing 12-month total MSM bookings decreased 17% to $769 million and had an average contract length of 3 years, down 5% compared to the year-ago period. After normalizing for contract length, total annualized MSM bookings for the trailing 12 months were $253 million, down 13%.

Moving on to revenue. Total revenue for the quarter was a record $580 million, up 6%, compared to the third quarter of fiscal 2012, on both a reported and constant currency basis. ESM total revenue was $355 million, up 7% compared to the year-ago quarter, and MSM total revenue for the quarter was up 4% to $225 million.

License revenue in the third quarter was $232 million, up 3% from a year ago. ESM license revenue was $131 million, down 2%, while MSM license revenue was $101 million, up 11% from last year. For the third quarter, maintenance revenue was a record $289 million, an increase of 6% compared to the year-ago quarter and up 1% sequentially. ESM maintenance revenue was $165 million, up 11% and MSM maintenance revenue was $124 million, flat compared to the third quarter of fiscal 2012.

This is the third straight quarter of 11% year-over-year growth in ESM maintenance revenue. Professional services revenue, which is included in our ESM business unit, grew 16% from the year ago quarter to a record $59 million. As Bob mentioned, we were pleased with professional services non-GAAP gross margins, which grew by 9 percentage points on a year-over-year basis.

Moving next to operating expenses. Non-GAAP operating expenses for the third quarter were $370 million, up 10% from the year-ago quarter. Looking in our business units, ESM's non-GAAP operating expenses for the third quarter were $284 million, up 11% from the year-ago quarter and MSM non-GAAP operating expenses were $86 million, up 8% from the year-ago quarter. Other income in the third quarter was a loss of $11 million compared with a loss of $4 million in the year-ago quarter.

Now turning to the balance sheet. Total deferred license revenue at the end of the third quarter was $622 million, down 1% sequentially and down 6% year-over-year. During the quarter, we deferred $95 million of license revenue, or 42% of licensed bookings, and recorded $98 million of deferred license revenue from the balance sheet. Total deferred revenue decreased by $66 million sequentially to $1.8 billion. The current portion of deferred revenue now stands at 55%.

Our software development cost as of December 31 were $268 million, as we capitalized $34 million and amortized $29 million during the quarter. Cash and investments totaled $1.3 billion, with 23% of our cash held domestically. And at December 31, we were in a net debt position of $79 million.

In November of this year, we issued $300 million of senior unsecured notes with a 10-year maturity. In the same month, we also entered into $200 million unsecured term loan agreement with an institutional lender. The term loan has a 3-year maturity.

For the quarter, cash flow from operations was $132 million. During the third quarter, we repurchased a total of 14.3 million shares. As part of the accelerated share repurchase agreement we announced in November, we received 13.1 million shares, which is in addition to the 1.2 million shares we repurchased for $50 million earlier in the quarter. Our current outstanding share repurchase authorization is $700 million.

With that, I'll turn the call back over to Bob for his concluding remarks and updated expectations for fiscal 2013.

Robert E. Beauchamp

Let me now provide you with our updated full year fiscal 2013 expectation for non-GAAP diluted earnings per share. We expect non-GAAP diluted earnings per share in the range of $3.35 to $3.45 per share. At the midpoint, this would represent a 5% increase over fiscal 2012. This range excludes an estimated $1.13 to $1.18 per share for non-GAAP adjustments, including expenses related to the amortization of intangible assets, share-based compensation expense, severance, exit cost and related charges and proxy contest costs.

We expect full-year fiscal 2013 cash flow from operations to be between $735 million and $785 million, which at the midpoint represents a 5% decrease over fiscal 2012, including the adverse impact from foreign currency exchange rates.

I'd like to highlight certain risk, which could impact our ability to achieve these expectations. Uncertainty surrounding the broader macroeconomic environment, especially in Europe. Sales productivity related to tenure of our ESM sales organization and uncertainty related to press coverage surrounding our strategic review and ongoing press coverage related to activist investor activity.

The current assumptions underlying our full year fiscal 2013 expectations include: FX impact given today's rates; total bookings flat with the prior year, with growth on a constant currency basis of low single digits; ESM license bookings decline in the mid- to high-single digits and down low- to mid-single digits in constant currency; MSM total bookings decline in the low- to mid-single digits and flat to down low-single digits in constant currency; revenue growth in the low-single digits with growth on a constant currency basis in the low- to mid-single digits.

Non-GAAP operating margin slightly lower than the prior year, other income at a loss of around $40 million, weighted shares outstanding down high-single digits to low-double digits from the prior year and a non-GAAP tax rate of 25%.

As we look at the factors affecting our performance in our third quarter results, we recognize that we must deliver stronger financial performance and an operating plan that drives greater value for all our shareholders. On our next call with you, we will provide our fiscal 2014 expectations based on a strong operating plan. This plan will be focused on generating stronger operating margins, earnings growth and cash flow.

With that, we will now turn the call over for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll go first to Matt Hedberg with RBC Capital Markets.

Matthew Hedberg - RBC Capital Markets, LLC, Research Division

Obviously, the ESM license bookings was disappointing. I guess I wanted to dig into that a little bit more. I think you indicated that there were a few large transactions that slipped. Was that more -- I know at the top you mentioned it was a little bit environment, a little bit execution. But could you sort of give us a little bit more color on was that more environment, was it more execution, and perhaps which geos those deals were in?

Robert E. Beauchamp

Yes. So the geos were -- while it was a little more Europe I would say that it was across geographies and across verticals. It was really transactions that were transformational or optional. We did not really see slips in deals that had an expiration date, a contract renewal. These were really the deals where the customer say is swapping out competitors, standardizing on our platform for their new architecture. Those sort of larger deals where there's more -- for lack of a better term, risk to the customer, more ROI justification. And when it got to procurement, we saw them slow down for a couple of reasons. In some cases, it was a macro where their institution just said, "We're pulling back on discretionary, large transactions. Let's -- we don't have to do it this quarter. Let's wait." In a few cases, there was -- they inserted a cycle where they wanted to speak with me, or with Steve, or with some other executives, BMC around press coverage and our strategic review announcements and the press coverage surrounding that. So we saw both of those things kind of add an additional cycle in the close. But again it was transactions that were transformational, optional and not deals where we had, for instance, capacity-based upgrades and contract expirations. We saw a really nice compliance for the quarter on those type of deals.

Matthew Hedberg - RBC Capital Markets, LLC, Research Division

And so not as competitive then either? Is that fair to assume also?

Robert E. Beauchamp

Probably right. I'd say it's not that it's not as competitive. The customer has a -- it was -- time was a backstop on contracts, on the deals where you have contract renewal, there's pressure on us and on the customer to reach an agreement by that deadline. Otherwise, the contract provisions kick in, licensing and passwords and all the things that can happen. The other one is more their own internal desire to lower their cost, improve their operations and a more discretionary sort of spending that were the ones that we saw slow down. But yes, I guess you could say more competitive. We were trying to replace competition in quite a few of them.

Matthew Hedberg - RBC Capital Markets, LLC, Research Division

And then in terms of the -- in terms of the full year guide, it's obviously a little different tone than last quarter, which I think you're expecting sequential and year-on-year growth in both the 3Q and 4Q periods. So I think at the midpoint of your full year ESM guide, it implies down kind of low-double digits for 4Q. Given the commentary on some deals that had already closed, or are still there, how conservative is that estimate versus prior expectations?

Robert E. Beauchamp

So one thing I'd just start with is the number -- the percentage of transactions, are the quarter that -- excuse me, if I look at the dollar volume that we do in a quarter that are in transactions $1 million or above, we track that pretty closely. And it typically runs in the high 40s, approaching 50% of our bookings in any particular quarter are these large transactions. This quarter is the first time that I can remember and we went back, I think, 4 years and just looked at it. We've not seen it drop below 40% and it did this quarter. So not only was it transactional, but we actually saw statistically a smaller percentage of our bookings on large transactions. We're assuming in the guidance that, that actually worsens and that we go to really an unprecedented, or certainly many, many, many years level of volume of large transactions just to be hope on the safe side, right? We're also assuming that the close rates that we saw in Q3 actually worsened in Q4 as we give this guidance. And so we've got a significantly more upside as it relates to the forecast than we had in Q3. We've got more buffers built into it. But given what happened in Q3, I don't know if I'm being conservative. But we think we're being conservative by applying these numbers that we've not ever applied before.

Matthew Hedberg - RBC Capital Markets, LLC, Research Division

And then if I can just squeeze in one last one. I know you didn't talk about fiscal '14 guidance at this point, but really given, at least from a guidance perspective, 2 straight down years on the ESM side. Should we -- is it safe to assume that we should assume some growth in '14 on the ESM side? Or is that maybe...

Robert E. Beauchamp

Yes, it's safe to assume we should assume growth. We should assume a company that is more focused on operating income, cash flow and margins.

Operator

We'll go next to Aaron Schwartz with Jefferies.

Aaron Schwartz - Jefferies & Company, Inc., Research Division

Just a follow-up on the comments you made about some more upside potential relative to your guidance. Can you just talk about how that then flows through on the expense side? Does that put sort of more people in an incentive phase? And what I'm getting to, it does look like the earnings would be lower on a sequential basis to what you just reported despite the ASR, the big buyback in the quarter. I'm just trying to reconcile so why the earnings would be down on a much lower share count.

Robert E. Beauchamp

Is that a Q4 statement, Aaron, that you're...

Aaron Schwartz - Jefferies & Company, Inc., Research Division

Yes.

Robert E. Beauchamp

I think it really is, is we're being conservative on the revenue side. And then you got to take the sequential seasonal pattern where expenses actually grow in Q4. It is all of the variable compensation is heavily back-end loaded and you'll see that in the half as well as Q4. You've got all the resets from calendar, payroll taxes, 401k and the like. It is not atypical for us to see a seasonal swing in Q4 for just our normal non-GAAP expense structure.

Stephen B. Solcher

And then our sales comp plans are back-end loaded.

Robert E. Beauchamp

Right.

Aaron Schwartz - Jefferies & Company, Inc., Research Division

Right. So, I guess, what I was asking, because the expenses are pretty in line with our model despite the lower bookings number. So I would've assumed variable comp would've been lower, but it didn't seem like it was. So I just don't know if sort of the recut of the guidance here puts maybe more sales folks in sort of an accelerator phase and that's what's sort of making them back-end loaded expense structure.

Robert E. Beauchamp

Well, not really. We're being conservative in the way that we're modeling out revenue going forward. So the deferral rate is slightly higher in Q4 than in Q3. Even though you're going to see a sequential increase in ESM license bookings, our expectation right now in the guidance is that we also are factoring in a higher deferral rate. So I believe what you're seeing is, is the upside that Bob talks about comes in we're going to do better at the op margin level.

Aaron Schwartz - Jefferies & Company, Inc., Research Division

Okay. And then you've mentioned, and I'm sure you don't have all the answers yet, given the review. It sounds like it's just starting. But you've talked about, sort of a few times here, the operational discipline into next year and a much more -- a focus on the earnings growth and the operating margin growth. Is there any sort of -- can you elaborate on that a little more? Is this sort of a shift in focus as you look at the growth reinvestment balance a little bit? Or are we getting ahead of ourselves in making that comment?

Robert E. Beauchamp

I'd say that we're not going to -- as we said in the introductory comments, we think our SaaS business, our cloud business, our mobility, MyIT consumerization business, our Control-M business, our growth engines that we talked about last quarter continue to do well and we need to feed them even more. I think that we -- there's other parts of our business that are not delivering the ROI they need to deliver, and we're going to find ways to move funds to these growth engines at an even faster pace. So truly accelerating some of the things we talked about last quarter. There's no wholesale change in our strategy. It's just moving faster and it's also being a little more pragmatic about the need to deliver operating income, cash flow and margin given these top line numbers. So this management team, if you go back in time, has been very effective at delivering on cash flow, op income and margin expansion when it's focused on it. And we're very focused on that next year so that we can deliver the results we need and the growth we need next year.

Aaron Schwartz - Jefferies & Company, Inc., Research Division

And I know you're not sort of quantifying anything, but the way you talk about the margins here, we assume that cash flow sort of follows that same directional flow?

Robert E. Beauchamp

Yes.

Operator

And Abhey Lamba, with Mizuho Securities, has our next question.

Abhey Lamba - Mizuho Securities USA Inc., Research Division

So Bob, amongst the reasons you mentioned shareholder activism as one of the key reasons behind the dynamics in the quarter. Now that issue we thought was kind of put to rest earlier on in the quarter, but it seems like it's still coming up in client conversations. Can you tell us a little bit more about how big of a factor is that even currently even in Q4? And how long will it continue to be a factor in your sales conversations?

Robert E. Beauchamp

Sure. I don't know how long it will continue to be a factor. It will be as long as it's in the market. I think that what is different is the fact that while we and the investment community and the management talked about our strategic review and that, that was behind us. The competitors are using the strategic review, they're using the market collateral that was generated as a result of that. They are -- they're using that aggressively against us, in our customer campaigns. Our head of MSM sales has been here a long time said that he believes on virtually every large competitive deal that he had, they had to address that this last quarter. In Europe, roughly 25% of the transactions that we did in Europe required on-site visits by management to talk to the customers about it. So while it's the case that, again, while the shareholders and the management team had stopped talking about it, the customers -- the analysts and the competitors have not. And in fact, we recently spoke with Gartner, Forrester and IDC, and I'll be talking to them, one of them, later after this call, today, who confirmed that they saw a large spike in customer inquiries surrounding this in their consultations. So it's just something we have to deal with and I believe that just time will eventually take it out of the equation. We're assuming it stays in our business, as we gave guidance for Q4 that it's not going to go away in Q4.

Abhey Lamba - Mizuho Securities USA Inc., Research Division

Sounds good. And lastly, as part of that -- a follow-up to that, has that resulted in any places where BMC has lost a dealer, or lost your customer, a large one? And secondly, as part of the same competitive conversation, if you can touch upon the OnDemand offerings, basically, your growth rates are good, but they are coming off of a small base. So any kind of shift in the competitive landscape over there? Are you winning more deals versus competition, your win rates versus others? Anything on that.

Robert E. Beauchamp

So there are 2 questions there. The first one was, yes, we did. And one of our largest transactions, the ESM largest transaction that was in the forecast, was a Fortune 50 company in New York. We were advised we had won all the technical evaluation. They had senior management had shaken hands and then they went silent and then we lost. And we were advised that we lost the business to the incumbent, a larger company than us. And the -- when they ultimately reached back and talked to one of our -- one of my direct reports. What they said was that the decision against us was made for corporate reasons and it was related to the activity around our company. So that's the only big loss that we really had. It was a multimillion dollar loss. We did have another customer that was a 7-figure deal that we were working who advised us that they were taking us off the approved vendor list, basically, for now, until they felt comfortable with that subject. So those are 2 examples. And as I mentioned before, there were many, many examples where we had to deal with it. But you asked the question specifically on lost transactions. Only one of the large deals was lost directly, we believe, because of that. On the OnDemand business, we're doing very well against ServiceNow specifically, although not as good as we -- I want to do and not as good as we're going to do. But Remedy OnDemand, Remedyforce, is growing very nicely. As we mentioned, 550 customers, double the count. Our win rates are very strong, our growth rates are strong. We're winning in larger deals, as well as smaller deals, nice 6-figure deals. And one of the deals I mentioned on the call was at a U.K. bank where HP was the incumbent. Some months ago, many months ago, ServiceNow had been verbally awarded the business and told that it was theirs. And then they called us a few months ago and told us they wanted to move off of that and go back to our -- and go and sit with the Remedy 8.0 On-Premise. So that was a nice win. So we're winning against them on -- by our OnDemand, but we're also winning with our On-Prem. And we're also winning because we can go back and forth between the 2 and systems integrators and outsourcers can use an On-Prem model and a SaaS model with their various customers and integrate between the 2. So we still have a way to go. We still have a lot of work ahead of us there. But the trends are really looking nice against our competitors there.

Operator

We'll go now to Yun Kim with Janney Capital Markets.

Yun S. Kim - Janney Montgomery Scott LLC, Research Division

Can you just explain just the overall business trends around these large transformation deals, which seems to be the source of weakness in the quarter? Has the pipeline for such deals been increasing over the past few quarters? And I'm just trying to understand the recent trends around these large transformation deals and your reliance on them.

Robert E. Beauchamp

Well, as I said before, we've had a fairly consistent percentage of our business has been from the 7-figure and 8-figure transactions for many years now. It's usually mid-40s to very high-40s, close to 50% of our volume, our deals of that size. And this quarter was the anomaly. They dropped below 40%, which we've not seen in a very long time, if we've seen it, in recent -- in a decade. And we -- and so, yes, the trend is we will continue to have large transactions. We will continue to -- it will continue to be in a very important part of our business. But as we guided to Q4, we're going to assume lower close rates, we're going to assume that something that they will continue to be more difficult to close. And that's -- part of our guidance, we've assumed actually even lower than we had -- Q4 guidance is actually lower than Q3 as a both close rate and large deal volume as a percentage.

Yun S. Kim - Janney Montgomery Scott LLC, Research Division

Okay, great. And then just shifting gears a little bit to more strategic areas within the ESM, can you give us some details around your Remedy OnDemand business, which is -- how much of a percentage of customers are new versus existing On-Premise customers? And maybe any major future product release that we can expect out of Remedy OnDemand?

Stephen B. Solcher

We don't have the breakout of Remedy OnDemand. Let me just give you the SaaS numbers in the aggregate. So cumulatively 80% of the customers that are the 550 that Bob talked about are new and 20% are existing. Of the existing customers, when they do convert, they are converting at about 130% of the existing run rate. So a little north of double what we were getting out of just, I would say, their ongoing run rate when we do get the converted customer.

Yun S. Kim - Janney Montgomery Scott LLC, Research Division

And then also, any metric you can share with us on the Cloud Lifecycle Management performance in the quarter? I'm not sure of your comments around cloud business was referring to the CLM product.

Robert E. Beauchamp

CLM year-to-date is up close to 40%. Cloud was up 44% in the quarter. It's up 32% year-to-year to date. That's cloud and all the related pieces. And CLM is somewhere, year-to-date, about 1/3 of the cloud-related bookings.

Operator

We'll go next to Derrick Wood, with Susquehanna Financial Group.

James Derrick Wood - Susquehanna Financial Group, LLLP, Research Division

So you had strong growth on the cloud booking side, on the Remedy On-Premise side, could you just share kind of some of the product areas that are seeing the greater weakness?

Robert E. Beauchamp

Yes. The proactive operations, the systems management business, red lights and green lights kind of out the patrol, to those that have been following us a long time. That business is still the biggest worry spot for us in terms of a particular product set. We've got more competition with a broader spectrum. There are some people that are giving very, very low end, light touch, low functionality, but very inexpensive products. We have other competitors with science labs, sort of a deep functionality, very expensive products. So there's a really, almost -- that market is almost over served with capability. The companies' like Cisco and Red Hat and others, they will come out with -- are coming out with monitoring, event management sort of products. So it's a crowded competitive field and it's also just not as much -- is not as sexy and is fun to sell as some of these other products. And so it continues to be the weakest product line for us. That was the main -- that's the main one that would...

James Derrick Wood - Susquehanna Financial Group, LLLP, Research Division

Any way to gauge the kind percentage of revenue, a percentage of your business on the ESM side coming from this part of the business?

Robert E. Beauchamp

Yes.

Stephen B. Solcher

It was 35% from a revenue base. It's probably somewhere in the mid 30's. One thing I mentioned to you, that statement I just said would have been true probably generally true at any kind of volume levels, but obviously when you have the license bookings, shortfall and large transactions all products kind of move up and down that are part of renewals, or part of -- are these larger transactions, rather, and so it can create anomalies. But I think that what I just talked about is not an anomaly, it's a longer-term issue.

James Derrick Wood - Susquehanna Financial Group, LLLP, Research Division

Okay. And then I'm hoping you can just update us on the sales side and I guess if the press release and stuff that's happened around Elliott and the review, I mean, has that impacted sales turnover last quarter you talked about pretty healthy growth increases in gross capacity and productive capacity. Can you just kind of update us on how that's trending, how you've seen things over the last few months?

Robert E. Beauchamp

Yes. So capacity is up 23% for the year. So we're in good shape on capacity. Attrition went up a little in October, which you expect. But it came back down pretty sharply. And by December it was really fine so for the -- we're okay on that. But total capacity is good, continue -- tenure continues to improve. We've not lost any kind of key sales leadership, sales management that I can think of. And we talked about that today. We had Carv on the phone talking about it. So we're in pretty good shape on that. The issue was we didn't see productivity improve and that is -- that's an area that we need to see improvement. So we've got to focus on that. That's the area when I talk about execution that we need to see continuing that to improve. We expected to see it, and we didn't see it. So we'll continue to track that.

James Derrick Wood - Susquehanna Financial Group, LLLP, Research Division

If I could squeeze in one more, Bob. You mentioned that execution is expected to improve in Q4, but you guys are talking about weaker large deal percentage and weaker close rates. So how do I reconcile? Is that more on the margin side? Or how do I reconcile those 2 comments?

Robert E. Beauchamp

Well, I'm not sure what I'm reconciling. What I'm saying is we hope -- we drive everyday, we're managing to run our business better. We are, as we give guidance, we're not assuming that it will. Until it does, we're not going to guide that it does. You follow me? We will guide once we have a trend of it's improving, we will guide up. Until it does, we're going to actually guide more conservatively than we had last quarter. We're not assuming any worsening of productivity in Q4 for our sales force. But we're going to try to be more conservative on close rates, pipeline close, all of our top-down and bottoms-up forecasting techniques.

Operator

Moving on to Kirk Materne, with Evercore Partners.

Matthew L. Williams - Evercore Partners Inc., Research Division

It's actually Matt Williams in for Kirk. Just 2 quick questions, if I might. Could you talk a little bit about some of the reasons behind the improvement in the On-Premise Remedy product line?

Robert E. Beauchamp

Yes. The first answer is Remedy 8.0 is an outstanding product. I continue to see some solid reports back on wins. Customers love the functionality. Remember, it's a -- going forward, it's a SaaS first model. So the functionality that we add on Remedy will be delivered in SaaS and then moved over to 8. So it's really designed from the beginning to be a flexible platform for our customers to go from SaaS to On-Prem. It's been very much modernized on its user interface on the ease of implementation, the time to implement. I think I mentioned before that we've received notes on how -- and seeing customer comments on how easy and fast it is to implement. So it's just a really good solid product. That's Part 1. Part 2 is that the -- I think some of the initial thought that all customers were going to move to SaaS is no longer the case. Customers are now, and as I mentioned, a large U.K. bank, these are -- the customers are doing whatever the best fit is. So if you are a company in, say, Department of Defense and you may very well want to go with an On-Prem model, highly secure. If your performance requirements are of a certain nature, you might want to do it On-Premise. So customers will pick On-Prem for certain capabilities and SaaS for others. And BMC's able to offer both of them to the customer. But the short answer is, Remedy 8.0 is a very solid product and much easier to install and implement. I would caveat it, that right now, that we've got 1 quarter under our belt and I want to see probably 2 more quarters -- we've had 2 quarters, excuse me, of On-Prem performing well on a total bookings basis. Let me get 2 more quarters under our belt before we declare victory on that.

Matthew L. Williams - Evercore Partners Inc., Research Division

Sounds good, fair enough. And then secondly, could you just talk a little bit about the MyIT product and how that's being received. And I know it's early there as well, but any sort of color on when that might actually start to have an impact on the ESM side? It would be helpful.

Robert E. Beauchamp

Sure, sure. So it won't ship until April. The -- so it won't have much -- it won't have, really -- no impact, really, on its own SKU until then. I think it’s already having an impact with customers who are trying to decide whether to go with our IT service management platform and they see the vision of how the MyIT is taking, basically making the help desk disappear. So you're not calling and calling someone on the phone and asking them to opening a trouble ticket. You're dealing with your IT service request the same way you deal in your personal life, doing online banking and various other things. So it's really changing the game. It's abstracting the engine in the back, whether it's Remedy 8.0, or Remedyforce, or Remedy OnDemand, or even competitive products. It abstracts those in the background and it brings the service desk -- so it's your own personal IT service desk that you carry with you as an employee of the company. And so I think we are winning deals for our other products because of the vision of MyIT. When we demo MyIT, it's as excited a group of customers as any product that I remember ever seeing demonstrations for. But I -- then I got to caution, we haven't sold one yet, right? The thing doesn't go on sale until April. And so I don't know what I don't know, and I'm sure we'll find something that is -- that we're going to have to deal with. I just don't know what it is yet. But so far, early indications are MyIT is really, really kind of game changing way of thinking about how to do IT delivery.

Operator

We'll now go to James Wesman with Raymond James.

James Wesman

Steve, just a quick question for the model. Looking at new share repurchase expectations for fiscal '14, what would you consider to be more reasonable, should we think of it in terms of fiscal '12, where we saw a mid-single digit decrease year-over-year? Or something close to fiscal '11, where there was a low single-digit decrease?

Stephen B. Solcher

Well, '14, the biggest difference between '13 and '14 is, is you don't get the full effect of the ASR in fiscal year '13. And it's strictly due to the timing of the waiting. So we took the ASR, went into effect November 23, and even though we took 13.1 million shares out at that point in time, there are still almost another 6 million shares that will not come out until the end of June. And that's the true up period of time. We have 7 months to take the buying pattern of the ASR to 750. So '14, what you're going to see is really the impact of that full waiting and we're going to start, if you -- when you do read the Q, you're going to see that we're already at a shares outstanding count of 142 million. So from where we are today, we're starting January 1 with a share count -- outstanding shares of 142 million. I don't know if that helped or made it worse.

Operator

We'll go next to Phil Winslow with Crédit Suisse.

Sitikantha Panigrahi - Crédit Suisse AG, Research Division

This is for Siti Panigrahi for Phil Winslow. You mentioned the 2 large MSM deals slipped in Q3. So just wondering, maybe could you give some color about the reasons for the deals slippage? And also in general, what are you seeing in terms of pricing and competition in the mainframe business?

Robert E. Beauchamp

Yes. So a couple of things on -- to answer your first question. The 2 deals were contract renewal expirations in Q4, where the customer called and requested that we try to negotiate a deal in Q3, which is not uncommon at all. And in fact, I'd say it's more common that a certain percentage of every quarter has that request. We worked with the customer on that. And in both cases, at the end of the quarter, they pushed and said, we'll do it in Q4 when we have to. So I don't have to, but when it's scheduled. And so we have good confidence in both of those transactions in Q4. And that's very normal for MSM. The second question was -- remind me again -- oh, pricing. Pricing is good. Let me give you an example. So IBM, on mainframe, IBM is shipping these specialty engines, and one of the advantages, our product, we're really focused on trying to add more functionality to our products so that we cannot be kind of in a commodity just to speed and feed, but actually offer capabilities that are not just faster but different than our competition. And one of the functions that we have as part of our mainframe cost optimization initiative is the ability to help customers move workload from the GPM engine to the specialty engine. So by moving that workload, we cut the customers bills that they have to pay back to IBM significantly. And in exchange for that, we like to charge a little more for that capability because we have that unique capability. So price points -- I mean, in general, pricing is always under pressure, it's always a competitive market. There's always a lot of customer pressure to work our prices and we will. But we feel good about how we've been able to hold our prices up, our price points up, by adding the customer with more capabilities, and specialty engine's a good example of that.

All right. Again, thank you, all, very much. We will be talking with you, I'm sure, throughout the quarter. And please call if you'd like to arrange more time. Thank you.

Operator

That concludes today's conference. Thank you, all, for joining us.

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