BMC Software F4Q09 (Qtr End 3/31/09) Earnings Call Transcript

May.13.09 | About: BMC Software, (BMC)

BMC Software, Inc. (NASDAQ:BMC)

F4Q09 Earnings Call

May 12, 2008 5:00 pm ET

Executives

Derrick Vializ - Investor Relations

Robert E. Beauchamp - President, Chief Executive Officer, Director

Stephen B. Solcher - Chief Financial Officer, Senior Vice President

Analysts

Michael Turits - Raymond James

Israel Hernandez - Barclays Capital

Derek Bingham - Goldman Sachs

Philip Winslow - Credit Suisse

Abhey Lamba - UBS

Brian Denyeau - Oppenheimer & Company

Walter Pritchard - Cowen & Company

Richard Sherman - MKM Partners

Tim Klasell - Thomas Weisel Partners

John Difucci - JP Morgan

Operator

Good day, everyone. Welcome to today’s BMC Software fourth quarter earnings results conference call. Today’s program is being recorded. At this time for opening remarks and introductions, I would 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 today. During our call Bob Beauchamp, our Chairman and CEO, will provide an overview of both the fourth quarter and fiscal 2009 performance of our company and business units, and update you on recent initiatives. After that, Stephen Solcher, our CFO, will provide additional financial and operational details. Bob will then discuss our expectations for fiscal 2010 before we open the call to questions.

The 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 which we will refer to at various times during the call. Both of these documents are available on our investor relations website at bmc.com/investors.

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, the development of and demand for BMC's products, BMC's operating strategies, acquisitions, and other statements that are not statements of historical fact are considered forward-looking statements. These statements are subject to numerous important factors, risks and uncertainties which 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 the financial presentation, 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 point out 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 measure is provided in the tables accompanying the press release and in our GAAP to non-GAAP reconciliations found on our website at bmc.com/investors.

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

Robert E. Beauchamp

Thanks, Derrick. Good afternoon and thank you for joining us on our call today. Fiscal 2009 was a year of significant progress and achievement for BMC Software across virtually every area of our business. We extended our leadership position as the business service management platform of choice for customers around the world. We developed, acquired, and integrated powerful new solutions and offerings into our BSM platform. We improved the go-to-market capability of our separate business units to increase their focus on our key markets. We strengthened our management team to drive our growth for the future.

We enhanced our partnerships with industry leaders like Cisco, Dell and VMWare, providing customers with more confidence to invest in our industry leading platform and we instilled greater operating discipline in our business and are now among the best-in-class in our industry.

As a result of all of these accomplishments, we met or exceeded almost every one of our financial goals for the year, despite a very weak macroeconomic environment. In fact, we delivered new company records in annual revenue, total bookings, ESM license bookings, non-GAAP operating income, and non-GAAP earnings per share. We continued to build value for our shareholders, as evidenced by our financial results.

Total bookings for fiscal 2009 grew 6% and by 11% on a constant currency basis. ESM license bookings for the year were up 26% and annualized MSM total bookings rose 2%.

Total revenue for the year grew 8% and by 9% adjusted for currency.

ESM non-GAAP operating income more than doubled year over year to 17% and we increased the strong profitability of our MSM business in the full year.

Our non-GAAP operating margin for fiscal 2009 increased five percentage points year over year to 33%. Non-GAAP EPS for fiscal 2009 was $2.26 per share, an increase of 13%.

And our balance sheet remained strong, with approximately $1.2 billion in cash and investments and $1.8 billion in deferred revenue?

We are very proud of our ability to consistently deliver value for our shareholders and our customers. This is especially true given the difficult economic conditions that our customers are experiencing in our major markets and the intensified currency headwinds that we experienced during the year.

Even with these impacts, our bookings, revenue, margin, and non-GAAP EPS results were in line with our mid-year expectations. One benchmark that was below our expectations was cash flow from operations. This shortfall was largely due to the timing of bookings in the quarter, which came later than usual. Steve will discuss this later.

As I mentioned, I am very pleased with the company’s performance in fiscal 2009. We are in a much stronger position today as the leader and innovator in business service management and over the course of the year, we made a lot of progress toward achieving our three key goals -- accelerating the top line of our ESM unit by maintaining a more focused sales approach, optimizing profitability and cash flow from our MSM unit by capitalizing on the continued stabilization of the mainframe market, and generating greater business process efficiencies in how we run our company.

One of the most important initiatives we took on in fiscal 2009 centered on our service automation business. As you know, we acquired BladeLogic in the first quarter of fiscal 2009. This transaction was truly a transformational event for BMC and the BSM industry, as it enable us to create the world’s leader in IT service automation.

The BladeLogic acquisition clearly provided an additional growth engine for top line bookings in fiscal 2009 and we are confident in the future of this business.

Our BladeLogic business exceeded our expectations. If we had included BladeLogic's results in the year-ago quarter, pro forma license bookings for this business grew 43% in fiscal 2009.

One of the many other benefits we gained with the addition of BladeLogic was their experienced leadership. The member of the BladeLogic senior management team that were brought over in the acquisition are today filling key roles within BMC.

According to a recent IDC survey, 84% of IT organizations see automation as a top investment priority that will help deliver on critical business outcomes. That’s because they believe automation can reduce cost, increase the availability of IT services, and provide a quick pay-back in terms of ROI.

In the current environment, these are messages that resonate with both CIOs and CFOs, and we believe we are well-positioned to continue to benefit here.

Given the confidence we have in the breadth and depth of our BSM product portfolio, we have put more focus on our sales organization throughout the year. We upgraded sales talent in key positions, provided further comprehensive management and product training, and established more rigor and discipline in our sales processes.

In a short period of time, we are already seeing positive results as our ESM sales productivity increased this quarter and on a year-to-date basis. We will continue to invest in additional ESM customer-facing sales individuals as we look to extend our reach.

While we enhanced our strategic portfolio through acquisitions, we also continued to internally invest in our business and drive innovation. A case in point -- during the fourth quarter, we launched several innovative new products across each of our BSM disciplines. These include service automation and service assurance solutions that help customers meet compliance requirements and improve performance management of applications in cloud computing and virtualized environments.

It also includes new service support capabilities, such as ITSM Version 7.5, that help our customer significantly reduce their software asset management costs.

Over the course of the year, we also continued to drive for tighter integration, among the primary technologies of our BSM platform. This makes it easier for organizations to discover, visualize, prioritize, provision and orchestrate IT services to deliver a true ERP for IT. These enhancements to our BSM platform have received plenty of industry attention. According to a recent report from Forrester Research, we were named a leader in IT asset lifecycle management, and Financial I, one of Europe’s top financial services publications, awarded BMC its prestigious Leader in Innovation for IT management award.

As you probably know, during the year we teamed up with key industry leaders such as Cisco, Dell, and VMWare to strengthen our presence in the data center and in the heart of virtualized environments.

We collaborated with Cisco to deliver a major breakthrough in management and automation for the new Cisco unified computing system. Combined with BMC's management software, Cisco’s unified computing system brings together network, compute, and virtualization technologies into one single integrated system.

We worked closely with Dell to expand our service automation integrations with Dell’s open manage platform, and strengthened our joint sales efforts.

We continued to expand our partnership with VMWare. In addition to the extensive integration already available, we collaborated with VMWare to more tightly link service automation and remedy with the VMWare platform to give customers a complete change management solution for their virtual infrastructures.

Our BSM platform is the clear choice for these and other industry leaders. The world’s most demanding enterprises are continuing to turn to BMC.

Our ability to help our customers through this challenging economy is of course reflected in our bookings and financial performance. It’s also reflected in our continued success and increasing mine share and market share.

Several significant customer wins during the quarter include travelers, progressive, and Sony Pictures Entertainment. Travelers was looking to reduce IT costs and minimize risk and the company selected BMC and standardized across our entire BSM platform. Its’ worth noting that Travelers selected BMC and replaced multiple competitors, despite the fact that these incumbents were offering aggressive lower prices for their technologies.

At Progressive, the company’s CIO and Director of IT continuously relayed the message that IT needs to be looked at as a value driver of the business and not an expense. They selected BMC as their service assurance standard to increase efficiency and reduce operational cost.

And to reduce IT costs and improve availability, Sony Pictures selected BMC's cohesive integrated platform to consolidate service desk operations across its company. Sony did not believe that our competitors had a solid vision or direction around their CMDB.

While we continued to add new customers to our BSM portfolio throughout the fourth quarter, we also remained focused on strengthening relationships with our existing customers. Given our clear leadership position in BSM, our customers continued to choose BMC to help meet their business objectives by standardizing on our complete BSM platform.

Here are some additional examples of how they increased their investment in our platform during the quarter.

EDS made a major additional investment in our Atrium CMDB technology to provide greater value to its end clients.

When Coke industries decided to form Coke business solutions as the shared services provider for all of the Coke companies, the company wanted to move to one centralized IT platform that could support all of its global businesses. Coke business solutions selected BMC, given that we are uniquely positioned to drive operational efficiencies by leveraging Atrium CMDB as the integration platform. Coke executives told me that they have standardized on our BSM platform as their ERP for IT.

Fujitsu in Europe chose BMC because of our market leading BSM integration and BladeLogic solutions, virtual management, and Atrium CMDB. This was a big win for us, one that significantly expands our relationship with this customer.

Turning now to our MSM unit, we are pleased to report that the mainframe market continues to be healthy and highly stable in terms of demand and pricing. During the year, we leveraged the strength of our solutions and our experienced team to enhance our share. In addition, our industry leading research and development, sales, and support teams continue to create some of the most compelling product lines and value propositions in the mainframe software marketplace.

We are making targeted investments to expand our MSM sales force to capitalize on the market opportunities.

In fiscal 2009, we launched a number of notable product releases that demonstrate our continued innovation in this market, including new technologies and products from data management, main view, and our control M enterprise scheduling product lines. As a result of our continuous innovation, our control M product line was uniquely positioned in the leaders’ quadrant of Gartner’s most recent report, Magic Quadrant for Job Scheduling, which evaluates vendors’ ability to execute and their completeness of vision.

Our MSM solutions are essential to our larger enterprise customers by helping them meet business objectives while lower their cost of mainframe management and enterprise scheduling. During the quarter, we continued to increase the MSM installed base by adding 26 new customers and 54 new product placements with existing customers, and we once again grew the annual run-rate of spend on our top transactions. This is the eight consecutive quarter where we have seen an increase in the run-rate on our largest transactions.

Looking forward, we expect to see a strengthening of the mainframe renewal cycle beginning in the latter part of fiscal 2010 and continuing into fiscal 2011. Given the economic environment, we are naturally cautious about the outlook for IT spending overall and we will be monitoring conditions closely to see how this impacts the mainframe market, so that we can respond appropriately.

I am very proud of our quarterly and fiscal 2009 financial results, particularly our strength and the consistency of performance that our team continues to deliver.

We have continued to stay close to our customers to help them achieve their business goals and at the same time, we are maintaining our operating discipline. We are making real strides in every area of our business and our fiscal 2009 was another milestone in our progression.

I will talk more about our outlook for fiscal 2010 later in this call but first, here’s Steve Solcher, who will provide more insight into our financial results. Steve.

Stephen B. Solcher

Thanks, Bob. I would like to start out by summarizing our financial performance in the fourth quarter; then I will walk you through key income statement and balance sheet line items.

In the fourth quarter, bookings, revenue, non-GAAP operating margin, and non-GAAP EPS were all in line with our expectations and we were able to deliver on our fiscal 2009 goals for each of these key metrics. It’s important to point out that this performance was achieved in light of a very difficult macroeconomic environment.

During the quarter, and for the first time, we did see a material impact from these challenging economic conditions. We have noticed that transactions are taking longer to be approved by our customers, which has a direct impact on the timing of bookings and the resulting cash collections.

In addition, customers are signing larger, more complex transactions which also lengthens the approval process and generally requires a higher license revenue deferral rate.

Our fourth quarter highlights include total bookings decreased 3% to $536 million, but rose 8% on a constant currency basis; ESM license bookings increased 21% or 34% on a constant currency basis.

Total revenue increased 3% with the U.S. reporting the largest growth and on a constant currency basis, total revenue rose 7%. Non-GAAP operating margin was 35%, up six percentage points from the previous year.

Non-GAAP EPS was $0.64 compared to $0.63 in the year-ago period. As Bob mentioned earlier one result which came in below our expectations was cash flow from operations at $198 million. This shortfall was mainly due to the working capital component of cash flow contributing less than expected. We were expecting a sequential reduction in trade receivables of approximately $15 million. A larger than normal percentage of bookings were closed later in the quarter, which did not allow for sufficient time of collection within the quarter.

This intra-quarter shift in bookings reflects the fact that customers are requiring additional levels of approval, pushing closure of the transactions to later in the quarter with a corresponding impact on the timing of cash flow. These factors resulted in a four day sequential increase in DSO to 60 days. We expect the trend toward longer sales cycles to continue but do not expect our quarters to be more back-end loaded than this fourth quarter. We have incorporated this expectation into our guidance for fiscal 2010 cash flow from operations.

I would also like to point out a few positive trends related to cash flow. Bookings and margins remain strong -- we have seen no material change in our finance receivable program or our ability to sell finance receivables as demand continues to be strong.

We have seen no material increase in bad debt expense or receivable write-offs, and our average days to collect open receivables declined slightly in the fourth quarter.

Accordingly, we have not experienced problems with customer payments and the increase in DSOs is attributable purely to an increase in the sell cycle.

Finally, we continue to see the positive changes in our ESM sales organization and our success of positioning BSM as the unified platform for running IT. These changes are driving a higher volume of larger, multi-product transactions than in previous quarters.

For example, in the fourth quarter, we increased the number of large transactions with world class organizations as 25 of our ESM license transactions were over $1 million versus 14 in the year ago period. Our average ESM license deal size in the fourth quarter increased significantly over the fourth quarter of fiscal 2008.

And we are seeing more of our top transactions include all product disciplines.

With that, let me review our financial results for the quarter and fiscal year in more detail.

Our non-GAAP operating income increased by 23% from $137 million to $169 million in the fourth quarter. Our fourth quarter non-GAAP operating margin was 35%, up from 29% in the year-ago quarter.

For the full year, we achieved a record non-GAAP operating income of $612 million, an increase of 26% over the prior year. Our non-GAAP operating margin for fiscal 2009 was 33%, up five percentage points from fiscal year 2008.

Please refer to slide five for our non-GAAP income statement, which includes segment profitability of our ESM and MSM business units. Our improved profitability in the fourth quarter was driven by the performance of our ESM business unit. ESM’s non-GAAP operating income increased to $54 million from $21 million in the year-ago period. ESM’s non-GAAP operating margin increased year over year by 11 percentage points to 19%.

For the full fiscal year, ESM’s non-GAAP operating income increased 164% to $193 million. ESM’s non-GAAP operating margin more than doubled in 2009, increasing to 17%. We are pleased with the progress we’ve made in significantly improve the profitability of our ESM business throughout the year and we will continue to look for improvements as we move forward.

MSM’s non-GAAP operating income in the fourth quarter was $116 million, relatively equal to the year-ago period, and its non-GAAP operating margin increased three percentage points to 60%.

For the full year, MSM’s non-GAAP operating income was $420 million, and its non-GAAP operating margin was 57%. Both increased by 2 percentage points from the previous year. We remain focused on maintaining MSM’s profitability.

Our non-GAAP net earnings for the fourth quarter were $120 million, a decrease of 2% over fiscal 2008. Non-GAAP diluted EPS for the period was $0.64, which reflects a non-GAAP effective tax rate for the quarter of 26%.

For the fiscal year 2009, non-GAAP net earnings were $431 million, an increase of 8% compared to $400 million in fiscal 2008. Non-GAAP diluted EPS for the year, another record, was $2.26 per diluted share, up 13% compared to $2 per diluted share in the prior year. This reflects a non-GAAP effective tax rate for fiscal 2009 of 29%. These non-GAAP results reflect diluted shares outstanding in the fourth quarter and for the full year of $187 million and $190 million respectively, versus $195 million and $200 million in the respective year ago periods.

GAAP operating income in the fourth quarter was $120 million compared to $98 million in the year-ago period. GAAP net income and fully diluted EPS were $83 million and $0.45 compared to $97 million and $0.50 in the fourth quarter of fiscal 2008 respectively.

Turning now to bookings, total bookings in the fourth quarter were $536 million, representing a decline of 3% compared to the year ago period. On a constant currency basis, fourth quarter bookings increased 8%.

Total bookings for fiscal 2009 were $1.88 billion, a record level and up $98 million, or 6% compared to fiscal 2008. On a constant currency basis, total bookings increased 11% for the full year. The weighted average contract length for total bookings for fiscal 2009 was 2.1 years, down slightly from 2.2 years in fiscal 2008.

Trailing 12-month annualized bookings for the fourth quarter grew 12% and on a constant currency basis grew 17%. This is now the 13th consecutive quarter in which we’ve achieved annualized bookings growth on a trailing 12-month basis.

Please see slide seven in our presentation.

Now let me turn to the performance of each of our business units. Within our ESM business unit, growth of licensed bookings is a key indicator of the success of our performance. Total ESM license bookings were $140 million in the fourth quarter, up 21% over the year-ago period. And on a constant currency basis, ESM license bookings were up 34%.

For fiscal 2009, total ESM license bookings were $489 million, a 26% increase over fiscal 2008, or a 32% increase on a constant currency basis.

On a pro forma basis, or if we had included BladeLogic's results in the year-ago quarter, total ESM license bookings in the fourth quarter would have risen 4%. On a constant currency basis, pro forma ESM license bookings increased 15% and for the full fiscal year, ESM constant currency pro forma license bookings grew 16%.

Let’s look now at our three ESM disciplines in more detail. License bookings for service automation in the fourth quarter were $33 million compared to $9 million a year ago, and on a pro forma basis, service automation license bookings in the fourth quarter increased 18%.

For the fiscal year, service automation license bookings increased from $27 million to $111 million. On a pro forma basis, service automation license bookings increased 37%. License bookings for service assurance were $47 million, up 37%. Similar to our MSM business unit, service assurance performance is driven primarily by renewable opportunities and thus results may vary quarter to quarter. For the full year, service assurance license bookings were up 9%, a nice recovery from fiscal year 2008 where license bookings were down 9%.

During the fourth quarter, we saw a decline in service support license bookings of 16%. However, for the full year, service support license bookings were up 3% and within service support, for our core franchise Remedy, we had license bookings growth of 9% for the year. Please see slide nine of our presentation for licensed bookings trends.

Turning to the MSM business unit, we believe that MSM is best evaluated on the basis of total and annualized bookings over the trailing 12 months. In the fourth quarter, total MSM bookings on a trailing 12-month basis increased 1% to $736 million and had an average contract length of 2.9 years. On a constant currency basis, total MSM bookings for the trailing 12 months were up 6%.

After normalizing for contract length, total annualized MSM bookings for the trailing 12 months were up 2% to $258 million, and on a constant currency basis, total annualized MSM bookings for the trailing 12 months were up 7%.

Turning to revenue, total revenue for the quarter was $479 million, a 3% increase compared to the fourth quarter of fiscal 2008. On a constant currency basis, revenue grew 7%.

License revenue in the fourth quarter was $192 million, relatively flat from a year ago. On a constant currency basis, license revenue increased by 7% in the quarter. ESM license revenue was $115 million, up 20%. MSM license revenue was $77 million, down 17% from last year.

During the quarter, the percent of license bookings that was deferred was 53%, four percentage points higher than the third quarter and five percentage points higher than in the year ago period.

For the fourth quarter, maintenance revenue was $252 million, an increase of 3% compared to a year ago. On a constant currency basis, maintenance revenue grew 5%. ESM maintenance revenue was $136 million, up 3%, and MSM maintenance revenue was $117 million, up 3% compared to the fourth quarter of fiscal 2008.

Professional services revenue, which is included in our ESM segment, increased 7% to $35 million in the fourth quarter. On a constant currency basis, professional services revenue increased 20%.

Our professional services business generated a non-GAAP gross profit of $3 million in the fourth quarter versus a slight loss a year ago.

Moving next to operating expenses, we are pleased with our ability of controlling our expenses during the fourth quarter. Non-GAAP operating expenses were $310 million, down 6% from the year-ago period. Looking at our business units, ESM’s non-GAAP operating expenses were $232 million compared to $240 million in the year-ago quarter. MSM’s non-GAAP operating expenses were $78 million compared to $90 million in the year-ago quarter.

We remain focused on proactively ensuring the appropriate cost structure in today’s difficult and turbulent times. In December, we initiated a program to reduce our workforce. These reductions were broad-based and impacted all functions, levels, and geographies. The benefits of these reductions have been incorporated into our expectations for fiscal 2010.

Although we have made significant progress, we continue to believe we can further simplify and standardize our key business processes, which will continue to help make us a more efficient and profitable company.

Other income was a loss of $6 million, which included approximately $4 million loss on investments related to our deferred compensation program.

Now turning to the balance sheet -- total deferred license revenue at the end of the fourth quarter was $611 million, a record level and up 5% sequentially and 10% year over year. During the quarter, we deferred $116 million of license revenue, or 53% of license bookings, and recorded $88 million of deferred license revenue from the balance sheet.

Total deferred revenue increased by $57 million sequentially to $1.79 billion. The current portion of deferred revenue now stands at 55%, up three percentage points from the prior year.

Our software development costs were $123 million, relatively flat with the third quarter of 2009 as we capitalized $19 million and amortized $18 million. Cash and marketable securities at March 31st totaled $1.17 billion, an increase of $130 million sequentially. During the fourth quarter, we repurchased 1.8 million shares for a total cost of $50 million. For fiscal 2009, we repurchased 11 million shares at a cost of $330 million. We now have approximately $345 million remaining in our existing share repurchase program.

Let me summarize by saying that our performance through fiscal 2009 underscores our strong financial and competitive position and bodes well for us as we enter fiscal 2010.

Our product portfolio allows our customers to improve efficiencies and reduce cost. Our upgraded sales team is focused on execution and our financial position has never been stronger, as demonstrated by our record earnings and solid balance sheet.

Although we believe the economy will remain challenging, we expect to continue to leverage our strengths in fiscal 2010.

With that, I will turn the call back over to Bob for his concluding remarks and fiscal 2010 expectations.

Robert E. Beauchamp

Thank you, Steve. As I mentioned, I am proud of the company’s performance in fiscal 2009. We executed well on our key initiatives and the end result is that we have an even stronger position today as the leader and innovator in business service management. Given our broad and innovative portfolio of products that customers are demanding, a highly trained sales force, and energized employees, we are uniquely positioned as we enter fiscal 2010.

As we move through fiscal 2010, it also seems clear that economic conditions will remain challenging. In addition, we expect currency to adversely impact our performance in the fiscal year, as it did last year.

For fiscal 2010, we expect non-GAAP earnings per share in the range of $2.37 to $2.47 per share, which at the midpoint would represent a 7% increase in EPS. Our non-GAAP EPS estimate assumes an effective tax rate of 30% and excludes an estimated $0.60 to $0.64 of special items, including expenses related to the amortization of acquired technology and intangibles, stock-based compensation, and restructuring activity. The assumptions underlying this full year fiscal 2010 estimate include total bookings and revenue growth in the low single digits on a reported basis; we expect the constant currency growth rates to be 100 basis points higher for both bookings and revenue; a license bookings ratable rate in the mid 50s versus 50% in fiscal 2009, as we expect to continue to have a higher volume of large transactions with complex terms and conditions.

While we are excited about the new relationship with Cisco, we are not assuming material benefit from this relationship in the first year; a continued improvement in non-GAAP operating margin; other income that reflects the current interest rate environment and reflects the full year of interest expense on our debt; share count similar to prior year.

We expect full year fiscal 2010 cash flow from operations to be between $600 million and $650 million. This assumes a $40 million increase in cash taxes paid during fiscal 2010 and a $60 million adverse impact from currency.

As in fiscal 2009, we expect virtually all the cash flow from operations to be derived from cash earnings versus changes in working capital. We will provide a more detailed overview of the company’s strategy, financial performance, and business initiatives at our 2009 investor day conference on June 23rd in New York City. We hope to see all of you there.

With that, we will now turn the call over to questions. Operator.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll go first to Michael Turits with Raymond James.

Michael Turits - Raymond James

Just on the cash flow shortfall, about $35 million short of the midpoint of guidance -- just making sure I understand -- is that the full amount of the shortfall, you are attributing that to essentially to late collections due to longer sales cycles, so should we see a catch-up on that in the coming quarter?

Stephen B. Solcher

Michael, you would and there is going to be an expectation for that cash flow to catch back up but we are not thinking that the distribution is going to go back to its normal pattern, so how we are guiding you is from a conservative point of view. We believe that this trend in bookings, the completion of bookings, is going to still be very back-end loaded like we experienced in Q4.

Michael Turits - Raymond James

And then I went back into the margins --

Stephen B. Solcher

Michael, to answer your question, yes, that is the entirety of the cash flow, simply the January and February were light and March was very strong.

Michael Turits - Raymond James

Okay, and as I said, I’m back into what the EPS guidance implies in terms of margin but am I right in thinking that you ought to have about a point of margin expansion -- is that something you feel like you can target?

Stephen B. Solcher

Yeah, I would say between one and two points, a hundred basis points to 200 basis points is really kind of right in the middle of what we are thinking. You know, I think the difference is going to be in other income, people are projecting some level of interest income and we would like to get people to think that with today, the full hurt that is associated with interest expense and then the earnings that we are doing, we’re looking for about a $2 million to $3 million loss per quarter in other income.

Michael Turits - Raymond James

Okay. Great, thanks very much, Steven and Bob.

Operator

We’ll go next to Israel Hernandez with Barclays Capital.

Israel Hernandez - Barclays Capital

Just a question in terms of the -- I guess the back-end load of the quarter. With respect to your mainframe business, do you see any changes in customer behavior on some of your larger mainframe contracts that came do? And what is your expectation on those as we begin the new fiscal year?

Robert E. Beauchamp

The only thing we saw that was different was we did see -- well, we still grew run-rate on our top 15 deals but we didn’t grow it as fast as we had in previous quarters, so they are still signing up for more spin with us every year when they renew these contracts, so that’s great. I mean, that’s essentially growing the business and it’s been going on for a long time but it wasn’t at the same rate that had happened in previous quarters and so we think that that is somewhat of an indication of capacity growth rates being less as they renew these contracts.

Israel Hernandez - Barclays Capital

And with respect to some of these push-outs or delays, were there any particular verticals that stood out or was it generally broad-based?

Robert E. Beauchamp

No, I don’t think you could point to -- we actually across the company we did pretty well in some of the worst verticals, the hardest hit verticals. We did well in financial services, we did well in our banking, we did well in insurance, we did well in retail. So we didn’t really see anything terribly notable in terms of the verticals.

Israel Hernandez - Barclays Capital

Thank you.

Operator

Moving on to Derek Bingham with Goldman Sachs.

Derek Bingham - Goldman Sachs

Thanks a lot. Steve, a question on the cash taxes -- I’m just wondering if you could help me understand why that dynamic is happening with just a little more granularity there?

Stephen B. Solcher

We finally have run out of our tax attributes. The NOLs that we have had in the past, we have now almost fully utilized those NOLs, or are severely limited on a go-forward basis. So what you are going to see in the next fiscal year is us getting up to this normalized level of cash taxes.

Derek Bingham - Goldman Sachs

Okay. And then the adverse currency effect, you said $60 million headwind expected for your cash flow for FY10 -- do you know what that number was for FY09 from currency?

Stephen B. Solcher

I don’t know what it was in ’09. What I would say the 60, most of that, I’d say over half of that is going to occur in Q1, so the biggest headwind we have is the impact that we have to bookings in Q4, which we will collect that cash in Q1 and maybe slightly into Q2, so the biggest part of the cash flow headwind we are going to see very early on in the quarter, so we actually expect a currency headwind in the first half and a tailwind in the second half.

Robert E. Beauchamp

And one point, just a reminder -- we took a $20 million hurt in revenue in Q4 on currency.

Derek Bingham - Goldman Sachs

Got it. Okay, I just had one product question -- the service automation license bookings, it looked like you put a whole lot on the balance sheet there in terms of the deferred license balance. Could you tell us what drove that?

Stephen B. Solcher

That’s just primarily a function of the larger deals. We mentioned it in the comments but we had a material increase in the ASPs of our deals this quarter in ESM. We saw seven out of the 10 largest deals all had multiple product suites involved with them, many of those had three or more, the entire three circles plus CMDB in it, so we’ve seen the sales force really begin to sell the entire product line and in some cases, when you get into those larger, more complex deals, the contract terms just dictate that it’s a deferred, it’s a ratable deal versus an up-front deal and that’s just a little bit of the other side of larger transactions.

Robert E. Beauchamp

Derek, not to get into the granularity of the accounting but what you are really seeing is that we have different pricing models within each of the three disciplines and when you put these three together, what you typically will have is the inability to have up-front revenue recognition and that’s really the primary driver -- that and some of these transactions have fixed fee professional services included in it, and that also is driving the deferral.

Derek Bingham - Goldman Sachs

Got it -- so it’s bundling with a broader deal that might include mainframe or DSM or something like that?

Stephen B. Solcher

It’s primarily -- you know, we kind of say it’s both, so it’s both within the product disciplines within ESM, and then it is also the bundling with the MSM product, so it could be both of those two.

Robert E. Beauchamp

For instance, we mentioned in the script Travelers, which was also true with many of our largest deals -- many of our largest deals this quarter. I mean, you saw the ESM license bookings numbers up for in Q4, 34% constant currency. Many of our largest deals were ratable and not current recognition.

Derek Bingham - Goldman Sachs

Okay. Thank you very much.

Operator

We’ll go next to Phil Winslow with Credit Suisse.

Philip Winslow - Credit Suisse

You had another good quarter on professional services from a gross margin perspective. When you look out the course of the next year, there’s been a big turnaround [inaudible] past [inaudible] quarters, how do you that trending over this next year?

Robert E. Beauchamp

You know, I think what you’ve seen, especially in the last two quarters, is our focus on not only growing the revenue side of it but really doing in a productive fashion. For the year, we ended with a gross profit of about 4%. Next year the expectation is to more than double that, so some of the ESM profitability that we are looking for for next year is going to be driven from -- we’re just going to do a better job of running our professional services organization.

Operator

We’ll move next to Abhey Lamba with UBS.

Abhey Lamba - UBS

Thanks. I have a question on guidance -- given that fiscal ’10 is a big year from a mainframe renewals point of view, when you are going to have higher license definitely, shouldn’t bookings growth be a little better than revenue growth, because your guidance is calling for a similar growth in both?

Stephen B. Solcher

True. Again, I would caution you on the MSM side -- although we expect a larger renewal opportunity to occur in ’10, that is going to be toward the second half of the year and on the conservative side of that is we are expecting or trying to temper the expectation around how much capacity grows within these renewals.

So you are absolutely right -- the number of renewals is going to be much greater but we are just taking a conservative view on those renewals that we are not going to grow the run-rate as the metric we’ve been giving at the same rate and pace that we did throughout fiscal year ’09.

Abhey Lamba - UBS

Got you -- and on your cash flow guidance, the currency hit seems to be a little too big, if we look at the currency hit expected for revenue and bookings. What are the moving parts there? Why is the cash flow being hit by such a high number whereas revenue an bookings, you are talking about 100 bps of hit on that?

Stephen B. Solcher

Well again, remember what happens from a cash flow point of view as cash flow is -- the big piece of it is a fiscal year ’09 event, so its going to be bookings related to the fourth quarter. We had about a $60 million hurt to bookings in the fourth quarter. That $60 million hurt is going to roll into cash flow in Q1 and Q2.

Abhey Lamba - UBS

Got you. Thank you.

Operator

Moving on to Brian Denyeau with Oppenheimer & Company.

Brian Denyeau - Oppenheimer & Company

Thanks, guys. So first, just a common housekeeping question -- the tax rate for the quarter, just walk through why it was 26% versus the 30 I think people were modeling for?

Stephen B. Solcher

Well, the 30 was a full year number, so we didn’t guide to a -- we didn’t guide to a quarterly number. You would’ve -- if you would’ve taken the 30 and imputed, that would have probably shown somewhere close to a 28% tax rate for the quarter. So we were expecting the quarterly tax rate to be less than 30.

The reason that it is lower is it is strictly the distribution of income, so the more income that is distributed outside of the U.S. is going to be the reason why our effective rate is going to be lower.

Brian Denyeau - Oppenheimer & Company

Okay, fair enough. And on the bookings side, it continues to have been fairly strong -- at what point does the good growth you’ve had there so far and in the last few quarters, at what point does that start to roll through on the license side and the P&L?

Stephen B. Solcher

At what point -- well, I think what we would look at is, especially adjusting for currency, so some of it is -- some of the growth is sitting on the balance sheet and getting rolled off over a period of time. I think you can view our guidance as being relatively conservative going forward in the -- what I would say the low single digit range. License is going to grow faster than the maintenance line but you will see some acceleration of the license number in relation to the maintenance number.

Brian Denyeau - Oppenheimer & Company

Great. Thanks, guys.

Operator

We’ll move next to Walter Pritchard with Cowen & Company.

Walter Pritchard - Cowen & Company

Steve, I wondered if you could clarify for us what the impact was of currency on expenses from a year-over-year perspective?

Stephen B. Solcher

You know, I’m not going to give you the exact number because I don’t know it but I think it was between $20 million and $25 million for the quarter. So roughly in line with, maybe a little bit more help on the expense line. I think we had about $0.01 pick-up in EPS.

Walter Pritchard - Cowen & Company

Got it -- and then just as it relates to the MSM products, I didn’t -- could you maybe go into a little bit more detail around the bucket of ESM that is remedy and the declines there? You mentioned that remedy itself was health -- what was the difference there?

Stephen B. Solcher

Well, the other two products within the support unit is IDM, which is our identity management product, had a decline, and the other major product in that is the magic product line, which was the low-end help desk product.

Walter Pritchard - Cowen & Company

Got it, and --

Stephen B. Solcher

But the core franchise remedy grew very nicely.

Walter Pritchard - Cowen & Company

Got it, and then just relative to the ESM release that you capitalized some R&D for last quarter and is upcoming, could you just help set some expectations around when things roll out there and how that -- we might see that impact the numbers over the next couple of quarters?

Robert E. Beauchamp

You’re talking about 7.5, I think?

Walter Pritchard - Cowen & Company

Yes.

Robert E. Beauchamp

7.5 is out and it is doing well. We are -- as a matter of fact, we recently just had a customer group that came in for a multi-day evaluation of the products and the feedback from that was that it was the strongest release, very modernized front-end. The products been really modernized really for the next decade in terms of what we have added to remedy, bringing web services to web front-end, how the product works in -- just the look and feel of it has been really truly modernized. The ease of installation, the ease of upgrade, the ability to upgrade from previous versions to a different remedy version is far better than previous versions.

It was something we really needed and it was a very important release for us and it’s hitting it now.

Walter Pritchard - Cowen & Company

Great, and then just lastly on the mainframe side, it sounds like so far, so good -- things have held up there and it sounds like you do expect a pick-up in the second half of the fiscal year. It seems like you are a bit more cautious than I’d expect, given that things have been holding up thus far -- why should we expect that mainframe might see more of a headwind say six or nine months from now if it’s held up through some pretty tough times thus far?

Robert E. Beauchamp

All we are trying to do -- you only get -- we are setting guidance for the full year today and all we are trying to do is we don’t know what’s going to happen in the economy, so we are trying to assume that it stays very, very tough, the macro economy. And if it doesn’t, then we’ve got upside. If the Cisco deal does better on the ESM, then we’ve got upside. If the ratable rate is less than we think, we’ve got upside. So there’s opportunities for upside.

The thing that we want to be cautious of on the other side of that on MSM is when these contracts come up for renewal, what will the capacity growth be? We believe there will be capacity -- we just had a large group of many of our largest customers who are giving us in a user group telling us that they are growing their capacity but we want to assume a more muted capacity growth rate than we’ve seen in previous years, given the economy. And so even though there will be more contracts, they may not be for as large a growth rate, so we are trying to just anticipate that.

If we are right, then we will have got it properly. If they grow faster than that, then there’s upside here.

Walter Pritchard - Cowen & Company

Great. Thanks a lot.

Operator

We’ll go next to Richard Sherman with MKM Partners.

Richard Sherman - MKM Partners

Good afternoon, guys -- just a couple of cleanup questions on [inaudible]. First off, you mentioned a nice growth in the ESM average deal size -- can you give us kind of starting points, end points, on the ESM average deal sizes?

Robert E. Beauchamp

Well, we are actually not breaking it out. It’s not a new metric we want to start tracking. It’s too volatile. It’s probably not one that would be that meaningful but I can tell you that it moved significantly. It moved enough where we saw -- we had to step back and look to see and what we saw was just a lot of our biggest deals -- I mean, just to name a few of our biggest deals -- Dell, all three product lines; Fujitsu, all three product lines; Travelers, all three product lines. You can look across some that have multiples of two product lines where you have -- some of these, I don’t know if they are clear to reference but we see SAP, HCL, U.S. Air Force -- just a multiple of our largest deals where multiple product sizes. The sales force has been trained on an all-in model now. They are selling it all -- they are selling it as a platform. The whole marketing technique is selling the CMDB and the platform. So we are really selling this ERP for IT and really I think really this last quarter, you really got a sense that that has now completely taken hold and that we are selling now and customers are buying a platform from BMC that includes multiple product lines with integration, with services, and we saw the biggest move we’ve seen really probably in my memory in terms of ASP or ESM this last quarter.

Richard Sherman - MKM Partners

Very good. Thanks, Bob. And then maybe talk a little bit about the federal opportunity upcoming and how you are addressing that opportunity -- are you hiring, are you working more with partners, doing mostly direct -- how are you looking at the federal opportunity there?

Robert E. Beauchamp

Well, federal -- I just got off the phone. I won’t say which one of our partners but we announced three big partners and obviously we’ve got a great new partnership with Cisco and others. I just got off the phone with the head of federal for one of our big partners at one of the largest IT companies in the world. We think there’s a lot of opportunity in federal. We’ve got a strong team in place -- in fact, my partner’s comment to me was that we have a very good team on the ground. We are working together well on federal opportunities. He was discussing the fact we had 21 CIOs and one branch of the military together going through our product offerings with them.

So I think we are well-positioned in federal -- we’ve got a great team in federal, we are going strong there and the opportunity, I personally have spent quite a bit of time in DC working with DOD and other groups and we’ve got a lot going on in federal right now. That’s all I can really say without getting specific.

Richard Sherman - MKM Partners

Thank you. Those are my questions.

Operator

Moving on to Tim Klasell with Thomas Weisel Partners.

Tim Klasell - Thomas Weisel Partners

Yes, the first question just has to do with the comments you made about the capacity increases on the MSM side. If the capacity increases are going to -- the rate of growth is going to slow, is it because the amount of loads that they are adding you think are going to slow? Or are they just going to try to run them at higher utilizations and --

Robert E. Beauchamp

I think you just have to assume that every line item is being scrubbed in this sort of economy, so it’s our assumption that the customers will -- where in the past during the best of times, they would err to the side of over-capacity. In this environment, they will really get out their pencils and try to figure out what’s the least amount of capacity they can buy and still maintain their service levels.

So it’s just an assumption that customers will be cautious and less willing to buy more capacity than they need, and so that’s really all it is. There’s nothing more scientific than that.

Tim Klasell - Thomas Weisel Partners

Okay, fair enough -- and then just a question on flow during the quarter -- obviously January and February, tough; March came in a bit better but how about -- about five or so weeks into this quarter, how has that sort of progressed? Has the up-tick in March sort of been maintained or did it fall back again?

Stephen B. Solcher

I think the flow would be -- I think we’ve seen a little bit better distribution than we saw in the first -- at least in the fourth quarter, but again we are very back-end loaded as a company. Customers more than ever are trying to press it to the bitter end and I think as we have guided, we are not expecting this trend to turn around in this next fiscal year. I think as the economy gets better, I would expect us to start getting more back into our normal distribution of bookings but right now, we are going to take a very conservative view of this.

Robert E. Beauchamp

Our sales force, by the way, just as kind of a related issue -- our sales force has been able to build the pipeline. Our coverage ratio, kind of the amount in the forecast as it relates to what the plan is has increased double-digits from what it was last quarter, and there’s an intense initiative on the sales force to build pipeline and increase the coverage ratios. And really, I will tell you I have never felt better in my entire career at BMC than I feel right now about the quality of the sales force and the sales training and the sales methodology that we have underway right now.

Tim Klasell - Thomas Weisel Partners

Great. That’s all my questions. Thank you.

Robert E. Beauchamp

All right, last call, Operator.

Operator

It will come from John Difucci with JP Morgan.

John Difucci - JP Morgan

Thank you. Steve, I have a follow-up to Michael Turits’ first question -- the weaker-than-expected cash flow, it sounds like it was due to the late timing of bookings, which implies receivables would also go up more than normal seasonal trends. But that doesn’t seem to be the case -- I mean, trade receivables increased by about $6 million this quarter sequentially, the same last year. The year before it was actually down about $3 million but that’s a $9 million delta and -- and you don’t really see it in deferred revenue either. You would assume that would go up. So I don’t know -- can you sort of explain that a little more so it is sort of -- the numbers just don’t coincide with the statement.

Stephen B. Solcher

Yeah, our view was, and again, I said it in the prepared remarks, was is that we were expecting -- again, bookings were going to come in, we were expecting to collect more open receivables as of 12/31, so the stuff we already had on our books, especially stuff that we would have built in January and then February, we expected to collect that. Now what’s happened was is those billings got pushed back to much later in the quarter. So again, I was expecting the trade number to be down by $15 million sequentially -- it actually grew, not the finance number, just trade receivables.

John Difucci - JP Morgan

Right. Okay, so you expect this quarter to be different than normal seasonal trends and it just wasn’t?

Stephen B. Solcher

That’s correct.

John Difucci - JP Morgan

Okay, and second, just a question on the maintenance line --

Stephen B. Solcher

Let me make sure I get two other points out real quick -- one thing is we got it on cash flow. I just want to make sure that everybody picks up that we expect software cap and CapEx to be about $50 million less next year than the year that we just finished, so even though 625 is the midpoint of our guidance, we believe that we will have software cap and CapEx at about 80, so free cash flow will be slightly better.

John Difucci - JP Morgan

Okay, that’s good. And then just a follow-up quickly on maintenance -- it was up year-over-year but it was actually down sequentially, which you haven’t seen in a while and I’m just curious -- was there any odd impacts there from foreign exchange sequentially or was there sort of late renewals coming into the quarter, or was there any pricing pressure?

Stephen B. Solcher

Well, there were two things -- we typically have some phenomenon that goes years back that from Q3 to Q4, we always seem to have a slight dip in our maintenance number. Now, if you adjust for currency, so again the maintenance number was about -- had two points of headwind related to currency, so it was actually slightly up. But this phenomenon really goes back to -- it’s just a perpetual trend that occurs every year at this point in time.

John Difucci - JP Morgan

Okay. I was just looking at the last -- last year it didn’t but -- and I’m sorry, just since you mentioned the CapEx, and that’s interesting the software CapEx, now that -- we had seen that come up over the last I think four quarters prior to this quarter, and then it went down, the capitalized software development costs. And I’m just curious -- are we going to -- I mean, should we start to expect to see some of these products that had become technologically feasible, should we start to see maybe some of this start to hit the top line, or is that something that you are I guess looking to see and maybe cautious given the guidance, or --

Stephen B. Solcher

No, I think you are right -- I think as you and I probably have had this discussion multiple times, is we view the capitalization of software as a good thing, that it shows you that we’ve got some new development that’s occurring, and we are hopeful that those product releases that we talked about in Bob’s section are going to come to fruition and we are going to see better results. And I think it’s -- we are a little bit conservative in getting out of the barn and thinking that this is going to happen immediately. So yes, I think the way that you are thinking about it is exactly right.

John Difucci - JP Morgan

Well, thanks for taking my questions.

Stephen B. Solcher

There’s only one other point that I would like to make and that’s on seasonality because I get a lot of questions about seasonality -- revenue, EPS, and cash flow, and I would say to even a degree, even the bookings number, I would encourage everybody to use last year’s fiscal year ’09 seasonality, with one exception I think on the bookings side -- Q2 will be actually will be a -- I shouldn’t say a decline -- will be less in seasonality with a pick-up being in Q3.

Robert E. Beauchamp

Okay. With that, we want to thank you all -- please do try to make our investor day. We look forward to -- we’ll have a large group of the management team that will be there for you to spend time with and listen to some of the exciting things going on. I would just like to thank the employees of the company that delivered on some really excellent results in this environment. There are very few companies out there delivering on these kinds of growth rates and this kind of profit margin expansion and results that BMC put out. And we are today a much stronger software company, much more relevant software company, much more competitive software company, and we are in an excellent position to do very, very well, albeit in one of the most interesting and difficult economic environments any of us have ever seen.

So with that, we look forward to visiting with you this afternoon and throughout the weeks and we will see you at the investor day. Thank you.

Operator

That concludes today’s conference. Thank you all for your participation.

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