BMC Software, Inc. F3Q10 (Qtr End 12/31/09) Earnings Call Transcript

Jan.27.10 | About: BMC Software, (BMC)

BMC Software, Inc. (NASDAQ:BMC)

F3Q10 Earnings Call

January 27, 2010 5:00 pm ET


Derrick Vializ – Vice President Investor Relations

Robert E. Beauchamp – Chairman of the Board, President & Chief Executive Officer

Stephen B. Solcher – Chief Financial Officer & Senior Vice President


Abhey Lamba – ISI Group

Kevin Buttigieg – FTN Equity Capital Markets

Analyst for Tim Klasell – Thomas Weisel

Derek Bingham – Goldman Sachs

Kirk Materne – Rafferty Capital Markets, LLC.


Welcome to today’s BMC Software third quarter fiscal year 2010 earnings conference call. Today’s program is being recorded. At this time for opening remarks I’d like to turn things over to Mr. Derrick Vializ.

Derrick Vializ

I’m Derrick Vializ, Vice President of Investor Relations. I would like to thank you for joining us today. During our call Bob Beauchamp, our Chairman and CEO will provide an overview of our third quarter financial and business performance. After that Steve Solcher our CFO will provide additional financial and operational detail. Bob will then provide an update on our expectations for the remainder of fiscal 2010 before we open the call for 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

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, risk 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, the financial presentation and in our annual report on Form 10K.

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 reconciliation found on our website at

At this time I’ll turn the call over to Bob.

Robert E. Beauchamp

I’m pleased to report that BMC Software delivered a very strong third fiscal quarter. Our financial performance was solid with the third consecutive quarter of double digit growth in non-GAAP EPS. Our business and operating performance was also very strong with robust growth in bookings and continued expense discipline and we enhanced our technology leadership launching new solutions that position us more strongly than ever to capture the growth potential from virtualization and cloud computing and the emergence of the hybrid datacenter.

As a result of our performance we are clearly on track to achieve or exceed our key business and financial goals for fiscal 2010 and to deliver results well above those of virtually all other enterprise software companies. Let’s look more closely at our year-over-year performance against some key metrics in the third quarter. Total bookings rose 18% to $539 million. This reflects our strong value proposition, competitive positioning and a favorable MSM renewal cycle.

ESM license bookings increased 15% and 39% sequentially. MSM total bookings on a trailing 12 month basis increased 8%. Total revenue was $508 million up 4%; license revenue was $216 million up 12%; non-GAAP EPS was $0.76 up 19%; and GAAP EPS was $0.59 up 34%. Cash flow from operations was $83 million in line with our expectations. Our balance sheet remains strong with approximately $1.3 billion in cash and investments and $1.7 billion in deferred revenue. Also during the quarter BMC was added to the closely followed NASDAQ 100 Index. The NASDAQ 100 is the globally recognized proxy for growth technology stocks.

So that’s a snapshot of the quarter. Let’s turn now to our two business units’ enterprise service management and mainframe service management beginning with ESM. As I mentioned total ESM license bookings were up 15% compared to the year ago period. Over the past few years we’ve consistently demonstrated the ability to win large platform oriented BSM deals and this quarter was no different as we closed 27 transactions with over $1 million in license bookings. 17 of those transactions and eight of the top 10 transactions included multiple product disciplines.

It is also worth noting that the number of transactions in the quarter between $500,000 and $1 million grew by over 50% compared to a year ago. This highlights the fact that we are seeing increasingly better broad based performance across our sales force and that we do not have to rely on large deals to grow the ESM business. These results give us further confidence about our ability to execute and grow our ESM business in to the future.

Regarding our sales force; on previous conference calls we’ve discussed our effort to invest in and strength our ESM sales force. These efforts are clearly working and we’re encouraged by the progress we’ve made to date. Since March of 2009 we saw an increase in the total number of sales reps, the total number of tenured sales reps and the productivity of our tenured sales reps. While we will continue to work diligently to develop and enhance the sales organization, what this implies is that the hard work of transforming our sales force is mostly behind us and that we now have a strong foundation to aggressively grow our sales organization and expand our reach.

We believe that the combination of our industry leading product portfolio with an industry leading sales organization provides BMC with a competitive advantage for the long term. Because of this combination we continue to see some of the most sophisticated and demanding customers choosing BMC over the competition.

Let me give you a few examples; New York Life a Fortune 100 company and a leading provider of life insurance relies heavily on Remedy to run IT areas for their business and they recently implemented BMC’s ProactiveNet and BMC’s Performance Manager. This customer chose to standardize on our entire BSM platform to maximize customer satisfaction, ensure compliance and optimize availability.

GEICO, provider of automobile, life and home insurance believe that their infrastructure had opportunities for improvement to automate manual processes, remove in efficiencies and remove time consuming tasks. After seeing the success that others had had with automation, they took a pro active approach to seeking automation opportunities from BMC. As a low cost insurance provider GEICO selected BMC’s cohesive integrated BSM platform to reduce their operating costs so that they can offer lower insurance premiums to their customers.

Cargill, an international provider of agricultural, financial and industrial products and services is in the early stages of a multibillion business transformation initiative. Cargill sought our integrated IT management platform to optimize availability, ensure performance and reduce the cost of managing this new environment.

AEGON Money Services, part of AEGON the international life insurance, pension and investment company chose BMC because of the relationship they had built with us over the years and the ability to leverage their current and future investments globally. AEGON money services also saw the ability to reduce their overall cost by acquiring BMC solutions such as Service Assurance and BladeLogic and displacing others such as IBM.

During the third quarter we also made several important investments in our ESM product portfolio. In October of 2009 we announced the acquisition of Tideway Systems, enhancing our BSM platform by adding the industry’s leading application discovery and independency mapping solution that automatically discovers, models and maintains the relationships between services, applications and infrastructure components even with ongoing infrastructure changes. This acquisition has made a quick impact.

Most recently, we acquired privately held Phurnace Software, a leading developer of application automation software. The application layer is the next frontier in automation and Phurnace provides the ability to automate the application deployment and configuration process for mission critical job applications. While we are already the leader in automation, the combination of BMC’s existing service automation product portfolio anchored by BladeLogic and Phurnace significantly widens our competitive advantage in this large and high strategic market.

The investments we’re making through both organic means as well as M&A underscores our commitment to lead the market with the industry’s best management solutions as well as position BMC as the unquestioned leader in BSM. We also continued to build strategic alliances that broaden our coverage in to new market segments and increases our competitive advantage. In the quarter we announced our alliance with, the enterprise cloud computing company to enable the delivery of BMC’s Service Desk Express solutions on’s platform.

The initial joint offering which will be available in the next fiscal quarter addresses the overwhelming customer demand for critical service desk and help desk functionality delivered via the cloud. I’ll come back to this later when I discuss recent technology trends.

Turning now to our MSM business; in the third quarter MSM’s non-GAAP operating income was up 11% over the year ago period. We also continued to see solid MSM booking performance. Total MSM bookings on a trailing 12 month basis increased 8%. As you already know our mainframe business is a lumpy business. As bookings for our MSM business are tied largely to the timing and size of renewals, MSM bookings can vary from quarter-to-quarter. However, a strong renewal cycle and our continued marketing efforts drove our solid performance.

During the quarter we continued to increase the MSM install base by adding 28 new customers, the majority of which were from our enterprise workload automation product line. One of these new customers was Embratel, a major Brazilian telecommunication company. We also saw existing customers renew and increase their relationship with us and add new products. Some of these major MSM wins include [Banco Bradesco], Cargill, Centers for Medicaid/Medicare, IBM Argentina and [Infocrossing]. In fact, we once again grew the annual run rate of our top 15 MSM transactions. This is the 11th consecutive quarter where we have seen an increase in the run rate of our largest transactions.

Our customers depend on BMC for the latest in mainframe innovation. During the quarter we enhanced some of our most compelling product lines. In December we released our new complete solution support for IBM IMS Version 11 and earlier this month Enterprise Management Associates named BMC’s Control-M the strongest product in their workload automation radar report.

Looking forward we expect to see continued strength in MSM renewals as we move in to the fourth quarter and the first half of fiscal 2011. We also expect to see continued strong performance in our new business sales initiatives across the entire MSM portfolio. That gives you a look at the third quarter which was a very strong quarter on a number of fronts. We’re determined to maintain and accelerate this momentum. That’s why we’re continuing to invest internally and externally to enhance our leadership.

We’re investing in those areas that offer the most value for our customers and the most potential for growth at BMC. This includes cloud computing, virtualization and software as a service. Clearly the acceleration of virtualization, cloud computing and SAS makes the need for IT management even greater. This is especially true given the extraordinary opportunities we see ahead for a unified system to manage the hybrid datacenter. It’s most likely that customer will combine traditional legacy systems with one more or all of these new technology trends in order to address their current and future business needs.

We see a big opportunity here to effectively manage across the hybrid environments. So, let me tell you how BMC is prepared for these new technology trends. As you may recall during our conference call last October, we briefly discussed our next big step forward to meet the demand with the launch of Dynamic BSM, the future of enterprise IT management. Dynamic BSM is the next evolution of BMC’s management architecture where the goal is to not only address the traditional requirements of IT management but also support the on demand provisioning and management of services that leverage these new computing platforms in today’s hybrid datacenter.

With Dynamic BSM our customers will be able to dynamically align the IT supply chain with business demand in real time and optimize resources through tiered classes of services and policy based automation. During the past quarter our new product enhancements, strategic partnerships and relationships with our customers have advanced BMC’s BSM platform leadership to help customers prepare for the next wave of IT management needs.

Last quarter we shipped our first release of our next generation Assurant solutions designed to managed the hybrid datacenter where we provide customers the ability to more easily identify, detect and predict problems while dramatically simplifying the installation and ease of use of our products. We’re also using these technologies to broaden how we deliver our enterprise class solutions to customers.

Enterprises today want options in how they deploy technology solutions ranging from on premise through managed services or using software as a service. We have the market leading on premise solutions today and are widely regarded as the defacto standard for managed services. Our market share among the global outsources and system integrators make this clear. Now, we’ve launched new offerings that will quickly establish BMC as the leader in management as a service.

As I mentioned earlier BMC and formed an alliance during the quarter do deliver BMC’s Service Desk Express on This strategic partnership combines the expertise and experience of the number one service desk provider with the number one platform for cloud based services. This will deliver a breakthrough approach to help IT organizations of all sizes overcome budget and resource constraints to achieve the capabilities that enterprise customers have enjoyed for so many years.

In addition, just last week BMC announced BMC Remedy ITSM On Demand which provides customers with our market leading Remedy IT Management suite delivered on a SAS model. Our offerings will be the first enterprise class management applications available via SAS allowing sophisticated customers to select a SAS based ITSM solution without making any compromises on functionality and scalability.

The popularity of the SAS delivery model is accelerating in enterprise IT organizations. IDC expects the systems management software as a service market will top $1 billion by 2013. BMC’s Remedy ITSM suite on demand and BMC’s Service Desk Express on will enable BMC to quickly become the leader in this market and will offer an important option for enterprises, mid tier customers and SMB customers.

As you can see the third quarter was a positive eventful period for BMC. As we look out over the remainder of fiscal 2010 and in to fiscal 2011 we know that we’re well positioned. We’re beginning to signs of improvement in the global economic environment. Key technology trends are driving increasing demand for IT management platforms that are vendor neutral and can scale across heterogeneous IT systems. We have the experience and the technology solutions to meet that demand.

We’re continuing to invest across the company to strengthen our portfolio and increase our sales footprint and capabilities and we have the management discipline to ensure an appropriate return on those investments. Based on our performance year-to-date and our current forecast we are on track to meet or exceed our guidance for fiscal 2010. I’ll talk more about our current outlook for fiscal 2010 later in this call but first here’s Steve Solcher who will provide more insight in to our financial results.

Stephen B. Solcher

BMC’s financial performance was very strong during the third quarter. We achieved solid results across all of our key financial metrics including total bookings, ESM license bookings, revenue, operating margin and EPS. This strong performance was balanced in both our ESM and MSM businesses and across our two major geographies North America and Europe.

With that, let me start off by reviewing our financial results for the third quarter in more detail. In the third quarter non-GAAP operating income increased by 4% from $183 million to $191 million. Non-GAAP operating margin was 38% flat with the year ago quarter and up 1% on a constant currency basis.

Please refer to Slide Five in our conference call presentation material for our non-GAAP income statement which includes segment profitability of our ESM and MSM business units. ESM’s non-GAAP operating income was $77 million down from $81 million in the year ago period. ESM’s non-GAAP operating margin was 25% compared to 26% in the third quarter of fiscal 2009. ESM’s non-GAAP operating margin was impacted by a nine point year-over-year increase in the ESM ratable rate.

Our MSM’s business unit non-GAAP operating income was $114 million for the quarter compared to $103 million in the year ago period. MSM’s non-GAAP operating margin was 57% compared to 56% a year ago. Non-GAAP net earnings for the third quarter were $142 million, an increase of 17% from $121 million in the third quarter a year ago. Non-GAAP diluted EPS for the quarter was $0.76 up 19% from $0.64 in the year ago period. This reflects a non-GAAP effective tax rate for the quarter of 25%.

These non-GAAP results reflect diluted shares outstanding in the third quarter of $187 million versus $188 million in the year ago period. GAAP operating income in the third quarter was $148 million compared with $129 million in the year ago quarter. GAAP net earnings and fully diluted EPS were $111 million and $0.59 respectively compared with $84 million and $0.44 respectively in the third quarter of fiscal 2009.

Turning now to bookings; bookings in the quarter were very strong. Total bookings of $539 million were up 18% from the year ago period. On a constant currency basis total bookings increased 14%. In the third quarter total bookings on a trailing 12 month basis were $1.9 billion flat with a year ago period. On a constant currency basis, total bookings on a trailing 12 month basis increased 3%. The weighted average contract length for total bookings on a trailing 12 months basis was 2.17 years up 6% from 2.04 years in the year ago period. The increase in the weighted average contract length is directly correlated to MSM’s entry in to its’ strong renewal period.

After normalizing for contract length, trailing 12 month annualized bookings for the third quarter were $875 million, down 6% from the year ago period. On a constant currency basis, trailing 12 month annualized bookings were down 4%. Please refer to Slide Seven in our presentation. Now, let me turn to the performance of each of our business units.

For our ESM business unit license bookings remain the best measure of performance. Total ESM license bookings were $152 million in the third quarter, an increase of 15% compared to the year ago period and up 39% sequentially. This strong performance reflects a significant turnaround compared to the first half of fiscal 2010. In addition to the strong growth in ESM license bookings we saw many positive trends in our ESM business. These include an increase in the average transaction size, growth in the number of transactions over $1 million and over 50% increase in the number of transactions between $500,000 and $1 million, strong platform wins with multiple product lines and an increase in sales productivity and headcount.

From a geographic perspective I am pleased to highlight the strong ESM license bookings performance in the US. I’m also pleased with our performance in EMEA during the quarter. We have delivered strong growth in this region through the first three quarters of fiscal 2010.

Turning now to our MSM unit; we believe the MSM business unit is best evaluated on the basis of total and annualized bookings over the trailing 12 months. In the third quarter total MSM bookings on a trailing 12 month basis increased 8% to $804 million with an average contract length at 3.06 years. On a constant currency basis total MSM bookings for the trailing 12 months increased 10%.

After normalizing for contract length, total annualized MSM bookings for the trailing 12 months were $263 million down 2% from $268 million in fiscal 2009. On a constant currency basis total annualized MSM bookings for the trailing 12 months were flat to the year ago period. As we’ve often said, our mainframe business is a lumpy business in which total bookings can vary quarter-to-quarter. We remain pleased with the solid performance and trends we’ve seen in our MSM business during the third quarter as we’ve entered a period of strong renewal activity.

Turning to revenue; total revenue for the quarter was $508 million up 4% from the third quarter of fiscal 2009. On a constant currency basis, total revenue was up 2%. License revenue in the third quarter was $216 million up 12% from $193 million in the year ago period. On a constant currency basis license revenue was up 9%. ESM license revenue was $137 million up 8% from the year ago period. MSM license revenue was $80 million up 20%.

During the quarter the percentage of license bookings that was deferred was 55%, in line with our expectations and higher than the 49% in the year ago period. The higher ratable rate was driven by the continuing trend towards larger more complex transactions. Maintenance revenue in the third quarter of fiscal 2010 was $260 million up 2% from the year ago period and up $3 million sequentially. On a constant currency basis, maintenance revenue grew 1%. ESM maintenance revenue was $141 million up 1% and MSM maintenance revenue was $120 million up 3% compared to the third quarter of fiscal 2009.

Professional services revenue which is included in our ESM segment was $32 million in the third quarter, a decrease of 20% compared to the year ago period. Moving next to operating expenses, we remain pleased with our ability to control cost. Non-GAAP operating expenses were $317 million up 4% from $305 million in the year ago period. The increase was driven by the adverse impact of foreign currency and the additional expenses related to three small acquisitions we completed this fiscal year.

On a constant currency basis non-GAAP operating expenses were up 1%. We do expect fourth quarter expense to be up sequentially which is consistent with our normal seasonality. Looking at our business units MSM non-GAAP operating expenses were $85 million up 6% from the year ago quarter. ESM non-GAAP operating expenses were $232 million up 3% from the year ago quarter.

Now, turning to the balance sheet; total deferred license revenue at the end of the third quarter was $588 million up $32 million or 6% sequentially. During the quarter we deferred $137 million of license revenue and recognized $105 million of deferred license revenue from the balance sheet. Total deferred revenue was $1.7 billion up 2% sequentially. Software development costs on the balance sheet were $144 million up 6% compared to the second quarter of fiscal 2010 as we capitalized $24 million and amortized $16 million during the quarter.

The level of capitalized software development costs is related to the continued development activity for ESM product releases made during the third quarter. Cash and investments at December 31st was $1.3 billion, roughly flat with the previous quarter. Our net cash position was $929 million. For the quarter, cash flow from operations was $83 million down from a tough compare of $155 million in the year ago period. Our cash flow from operations for the first three quarters is in line with what we expected and we’re on track to achieve our annual cash flow from operations guidance.

Driven by strong third quarter bookings, DSOs increased to 60 days, up eight days from the September quarter. During the quarter we remain committed to share repurchases. We repurchased approximately $2 million shares for a total of $75 million. As of December 31st, the remaining amount authorized on our share repurchase program is $145 million.

So, let me briefly sum up; during the quarter we significantly grew our bottom line while showing strength in bookings across both of our businesses with solid performance across our two major geographies. Our ESM business delivered strong growth in license bookings benefitting from improved sales productivity. Our MSM business capitalized on customer renewal opportunities further penetrated our install base and won new business.

Our third quarter results position us well to achieve our fiscal 2010 financial goals across all key measures. With that, I’ll turn the call back over to Bob for his concluding remarks.

Robert E. Beauchamp

We are once again increasing our full year non-GAAP EPS expectation and reiterating our expectations for all other key metrics. For fiscal 2010 we expect non-GAAP earnings per share in the range of $2.64 to $2.72 per share. At the midpoint this would represent a 19% increase over last year and an 11% increase compared to our initial 2010 expectations. Our non-GAAP EPS estimate excludes an estimated range of $0.65 to $0.68 per share for special items including expenses related 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. At today’s rates we expect currency impact to have a slightly positive impact on bookings. A license bookings ratable rate in the low 50s versus 50% in fiscal 2009 and a non-GAAP tax rate of 27%.

We expect full year 2010 cash flow from operations to be between $600 and $650 million unchanged from our prior expectation. As we look out over the remainder of 2010 and in to fiscal 2011 we’re beginning to see signs of improvement in the economy and IT spending. We also believe that the macro environment for managing IT will be positively influenced by key technology trends such as virtualization, cloud computing and software as a service where we are well positioned to capitalize. We will provide our expectations for fiscal 2011 on our next earnings call.

With that, we’ll turn the call over to your questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Abhey Lamba – ISI Group.

Abhey Lamba – ISI Group

I know Bob you’re not giving fiscal ’11 guidance but conceptually can you talk if we should expect your margins to keep going up on a percentage basis as we exit out of fiscal ’10?

Robert E. Beauchamp

I think as a company we continue to operate more efficiently. I think top line growth will be a bigger part of the story this next year. We still think we can grow our expenses in a more efficient way next year but there’s a lot of leverage in this plan as the economy picks up, as the sort of top line results you saw this quarter hopefully continue on well in to 2011 and so we can improve margins by just continuing to do good expense management. But, more importantly to really grow on the top line.

Abhey Lamba – ISI Group

Steve, you raised EPS guidance but maintained cash flow at where you started the year, any color on why not raise that as well or narrow the range to either the high end or the low end of the guidance range as you probably have better visibility in to this quarter’s cash flows?

Stephen B. Solcher

A little bit of it has to do with you have to go back and look at our initial range. So when I think about the cash flow statement you have cash earnings and then you have the impact of working capital and what you’re seeing today is cash earnings are growing by our beat and working capital is actually contributing less and that really relates primarily to less of our deferral license revenues going on the balance sheet. If you go back to our initial guidance we guided somewhere around mid 50s as our deferral rate, we just indicated it as probably going to be closer to the low 50s. That alone is probably the biggest delta that you’re seeing. It’s more cash earnings and less working capital help.


Your next question comes from Kevin Buttigieg – FTN Equity Capital Markets.

Kevin Buttigieg – FTN Equity Capital Markets

Growth was obviously very strong this quarter in terms of total bookings and license bookings but operating expenses were up as well and I know Steve you mentioned the ratable rate was up which I assume you mean you had to defer a larger portion of the revenues but had to record a larger portion of the costs up front. But I guess what I was wondering was the ratable rate year-over-year in the third quarter was the same as it was in the second quarter so is there another dynamic behind that or have I got that wrong?

Stephen B. Solcher

No, actually when you think about sequentially the nine point that we talked about on the call is a year-over-year statement but going from Q2 expense to Q3 probably the biggest change was just fx alone. So fx on the expense side was a help in Q2 and it went to a hurt in Q3, the quarter we just ended. That was roughly a $50 million swing alone. You also have to pick up the run rate of the three acquisitions that we did in the quarter and then software cap actually decreased from Q2 to Q3 by about $5 million. So those three things are really what is the biggest change between Q2 and Q3 expenses.

Kevin Buttigieg – FTN Equity Capital Markets

Were the three acquisitions accretive or dilutive to operating income on a dollar basis?

Stephen B. Solcher

In combination all three are dilutive.

Kevin Buttigieg – FTN Equity Capital Markets

Then just finally with regards to the mainframe renewal cycle could you talk a little bit did you have any sense about whether or not those contracts that are up for renewal how they are renewing compared to their original value?

Robert E. Beauchamp

Again, we had an increase in the run rate, low single digits but nonetheless it was an increase in the run rate and when you consider the fact that most customers are more conservative at this point in their buying than they were say three years ago, it generally points to the fact that while we were increasing run rate they’re buying less excess capacity, putting less buffer in it so actually I think that bodes well for potentially earlier renewal cycles next time and also potentially higher renewal cycles next time as they’re buying basically just enough at this point.

I think that probably softened, actually a little bit of what we had originally said a year ago thought was going to happen at this point in the cycle, we delivered some really strong results on mainframe but it will probably elongate this positive period of the cycle and will probably shorten the time to the next cycle for mainframe. When you combine that with the fact that we feel fairly confident that IBM will announce a new processor in the next year and this starts again.


Your next question comes from Analyst for Tim Klasell – Thomas Weisel.

Analyst for Tim Klasell – Thomas Weisel

You mentioned that the ESM business the sales force transition was going pretty well. I was just wondering if you could provide some color going forward as far as what your ramp up plans are? I think you said you did a slug of hiring back in March and that they’re kind of becoming tenured now. So what’s that looking like going out say six to nine months?

Stephen B. Solcher

The number of productive reps continue to go up, the number of total reps continue to go up. We will continue to hire more sales people. We actually feel pretty strongly that we are supply constrained not demand constrained right now and if we have more feet on the street it will scale very nicely for us. So, we’ll continue to grow it, we’ll have to just watch it to make sure we balance it against what we need to deliver in terms of profit growth but right now we are adding sales people very, very high caliber sales people almost as fast as we can hire them.

Analyst for Tim Klasell – Thomas Weisel

If I could ask about the close rates, how did those track compared to the last couple of quarters? And, if I look out to the guidance it kind of suggests that it looks like if you maintain the low single digit revenue growth and bookings growth is there a reason to expect maybe things to slowdown a little bit in Q4 or is that just some of your conservatism that you’re building in?

Robert E. Beauchamp

I think it’s probably more conservatism than it is any real factor of any slowdown in the economy. Actually, I think the momentum that we built up so far in the sales force we believe is going to continue to carry over in to Q4 at least on the ESM side. Then, if you think about the MSM side as we said, we have just entered what we’d say is kind of the strong renewal period. So our expectation level is still pretty high.

Stephen B. Solcher

In terms of close rates I don’t think there was any significant change. We think we’re doing very well against the competition. The way that we now track our pipeline and our deals, we’re getting very solid metrics on our wins and losses and we’re winning an awful lot. This is why I say frankly, the biggest inhibitor we have to accelerated growth is just being in more deals. Our pipeline, particularly in areas like automation, BladeLogic pipeline for instances is growing very, very strong right now and so we just need to be engaged in more deals because we’re winning a very significant percentage of the deals we’re in.

Analyst for Tim Klasell – Thomas Weisel

I guess that’s always a good problem to have too much pipeline, right?

Stephen B. Solcher

There’s no such thing as too much pipeline but I do think that when the wind is in your sails like it is for us right now we just want to get as many deals going as we can because we’re doing well whenever we engage.

Analyst for Tim Klasell – Thomas Weisel

Then one last one for me, as far as I think ORACLE mentioned at its analyst day that they’re looking at merging their console product with Suns and selling hardware combined. I know you guys have that partnership with CISCO. Can you comment on how that’s going and whether you’ve seen any change in the competitive environment as far as other vendors partnering with hardware guys and kind of bundling these sales together?

Robert E. Beauchamp

Let me come at it a couple of ways. One, as it relates to CISCO things are going quite well with CISCO. We’ve got quite a few customer wins now behind us, revenues coming in from the relationship, we’re working jointly on large engagements with them, our teams are working particularly on some large transactions very, very close. I was in a briefing myself just two days ago with a very large service provider and in the room were a representative of CISCO whose here in Houston doing joint presentations.

We’ve got a lot going on in Europe with them and all indications from CISCO is that they are very satisfied with this partnership and how it is progressing. To come at it from a different angle I think the ORACLE announcement with Sun, that being completed combined with what you see from CISCO, what you see from HP building its own full stack, IBM its own full stack, EMC doing something that looks something like trying to build a stack, it all bodes very well for BMC because we essentially become the abstraction layer for these silos that are being built that allows the customer to not have to lock in and commit to a single vendor.

I haven’t met any customers who are excited about locking in to a single vendor for their entire stack, it is quite the contrary. In fact, just yesterday I had lunch with one of the largest, I’ll call it exchanges in the world that does huge amounts of transaction volume and in that meeting they specifically said, their CIO told me that they intend to have multiple virtual machine from multiple VM providers rather than standardized on VMware, or Microsoft, etc. They are going to intentionally maintain heterogeneity.

I think as these larger companies attempt to build proprietary stove pipes, the demand for a single company that can manage all of it and basically commoditize a large portion of their stacks just raises the value proposition and necessity for someone like BMC.


Your next question comes from Derek Bingham – Goldman Sachs.

Derek Bingham – Goldman Sachs

On mainframe bookings in terms of what you are seeing in front of you do you expect fourth quarter mainframe bookings to be up versus what you had in the December quarter in March?

Robert E. Beauchamp

We are looking right now, although I would hate to guide you to a specific number but I would say flat to slightly up. But, let me just caution that trying to pick mainframe exactly is a dangerous game because it’s too lumpy, it’s too many deals. Two or three deals can make that number change fairly significantly. So I look more on trailing 12 months than trying to nail a particular number in any given quarter.

Derek Bingham – Goldman Sachs

I’m just trying to get a sense of the renewal schedule that you see as opposed to new deals that aren’t currently in the pipe. Kind of related to that as well, when you turn forward to FY ’11 just in broad terms can you grow mainframe bookings in FY ’11 off a more difficult compare because you had a pretty good renewal wave in FY ’10? Is it reasonable to think that those can be up again next year?

Stephen B. Solcher

I think absolutely and I think as we’ve indicated in the past when you think about the strength of the cycle we’ve always indicated that it’s been the latter half of this fiscal year and the first half of next fiscal year I believe that we’ve gained a lot of traction in what we would say new business either taking share from existing customers or expanding our footprint with customers that we have today. I’m pretty confident, I am sure if Phil Miller was sitting here giving you the same story he would say the same thing.

Derek Bingham – Goldman Sachs

Can you give a little more detail just on the broad environment. As you’re talking to customers starting off calendar 2010 how much are you seeing kind of pent up demand and a snap back in spending versus customers still kind of being cautious and wanting to start the year off slow?

Stephen B. Solcher

I think there are definitely signs the economy is picking up or at least IT spending in our space is picking up. Our briefing center again, this last week was just packed with customers. I’ve forgotten the numbers but it was well over two dozen different corporations here in Houston for two day or more briefings and very senior level, CIO level people in attendance. There is a lot of excitement around the hybrid datacenter, around managing the legacy systems, the existing systems, the cloud computing environment, virtual environments and SAS and other service offerings all basically using the same tool suites and the same methodology, the same change management and availability management suites integrated together.

So it’s almost like there’s been a tipping point or kind of a universal epiphany that the old ways of management just aren’t going to work as the complexity and the math of cloud environments and virtual environments really lay in. So, I would say that we haven’t seen any dramatic shift, it’s just been getting hotter and hotter and hotter for us in terms of customer excitement and energy in the field. My own talks with the sales force as I’m traveling around making calls together, there is just a lot of energy, the pipeline is building so it feels good right now at BMC.

Derek Bingham – Goldman Sachs

Can I just ask one more? Steve, on ESM margins I think you’ve gotten now about 25% for a couple of quarters in a row so that’s looking pretty sustainable and you got there in a hurry. Is there a pretty clear path to keep moving forward to 30% next year? Is that reasonable or is it starting to get tougher to get those incremental points on the distributed side?

Stephen B. Solcher

I don’t want to give you a specific number. We all believe it is just a game of rate and pace so for us as Bob mentioned earlier we’re really looking for to take advantage of some really strong performance on the top line and spend a little bit of money but I think we can continue to increase the margin not only on a percentage basis but on an absolute basis at the same time.


Your final question comes from Kirk Materne – Rafferty Capital Markets, LLC.

Kirk Materne – Rafferty Capital Markets, LLC.

Bob, can you just talk a little bit about some of the ESM strength? I guess just a little bit more around whether it is coming from automation, service desk, is there one particular segment that is really pulling it or is it you’re seeing strengths across all of the ESM product lines?

Robert E. Beauchamp

So eight out of 10 of our largest transactions were multi disciplined deals so you’re seeing more and more customers just kind of buy up on the whole thing. I’ll tell you this last quarter two large deals, one was let’s call it one of the top five largest public companies in the world that really standardized on us with a significant transaction. By the way Accenture will be doing the implementation in that customer’s environment for us. It was really almost a year long evaluation, very competitive and our acquisition of Tideway played a role in that as discovery was really a key part of it.

So across that company they didn’t look at as individually products, they were looking at it as standardizing on a vendor but they did take the time to go in and evaluate each of those products on each individual merit to make their summary decision and we won that business. Similarly, a top five largest private company a very similar sort of story where they came in and evaluated in their case a massive SAP implementation and they needed to ensure that they could manage this SAP environment and they standardized on BMC.

In a sense the all in sales model that we have had now for over a year is beginning to make the products move more together. So, you’ll see kind of them move up and down somewhat together. I will tell you that the service assurance business, we talked about our latest announcement of our newest next generation management products in the prepared remarks, had a very strong quarter through that. Automation did solid and Remedy generally is in almost every deal. That’s probably an exaggeration but in almost all of our largest deals Remedy is a clear part of it as well. They are moving together, I’m not particularly disappointed in any of them or none of them are disproportionately carrying all the weight either.

Kirk Materne – Rafferty Capital Markets, LLC.

If I could just ask one quick follow up, you mentioned earlier that you’re starting to see some revenue roll in from the UCS partnership with CISCO. I assume that’s probably pretty much nominal right now?

Stephen B. Solcher

That’s right.

Kirk Materne – Rafferty Capital Markets, LLC.

As we head in to fiscal ’11 do you think that is sort of a linear progression in terms of some of the revenue potentially from that partnership or do you think there’s some opportunities for it to really scale quickly?

Robert E. Beauchamp

I don’t think I can give you an answer better than this, I think you have to just listen to CISCO talk about how many they sold and how many they think they are going to sell. I think right now the production, and remember that we may very well not be attached to individual proof of concept boxes where they just want to see the speeds and feeds. But, once somebody really is looking at this device to put in to heavy production like I mentioned a customer earlier this week who has a named strategy and really standardizing on UCS is why they told us they made that decision. It is a massive IT organization that says they are going to standardize on it.

We absolutely expect that to be and see part of that. I think you just have to track CISCO’s numbers. I don’t think it is going to be material in another quarter or two, it will just kind of scale up hopefully fairly rapidly and we’ll probably guide you once we have a little better transparency in the next earnings call.

Thank you very much for joining us. I just want to thank also BMC, we had a really solid quarter in Europe. North America had some very strong performances in some of the regions there. By the way every single region in Europe performed well and appears to be situated well to do again. I look forward to the call in 90 days. Thank you all for joining us.


That concludes today’s BMC Software teleconference. Thank you all for your participation.

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