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Executives

Vivek Ranadivé – Chairman and CEO

Murray Rode – COO

Sydney Carey – EVP and CFO

Analysts

Nabil Elsheshai – Pacific Crest Securities

Mark Murphy – Piper Jaffray

John Difucci – JPMorgan

Brad Zelnick – Macquarie Securities

Derek Bingham – Goldman Sachs

Tim Klasell – Thomas Weisel

Yun Kim – Broadpoint AmTech

Michael [ph] – Friedman, Billings Ramsey

Brent Williams – Benchmark

TIBCO Software Inc. (TIBX) F1Q10 (Qtr End 02/28/10) Earnings Call Transcript March 25, 2010 4:30 PM ET

Operator

Good afternoon, ladies and gentlemen. I'm Christian, your conference operator. Welcome to TIBCO’s First Quarter 2010 Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. You can also listen to this call via the Internet at www.tibco.com.

Today’s call is being recorded and will be available for playback from TIBCO Software’s website at www.tibco.com. In addition, replay will be available through InterCall for one month following today’s call by dialing 800-642-1687 from the U.S. or 706-645-9291 internationally. The confirmation code is 53656894.

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

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

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

Our presenters on the call are Vivek Ranadivé, TIBCO’s Chairman and CEO; Murray Rode, Chief Operating Officer; and Sydney Carey, Chief Financial Officer.

I’d now like to turn the call over to Vivek.

Vivek Ranadivé

Thanks, Christian and thank you, all for joining us today. I'll open the call with summary remarks and our first quarter performance and then I will turn it over to Murray and Sydney to discuss the details.

Q1 provided a strong start to the year for us. Total revenue grew by 17% over the first quarter of 2009 for a Q1 record of $155 million. License revenue grew by 21% to $54.2 million. Non-GAAP operating margins came in at 20% and expanded by more than 300 basis points over last year and non-GAAP EPS at $0.12 grew by $0.03 over the first quarter of last year. Once again, we exceeded our guidance ranges for revenue and profitability.

Also this quarter, we repurchased $30 million worth of stock and acquired Foresight, a leader in claims management software and EDI. In addition, we just today announced the acquisition of Netrics, a provider of data quality software.

For some time, I've spoken of the ongoing shift in enterprise IT from the need to simply support transactions to today's requirements to also support a broad range of business events. A transaction is an agreement between parties that needs to be stored and event on the other hand, is a much broader notion and pertains to the change in status or circumstance of anything. An event could be a transaction, an event could be someone clicking on a browser, an event could be a person getting on an airplane, a piece of luggage getting on an airplane or not. With transactions alone, you are too often left saying, "I wish I knew." With events, you know.

The enterprise IT environment of the past 25 years has been architected for transactions and centered around the database. Even today, the companies whose greatest value proposition is moving information back and forth between databases, what you see from TIBCO customers who are leaders in their respective markets, what you see in TIBCO's performance and results and what you see too in the pack of followers you are trying to play catch-up with TIBCO is the market of today and tomorrow is clearly centering around events. TIBCO marries the two worlds of transactions and events.

I have also spoken of the two second advantage that TIBCO gives its customers. The two second advantage is the reference to what happens when an enterprise becomes event-driven and leverages in memory technologies versus relying exclusively on transactional systems that forcibly and constantly require round-tripping back and forth to a database.

The two second advantage is the phrase I have coined to describe the substantially higher value to having just a little bit of the right information in the right place at the right time and in the right context than having all of the information in the world six months after the fact. TIBCO's event-driven in-memory platform of infrastructure software products provides this two second advantage and more customers in every industry are standing up to take note.

Just this quarter, we had seven distinct verticals comprise 5% or more of our revenue mix with significant growth in the range of markets including financial services, energy, insurance, life sciences, health care, and retail. We had 97 deals over $100,000, up 47% from the same period a year ago. And our core SOA, important in enabling an event-driven enterprise, grew by more than 30%.

It is becoming clear that you can't solve 21st century problems with 20th century infrastructure. The world is too large, customers are too demanding, and the stakes are too high to wait until after the fact to detect, understand, and act upon the business event. Apparently too, it's a good time to be TIBCO as companies large and small seem to be trying to be just like TIBCO in the various assets they are gobbling up, whereas not that long ago, mine was a lone voice in the wilderness talking about predictive business, the power of events, and the importance of messaging.

We've now reached the proverbial tipping point as sorts of companies in their marketing messages at least now join the frame. So for all of these companies, newcomers to the event-driven world, I say, "Welcome to Enterprise 3.0. Let the best company win."

Finally, I spoke on our last call of continuing to build our innovation advantage and you will see concrete evidence of that this spring when we host TUCON, our annual user conference in May. I look forward to seeing many of you there.

Now, I will turn it over to Murray. Murray?

Murray Rode

Thanks, Vivek. I'll focus my remarks on our general mix of business this Q1 and then discuss our recent acquisitions before turning it over to Sydney.

In terms of deal activity, we saw broad-based health in deal flow with 97 deals over $100,000 in license versus 66 a year ago and I would point out 87 the year before that, so a good long-term trend. New license customers numbered 44 in the quarter versus 49 for Q1 of last year and 30 in Q1 of 2008.

In terms of larger deals, we had 10 deals over $1 million in license versus 11 a year ago. The broader diversity of deals meant our average deal size for transactions over $100,000 in license came in lower than last quarter at just under $500,000, but basically in line with our long-term historical range of $500,000 to $800,000. What's really important to take away from this data is the healthy increase in volume that was demonstrated in this mix, which we believe is a good indicator of an improving selling environment for TIBCO.

In terms of geographic mix, total revenue was as follows. Americas, 51%; Europe, Middle East, Africa, 39%; and Asia-Pacific and Japan, 10%. There was nice growth from a regional perspective with Americas up over 13%, Europe up almost 16%, and Asia-Pacific up 43%. Standout performance came from Latin America and Canada in the Americas, Northern Europe in Europe and the Greater Asia region.

From a vertical market perspective, total revenue was as follows. Financial services, 25%; telecommunications, 10%; energy, 8%; government, 8%; life sciences, 8%; insurance, 6%; and manufacturing, 5%. Overall, we continue to show diversified and balanced performance across a range of vertical markets with particularly good growth in our larger verticals of energy, finance, life sciences, and insurance.

From a product perspective, the breakdown of license revenue among our major product families was as follows. SOA, 70%; business optimization, 22%; and BPM, 8%. As Vivek mentioned, SOA had a very nice quarter, up 32% over last Q1, driven in large part by strength in our core infrastructure products.

I'd also point out that SOA has been trending well for several quarters now. Our business optimization category grew by 25% year-over-year with a good showing from Spotfire. BPM had a modest start to the year, but this was not unexpected given the timing of BMP deals in our pipeline. We also continue to see BPM as a key driver in many platform deals, as well as a growing convergence of BPM and SOA. All this is part of what is driving strength in our SOA and our overall platform.

Looking ahead, it's important to understand a key growth catalyst in our business is how our products combine to create the Enterprise 3.0 applications that Vivek described. SOA, BPM, and business optimization, all represent discrete growth markets where we believe we have leading technologies, but their strength as an integrated platform from our flexible cost-effective applications is what is most compelling about our offerings.

Our ongoing investments in R&D and marketing will continue to focus on the unique value of our broader platform and more details around this will be announced at TUCON. So stay tuned.

Finally, I'll mention a couple of recent technology oriented transactions we made. Foresight completed late in Q1 and Netrics just announced today. Foresight is a leader in transaction automation and management software and brings us a portfolio of EDI products and greater focus in the U.S. health care market, especially among payers with its clients covering over 50 million lives. With the coming adoption of the new HIPAA 5010 standard, we believe there is some interesting potential for our combined offerings.

Netrics, our latest acquisition, is a provider in the data quality, data cleansing space with some powerful algorithms that enable intelligent searching of events and data whether on premise on in the cloud. They were an existing partner of ours and a technology we embed within our MDM products. We liked what we saw in Netrics and we are now pleased to have them as a native part of our data governance strategy.

With that, I will turn it over to Sydney.

Sydney Carey

Thank you, Murray. First, I will provide additional details on our financial performance in Q1 and then I will provide comments on our financial outlook for Q2. I'll review our financials on both a GAAP and a non-GAAP basis. A full reconciliation was included with our press release along with an explanation of our non-GAAP measures.

Some key performance data on our first quarter results are as follows. Total revenue was $155 million, up 17% year-over-year or 15% on a constant currency basis. License revenue was $54.2 million, up 21% year-over-year or 18% on a constant currency basis. Services revenue was $100.9 million, up 15% from last year or 13% on a constant currency basis. Both professional services and maintenance components to this revenue stream were very strong in the period.

Non-GAAP gross margin for Q1 was 75%, approximately 80 basis points higher than in Q1 of last year. Non-GAAP operating income was $30.4 million, up $8.5 million or 39% from the same period a year ago. This resulted in an operating margin of 19.6% versus 16.5% a year ago. Q1 cash flow from operations totaled $40.5 million. Non-GAAP EPS was $0.12 versus $0.09 a year ago. On a constant currency basis, earnings for Q1 were negatively affected by approximately 7% as compared to the prior-year period.

Turning to our balance sheet, we ended the quarter with approximately $279 million in cash and short-term investment. Deferred revenue including both long and short-term components totaled $187 million, up almost $30 million from Q1 of last year. Cash collection for the quarter was strong with DSOs at 65 days compared to 72 days in Q1 of last year. Also during the quarter, we repurchased 3.1 million shares at an average price of $9.42.

We started off the year with a strong Q1 and that we delivered nice growth in both revenue and profit. Last year, we focused on cost containment and margin expansion. This year, we are focused on delivering growth with leverage.

For Q2 2010, our outlook is as follows. We expect total revenue to be in the range of $159 million to $164 million. We expect license revenue to range between $56 million and $60 million. The non-GAAP operating margin is expected to be 19.5% to 20.5%. Non-GAAP EPS for the quarter should range between $0.12 and $0.13 with an assumed tax rate of 32%. GAAP EPS should range from $0.05 to $0.06 with an assumed tax rate of 32%. We expect cash flow from operations to range from $20 million to $25 million.

With that, we will be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Nabil Elsheshai with Pacific Crest Securities.

Nabil Elsheshai – Pacific Crest Securities

Hey, guys. Thank you for taking my question. First, I'll start with – some say, I think you may have been referring to this in your prepared comments, any comments on Informatica buying a messaging company and how much you guys may have competed with that company in the past.

Vivek Ranadivé

Yes. No, we are actually happy that somebody like Informatica bought them. It's a niche product, it's a good product. It seems like every day that Informatica is trying to be more like us. They bought MDM, they bought messaging. Maybe they will look for BPM next.

So – but we are not – the thing is that you got to remember that it's kind of like buying a cell phone battery. Now, you still have to make the whole cell phone and so it's a very niche product like program creating [ph] and it – there is some competition with our messaging appliance. But frankly, it's better that Informatica bought them than say, an IBM.

Nabil Elsheshai – Pacific Crest Securities

Okay. And then, working up the strong results particularly in optimization business, I was wondering if you could comment a little bit about if you've had greater success maybe with some cross-sell opportunities within your installed base and what has driven the turnaround in Spotfire this quarter versus last year.

Vivek Ranadivé

Yes, we are seeing more up-sell, cross-sell. We've now integrated more of that capability with the rest of our stack. So we are seeing leverage from that as well. So we are literally executing on all fronts. But Murray, you might want to add to that?

Murray Rode

Well, I think as it relates specifically to Spotfire and even the core SOA products, it was just the good order demand was strong across the board. So I think even isolated sales of Spotfire were up significantly year-over-year.

Nabil Elsheshai – Pacific Crest Securities

Okay, great. And then last question. On the sales headcount, I know you guys have added a lot over the last two years. Are you pretty comfortable with where you are on capacity? Are you planning to continue to add there?

Vivek Ranadivé

Well, we are continuing to add and we are adding in different ways. So we are – we've started investing more in channel sales for example. So we will continue to add as we see fit. So we will continue creeping up. Is that a good description, Murray?

Murray Rode

Yes. And I think the other thing about capacity is our ability to sell and to have sales capacity is more than just quota head. As Vivek mentioned, it's also people in our alliances group, which is not counted in that that quota head and that's increased pretty significantly as well as our broader services organization and the way that they develop larger accounts is also part of our greater sales capacity.

Nabil Elsheshai – Pacific Crest Securities

Great, perfect. Well, thank you very much for taking my questions. I'll let other jump in.

Vivek Ranadivé

Thank you.

Operator

Our next question is from Mark Murphy with Piper Jaffray.

Mark Murphy – Piper Jaffray

Yes, thank you. You had recently filed a long-term incentive plan, which lays out a path to $1 EPS in FY '12 or FY '13. And if you were to achieve that, it looks like it implies an EPS CAGR of something like 16% to 22% depending on in which year they will be achieved. I think the street is currently modeling closer to 12%. And so I'm wondering how confident you are in achieving those targets or what the odds are and is there any way you can approximate for us what level of revenue growth you would be targeting as you try to get there?

Vivek Ranadivé

We are – obviously, it's an incentive program that we have to deliver flawlessly year after year after year for those number of years and then after that as well. When Sydney and I were on the road, we put a stake in the ground and we said that we thought we could achieve 15% to 20% EPS growth and I think we've now been doing that after sometime. We've again done it this quarter. And from our perspective, that's what we are going to strive to keep doing quarter after quarter and year after year.

Mark Murphy – Piper Jaffray

And any thought on what level of revenue growth would be – I know there is probably a range of outcomes, but I mean, in a normalized – if we are getting into a more normal economic climate, what kind of level do you think would get you there?

Vivek Ranadivé

Well, on a normal economic environment, we should be in the double-digit revenue growth. But again, I don't want to speculate on that.

Sydney Carey

Yes. I mean, there is just so different ways that we can accomplish the $1 EPS and so at this point, you can look at revenue growth solely, you can look at a combination of revenue growth and stock buyback and acquisition. So it really – it has multiple factors that will contribute to that margin expansion. So at this point to give a kind of longer-term growth rate, it wouldn't be appropriate.

Vivek Ranadivé

But I think all of that being said, we obviously are feeling pretty good about where the company is positioned and the shift that we see taking place through this event-driven architecture and many people, including many on this call, have long said there is no such thing as SOA and we've seen great success in that market and we will continue to see great success. And so we think that proverbial tipping point of a shift from a purely transactional to a transactional/event-driven architecture has started and it's going to keep growing and growing.

Mark Murphy – Piper Jaffray

And then one last one, Vivek on that topic. Can you talk about how TIBRR [ph] is playing into that? Any update on customer adoption or do you see any incremental signs that this convergence of enterprise software and social software is gathering steam?

Vivek Ranadivé

Yes, we are very excited about TIBRR. We just – it was actually one of my personal bred projects and we just have gone live with the World Economic Forum. They are using it for 5,000 customers – for 5,000 users and we are a natural to provide that. The messaging that we have is what's needed. Also the fact that with our approach, you are not just following people, but you are following information, you are following subjects, you could be following a point-of-sale terminal or a database and you are able to do that at a very huge scale using our messaging and our caching technologies.

So we think that this is actually a huge up-sell, cross-sell opportunity for us into our whole installed base. We are getting very positive feedback from people that we are showing it to and if you are there at TUCON, you will see it over there.

Mark Murphy – Piper Jaffray

I will be there. Thank you very much for –

Vivek Ranadivé

Yes, we actually have a couple of customers, I believe, or at least one that's going to be demoing at live and show how they are going to be using it.

Mark Murphy – Piper Jaffray

Okay, great. Looking forward to it.

Vivek Ranadivé

Thanks.

Operator

Our next question comes from John Difucci with JPMorgan.

John Difucci – JPMorgan

Thanks. We saw a nice job in deferred revenue and cash flow this quarter. I'm just curious, were there any like – you mentioned there were 10 deals over $1 million, which is actually down one deal from last year, just curious were there any very large deals out there this quarter.

Sydney Carey

There were no deals above $5 million and the deferred is still primarily made up of maintenance. We did see, on a year-over-year basis, a little bit of an increase in license deferred, but it's a very small component of the overall deferred balance.

John Difucci – JPMorgan

Okay, great. And Vivek, as you pointed out, you have been talking about this move to dynamic in-memory event-driven architecture for some time and as technology around you starts to continue to develop – what I'm talking about is memory technology, bandwidth, CPU technology, it seems – it – from where we sit, it looks more and more like this could happen.

But – and at the same time, your core infrastructure products are what sometimes – it's actually what investors look to TIBCO as and I'm just wondering when is it – because you – now you are buying companies like Netrics and you've been assembling technologies along the way. When is it that we start to hear in the field a little bit more about TIBCO really taking advantage of this? I'm not saying we are not hearing it at all. We – I guess we do, but it seems like it's becoming – it could become more of a reality. If you can just comment on that, please?

Vivek Ranadivé

Well, it's becoming a reality. It's just a fact now. And the – and there is multiple signs. One is, you look at the cross-section of customers and industries. So retail can't live without this now. It's not just banks, it's telcos, it's energy companies, it's retail companies, it's health care companies. So you see that happening. You also see the class of problems what I'd refer to as 21st problems and opportunities that you simply can't solve with a round trip to the database.

And then look at what everyone else is doing. Everyone else is jumping into this field. Companies big and small are all trying to recreate these tacks [ph]. Its' IBM, it's Oracle, it's SAP, it's Informatica, it's all over the place. You see people saying that, "Well, we've got to get beyond transactions and start moving into this world of events."

And so what we are seeing is there is people that are solid players in the transactional arena and then there is the event arena and that's where we dominate. And I have yet to talk to a customer who does not get it. And so that's a drastic change from a year ago or two years ago when people didn’t think that they really needed this two second advantage that I keep talking about. So it will be upon you, it's upon you right now. It's reflected in our numbers.

John Difucci – JPMorgan

But when you go to market with this message, are you – do you have to convince customers to stop doing something that they've been doing a certain way for years and try to at least give this new way a shot?

Vivek Ranadivé

Well, the beauty of it is that customers have tried to do things the old way and they haven't been able to do it. AT&T wanted to provision – they wanted to do the iPhone and they tried using Enterprise 2.0 technologies and they weren’t getting there. Steve Jobs wanted to write it the first time and you were in the store.

And so we have example of the example of the example where people had tried the old way and what we do doesn't – it sits on top of the transactional systems. So if you are Citibank in Asia and you tried spending $200 million, $300 million a year on outbound marketing and stop producing results, then you say, "Well, why not inbound marketing? Why not make it event-driven? Why not make it on the spot"?

And so what we are seeing is that customers are really being forced to cater to the needs of that 21st century customer and it's all the same things. You have customer up-sell, cross-sell, you have fraud detection. You hear preventing loss of a customer. Regardless of industry, you are seeing all the same types of problems that customers are trying to solve.

John Difucci – JPMorgan

Okay.

Murray Rode

And I think too, John, the metrics have been very strong on the core business, particularly this quarter. I mean, it was the strongest part of the business in the quarter and we saw a huge increase really in core SOA sales. So I think it all reinforces the fact that the core of the business, the lifeblood of what we sell is the part of the business that's really showing the strongest growth at the moment.

John Difucci – JPMorgan

Okay, great. Nice job. Thanks.

Vivek Ranadivé

Thanks, John.

Operator

Our next question comes from Brad Zelnick with Macquarie Securities.

Brad Zelnick – Macquarie Securities

Thanks guys and really nice job. As I think about your success in the quarter and I look at the various drivers, if I think about the move towards event-driven architecture, the overall environment improving and the success of TIBCO and Murray in the back, I know you are out there talking to customers on a regular basis.

Can you comment across those three dimensions and their relative contribution to where you are? I mean, it seems like things were otherwise very broad-based, but I was hoping you might just be able to give a little bit more color on your thoughts on the environment.

Vivek Ranadivé

Yes, I think the environment is a little bit better than it was – it's better than it was a year ago. But you know that it's better for us. It is better for other people? I don't know. Because what we do is we allow you to cut cost and that's important to them. We allow you to leverage the infrastructure you already have and that's important to them. Customer up-sell, cross-sell, everyone is focused on that right now and I don't care who you are, that's the focus. And we allow people to do that.

So we have a – the strongest pipeline we've ever had. We have the most pricing power that we've ever had. We have a better set of stronger product lifecycle than we've ever had. So it's a – I think it's like our seventh consecutive quarter where we've exceeded guidance. So from our perspective, it's a good environment, getting better and better every day.

Brad Zelnick – Macquarie Securities

Thanks, Vivek. When you talk about pricing power, is there any sense in a metric in terms of relative discounting or anything that you can point to or even anecdotally that give us a feel for what that's like competitively?

Vivek Ranadivé

Yes, we've – there were situations where when a couple of years ago we were competing with the little guys and we basically made the – a decision way back that we were going to just beat everyone and be the sole survivor. And so we were more flexible with our pricing and – we'd ask for $3 million and then our competitor would offer the same thing for $100,000 and then we have to settle for $0.5 million. And so it was higher than the competitor, but it was lower than what we hoped.

And now, we are in a situation where we just don't negotiate and I can give you anecdote up to anecdote up to anecdote up to anecdote where a customer – we ask for $4 million, the customer said they would offer us $0.5 million they thought on the last day of quarter, we then – we didn’t and then eventually, they gave us the $4 million. So I see that example over and over and over again. We made it much harder for our people in the field to be able to give those kinds of discounts and we are getting much greater value now than we've ever gotten before.

Brad Zelnick – Macquarie Securities

That – this point [ph] is very encouraging and thanks for sharing that with us. If I could just hit you with one or two more real quick ones, Savvion being bought by Progress in the quarter, is that something you looked at as – were you coming across them in the field much and how do you think about that asset?

Vivek Ranadivé

Yes. We haven't – we don't really come across them that much, but I'm sure that my guys look at everything and we are very, very confident about our BPM technology. It's – I think Savvion is kind of more at the lower end. And again, that's yet another company, Progress, that's trying to be like TIBCO. And so the list goes on and on of companies that – the fact is that you need to start with the core scalable messaging in SOA infrastructure and then you need to kind of pace around it.

So I'm sure they will have some success in this situation. But we have the best – we are the gold standard in BPM. So if you look at all the major telcos and banks and so on, if you look at mission-critical large-scale environments, they are mostly TIBCO.

Brad Zelnick – Macquarie Securities

Thanks. And just lastly, sales headcount, where did you finish up the quarter?

Murray Rode

172.

Brad Zelnick – Macquarie Securities

Thanks a lot, Murray. Again, great quarter and I look forward to seeing everybody out at TUCON.

Vivek Ranadivé

Thank you.

Operator

Our next question comes from Derek Bingham with Goldman Sachs.

Derek Bingham – Goldman Sachs

Hi, everybody. Thanks for taking the questions. I wanted to dig in a little bit just in terms of how you are thinking about your cost model. First, could I ask on overall headcount, where you ended the quarter?

Sydney Carey

We ended at about 2,150.

Derek Bingham – Goldman Sachs

Okay. And then, in terms of what Foresight brought on board versus what was organic, was there a meaningful number advantage from Foresight?

Sydney Carey

There was not a lot of folks from Foresight.

Derek Bingham – Goldman Sachs

Okay, okay.

Sydney Carey

About 40.

Derek Bingham – Goldman Sachs

Okay, got it. The – and then things like R&D and G&A, I mean, I think to be seasonally down a little bit is not that unusual, any other time each down you think something like $2 million and – in a quarter when you brought in a new company, a new acquisition? Is there anything kind of unique to what you did with those costs in the quarter or in terms of how progress has been early [ph] to May quarter and beyond?

Sydney Carey

Sorry, Derek. It was a little hard to hear there. You were asking about the R&D cost in the quarter?

Derek Bingham – Goldman Sachs

Yes, and G&A. Both down, I mean pretty meaningfully sequentially. I mean, is that kind of the right base from here or is there anything that kind of depresses that kind of seasonally in terms of how those costs progress into the May quarter?

Sydney Carey

Well, again, as sales volumes pick up, especially in the R&D side, you will see variable costs associated with that with travel and other costs. It – in Q4, we tend to have a higher variable cost factor that hit the R&D and the G&A organization as the revenue ramps and we have more variable costs hitting that period. But I would say on a kind of a go-forward basis, it's a pretty good base to come off of.

Derek Bingham – Goldman Sachs

Okay, okay. Lastly, just on uses of cash, first question would be is this kind of a – the last couple of quarters emblematic of what you kind of would expect to be doing going forward with your buyback plan? And then also I wonder if you could just articulate your M&A strategy overall, if there is any kind of common thread to it in terms of how you are thinking about that?

Sydney Carey

Yes, we have $60 million remaining on our currently approved buyback program. So we will continue to evaluate that each period. And again, use of cash between buyback and acquisition is evaluated. So I'll let Murray acquisition piece.

Murray Rode

And in terms of the acquisition strategy, overall, Derek, it's not changed that much in the last year or so in terms of our focus being more on smaller transactions that are either extending the platform or adding new complementary markets to the business. I think anything that gets to be a larger transaction creates a much higher hurdle for us on the financial allowances and pretty much anything we buy, we are looking at making it accretive within the first year of acquisition.

Vivek Ranadivé

And also, they tend to be technology oriented. So we've – even the last couple that we announced, there is not much revenue there, it's great technology.

Derek Bingham – Goldman Sachs

How would you characterize the environment right now in terms of – is it a good buyer's market when you think about the rest of the year?

Murray Rode

Well, it's – I think there is actually – there was actually quite a few opportunities. I think whether or not it's a – it's exactly a buyer's market sort of varies a bit from sector to sector. But I – again, I think the bottom line is there is quite a few opportunities.

Derek Bingham – Goldman Sachs

All right, perfect. Thanks so much.

Operator

Our next question is from Tim Klasell with Thomas Weisel.

Tim Klasell – Thomas Weisel

Yes, good afternoon, everybody. So just a quick question on Netrics, the acquisition announced today. Obviously, not very meaningful on the revenues, but how about on your cost of goods sold? Was that a meaningful piece of your COGS that will be going away with this or how should we think about that?

Murray Rode

In the Netrics case, not really, Tim. It won't impact things that much.

Vivek Ranadivé

But it's true that we were embedding the product.

Murray Rode

We were embedding it and there are other acquisitions that obviously we've made that affect that more or less. But in the Netrics' case, it was still fairly early in the partnership too. So we hadn't – we hadn't built up the full head of steam we expected. So a little bit we were anticipating how successful we were going to be with the partnership in going ahead with an actual acquisition.

Vivek Ranadivé

Yes. And the other thing is that we are – Tim, we are very excited about this – both, about the EDI, health care, as well as about Netrics where the approach that they have taken to solving that problem, again very much fits with our Enterprise 3.0 vision. We believe it's unique and it just applies in our MDM product, but it applies really across the board in everything we do with our active spaces and so – and I believe that our sales force will be very able to sell this capability.

Tim Klasell – Thomas Weisel

Okay, great, great. And then jumping back to the very impressive performance by the core SOA product, what are you seeing for the – what's driving demand there? Are you seeing existing projects where you guys have been involved as either being extended or they are running out of capacity and they want to – it's sort of the initial flip-stop sort of in an IT recovery? Are you beginning to see big, large new projects beginning to be deployed where you are getting in on that like – where would you say we are in the IT recovery in your customer base?

Vivek Ranadivé

It's a little on both, Tim. So I have yet to see a situation where when it's nearing the end of the time for the ELA where the customer isn't anxious to update and renew it. So fortunately, that continues to be a big source of opportunity in revenue for us. But now we – as I said earlier – in my earlier comments, there are – this new – there is a new class of opportunities and problems that I keep calling 21st century where people just have to rethink how they approach certain things.

So Reliance in India, they wanted to solve the customer churn problem and they tried conventional CRM techniques, they tried data mining and then when they went to kind of the two second advantage, so that was a new project, it was very successful for them where you drop five calls in a 24-hour period, before the sixth drop call, you offer them some free SMS messages and they top up their prepaid card.

So we are starting to see more and more even within industries like finance where people are now getting back and doing the big projects again.

Tim Klasell – Thomas Weisel

Okay, great, great. And then one final question. It sounds like again you are slowly ramping the direct sales. But you made an interesting comment of going after the channel and historically, TIBCO has been a difficult for the channel because it requires a lot of in-depth understanding that maybe some channel partners wouldn't want to invest in. Are you seeing a change there? Are you changing maybe some of your product to make it more channel-friendly? How should we be thinking about that?

Vivek Ranadivé

Well, I think it's like three factors at play. One is we are – our products are getting better, so they lend themselves more to channel. So that is certainly the case. The second is that the customers are telling partners that this is where they want to go. So it's kind of a push-pull thing where the partners are getting it from their customers. So they have to get on it. And then number three is the partners themselves are actually now people have a critical mass of talent that they can leverage and that they are having great success with. So we are seeing all of those three at play.

Tim Klasell – Thomas Weisel

Okay, great. Thanks a lot. I appreciate your time.

Vivek Ranadivé

Thanks.

Operator

Our next question comes from Yun Kim with Broadpoint AmTech.

Yun Kim – Broadpoint AmTech

Thank you. So great quarter, guys. Can you guys describe to us what drove the higher volume of – higher volume in the deal activity in the quarter with a lower ASP, especially in light of record number of seven-figure deals in the previous quarter? And was that partially driven by strength in Spotfire product, although the SOA product did very well in the quarter? And then based on your pipeline, do you expect that high volume deal activity to continue or was it a one-quarter event? Thanks.

Murray Rode

Well, I think if you – these – average selling price for us is always – in any given quarter is always a little variable, just based on even one or two larger deals. So if you look at our top 10 deals in the quarter, they were still very strong. There just wasn't one really big deal, which had the tendency to push up the average sales price. That's one factor. The other factor is I think as you do point out, when Spotfire has a good quarter, they tend to have slightly – or smaller size transactions and a higher volume of them. So that affects the average too.

Again, generally, we felt like that number of deals greater than $100,000 in license was a strong metric for Q1 and that was kind of the key metric. And then the average selling price was still within what has been our long-term historical range for average deal size in that $500,000 to $800,000 range.

Vivek Ranadivé

But I think we are also getting better, Yun Kim, at allowing customers to take a small bite and get something up and going. And I think some of that is reflected in this as well.

Yun Kim – Broadpoint AmTech

Okay, great. And then telco came in a bit soft in the quarter. I know it's a vertical with a high variability. Do you expect that vertical to be a better contributor than 10% of revenue by the end of the year?

Murray Rode

Well, again, we see telco as one of our prime markets and a strategic market for us. So it very well could be. As you say, in any given quarter, you can get a 4% or 5% variance in a vertical like telco.

Yun Kim – Broadpoint AmTech

Okay. And secondly, what was the top 10 deals representing in terms of total revenue?

Sydney Carey

19% this quarter.

Yun Kim – Broadpoint AmTech

Okay, great. That's it for me. Thank you.

Vivek Ranadivé

Thank you.

Operator

Our next question comes from David Hilal with Friedman, Billings Ramsey.

Michael – Friedman, Billings Ramsey

Hi, this is Michael [ph] on behalf of David. One question for you, guys. With the SAP management change and presumably some shift in their strategy, do you envision the company focusing more on that we were – anything else that could be more positive or negative in regards to TIBCO?

Vivek Ranadivé

Well, we think they have a really good – we have a really good relationship with them and we talk to them all the time. And we think it's all good for TIBCO. We think that SAP customers will continue to welcome TIBCO and we are looking at partnering with SAP on a couple of things. And so from our perspective, it's good.

Michael – Friedman, Billings Ramsey

Okay, thanks.

Operator

Our final question comes from Brent Williams with Benchmark.

Brent Williams – Benchmark

Thanks for taking the – thanks for taking the question. My question came – comes around the Netrics acquisition. How many employees and of that, how many are developers and sales people?

Murray Rode

Of the – I'm sorry?

Brent Williams – Benchmark

Of the Netrics people that you acquired.

Vivek Ranadivé

How many employees –

Murray Rode

They are almost all R&D.

Brent Williams – Benchmark

Okay. And about how many are they?

Murray Rode

It was just over a – just over 10 people, 10 or 11 people I believe.

Brent Williams – Benchmark

Okay. And so how would you sort of talk about – what distinguishes Netrics versus the – I mean, there is a whole range of products that range from something like spellcheckers on up to rules engines and all sorts of other wild stuff. How would you sort of differentiate Netrics from some of the other products that are out there in the world?

Murray Rode

Well, I think the key thing about Netrics – some of this has been – has also been highlighted in the press release and the sound files we've talked about is their approach to data matching and the fact that it's also a very embeddable technology, so it's easy to deploy on a whole bunch of different use cases. But I think this algorithmic approach to data matching, so the matching capability improves over time with more and more data. I think that's the key differentiator.

Vivek Ranadivé

Yes, there is nothing like it out there. We have studied this market for a long time and this is – even though it's a small company, they have been actually at it for quite some time and this algorithmic approach is truly a unique approach and again, the problems of the 21st century like the guy who did the Christmas Eve – who tried to do the Christmas Eve bombing in Detroit, his name was spelt differently and so you needed a certain kind of matching algorithm to pick that up. If you didn’t have it, you couldn’t pick it up, which is what happened.

Brent Williams – Benchmark

All right. And then where is the sort of initial – you mentioned that is pervasively embeddable, but where is the sort of initial point that it gets welded into the existing product suite? Is it just sold as a – sort of independent add-on, is it integrated with the core business first, is it really part of event-driven stuff?

Murray Rode

Yes, there is two areas we are going to start with. One is continuing independent sales of the product. The second, in terms of where it intersects initially with our products, is in our master data management offerings and enhancing the solution we have as part of master data management for data governance.

Brent Williams – Benchmark

Okay. So we aren’t necessarily going to start staying up late at night waiting for a press release about how this is going to be the first event-driven matching engine or anything like that?

Murray Rode

Well, I think because it's part of our master data management solution, that's going to be part of the value proposition.

Brent Williams – Benchmark

Got it. Okay. Thanks very much. I appreciate it.

Murray Rode

Thanks.

Vivek Ranadivé

Okay. Well, we will conclude this call now. Thanks all for joining us and we hope to see many of you at TUCON in May. Thanks and have a good afternoon.

Operator

Ladies and gentlemen, thank you again for joining us. We will now conclude TIBCO's first quarter 2010 earnings call. You may now disconnect.

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Source: TIBCO Software Inc. F1Q10 (Qtr End 02/28/10) Earnings Call Transcript
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