BMC Software (BMC)
F2Q07 Earnings Call
November 8, 2006 5:00 pm ET
Executives:
Bob Beauchamp, Chief Executive Officer
Steve Solcher, Chief Financial Officer
Derrick Vializ, Vice President, Investor Relations
Analysts:
Sarah Friar, Goldman Sachs
David Rudow, Piper Jaffray
Kevin Buttigieg, A.G. Edwards
Tim Klasell, Thomas Weisel
Richard Petersen, Levin Capital
Kirk Martene, Banc of America Securities
Pat McMullen, Mendelow Capital
Operator
Good day everyone and welcome to today’s BMC Software second quarter earnings results conference call. Today’s program is being recorded. At this time, for opening remarks, I would like to turn the conference over to Mr. Derrick Vializ. Please go ahead, sir.
Derrick Vializ, Vice President, Investor Relations
Thank you operator. I’m Derrick Vializ, Vice President of Investor Relations, and I would like to thank you for joining us today. Today’s call is being webcast live and is also being recorded. An archive of the recording will be available this evening on 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/investor.
During our call, Bob Beauchamp, our CEO, will provide an overview of our second quarter performance, an update on our Business Service Management strategy and our overall progress toward achieving our fiscal 2007 priorities. After that, Steve Solcher, our CFO, will provide additional financial and operational details. Bob will then provide updated guidance for the third quarter and 2007 fiscal year before we open the call to questions.
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 duty 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 each non-GAAP measure 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.
Bob Beauchamp, Chief Executive Officer
Thank you, Derrick. We had a strong second quarter in virtually all aspects of our business including total bookings and revenues, license bookings and revenues, and our non-GAAP operating income and earnings per share. We have now met or exceeded guidance for six consecutive quarters.
A few highlights for the quarter: our core BSM license bookings rose 30% year-over-year, a leading indicator that BSM, Business Service Management, has entered the mainstream. License bookings were up 23% year-over-year. We saw strength across both business segments and multiple product lines and geographies. This is evidence that more and more customers and prospects are choosing BMC and that our winning close rates are increasing and that our sales force realignment is working.
Total revenues grew 7%, well above the high end of the guidance range we provided to you last quarter. We continue to control non-GAAP operating expenses which were nearly flat year-over-year. Strong revenue growth combined with our expense management enabled us to achieve a non-GAAP operating margin of 22% for the quarter. Obviously, we are now positioned to exceed our original 20% operating margin target for the year.
Non-GAAP EPS was $0.05 above the high end of our guidance range and we continue to focus on maximizing shareholder value by aggressively repurchasing shares. So, you can see we had a strong performance in our second fiscal quarter. Our strategy is on track, we’re continuing to build shareholder value, and we’re focused on capturing the positive momentum over the second half of fiscal 2007.
As you know, last month we hosted our annual investor day in New York City. You heard us talk at length about our four key areas of focus: The first is to drive license bookings growth in our ESM unit by capturing the positive momentum around Business Service Management. Second is to improve the bookings performance of our MSM or Mainframe unit while maintaining its profitability. Third, drive for greater efficiencies within our business process. And fourth continue to build value for shareholders by delivering solid financial results, generating strong cash flow from operations, and continuing share repurchases.
I want to reiterate a few key points related to these objectives and update you on the progress we’ve made during the quarter. During the second quarter, we saw very strong evidence of the momentum that is building around BSM, in particular the increased demand for our core BSM offerings. Our BSM vision, leadership, and solutions enabled us to garner the business of customers such as Cameron International, Chevron, Embark, and Johnson & Johnson.
During the quarter we also won the business of a global provider of IT and business process outsourcing services. This customer had been using CAs, IT service model tools, and is now standardizing on our BSM platform.
We continue to obtain positive reviews from the leading industry analysts for our BSM strategy and our offerings. Recently a major analyst firm showed BMC is the clear leader in the CMDB race in front of IBM, HP Mercury, and far ahead of CA. I’m also encouraged by the solid momentum of our Distributed Systems Management business during the quarter.
DSM license bookings and maintenance bookings were both up over 20% compared to a year ago period, driven by increases in our legacy Patrol and new BMC Performance Manager Solutions. These solutions are an important building block for our Business Service Management strategy because you must be able to monitor and manage your systems before you can effectively manage your business services.
Our progress here reflects the strong product, channel, and customer focus that we’ve implemented since rolling our BMC Performance Manager Solution. BMC Performance Manager allows our users to proactively manage the availability, performance, and business impact of their distributed systems environment. Our unique approach to agent-based and agentless monitoring is gaining strong customer acceptance.
Among the key customer wins for DSM was Lowe’s, the home improvement retailer, which was looking for a single vendor monitoring solution. Vendor consolidation is an ongoing trend in our industry and we’re pleased that Lowe’s replaced Tivoli and shows BMC over IBM, HP, and CA.
We continue to focus our Mainframe Systems Management unit on improving its top line performance while maintaining its profitability. As we have said, we think this is an important business. During the quarter, we won 20 new MSM customers of which 9 were competitive replacements.
Key competitive wins during last quarter included Nationwide, Sterling Commerce, and Signal Iduna in Germany. The Nationwide win is very noteworthy because we have now replaced IBM’s OMEGAMON with BMC’s MAINVIEW product line.
We’re continuing to drive this business forward. We are the leader in integrating the Mainframe into an overall BSM solution. Recently, we announced the introduction of our Mainframe Discovery Tools. Using these technologies, CIOs and their management teams are now able to include Mainframe transactions and IT processes in their BSM strategy, providing a full view of their business services across the enterprise.
We’re also continuing to improve and evolve our BSM go-to-market capabilities. Last quarter we hosted BMC UserWorld in San Francisco. This is our largest annual customer event. At UserWorld one of our global strategic partners, Accenture, attested to the value of BSM, our leadership in this space and the strength of our relationship. In fact Accenture announced that it has chosen BMC as its preferred platform for the delivery of infrastructure managed services. This type of strong buy in from systems integrators is a key driver of our bookings growth. Bookings through systems integrators increased strongly in the quarter and the first half compared to the year ago periods.
At BMC UserWorld we also had support from a range of other partners including Oracle, Microsoft, IdeaShare, EDS, and VMware. The VMware executive present stated “BSM doubled the value prop of virtualization. We advise our clients to look into BSM as early as possible. It will save a lot of heartache later on.”
We’ve talked in the past about the extensive retraining of our sales force and we’ve seen the solid results from this. During the quarter, we also introduced a new program to recognize, reward, and resource strategic BSM partners. We’ve implemented a tiered model for resellers and service partners, which is designed to provide better incentives to grow their and our BSM revenues. While we remain sharply focused on top line, we continue to do a very good job of controlling expenses. As we’ve discussed, we’ve separated our business into two units at the beginning of the year to provide greater focus and accountability. In addition, we have major initiatives underway to streamline and improve our business processes, and we’re making solid progress here.
As I previously announced at investor day, I have established a senior executive position reporting directly to me for business operations. The focus of this individual, Jay Chung, is for us to achieve sustainable, long-term structural efficiencies enabling better execution and business growth for the long term.
As we move through the second half of 2007, it’s clear that we have a lot of strengths -- a strong leadership position in BSM that differentiates us in the market place, growing customer interest and acceptance of the benefits of BSM, continued strength and opportunity in the Mainframe market, and a more focused and accountable organization with significant financial strength.
Let me now turn the call over to Steve Solcher for a more detailed operational and financial review. Steve…
Steve Solcher, Chief Financial Officer
Thanks Bob. Before I address the quarterly details, let me say that our second quarter results demonstrate the leverage of our operating model. Our focus on improving operating efficiencies has created an expense structure which will allow us to scale and improve profitability with solid top line performance.
For example, in the second quarter total revenues grew by 7% and non-GAAP expenses increased by less than 1% resulting in a non-GAAP operating margin of 22%. This is the highest operating margin in any given quarter the company has achieved in over six years and positions us well to exceed our original fiscal 2007 goal of a non-GAAP operating margin of 20%.
Although we are pleased with our progress, we are not done. We are committed to further improvement in our expense structure and remain focused on driving more operating efficiencies in our business in the coming years. We believe that this is a key part of our commitment to further enhance shareholder value.
Now to the details of the quarter. I’m going to begin by discussing our non-GAAP and GAAP operating results, then I’ll discuss our bookings metrics and the performance of each of our business units, after that I’ll cover revenues and operating expenses. Finally I’ll conclude by discussing our balance sheet and cash flow from operations before turning the call back to Bob who will provide updated guidance for the third fiscal year and the year.
Non-GAAP operating income was $86 million in the second quarter, an increase of 38% from a year ago. Non-GAAP operating margin was 22%, up 5 percentage points on a year-over-year basis. Non-GAAP diluted EPS was $0.37, up 37% compared to the year ago period. These non-GAAP results reflect diluted shares outstanding in the second quarter of 209 million versus 221 million in the second quarter of fiscal 2006.
GAAP operating income for the second quarter was $60 million, up 48% compared to a year ago period. GAAP net income and fully diluted EPS were $58 million and $0.28 compared to $43 million and $0.19 in the second quarter of fiscal 2006 respectively.
We had a strong bookings performance in the second quarter as total bookings of 315 million were up 12% compared to the year ago period. Looking at a longer term trend, total bookings for the 12 months ended September 30, 2006, were 1.5 billion, and the weighted average contract length for the period was 2.2 years.
For the 12 months ended September 30, 2005, total bookings were 1.6 billion and the weighted average contract length for the period was 2.5 years. Annualized total bookings for the trailing 12 months were $701 million, up 4% compared to the year ago period. Please refer to slide 7 in our presentation. As you can see, the shorter contract length more than offsets the decline in trailing 12-month bookings.
Now, let me turn our Mainframe Service Management business or MSM. We believe the MSM business is best evaluated on the basis of total and annualized bookings over the trailing 12 months. Total MSM bookings on a trailing 12-month basis were 639 million in the second quarter, and the average contract length for those bookings was 2.9 years.
In the year ago period, total MSM bookings were 757 million and the average contract length was 3.1 years. With a decrease in total MSM bookings and the shorter average contract lengths, total annualized MSM bookings were down 10% to 221 million. Although this decline is similar to last quarter, I am encouraged that for the first half of this fiscal year annualized MSM total bookings were up slightly over the year ago period. As a result, we expect significant improvement in the trailing 12-month annualized total MSM bookings metric by the March quarter.
For our Enterprise Service Management business or ESM, licensed bookings are the best measure of performance. Total ESM license bookings were 82 million in the second quarter of 2007, up 27% over year ago period. Within our ESM business unit license bookings for our core BSM product group are a good indicator of the success of our Business Service Management strategy. Core BSM license bookings were up 30% in the second quarter compared to the second quarter of last year. Please see slide 8 of our presentation for the historical license bookings.
Turning to revenues. Total revenues were $387 million, a 7% increase compared to the second quarter of fiscal 2006 and are above the high end of our guidance range. License revenues in the second quarter were $138 million, an increase of 18% compared to a year ago. License revenues were up in all major geographies.
Maintenance revenues in the second quarter of 2007 were $227 million, an increase of 2% compared to a year ago. It is important to understand that maintenance revenues will have quarterly fluctuations based on the timing of contracts, renewal rates, and new license bookings. On a four quarter trailing basis, maintenance revenues of $900 million were up 5%. Professional services revenues were $22 million.
Moving on to operating expenses. I am really pleased with our expense results in the quarter excluding restructuring related expenses, amortization of acquired technologies and intangibles, and stock-based compensation. Non-GAAP operating expenses were $301 million, essentially flat with the year ago period. Excluding the expenses from Identify Software, our recent acquisition, non-GAAP operating expenses were down 3%.
As we have discussed, a major focus for us in fiscal 2007 and the years ahead is simplifying, standardizing, and continuing to enhance the automation of our key business processes. Some of the initiatives that we have completed or are underway include the continuing of our expansion into low cost locations, re-engineering our core processes, and eliminating redundancies in systems and applications.
As we complete these actions, we expect them to enable growth, improve execution, and increase efficiencies. By the end of fiscal 2007, we expect these activities to result in a runrate cost savings of $60 million to $65 million net of investment.
Now, turning to the balance sheet. Total deferred license revenue decreased by $5 million sequentially to $408 million at the end of the quarter. During the quarter, we deferred $50 million of license revenues and released $55 million from the balance sheet. Total deferred revenue decreased by $72 million sequentially to $1.56 billion at the end of the quarter. This decrease reflects our seasonal billing pattern and compares to the $80 million sequential decrease in total deferred revenues a year ago.
Software development cost on the balance sheet decreased by $5 million sequentially to $107 million as we capitalized $11 million and amortized $16 million. Cash and marketable securities at September 30th were $1.4 billion.
For the quarter, cash flow from operations was $27 million which compares to a negative $8 million a year ago. Non-GAAP adjusted cash flow from operations was $24 million. Adjusted cash flow from operations excludes $6 million of restructuring payments and a positive impact of $9 million of servicing receipts due to the timing of their collection and remittance to third-party financing institutions. See slide 10 for a reconciliation between cash flow from operations and adjusted cash flow from operations.
Given our solid first half performance and our current outlook for the remainder of the year, we remain on track to achieve our full year fiscal 2007 cash flow from operations guidance.
Financed receivables sold to third-party financing institutions totaled $25 million during the quarter, down 32% compared to $37 million in the year ago period. During the second quarter we repurchased 5.2 million shares for an aggregate value of $130 million. We have $529 million remaining under our current share repurchasing program.
With that, I will turn the call back over to Bob for his concluding remarks and guidance for the third quarter and fiscal year 2007.
Bob Beauchamp, Chief Executive Officer
Thank you, Steve. As a result of our strong earnings performance in the second quarter, we are now raising our non-GAAP earnings per share guidance for the year. We now expect non-GAAP earnings per share will range between $1.40 and $1.48 for fiscal 2007, using an estimated tax rate of 29% for the remainder of the year.
Non-GAAP EPS excludes an estimated $0.45 of special items, including expenses for amortization of acquired technology and intangibles, stock-based compensation and restructuring.
We are raising our revenue and operating margin goals for fiscal 2007. We now estimate revenue growth in the mid-single digits. We also expect to exceed a non-GAAP operating margin of 20%.
We reiterate our cash flow from operations expectation to be between $400 million and $450 million and adjusted cash flow from operations to be between $475 million to $525 million. Adjusted cash flow from operations excludes an estimated $45 million negative impact from servicing receipts and $30 million in restructuring cost.
For the third quarter of fiscal 2007, we expect revenues to be in the range of $390 million to $410 million and non-GAAP EPS to be in the $0.35 to $0.39 range, using an estimated tax rate of 29%. Non-GAAP EPS excludes an estimated $0.10 of special items including expenses for amortization of acquired technology and intangibles, stock-based compensation and restructuring.
Let me close by saying that we are very pleased by the progress we are making. With core BSM license bookings growth of 30%, BSM is clearly gaining momentum and has entered the mainstream. There was strength across both business segments and multiple product lines and geographies. Through our customer wins including significant competitive wins and displacements, we saw strong evidence that our sales force realignment is working. We continue to obtain positive comments and reviews from our strategic partners and leading industry analysts validating our BSM strategy, innovative technologies and market leadership.
Our new organization structure is helping to clarify our focus and improved performance. We are managing our cost structure extremely well and we remain financially strong. Our goal for the rest of the year is to continue to work in all of these areas in order to build value for our shareholders.
Before I turn the call over to questions, I want to thank the employees of BMC Software. The second quarter and the first half of fiscal 2007 is a major milestone in the transformation of this company that we’ve been working on for a long time. Thank you for your hard work, your dedication, and your loyalty. It’s making a big difference to this company and our shareholders.
Operator, let’s now turn the call over to questions.
Question-and-Answer Session
Operator
Thank you sir. At this time, if you do have a question please press * and 1 on your touchtone telephone. If you are using a speaker phone please make sure your mute function is turned off to allow your signal to reach our equipment. Once again that is * and 1 for questions. We’ll move first to Sarah Friar with Goldman Sachs.
Sarah Friar, Goldman Sachs
Good afternoon guys, good quarter. Bob, on the guidance front I guess that might be the only nit to pick, you effectively just lifted it by what you beat this quarter. Should we read anything into that because I would assume you’re going into the seasonally stronger second half for BMC?
Steve Solcher, Chief Financial Officer
Sarah this is Steve. I think the thing that I would highlight for you is the tax rate has actually taken a penny off. So, if you think about where we were in our prior guidance, we were guiding that at 28% tax rate, which is about a penny in each quarter. Actually what we’ve done is we have raised not only by what we beat in the current quarter but by the additional pieces thinking through the tax rate piece of that, so another $0.02.
Sarah Friar, Goldman Sachs
Got it. And then Steve since I have you, the maintenance number ticked down, what’s going on that line item? I would presume it should get a nice pull through from the nice license revenue growth you’ve seen this quarter.
Steve Solcher, Chief Financial Officer
I that is, I think license bookings actually are more of an impact to maintenance in future quarters, so I’m pretty optimistic about where we’re going to see maintenance in the future. I think in my prepared remarks we talked about on a quarterly basis that you’re going to see fluctuations of the number. That being said, we look at a trailing number which is about a 5% growth rate maintenance, which is right in line with our expectation level.
Sarah Friar, Goldman Sachs
Got it. And just one final one for you Bob, more of a product question. We are hearing great feedback on Remedy on the upgrade cycle going on there and particularly even with some of your bigger competitors like IBM doing a good job of selling that service desk, because they don’t have the product. Could you just talk a little bit about what you’ve seen with Remedy and the plan to SOA and so on?
Bob Beauchamp, Chief Executive Officer
Sure. Well, one thing that’s important to know about it is that Remedy, the latest version that we’ve shipped out with ITSM version 7 is more than the old Remedy service desk. It includes the CMDB, it includes the integrated service desk technology that we added to the Polydyne acquisition a couple of years ago and other key functions. So, the product has been fairly dramatically enhanced beyond the original AR systems platforms; so that’s part one. Part two is we’ve seen a significant increase in our revenues from our partners, particularly the large systems integrators and outsourcers. If we look at it in the second quarter, we saw a 40% increase year-over-year in our SI bookings around these areas. Also, for the first half we saw a 27% increase. So, we think that the whole Business Service Management strategy is driving services revenues, which is driving the SIs to the table with BMC. While IBM is important, we’ve seen notable growth from the other ones. Frankly the acquisitions that have occurred by HP and by IBM have driven the SIs to BMC as the logical partner to work with as they view those two companies kind of lining up against each other and trying to match pound for pound on their competitive strategies, and these numbers show us gaining share. We also see HP stumbling with its Peregrine acquisition and it’s driving a number of large customers and small customers to reevaluate whether they stay with Peregrine or move to the roadmap that HP has laid in front of them to transition them, and we see those as really driving quite a bit of opportunity and proposals we get to generate around that.
Sarah Friar, Goldman Sachs
Okay, that’s very helpful, thanks a lot.
Operator
We’ll move next to David Rudow with Piper Jaffray.
David Rudow, Piper Jaffray
Good afternoon everyone, very nice quarter again. On the Mainframe, what do you see competitive wise from IBM? Have they reported more price discounting in the recent quarter, and do you expect to see that for the balance of the year?
Bob Beauchamp, Chief Executive Officer
I don’t think there’s been anything profoundly different from IBM. We have seen some fairly dissatisfied customers. I will tell you that one of our nicest Mainframe wins we had this quarter was a large insurance carrier that we replaced the candle products entirely. These were I believe four major processors’ licenses that we replaced entirely with our MAINVIEW product line, and these were both for pricing and functionality reasons that we won that business. So, we’re quite pleased with that. We saw them go after us in an account in Germany and really try to throw the kitchen sink at us, and the customer instead signed up for a multi-year deal with us after evaluating the technology and found us to be far superior. So, IBM has got some chinks in the armor in their acquisitions. One specific thing, it’s not so much Mainframe, but we believe there’s a major opportunity to replace the Tivoli enterprise console architecture as they now are going to, at least as best as we can determine, force their customers to move toward the Micromuse technology that they’ve acquired. That is similar to the Peregrine post March from HP will open a large number of RFPs that we look forward to participating in and aggressively trying to compete against them.
David Rudow, Piper Jaffray
You guys are still targeting about 5% decline for your Mainframe business as a whole, correct?
Bob Beauchamp, Chief Executive Officer
That’s still the target but I would just quickly point that if you look at the second quarter and first half in total we were flat on both an annualized basis and on an absolute basis.
Steve Solcher, Chief Financial Officer
David, let me just comment to that. Our previous guidance has been what we would like to see on an annualized basis over the trailing 12-month period is a decline of no greater than 5%. So what Bob alluded to earlier was on an annualized basis. So far through the first six months we’re actually up 1%, so a nice trend that’s pretty encouraging and we’ll see how the second half of the year turns out.
Bob Beauchamp, Chief Executive Officer
But I would say that our sales alignment is paying off where we have a small army of Mainframe-only sales people focusing on Mainframe. It sharpens their ability to compete.
David Rudow, Piper Jaffray
And then on the ASPs for BSM, how have those trended over the last four quarters and where do you see them going over the next four given the traction you’re seeing in that line of business?
Bob Beauchamp, Chief Executive Officer
Up slightly, but not too much. What we see is some more robust sort of transactions. For instance, at one of the largest communication technology manufacturers in the world there was a competitive situation there around BSM, and we won that business over our competition and it was a broad set, almost the entire core BSM product portfolio. At Cameron International -- I mentioned that one earlier in the call -- this was a competitive transaction where we sold service level management, knowledge management, transaction management, service impact management, Discovery, a pretty broad suite of BSM products all brought together around ITEL. So, we are now seeing what I would say is a trend towards more bundled offerings really focusing around ITEL best practices.
David Rudow, Piper Jaffray
Okay, thank you very much, and again great job.
Operator
We’ll hear next from Kevin Buttigieg with A.G. Edwards.
Kevin Buttigieg, A.G. Edwards
Thank you very much. I will echo the compliments on the quarter. Let me ask you a little bit about the Mainframe side again. What are you seeing there in terms of capacity upgrades? And do you have any commentary with regards to performance in Europe with regards to Mainframe specifically or just generally on the business?
Bob Beauchamp, Chief Executive Officer
I don’t think we have any on the Mainframe. In general, while I was pleased with all the geographies, Europe was the weakest of the three in general, and I think some of that is the economy in Europe, but I also think some of it is just we’re still tightening up that organization, and Kaus, our Head of Worldwide Sales, has been spending time focusing a lot of energy on that as well, and I think that will pay off. I still think we have a few more quarters before we have Europe where we want it to be, but nonetheless I’m still quite pleased with their results. In terms of Mainframe capacity, I don’t have anything to add beyond what IBM’s general guidance has been there. We don’t see anything dramatic having occurred in this space. It’s just a good business to be in. We’re glad we’re in it and we are very glad that we’ve seen the performance. I will mention this. We talked about the number of wins we had. This is not just a Mainframe statement; this is across all of our products. We had no license transactions this quarter over $5 million, but we doubled the number of $1 million license transactions this quarter. So there were no whales in this. This was the net caught of bit-sized keepers.
Kevin Buttigieg, A.G. Edwards
Okay, great. Then, Steve, if I could drill down a little bit on the revenue and the expense side. You broke out the identifying impact on expenses, could you do the same thing on the revenue side or on the booking side however way you’d like to do that?
Steve Solcher, Chief Financial Officer
I can. I added about 2 percentage points to total revenue, and the same thing to total bookings.
Kevin Buttigieg, A.G. Edwards
Okay, and then on the expense side, how much of the improvement that you’re showing year-over-year this year do you think is attributable to the process improvements, and do you have any outlines for what hiring plans might be for the rest of the year?
Steve Solcher, Chief Financial Officer
I think on the year-over-year number it’s directly attributable to some of the actions that we’ve taken around process improvement. With that being said, I think there’s a lot to do and I think in future quarters you’re going to see those results kind of bear fruit. For head count and hiring, I think we’re relatively flat in total. I think you’ll see it geographically dispersed throughout, but I think we’re maintaining kind of a flattish view.
Bob Beauchamp, Chief Executive Officer
I have one thing to add to it. When I mentioned in my prepared remarks about the new position reporting to me that Jay Chung is focused on, Jay is really focused on long-term structural simplification, standardization, and automation. He has IT reporting to him, he has many of our back office processes -- obviously not the finance and accounting functions -- but the back office processes of order entry, many of the functions that are involved in streamlining our whole business. He’s focused on everything from contract simplification to the commission structure, simplifying that, every aspect of our business, he’s looking at making this a multi-year process driven productivity gain across the company. And by the way, he’s using BSM internally to get some of that done.
Kevin Buttigieg, A.G. Edwards
Okay great, thanks very much.
Operator
We’ll go next to Tim Klasell with Thomas Weisel.
Tim Klasell, Thomas Weisel
Good afternoon everybody and I throw my congratulations in there as well. First, I guess jumping into the contract length, obviously we’ve seen a flat and you’ve mentioned that you expect it to flatten. The flip side of going with a shorter contracts is sometimes exposing the renewal rate, can you give us an idea, have you shortened the contract rates, have you seen any impact on the renewal rates?
Steve Solcher, Chief Financial Officer
I don’t think there’s any correlation to that. I would tell you some of the shortening of the contract length is strictly attributable to the mix. So as ESM becomes a greater piece of the mix, you’re going to see the overall contract length continue to shorten, but I don’t think we’re seeing any correlation right now between renewal rates in the dollars we’re getting and the contract length itself.
Bob Beauchamp, Chief Executive Officer
Mainframe renewal rates are staying fairly constant.
Tim Klasell, Thomas Weisel
Okay, good. Then, you mentioned about Patrol that you saw growth, do you see growth in the so called Patrol Classic or was it mostly on the newer products?
Bob Beauchamp, Chief Executive Officer
As I answer that I need to quickly just remind that we view that Patrol business…it’s a little bit of a complicated story because you have a huge embedded install base and you also have those customers entitled to upgrade to the new product line at no charge. So, there’s an element of migrating to the new product that occurs. There’s also selling new licenses of BPM. And because BPM, the BMC Performance Manager, which is the new product is such a powerful new web-based technology we are seeing an increase in brand new customers, we’re seeing an increase in old customers coming back and not only converting but actually adding more servers and more licenses. So, it’s kind of difficult to break the two apart. You also have good renewal rates of the Classic Patrol. Now, I would also say this. We don’t anticipate this kind of growth rate to go on forever. There is a pinup demand function here of the BMC Performance Manager coming out in full force and we saw really a surge there. I hope it continues, but we’re not planning on that to continue in our business plans.
Tim Klasell, Thomas Weisel
Okay, great. And then just sort of maybe a little color on BSM. Can you give us sort of an idea what sort of typical projects you see, what sort of a catalyst to get people to use BSM, is it things like virtualization, is it compliance, can you give us an idea of any sort of shift in the demand drivers there?
Bob Beauchamp, Chief Executive Officer
Okay, there’s a number. So, let’s say that you’re going to be rolling out Microsoft Vista, just an example, where you’re going to have a significant upgrade of a new technology going into an enterprise. In order to do that you’re going to need to discover and know what all your existing devices are, you’re going to need to know the configurations of those devices, you’re going to need to know what services those devices are aligned against and what users have access to those services. So, we do that and we store that in the CMDB. Then when it comes time to do a migration, you would be able to use our technology to change the configuration management to actually go out and push the images of the new servers out into the field, confirm that those are configured properly, and then reassign the authorizations back to the business services that they are applied against. So, you have things like migration changes and new technologies that will push it. In the financial services sector, what you see is an enormous amount of SOA development underway. And when that happens the CIO of the largest banks in the world -- and one I am sure one of the analysts on this call is listening -- said to me that his number one problem is change management for their IT organization because he can’t roll out the new applications if his existing infrastructure is brittle. So, having an automated way of managing change management across the entire IT organization, knowing the configurations, knowing the relationships, knowing the devices and what they are related to is critical for them to be able to roll out new applications with competence and roll them back if they have a problem. So, it depends on the industry to some degree. You have other industries that are just focused on cost, driving cost out. We were just with a major governmental agency last week. They are doing a huge data center consolidation and they are trying to drive $25 million out of their IT budget. They came to see us looking for us to help them to consolidate and automate many of the processes that today are manual and are done with different point products bringing it altogether, simplifying it, paying less money to other vendors, moving that share of spend to us and eliminating manual processes through automation. So, you see data center consolidation, you see desktop management, you see change management. Those are the things that are driving this.
Tim Klasell, Thomas Weisel
Okay, great. Thanks a lot guys and congratulations again.
Operator
And again it is * and 1 for questions. We’ll hear now from Banc of America’s Kirk Materne.
Kirk Martene, Banc of America Securities
Yes, thanks very much. Bob, maybe just one quick question now that the wheel is starting to turn with BSM, can you talk just a little bit about how you feel, is this the time to start reinvesting perhaps more aggressively in terms of broadening the product platform, do you feel like you have all the products you need? You guys have been pretty stable in terms of going after maybe one or two products to add on a year. I was just kind of interested in your thoughts, is the time to start hit while the iron is hot and you guys seem to have a lead, any color around that will be great.
Bob Beauchamp, Chief Executive Officer
I’ll answer it this way. We have plenty of products to do well for the near term certainly. There are plenty of ways we see to expand. BSM is a fairly large umbrella that we can continue to add more and more functionality to. We have some internal development underway right now which I’m not ready to disclose yet. I wanted to do that today but my R&D team tells me it’s too early and to give it another quarter, so I’m going to talk to about an area that I think will really add some turbo chargers to BSM, and we’ll be doing that through internal development. It’s a new functionality built on top of the AR system giving an entirely new capability to BSM. We also have some acquisitions we look at. As you just mentioned, we’ve been fairly conservative and we’ve been cautious in our acquisitions. We don’t expect to throw caution to the wind. We expect to remain conservative and thoughtful in our acquisitions, but we are looking at some acquisitions currently as well, and we see plenty of opportunity to expand BSM, but the good news is we don’t have to in the short term.
Kirk Martene, Banc of America Securities
Great, that’s very helpful, thanks a lot.
Bob Beauchamp, Chief Executive Officer
Operator, last question please.
Operator
And our last question will come from Pat McMullen with Mendelow Capital.
Pat McMullen, Mendelow Capital
Do you have a currency to the growth rate this quarter?
Steve Solcher, Chief Financial Officer
About a percentage point.
Pat McMullen, Mendelow Capital
Okay, and on deferred revenues I know there are a lot of moving parts with mix change and the contract length and everything, but do you have any thoughts about deferred revenue and when you think that might start to grow again, the ex-seasonality effects kind of if you wanted to grow your rear?
Steve Solcher, Chief Financial Officer
Actually I think you will see by the end of the year deferred will continue to grow. I think this is a typical pattern for us where seasonality is going to make a play and it’s really just a timing of billings and bookings. So, as we mentioned earlier, similar to last quarter we had about an $80 million reduction. We had it again this quarter and you should expect in the future that that number will start to improve on the total deferred balance.
Pat McMullen, Mendelow Capital
Okay, thanks.
Bob Beauchamp, Chief Executive Officer
Let me wrap it then by thanking you all for joining us. I’m certainly proud of the employees at BMC and we appreciate our shareholders that have worked with us and hopefully we’re rewarding them with good results. We’ll continue to focus diligently on all of our key objectives that we mentioned to you earlier. We look forward to speaking with many of you over the next weeks and months. Thank you.
Operator
That will conclude today’s BMC Software teleconference. You may now disconnect and have a pleasant day.
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