BMC Software Q4 2010 Earnings Call Transcript

May. 6.10 | About: BMC Software, (BMC)

BMC Software (NASDAQ:BMC)

Q4 2010 Earnings Call

May 05, 2010 5:00 pm ET

Executives

Robert Beauchamp - Chairman, Chief Executive Officer and President

Derrick Vializ - Vice President of Investor Relations

Stephen Solcher - Chief Financial Officer and Senior Vice President

Analysts

Israel Hernandez - Barclays Capital

Matthew Hedberg - RBC Capital Markets Corporation

Michael Turits - Raymond James & Associates

Derek Bingham - Goldman Sachs Group Inc.

Philip Winslow - Crédit Suisse First Boston, Inc.

Tim Klasell - Thomas Weisel Partners Equity Research

Abhey Lamba - UBS

Yun Kim - Broadpoint AmTech, Inc.

Operator

Good day, everyone, welcome to today's BMC Software Fourth Quarter Fiscal Year 2010 Earnings Results Conference Call. [Operator Instructions] At this time, for opening remarks and introductions, I'd like to turn things over to Mr. Derrick Vializ. Please go ahead, sir.

Derrick Vializ

Good afternoon, everyone. I'm Derrick Vializ, Vice President, Investor Relations, and I would like to thank you for joining us today. During our call, Bob Beauchamp, our Chairman and CEO, will provide an overview of both the fourth quarter and full year fiscal 2010 performance of our company and business unit, and update on recent initiatives. After that, Steve Solcher, our CFO, will provide additional financial and operational detail. Bob will then discuss our expectations for fiscal 2011 before we open the call to questions.

The prepared comments were previously recorded. This call is being webcast and a complete record of the call will be made and posted to our website. In addition to today's earnings press release, we have posted a presentation which we will refer to at various times during the call. Both of these documents are available on our Investor Relations website at investors.bmc.com

Before we continue, I would like to remind you that statements in this discussion, including statements made during the question-and-answer session regarding BMC's future financial and operating results, 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 result are described in today's earnings press release, the financial presentation and in our annual report on Form 10-K. All of these documents are available on our website. These forward-looking statements are made as of today based on certain expectations and we undertake no obligation to update these forward-looking statements.

I would also like to point out that the company's use of non-GAAP financial measures is explained in today's earnings press release and a full reconciliation between non-GAAP measures and the corresponding GAAP measure is provided in the tables accompanying the press release, and in our GAAP to non-GAAP reconciliations found on our website at investors.bmc.com At this time, I will turn the call over to Bob.

Robert Beauchamp

Thank you, Derrick. Good afternoon, and thank you for joining us on today's call. The fourth quarter marked the end of another solid year business and financial performance for BMC Software.

During fiscal 2010, we performed well against our key metrics, operating cash flow, total bookings, revenue, non-GAAP operating margin and non-GAAP diluted EPS. Cash flow from operations increased 10% to $635 million. Total bookings for the year grew 4%. Total revenue for the year was $1.91 billion, up 2%.

Non-GAAP operating margin for fiscal 2010 increased two percentage points year-over-year to 35%. Non-GAAP diluted EPS increased 17% to $2.66 per share, while GAAP diluted EPS increased 74% to $2.17 per share. And our balance sheet remains strong with $1.5 billion in cash and investments and $1.8 billion in deferred revenue. So again, another very good year for BMC with momentum building in the second half, and we expect fiscal 2011 to be even better.

Let's turn now to look specifically at the fourth quarter. We generated strong bookings and strong cash flow from operations. Total bookings for the quarter were $587 million, up 9% year-over-year. And cash flow from operations was $304 million, an increase of 53% year-over-year. While I'm pleased with these results, our revenue and non-GAAP diluted EPS for the quarter were at the low end of our expectations. We had a significant ESM transaction close minutes after the end of the quarter cutoff. This materially impacted fourth quarter results by roughly $15 million to license bookings and upfront license revenue. We believe that this delayed transaction is an anomaly and not the result of our historical sales processes and practices. With the timing of this transaction, as well as several other large GSM transactions that we closed in early April, we're off to a very strong start in fiscal 2011.

While I will discuss specific guidance later in the call, our overall outlook is quite positive. The size of the pipeline in both our ESM and MSM businesses looks robust, the demand environment is improving and our competitive position remains exceptionally strong. We're seeing acceleration in the trends that drive our business.

Let me turn next to discuss some key business and operational highlights during the fourth quarter and full fiscal year. During fiscal 2010, we further strengthen our market-leading position in IT Service Management. As you know, Remedy is a strategically important solution for us because of its broad market penetration, which we leveraged to generate strategic platform sales. Not surprisingly, it's an area that attracts a lot of attention and the sharpest competition.

We believe that over the past 12 months, we added more customers and grew our installed base faster than any of our significant competitor. During this time period, we added a total of 263 new Remedy IT Service Management customers. And it's important to note that we achieved this even before launching our ITSM SaaS offerings. As you may recall, we recently announced two powerful Software-as-a-Service or SaaS offerings that enable us to leverage our leadership in IT service desk and to broaden our customer footprint through these new offerings. This SaaS initiatives include our new BMC Remedy OnDemand solution, which provides customers with our full industry-leading service management offering delivered as a service.

We've also introduced ServiceDesk on Force.com offered through our partnership with salesforce.com, which is aimed at a market that is looking for a powerful service desk at a low price point. This solution addresses the growing customer demand for critical service desk and help desk functionality delivered via the cloud. These are both very important initiatives for BMC. And I'm pleased to report that during the quarter, the initial reaction in the marketplace has been positive.

We are particularly encouraged that we had six wins for our SaaS offerings prior to their announced general availability. In addition to these SaaS transactions and the previously mentioned Remedy ITSM new on-premise customers, during the year, we also added nearly 100 new Remedy ITSM customers through managed service providers and global systems integrators. We think this initial demand bodes well for our ability to further penetrate the market with our SaaS offerings, on-premise offerings and managed service offerings and to further strengthen our ITSM market position.

We are continuing to see strong performance in larger multi-product platform deals with our enterprise customers. During fiscal 2010, we had 80 ESM license transactions over $1 million, 52 of these were multiple product license transactions, which is up about 10% over the previous year, and it reflects the changes we're seeing in the composition of our transaction.

We are also encouraged to see strong growth in our mid-sized transactions. The number of ESM license transactions between $500,000 and $1 million increased year-over-year by 33%. In the fourth quarter, we had 22 ESM license transactions over $1 million. The majority of these were multiple product license deals. ESM major wins during the fourth quarter included Fujitsu, CGI, Coinstar, and TELUS.

We also saw ASP's continue to grow. It's worth noting that the number of transaction in the quarter between $500,000 and $1 million grew by over 15% compared to a year ago period.

Many of our ESM sales wins were driven by customers who are adopting our service automation offerings and our Atrium Configuration Management Database, or CMDB. The continued penetration of our Atrium CMDB into the enterprise customers bodes well for our ability to drive larger, more strategic platform wins.

Our automation offerings including BladeLogic had a very strong quarter and are significant competitive advantage that we enjoy among IT management software vendors. For example, during the quarter, we had multiple competitive wins and replacements against HP Opsware for our service automation offerings. We're also seeing a positive impact from our efforts to strengthen our top-notch ESM sales organization.

At the conclusion of our fiscal year, the total number of sales reps and the total number of tenured sales reps were above where we were a year ago. At the same time, these tenured sales reps increased their productivity on a year-over-year basis. We pass the peak point in our hiring and are beginning to see the benefits of this expansion as the productivity of new reps we brought on board throughout fiscal 2010 increases. We expect the average number of tenured reps to increase over 20% in fiscal 2011 compared to fiscal 2010.

Turning now to our MSM business. Strong demand across the MSM portfolio continued into the fourth quarter, demonstrated by the 10% increase in total MSM bookings for fiscal year 2010. This growth reflects the continued strength in the mainframe renewal cycle, growth from our new business sales efforts and our continuing commitment to operational excellence. It's important to remember that in addition to mainframe specific solutions, MSM offers enterprise-wide, platform-agnostic solutions which are not tied to the ebbs and flows of the mainframe hardware cycle. Representing nearly a third of MSM's revenue base, these solutions include our industry-leading enterprise workload automation and middleware management products.

During the fiscal year 2010, we increased the MSM installed base by adding 101 new customers. In the quarter alone, we added 42 new customers and also saw 88 existing customers renew and increase their relationship with us by adding new products to their existing portfolio. Some of these major MSM wins include Banco Bradesco, Kookmin Bank, Sallie Mae and T-Systems. And we, once again, had a solid increase in the annual run rate of our top 15 MSM transactions, driven by significant competitive wins at key accounts. This is the 12th consecutive quarter where we have seen an increase in the run rate of our largest transactions. Looking forward, we now expect to see continued strength in MSM renewals throughout all of fiscal 2011 and into fiscal 2012.

Our confidence in the continued strength of MSM is a direct benefit of our improved visibility relating to the timing of renewals, our execution of new business, as well as the upcoming IBM mainframe release. So that's a snapshot of key business and operational developments during the quarter. Looking in our markets more broadly, we like what we see, and think fiscal 2011 will mark further progress and achievement as we work to solidify our position as the world's leading IT management software platform.

According to recent industry reports, the need to improve IT management and make it more efficient has increased the demand for these technologies. A large industry leading analyst firms stated in one of its surveys that even though CIOs projected a slight budget increase in 2010 from 2009 historic budget cuts, the increase still leaves them with fewer resources in 2008. In addition, the survey stated that business priorities for IT call for greater productivity and continued cost efficiencies. The top CIO business priorities in 2010 include improving business processes, reducing enterprise costs and increasing the use of information and analytics.

This plays directly to our strength in IT management software. And it's one of the major reasons we expect to see continued growth in fiscal 2011. This growth will also be fueled by key technology trends, virtualization, cloud computing and Software as a Service, that only heightened the need for unified IT management. Amidst this change, we believe that an IT infrastructure agnostic software management company, such as BMC, will be very strongly positioned.

We offer the most comprehensive approach and unified management platform for managing IT. BMC's portfolio of BSM solutions helps customers efficiently manage business services across its IT service life cycle of request, deliver, operate, plan and govern across mainframe, distributed, physical, virtual and cloud computing environments. The strong partnerships we built with industry leaders, Cisco, Dell, Accenture, and salesforce.com to name a few, underscores the strength of BMC's competitive advantages in the IT Management Software business. They also reflect the scope and scale of the market opportunities that lie ahead.

During fiscal 2011, we will continue to make the investments necessary to maximize these opportunities. These investments include new technologies to address key trends in the marketplace, such as customer migration to hybrid cloud environments and for Software as a Service. It also includes ensuring that we are properly positioned on the ground with the right people and organization to build strategic relationships with customers. We'll be looking in particular to strengthen our professional services organization to improve its ability to deliver value for customers and for BMC. In addition, we expect that in the year ahead, we'll see the benefits of the investments made in fiscal 2010 to expand and improve our sales force.

So from a strategic perspective, the market environment we are in plays very well to our strengths. When you combine it with the improving economy, an expanded product portfolio, a strengthened sales force and an exceptional start to the year, we're very confident that we are strongly positioned for fiscal 2011.

I'll talk more about our current outlook for fiscal 2011 later in the call. But first, I would like to turn the call over to Steve Solcher, who will provide more insight into our financial results. Steve?

Stephen Solcher

Thank you, Bob. Looking back over the course of fiscal 2010, there are few important aspects of our business and financial performance that I'd like to highlight. First, even amidst to relatively challenging economic environment, we were able to grow our business. After experiencing a slow start during the first half of fiscal 2010, we saw bookings growth accelerate during the second half of the year.

Second, we made the investments necessary to improve our strategic position. This includes strengthening our technology portfolio, enhancing our sales force and improving our efficiency.

Third, we did all of this while substantially improving our earnings and cash flow from operations. The combination of these factors underscores the strength of our strategy, our ability to meet customer demand and our financial discipline we bring across our business. We expect this momentum and improvement to continue into fiscal 2011. As Bob mentioned earlier, the first quarter is off to a strong start.

With that, let me review our financial results for the fourth quarter and full year in more detail. Non-GAAP operating income decreased by 5% from $169 million to $161 million in the fourth quarter. Our fourth quarter non-GAAP operating margin was 33%, down from 35% in a year ago quarter. For the full year, we achieved a record non-GAAP operating income of $675 million, an increase of 10% over the prior year. Non-GAAP operating margin for fiscal 2010 was 35%, up two percentage points from fiscal year 2009.

Please refer to Slide 5 for selected non-GAAP income statement information, which includes segment profitability of our ESM and MSM business units. ESM's non-GAAP operating income in the fourth quarter decreased to $51 million from $53 million in the year ago period. ESM's non-GAAP operating margin decreased year-over-year by two percentage points to 17%.

For the full year, ESM's non-GAAP operating income increased by 27% to $240 million. ESM's non-GAAP operating margin increased by four percentage points in fiscal 2010 to 21%. We are pleased with the progress we've made in improving the profitability of our ESM business throughout the year, and we'll continue to look for improvement as we move forward.

MSM's non-GAAP operating income in the fourth quarter was $110 million, down 5% from the year ago period, and it's non-GAAP operating margin decreased four percentage points to 56%. For the full year, MSM's non-GAAP operating income was $435 million, up 3%, and it's non-GAAP operating margin was 57% flat compared to a year ago. We remain focused on increasing MSM's non-GAAP operating income in fiscal 2011.

Our non-GAAP net earnings for the fourth quarter were $121 million, flat with fiscal 2009. Non-GAAP diluted EPS for the period was $0.65, which reflects a non-GAAP effective tax rate for the quarter of 26%. For fiscal year 2010, non-GAAP net earnings were $496 million, an increase of 15% compared to $431 million in fiscal 2009. Non-GAAP diluted EPS for the year was $2.66 per share, up 17% compared to the prior year. This reflects a non-GAAP effective tax rate for fiscal 2010 of 26%. These non-GAAP results reflect diluted shares outstanding in the fourth quarter and for the full year of $186 million and $187 million, respectively; versus $187 million and $190 million in the respective year ago periods.

GAAP operating income in the fourth quarter was $116 million compared with $120 million in the year ago period. GAAP net income and diluted EPS were $119 million and $0.64, compared to $83 million and $0.44 in the fourth quarter of fiscal 2009, respectively. GAAP operating income in fiscal 2010 was $506 million compared with $368 million in fiscal 2009. GAAP net income and diluted EPS for the fiscal year were $406 million and $2.17 per diluted share, versus $238 million and $1.25 per diluted share in 2009.

Fourth quarter and full fiscal year GAAP net earnings were positively impacted by a net $30 million income tax benefit we recorded in connection with the settlement of prior year's tax matters with the Internal Revenue Service. This tax benefit was excluded from our non-GAAP results.

Turning now to bookings. Total bookings for the fourth quarter were $587 million, representing an increase of 9% compared to the year ago period. On a constant currency basis, fourth quarter bookings increased to 4%.

Total bookings for fiscal 2010 were $1.95 billion, up $66 million or 4% compared to the fiscal 2009. On a constant currency basis, total bookings increased 1% for the full year.

Total license bookings for the quarter increased by 8% year-over-year to $237 million. Total license bookings for the year increased by 1% to $772 million. The weighted average contract length for total bookings on a trailing 12-month basis was 2.12 years, up 3% from 2.06 years in the year ago period. The increase in the weighted average contract length is directly correlated to MSM's strong bookings performance. Accordingly, the longer-term MSM bookings accounted for a slightly higher percentage of total company bookings.

After normalizing for contract length, trailing 12-month annualized bookings for the fourth quarter were $920 million, up 1% compared to the year ago period, and up 5% sequentially from the prior quarter. Please refer to Slide 7 in our presentation.

Now let me turn to the performance of each of our business units. Total ESM license bookings were $137 million in the fourth quarter, down 2% from the year ago period. As Bob mentioned earlier, we had a significant ESM transaction close minutes after our quarter cutoff.

For fiscal 2010, total ESM license bookings were $471 million, down 4% from fiscal 2009. This shortfall is primarily due to the 16% decrease in ESM license bookings in the first half of the year. However, during the second half of fiscal 2010, ESM license bookings growth accelerated and bookings were up 6%. From a geographic perspective, I'm pleased to highlight the strong ESM license bookings performance in EMEA during the quarter and in the fiscal year.

Turning to the MSM business unit. We believe MSM is best evaluated on the basis of total and annualized bookings over the trailing 12 months. Total MSM bookings for fiscal 2010 increased 10% to $813 million and had an average contract length of 2.9 years. On a constant currency basis, total MSM bookings for the year were up 7%. After normalizing for contract length, total annualized MSM bookings for the trailing 12 months were up 7% to $278 million. On a constant currency basis, total annualized MSM bookings for fiscal 2010 were up 4%. As bookings for our MSM business are tied largely to the timing and size of renewals, MSM bookings can vary widely from quarter-to-quarter.

During the fourth quarter, we continue to see strong demand from our mainframe customers, as we are in a period of strong renewal activity and had solid performance in our new business sales initiatives across our MSM portfolio.

Turning to revenue. Total revenue for the quarter was $491 million, a 3% increase compared to the fourth quarter of fiscal 2009. On a constant currency basis, revenue remained relatively flat. Total revenue for the year increased 2% to $1.91 billion on a reported and constant currency basis.

License revenue in the fourth quarter was $201 million, up 5% from the year ago. License revenue was negatively impacted by the decline in ESM license bookings, and an increase of three percentage points in the ratable rate compared to the prior year. ESM license revenue was $124 million, up 8%; while MSM license revenue was $78 million, flat from the last year.

For fiscal 2010, license revenue rose 7% to $758 million. During the quarter, the percent of license bookings that was deferred was 56%, one percentage point high year than the third quarter and three percentage points higher than the year ago period.

For the fourth quarter, maintenance revenue was $255 million, an increase of 1% compared to the year ago. ESM maintenance revenue was $137 million, up 2%; and MSM maintenance revenue was $118 million, relatively flat compared to the fourth quarter of fiscal 2009. For fiscal 2010, maintenance revenue increased 1% to $1.02 billion.

Professional services revenue, which is included in the ESM segment, remained flat at $35 million in the fourth quarter. We do see trends improving in our Professional Services business as revenues grew 10% sequentially. Professional Services revenue in fiscal 2010 decreased by 11% to $129 million.

Moving next to operating expenses. Non-GAAP operating expenses in the fourth quarter were $331 million, up 7% from the year ago period and up 4% on a constant currency basis. The majority of this increase in non-GAAP expenses on a constant currency basis is attributable to the increase in sales capacity and three technology acquisitions we made during the year. Non-GAAP operating expenses for the year were down 2% from the previous year on both a reported and constant currency basis.

Looking at our business units, ESM non-GAAP operating expenses for the fourth quarter were $245 million compared to $232 million in the year ago quarter. MSM's non-GAAP operating expenses were $85 million compared to $78 million in the year ago quarter.

For fiscal 2010, ESM's non-GAAP operating expenses were $902 million compared to $938 million in fiscal 2009. MSM's non-GAAP operating expenses were $335 million compared to $322 million in the previous year.

Turning now to the balance sheet. Total deferred license revenue at the end of the fourth quarter was $624 million come, up 6% sequentially and 2% year-over-year. During the quarter, we deferred $134 million of license revenue or 56% of license bookings, and recorded $99 million of deferred license revenue from the balance sheet. Total deferred revenue increased by $96 million sequentially to $1.82 billion. The current portion of deferred revenue now stands at 54%.

Our software development costs were $146 million, a 1% increase over the third quarter fiscal 2010 as we capitalized $19 million and amortized $17 million. Cash and marketable securities at March 31 totaled $1.5 billion, an increase of $227 million, sequentially. Our net cash position was $1.2 billion at March 31.

For the quarter, cash flow from operations was $304 million, up 53%. For fiscal 2010, cash flow from operations was $635 million, up 10% from the prior year. We are especially pleased with our cash flow performance during the quarter and for fiscal 2010.

During the fourth quarter, we repurchased 2 million shares of our stock for a total cost of $75 million. For fiscal 2010, we repurchased 8 million shares at a cost $275 million. We announced today that our Board of Directors has authorized an additional $1 billion to our stock repurchase program, so that we now have just over 1 billion in our current share repurchase program.

Let me summarize by saying that our performance throughout fiscal 2010 underscores our strong financial and competitive position, and bodes well for us as we enter into fiscal 2011. With that, I'll turn the call back over to Bob for his concluding remarks and fiscal 2011 guidance.

Robert Beauchamp

Thank you, Steve. Looking forward to fiscal 2011, we believe it will be a year of strong growth in bookings, revenue, non-GAAP diluted earnings per share and cash flow from operations. The combination of an improving economy, better prospects for IT spending, strong market demand, our leading-market position and our strong start to fiscal 2011 underlie our confidence for our outlook.

For full year fiscal 2011, we expect non-GAAP diluted earnings per share in the range of $2.84 to $2.94 per share. At the midpoint, this would represent a 9% increase over last year. This range excludes an estimated $0.77 to $0.82 per share for non-GAAP adjustments, including expenses related to the amortization of intangible assets, stock-based compensation and restructuring activity.

The assumptions underlying this full year fiscal 2011 estimate includes: total bookings and revenue growth in the mid-single digits; continued improvement in non-GAAP operating margin; a slight increase in the license bookings ratable rate; slight bookings, revenue and non-GAAP EPS hurt due to currency assumed at today's rates; weighted shares outstanding similar to prior year; and a non-GAAP tax rate of 27%. We expect full year fiscal 2011 cash flow from operations to be between $660 million and $710 million. With that, we will now turn the call over to questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll hear first from Michael Turits with Raymond James.

Michael Turits - Raymond James & Associates

First, I understand the deal that closed after the deadline, but it's still -- you didn't book that either and yet there was a pretty big delta between the bookings growth and the revenue growth, and yet the ratable rate only went up by a point, I think, quarter-over-quarter. I was wondering if you can help settle that?

Stephen Solcher

Michael, can you rephrase the question. I'm not sure I followed you when said bookings and revenue growth. I mean, revenue is off the balance sheet. So we're not going to have the immediate piece of that impact. By telling you about the deal, we were trying to give you at least a view of what if that deal had closed, what would the impact it would have had in the quarter.

Michael Turits - Raymond James & Associates

Sure, no, I'm just trying to understand why you had very strong bookings, good bookings, up 8%, but the revs were only up 2%. So it seems that there was a rev rec issue of some sort, and yet you're deferral rate didn't really increase that much. I'm just trying to understand why the gap between pretty good bookings and now this good revenues?

Stephen Solcher

Well, I think a lot of it has to do with -- the bookings include the maintenance fees, which is going to get deferred, so you got to take the two, between license and the maintenance fees, so. For our growth, the rate that we posted in the quarter was attributable to both, and then we had license bookings growth as well as maintenance. But the vast majority of that improvement came from the maintenance line.

Michael Turits - Raymond James & Associates

And on the other side is the ESM margins, which I think were, what, down around 17%. So I guess even with the miss, I mean, I guess I'm surprised that the -- even with the deal slip, I'm surprised that you didn't have your expenses set up so that margins would've come in stronger x one deal that slipped.

Stephen Solcher

Well, in a lot of these transactions, you've got -- as any software company, you're going to have these transactions that are kind of at the end of the quarter, and so the deal that moves gets delayed literally by minutes, you just can't make enough of the expense off in that relatively short period of a time. I mean our expenses to your point is we're up in line with where we expected. Currency had an impact as well as the M&A that we had done throughout the year, and then we, of course, had -- I've said over the last couple of calls that we've been kind of hiring sales capacity. So it was not a surprise, frankly, from the expense point of view. It was really revenue did not come in at the level that we expected, and that's primarily driven the ESM license bookings were lighter than we anticipated.

Robert Beauchamp

I was just going to make a point just to summarize what Steve said. I mean you had the -- on the expense side, we intentionally front-end loaded the sales capacity for the year. And so it was in line with what we expected, but it was a little more than we were maybe traditionally had done, and we're getting ready for this new fiscal year. Obviously, with the guidance we just gave, we're expecting some pretty solid growth in '11. We wanted to make sure sales capacity was ready to go. So we will have, as we've said in the prepared remarks, 20% more productive salespeople in the field, in ESM next year. And so that kind of kept that there, then you had currency and you had M&A. So the expenses, what it was, is kind of baked into that side. We were okay with that. And I think given where we are with the optimism we've got going into '11, I wouldn't have changed anything about that sales build-out. I think it's a right decision, and I think it's already showing up in the strength to Q1 and in the plan for the rest of the year.

Operator

Moving next to Phil Winslow with Credit Suisse.

Philip Winslow - Crédit Suisse First Boston, Inc.

Just a question back on to the ratable recognition for this quarter, but also more in terms of the guidance as well. You mentioned that you're expecting a higher ratable rate for fiscal 2011. How much of that do think could impact your revenue by this coming year?

Stephen Solcher

So Phil, we're looking for a slight, and when I say slight, it's probably anywhere from one to three percentage points increase in that deferral rate. And let's just take the midpoint of that, it is roughly about 100 basis points of margin, and it's somewhere between $15 million and $20 million of license revenue.

Philip Winslow - Crédit Suisse First Boston, Inc.

And then when you do look at just the ESM business as a whole, what are, I guess, metrics that you look at from a macro perspective to think about just what this segment could grow at this coming year. Is it server shipments? Is it IT helpdesk? Account employees? I mean what metric do you guys look at as a good forward indicator?

Robert Beauchamp

Well, it's not just one or two things. In general, we look at IT spending for the space. We spend a lot of time with the top industry analysts who you know the names of, and they help us in sizing what we think spending is going to be for IT, overall, what we think spending is going to be for in Enterprise IT, what we think it's going to be for software and then specifically, what do we think it's going to be by each of our kind of our major product line areas. And then we essentially assume that we're going to try to gain share would be our goal in each of those areas that we play. Then we come at it from the tops down. Then we'll also just look at the bottoms-up forecast to whether we see the deals renewing, how do we see the pipeline building from the sales force and the optimism, which I'll tell you is quite strong right now in the sales force. And then we check that against things like server shipments and what other platform providers like Oracle, what they're doing or IBM, et cetera. But we don't build a sheet based on those projection. Its more tops down, and then we do a quick bottoms up. We look at cloud computing, virtualization and spinning, and we see they're giving example right now. We're tracking over 100 significant cloud-standardization initiatives that we're competing in, and this gives us a lot of energy that there's some really nice large transactions that are out there for us as some of these cloud deals that are being won -- that we expect to win and some that we've won, puts us in a position to kind of become the standard within that enterprise on cloud computing, which could be the short end for the standard management company platform for the entire IT organization in those companies.

Operator

Moving on to the Derek Bingham with Goldman Sachs.

Derek Bingham - Goldman Sachs Group Inc.

Bob, just on that cloud point. When people are looking and are kicking the tires on your infrastructure and their cloud operators, are they looking at the whole package? Is it one or two things in particular of your platform?

Robert Beauchamp

Well, it's certainly a broad set of products. There are a few things that are particularly important. We see automation. We just had a really strong quarter in automation for the company. And almost as soon as you talk about cloud, you start talking about automation from the beginning. Our CMDB plays very well into that. The concept of the self-service cloud is integral into the whole discussion of cloud computing, so our service requests system is part of it: Our Atrium Orchestrator; BladeLogic; the Remedy components are built into it as well; NGP, which is our next-generation platform for systems management. It really plays with a broad set, but I would say automation and the CMDB -- leveraging the success we've had in the CMDB or the areas that we see the most immediate interest. And where? It's going to be basically in every deal.

Derek Bingham - Goldman Sachs Group Inc.

On the tenured reps in terms of the increased capacity that you have, the being up 20%, that you'll be up 20% for the entire year like starting today and then throughout the year kind of relative to last year, is that...

Robert Beauchamp

That's the average for the year. But I'll tell you that our sales organization, we're not doing aggressive hiring right because we hired pretty aggressively in Q3 and Q4 to get it up to speed, so that by the time it hit the ground in fiscal '11, they're trained. We just finished our training, our kick-off meetings in around the world. I was just in Rome last week where we've finished up that training. We did it here in the U.S. the week before. So we basically got a productive sales force trained and out there, no big changes in compensation plans, no disruption in terms of turnover and management turnover across any big layers, and really ready to go there. I would add one other thing, we did promote the head of Europe. We did exceptionally strong in Europe this last year and this last quarter, broad across every product line, across geographies. And Luca Lazzaron was recently promoted to the Senior Vice President of Worldwide Sales, who has been running EMEA for us, and they've certainly been very successful for us. And U.S., we got a great management team there, but Luca is now over the whole Worldwide Sales organization.

Derek Bingham - Goldman Sachs Group Inc.

Just one more if I could on your point on expecting continued strength in MSM renewals for FY '11? MSM bookings, FY '10 was kind of viewed as a big renewal year. And you were up 10% reported at 7% constant currency. I mean is it your view that you can kind of continue in FY '11 a similar pace in terms of MSM bookings growth?

Robert Beauchamp

Yes. MSM, actually, our view of that business is that it's improved even since the last time we spoke with you. We're getting better visibility. We're seeing the kind of the peaks and valleys come together a little bit. So it's becoming a more predictable business. We got better visibility. We've got a -- as we've been saying traditionally, we saw strength at the end of '10 into the first half of '11. We would modify that now to say that's going to continue throughout all of '11 and well into '12. And we'll update '12 when we get there. It's a little too far out to give guidance on it now. But right now, we see a really healthy MSM environment. They were also making investments in their sales and marketing organization as well. You heard the we had opened 101 new customers inside of MSM this last year, and also we had a lot of success adding new product titles, et cetera. We are investing MSM because we think we'll continue to see growth across new customers, new product titles and improving the run rate, particularly, as we get confidence and see this visibility that we have now for the remainder of '11.

Derek Bingham - Goldman Sachs Group Inc.

So what's driving that? I mean, I know you've mentioned in the past that some people had bought kind of just enough during the downturn, and so maybe people are coming back sooner than they otherwise would have for new capacity. And what else is driving the strength?

Robert Beauchamp

Yes, I think you said it. I think we've seen customers kind of buy, just in time, inventory on the mainframe. They didn't buy excess. They didn't buy -- they weren't kind of going to the extra size, so while where at it, let's buy a little more, because their budgets were to tight to do that. And so now they find themselves close to the marginal edge of their agreements. We also find, and this is I think very important, we just think we're doing a really good job of winning against the competitors right now in the MSM area. We think having a dedicated sales force who can sell value -- I was just on the phone about three hours ago with the CIO of a very large insurance company that just did an eight-figure transaction with us on mainframe, as well as a large BSM transaction with us last quarter, to thank him for his business. And this is a case where we can replace competitors or really standardize on us across our platform, our entire monitoring environment and automation environment. So I think we're just doing a good job of executing both R&D-wise or product-wise. Customer sat is really at or near an all-time high on MSM. And we do our own internal surveys. We also pay somebody else to check that for us. And we've got really good execution going on there.

Operator

Moving on to Matt Hedberg with RBC Capital Markets.

Matthew Hedberg - RBC Capital Markets Corporation

Bob, excluding the $15 million deal that slipped, how would you classify overall close rates in the quarter? And I guess looking onto '11, concerning your comments earlier around an improving pipeline and demand, what are your assumptions there? Are they as conservative as they were in FY '10?

Robert Beauchamp

Let me try to take those one at a time here. On the close rate, I would say it was about -- it's kind of hard with that one transaction slipping to comment on with because it wasn't actually material. Again, I'll tell you that we did plan on that deal all quarter. The customers said it's coming. There was no debate internally or externally with the customer about it. At the last minute, the lawyers and what not just couldn't get the paperwork completed until literally single-digit minutes after the clock struck midnight. But I would say if you can take that aside, it was in line with what we normally would see. This wasn't like Q1. We didn't see any kind of systemic buying pattern changes. We didn't have a large number of transactions that suddenly became as hard to close. It was I would say in line with what we had seen previously. This was not a demand issue. We didn't see any slowing in demand out there. It was just kind of what we said in the prepared remarks. Now your second question was about ESM and the overall market. Let me see if I answer this properly -- if I don't answer it properly to your question, let me know. In general, we're seeing some pretty solid optimism from our sales organization, and that comes from just the deals that are in the works. I'll give you an example. Our Executive Briefing Center in the last year, fiscal year '10 was up almost 80% in the number of briefings that we had, almost 80%. The number of CIOs or CXOs that were in our briefing center was up 5x what it had been in fiscal '09. The ASPs were up. The number of deals, 500,000 to a million significantly up. So that's a good healthy transaction mix. It's not just dependent on a few transactions. And then you've got this more productive sales force with 20% more selling feet on the street that should be on a productive sweet spot. Then with cloud and what we're seeing on a macro level, we think that, that should payoff very well. Another thing I mentioned to you is that John McMahon is going to be focused really this year, as he continues to run all of the sales and services, he is going to be focused on sharpening up our professional services organization with Vincent Loisel [ph], who's running that group, and really connecting sales and services together and kind of doing what they did on the sales side last year with the services side this year and really making that organization more profitable, more strategic organization for us to help us get that in line. And see if I left anything out of your question there

Matthew Hedberg - RBC Capital Markets Corporation

A question on the partnership front, the Cisco UCS initiative. I know it's still early there, and we're waiting on more details from Cisco, but knowing what you know now about what has moved through, particularly on the SMB side, how do you guys think about your attach rate there on the Blade side? I mean do you have more to talk about there in terms of kind of how you're sizing that up here?

Robert Beauchamp

I don't have anything statistically to give you there, but it just doesn't exist right now in any meaningful form and in terms of statistically significant sort of math you can use to draw inferences from because it's still too spotty. You got way too many deals that are just out there that are just pilots. You're not getting still the big shipments of major production systems with production software running on day one, those sort of things. What we are seeing is an awful lot of interest in the largest implementation, some of the world's biggest enterprises where -- I was at Cisco yesterday, I was in San Jose, in their headquarters yesterday with my head of alliances and our CTO, meeting with some of their top people on this alliance, and there's a lot of enthusiasm, a lot of -- there's additional resources being applied by both companies as we both see the upside of the alliance. Interestingly, it's expanded beyond just the UCS-embedded software discussion into broader product alliances. We're doing deals together in customer accounts. This week, I'll be at a customer event. We'll have almost 100 customers. And lots of CIOs from very, very well-known companies will be there, and Cisco is part of that event that's helping us on broader than just the UCS event. So I think the alliance is in good shape. But really trying to extrapolate math to get to the UCS attach rate at this point is unfortunately it's just still too early.

Operator

Next, we'll hear from Abhey Lamba with ISI Group.

Abhey Lamba - UBS

Bob, just continuing on the UCS conversation, do you have anything baked into your guidance from that? And also the progress that you mentioned just now, how does it track with your expectations going into the partnership? Did you kind of expect this type of performance? Or were you expecting a flagship of a slower uptick of the product? And then I have a follow-up.

Robert Beauchamp

I would say that -- well, first, the first part of your question, all of UCS numbers will be upside into the guidance. We didn't assume any material impact to it at all. We hope that's not the case, but we thought it would be best to plan that way and let's see how it comes in. We actually have some generated revenue. We are generating revenue. It is coming in, but we choose at this point until it gets more clarity to not have it impact the guidance that we just gave, more as upside. In terms of expectations, I think you can say there's a growth number that I didn't always hope was more, but it's not out of whack. I would like it to be -- further along, I'd like UCS to be more UCS servers in the market. There's a lot of things I would like. I wouldn't say it's out of whack of the range of what kind of we expected. I would like it to be more at this point. But the market is what it is. We move into a terrible economic environment. The Cisco's competitors have responded against Cisco, and I think it's still in a very early stage.

Abhey Lamba - UBS

And Steve, looking at your guidance for fiscal '11 and all the parameters you mentioned about sales force productivity and some of the tailwinds that Bob also kind of highlighted for the business, and then we look at margin, you're not baking in a whole lot of margin expansion there. So is it because you're being more conservative on the margin side? Or are you planning to expedite some spending in sales and marketing of R&D during fiscal '11 as some of these heavy news come in?

Stephen Solcher

Well, I think it's both. And I'll add a third factor and that is, as we've said earlier, the deferral rate is going to be up, which has the impact of taking about 75 basis points hurt to margin for next year. But we are looking for margin to expand. We're looking at it not only as a percentage but in absolute terms. We're actually looking for both business units to expand on a percentage and absolute basis. But there's a little conservatism in the numbers. There's a little bit of the deferral rate, and we'll just have to see how customers buy. And I think that's primarily the keys to it.

Operator

We'll now go to Israel Hernandez with Barclays Capital.

Israel Hernandez - Barclays Capital

Bob, can you talk about some of the SaaS opportunities that you have going. And what do you think the upshot here could be over the next several quarters as these products come to market?

Robert Beauchamp

On SaaS?

Israel Hernandez - Barclays Capital

Yes.

Robert Beauchamp

Yes, I'm really excited about it. I think these products -- we had two products that are not even generally available yet, and we're basically didn't unleash them to the sales force. It was essentially kind of an R&D, hand-managed sort of transaction. So we didn't go out there and begin to really push it with the sales force in any big material way. And we closed half a dozen or so of them while the products were still preannounced. And by the way, these are competitive, competitive against the kind of our big traditional competitors out there that have tried to kind of couple together a SaaS offering or quasi-SaaS offerings, but also against some of the startups out there or smaller companies that are theoretically pure SaaS. As it turns out, they're really not pure Saas. As it turns out, some of these companies are actually doing on-premise with their people-customized code. But nonetheless, we were able to win in against small competitors and large. And with both the Remedy OnDemand and the ServiceDesk Express on force.com, and they both went out there and won in the market. And now we're going to turn on the sales engines. And Marc Benioff and I were just communicating last week about it. He is very fired up about it as am I. I'm pretty excited about it. Like with Cisco and the UCS thing, we're going to wait to start adjusting our top line growth plans until we really see those numbers begin to really run up. But I think that there's clearly a part of the market that is not interested or is interested in staying on-premise, and we would be able to serve that. There's clearly a part of the market that wants to do managed services. We're going to be able to and are doing business that way. There's clearly part of the market that want to outsource, and we've been doing very well there. In fact, we just signed a deal today with one of the world's largest global outsourcers and systems integrators, standardizing on us there with our ITSM offerings and a contract for our entire product line and now we're in SaaS. So we really kind of got all four areas covered with products that are integrated into our entire product portfolio suite that go from very inexpensive to full-blown heavy-functionality customizable solution. So we can run the spectrum, and I think SaaS for BMC is not going to be a hobby. It's going to be a very strategic part of our business, but part of our integrated business, not a standalone entity.

Israel Hernandez - Barclays Capital

And Steve just a quick question here. How much is currency impacting the fiscal '11 guidance? Maybe you can quantify what impact that is having, if anything.

Stephen Solcher

I think, it will impact negatively. It's going to impact bookings, revenue and EPS slightly. We really don't see any impact to cash flow at this point in time. But as you probably have seen over the last several days, the volatility in the market is something that, I think, we're adjusting our views literally on a minute-by-minute basis. But right now, it is not material. Our guidance is pretty much has taken in current rates, and we think there will be a slight impact to the three metrics that I just said.

Operator

Our next question will come from Tim Klasell with Thomas Weisel Partners.

Tim Klasell - Thomas Weisel Partners Equity Research

I know this is long term. But on the cloud opportunities as you track those 100 projects, clearly there is going to be a need for new management capabilities and what have you, but how about cannibalization effect? Are there any products sets that we should be thinking of that maybe customers will need less of as they move to more of an outsourced service, if you will?

Robert Beauchamp

I'm trying to think of anything that I can think of that goes away or gets cannibalized. Not really, I mean, we, just today, were notified of one of the -- of a major application provider in Europe that we had won that business. It was very competitive against some of the biggest companies in IT that you know the names of. And we've been fighting it out with them for months, and we were just notified today that we've won that business. And it's really a broad set of our -- they were already a good customer and used lots of our products. It's the same products in some cases, but we've got some new things coming out. You'll see announcements from us this month and then some others that will follow up later in the year, where we basically continue to ratchet up the cloud-specific functionality, in particular, the integration and some of the automation components that are specific to cloud. As I sit here, I can't think of it. There may be something I can't think of it right now, Tim, of something that goes away. I think what we'll end up having is customers will want the cloud-specific functionality and the integration design for cloud implemented on their clouds, but they'll want, and this is really key for us, they will want to be able to manage their physical environments, their virtual environments, their cloud environments, internal cloud and their external cloud environments and their SaaS environments with one operations platform, and that's what we're bringing to the table. If you think about it, this is almost like another operating system. Another platform is coming on the scene for management. It increases the complexity of managing it. If you're going to manage cloud, let's say, you buy VMware suite to manage and you try to, and what they is coming out, to manage their cloud environment. Okay, so you've got certain products for them to manage cloud, which by the way only work on the VM hypervisor. Then you could buy other products to manage hardware from Oracle that just manages Oracle, and then you buy some other -- so you get into this huge bucket of balls of managing components with other components and your building management stacks that are not integrated. BMC gives the customer the ability to manage all of those environments, physical, virtual cloud and external cloud like Google, et cetera and SaaS offerings from a single vendor, and that's really integrated together. So we see it's going to continue to raise the strategic importance of an integrated management environment in these large enterprises. Those customers are saying that very, very clearly to us in the Briefing Center.

Tim Klasell - Thomas Weisel Partners Equity Research

You guys did well in Europe, but how is the macro changing over there for you? Are you noticing any of the impacts from the recent events, or...

Robert Beauchamp

No, not yet. I mean we have not -- I mean, our business is doing so well in Europe, particularly like in Northern Europe and the U.K. and some other areas where we're just really been doing well. The business goes on. I think that we can almost imply that we must be gaining really a significant amount of share there because we're seeing some fairly markedly different numbers from our competitors over there. And now we do plan for next year because we've done so well in Europe, we do plan next year for Europe to not grow at the same cliff it has been growing, and for North America to grow a greater cliff. We do think that you got the sales maturation of the transformation that we're going through with a really solid management team as I mentioned in the U.S., but they were about six months or so behind the EMEA team in terms of their transformation, and also just the overall macro economy.

Operator

And that will come from Yun Kim with Broadpoint.

Yun Kim - Broadpoint AmTech, Inc.

Steve, can you give us some better picture of how your license revenue for ESM is likely to trend for the year. It looks like the ESM license revenue was fairly consistent in the high single-digit range last year. Should we expect that same trend to continue, obviously, netting out that higher ratable component we talked about? And then also, how should we think about the MSM license revenue trending this year? Do you expect that license revenue to be in the high-single digits again for MSM?

Stephen Solcher

Yes, let me guide on both, which would be -- so let me just say on both the ESM and MSM, I'll give you a little bit more clarity on kind of how we're thinking. So both revenue and bookings, we expect to be very similar for MSM, we're looking for growth next year to be in the low- to mid-single digits, and for ESM, in the high-single digits. Now for both of them, we're expecting license to grow faster, both in license bookings and in revenue than the maintenance trends. So I think you could probably imply without us being specific in what kind of trends that we're looking for, for license revenue. I'd rather not guide to that level of specificity.

Robert Beauchamp

All right. Well, listen. Let me just end by thanking you all for participating with us today. For the BMC employees, listen to this. I want to particularly thank you, a very remarkable year in this environment and remarkable in terms of contrast on how we perform against our competitors. Obviously, the guidance we've set for '11 shows some exciting growth in new products and new technologies and new architectures coming upon us, and we feel very good about the year ahead. And we look forward to updating all of you on how the year progresses. Thank you.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!