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TIBCO Software Inc. (NASDAQ:TIBX)

F1Q2014 Earnings Conference Call

March 20, 2014 04:30 AM ET

Executives

Matt Langdon – Chief Financial Officer

Murray Rode – Chief Operating Officer

Vivek Ranadivé – Chairman and Chief Executive Officer

Analysts

Jason A. Maynard – Wells Fargo Securities LLC

Albert Chi – JP Morgan Chase & Co.

Brent Thill – UBS Investment Bank

Jesse Hulsing – Pacific Crest Securities, Inc.

Aaron M. Schwartz – Jefferies LLC

James Derrick Wood – Susquehanna Financial Group, LLLP

Abhey Lamba – Mizuho Securities USA Inc.,

Keith E. Weiss – Morgan Stanley & Co. LLC

Gregory Dunham – Goldman Sachs Group Inc.

Steven R. Koenig – Wedbush Securities Inc.

Pinjalim Bora – Piper Jaffray & Co

Karl E. Keirstead – Deutsche Bank Securities, Inc.

Operator

Good afternoon, ladies and gentlemen. My name is Dustin, welcome to TIBCO's First Quarter 2014 Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. You can also listen to this call via the Internet at www.tibco.com. Today's call is being recorded and will be available for playback from TIBCO Software's website at www.tibco.com. In addition, a replay will be available through InterCall for one month following today's call by dialing 800-585-8367 or 404-537-3406. The passcode for both the call and the replay is 7022353.

The following conference call includes forward-looking statements, which represent TIBCO Software's outlook and guidance only as of today and which are subject to risks and uncertainties. These forward-looking statements include, but are not limited to, forecast of revenues, operating margins, operating expenses, outstanding shares, and earnings per share for future periods. Our actual results could differ materially from those projected in such forward-looking statements.

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

This conference call also includes certain financial information that is not been prepared in accordance with Generally Accepted Accounting Principles, as we believe that such information is useful for understanding our financial condition and results of operations.

For a presentation of the most directly comparable financial measures calculated in accordance with GAAP and a reconciliation of the differences between the non-GAAP and GAAP financial information, please see our website at www.tibco.com.

The participants on today's call are Vivek Ranadive, TIBCO's Chairman and Chief Executive Officer; Murray Rode, Chief Operating Officer; and Matt Langdon, Chief Financial Officer.

I'd now like to turn the call over to Mr. Langdon.

Matt Langdon

Thank you, Dustin, and thank you all for joining us today. In a departure from past calls, we are changing our format and I will lead off. I will begin the call by reviewing our quarterly financial results and providing Q2 guidance. Murray will follow with additional operating details and Vivek will then provide his perspective on the business before moving to Q&A.

Please note, I will review our financial results on both a GAAP and a non-GAAP basis. You will find a full reconciliation in our press release along with an explanation of our non-GAAP measures.

For the first quarter, total revenue was a record for Q1 at $252.9 million, up 6% over last year. License revenue was also a record at $83 million, up 6%; and services and maintenance revenue, which includes professional services, subscriptions and maintenance with $169.8 million, up 6% from last year; the sequential decline from Q4 in services and maintenance revenue was driven by typical seasonal trends in professional services. However, it's important to note that maintenance revenue was up sequentially and up on a per day basis.

Also this quarter, non-GAAP gross margins were 72.1%, up 70 basis points over last Q1 with better margins on both license and services. Non-GAAP operating income was $47.2 million, an increase of 7% over last year and resulted in an operating margin of 18.7%. Non-GAAP EPS for the quarter was $0.19. Q1 cash flow from operations totaled $51.8 million and we spent $36 million repurchasing 1.6 million shares this quarter.

Effective this quarter, we are updating our license revenue disclosure in a very simple way. Previously, we disclosed license revenue in three categories. First, what we referred to is SOA or integration and core infrastructure; second, BPM or process automation and collaboration; and third, business optimization.

For the record, in Q1, our mix across these three categories was as follows; integration and core infrastructure was 47% of our license revenue and grew 11% over Q1 of last year. Process automation and collaboration was 12% of our license revenue and grew 56% over Q1 of last year and business optimization comprised 41% of our license revenue and was down 7% over Q1 of last year.

Going forward, we are consolidating these three categories into two; the first what we are labeling simply, core infrastructure; and the second, event processing and analytics. Core infrastructure is the sum total of the old SOA and BPM category whereas event processing and analytics is simply more modern label to what we previously referred to as business optimization.

We believe this categorization better reflects the reality of how we manage our business today. How our products are packaged and sold and how customers look to buy. For example, with regards to core infrastructure, over the past two years, more than 70% of our BPM revenue came from deals that also included SOA products.

In Q1 84% of our BPM revenue came from deals that included SOA products. Increasingly these technologies are being sold together and viewed really as two sides of the same coin and so we are updating our external reporting to reflect this.

Our license revenue under the new categorization then as described was as follows. Core infrastructure represented 59% of license revenues in the quarter and grew 18% over Q1 of a year ago; while event processing and analytics represented 41% of our license revenue and was down 7% over Q1 of last year.

With that I'll now turn to our balance sheet. We ended the quarter with $760 million in cash and short-term investments. Deferred revenue including both long and short-term component came in at $292.8 million, up 4% sequentially and up 6% over Q1 of a year ago. DSOs in the quarter came in at 73 days, which is at the high-end of what we consider still our normal range.

Looking forward for Q2 2014, our guidance is as follows. We expect total revenue to be in a range of $263 million to $271 million, for implied growth of 7% to 10% over Q2 of last year. We expect license revenue to range between $87 million to $93 million. Non-GAAP operating margin is expected to be 19% to 20%.

We expect non-GAAP EPS for the quarter to come in between $0.20 and $0.22 with an assumed tax rate of 27%. GAAP EPS should range from $0.07 to $0.09 with an assumed tax rate of 33%. For the year, we continue to expect EPS will grow in the high single to low double-digit percentages off of 2013, on a longer-term basis 15% to 20% annual EPS growth continues to be our target.

With that I will now turn it over to Murray.

Murray Rode

Thank you, Matt. I'll provide additional color on our operating performance starting with some key metrics on deals, regional and vertical performance and product license revenue.

First, deal metrics were again healthy this quarter. We had 126 deals of $100,000 or more in license revenue versus 104 last year, and we had 18 deals of $1 million or more versus 12 last year. Average deal size for license deals of $100,000 or greater in license was $576,000 versus $652,000 a year ago. Our Top 10 customers comprised 16% of total revenue compared to 21% last year and 20% in Q4.

Looking at the geographic mix, total revenue across our three major regions was as follows; Americas at 57%; Europe, Middle East and Africa at 34%; and Asia-Pacific, Japan at 9%. Year-over-year growth was strongest in the Americas, especially for core infrastructure sales. Europe was stable while results in Asia were mixed as growth continued in Southeast Asia which was offset by results in Japan and Australia.

Shifting to vertical markets, we had eight verticals contribute 5% or more of total revenue as follows; financial services 23%, communications 12%, energy 9%, transportation and logistics 8%, manufacturing 7%, government 7%, retail 7%, and insurance 5%. Of these verticals, the year-over-year growth rates were highest in logistics, insurance, energy, and government with growth rates ranging from 16% to 28%, respectively. There was also a gain this quarter solid growth in financial services at just over 14%, as well as manufacturing, which grew close to 15%.

We continue to like the vertical diversity of our business, which we see as a good indication of mainstream demand. As Matt mentioned, the breakdown of license revenue among our product families was core infrastructure of 59% and event processing and analytics at 41%.

Looking at the performance this quarter, I want to emphasize several points about our products in the quarter in general. First, we saw particularly strong growth in BusinessWorks, our flagship integration product, as well as AMX BPM and our Master Data Management product.

Growth rates for these products were all 60% or greater. The strong growth here is largely attributable to just fundamentally strong execution in infrastructure sales in the Americas and in EMEA as well as a concerted effort to drive sales in these product areas.

Second, if you look at our overall performance from a billings perspective, that is total revenue adjusted for the change in our deferred revenue on the cash flow statement, and I know many of you evaluate this each quarter, we had the strongest growth rate by this measure since the third quarter of fiscal 2012. Much of this relates to the fact that very little license revenue came from deferred revenue this quarter, especially as compared to the year ago period.

Also, interesting to note is that the total contract value of cloud and subscription bookings was up over four-fold this quarter over last year, albeit are small numbers, but showing the signs of an important and budding opportunity.

Third, in terms of our sales capacity, we ended Q1 at 275 quota-carrying reps and today stand at 280, up six heads from Q4. This is short of where we wanted to be, but our focus remains on hiring only the top candidates as we grow the sales force. In addition though, we are ramping up important supporting roles in insight sales, business development and account development reps, adding 16 of those in the quarter. These are key roles in supporting our overall efforts to increase sales productivity, as well an important element in driving our ability to sell a broader mix of deal sizes. Remember that part of our strategy is not just improving sales to larger enterprises, but also adding a higher volume of smaller transactions to our business model.

Fourth, Spotfire did not execute well this quarter and performed below plan. However, the issue is not the product, as it's really the most capable and versatile product in its market. We've been too focused on big deals and traditional enterprise sales and we must move more aggressively to broaden out into a higher-volume horizontal market business.

While Version 6 of Spotfire was a strong release for the product, it will get better in Q2 with the launch of Version 6.5 which has yet more new features designed to make the delivery of analytical apps dramatically easier. This release includes a personal desktop edition, new simple-to-use mapping and staff capabilities, expanded data connectivity, especially for big data sources like Hadoop clusters and enhanced usability features, all of which make this version the most widely applicable product yet. In addition, the launch of Spotfire Cloud is off to a strong start with almost 8,000 trial users and counting since January. There is some work to do to get back to a better growth rate from Spotfire, but we believe we have the raw material to do so.

So overall, the story this quarter from an operating perspective was really about a continued trend of stronger, more consistent activity from our core infrastructure business, while we also continued to build our cloud and high volume business which again, we see as additive to our model in the long-term.

With that, I'll turn it over to Vivek.

Vivek Ranadivé

Thanks, Murray. I'll make four simple points before we start the Q&A. First, financially we are headed in the right direction. We delivered record total revenue and record license revenue. We expanded our gross margins and our operating margins and we grew earnings per share, while we continued to innovate at a blistering pace.

Second, the appetite for our core infrastructure products has never been stronger. As Murray highlighted, we saw a great demand for our integration, BPM and MDM products in the quarter. In fact, our infrastructure sales grew 30% in the Americas and 14% in EMEA. Our focus on execution is driving growth with consistency.

Third, we have never made excuses. When we weren't executing in our infrastructure business, we acknowledged it and we made the necessary adjustments. We are seeing the results of these adjustments now. With Spotfire, most experts will tell you that TIBCO has the best product in the market. Here too, we are making the adjustments needed to get this business back on a strong growth trajectory.

Fourth, let's not be confused. There are a lot of 20th century companies that continue to throw out terms like big data, while offering little or no substance. Customers are not fools. The real value for companies lies in their ability to handle what I call fast data. Rather than relying on mountains of static data, hours after the customer leaves the store, fast data entices the customer before they leave the isle. Only one company has the platform for fast data. Only one company can deliver the Two-Second Advantage and that is TIBCO.

Finally, before moving on to Q&A, I'd like to take this occasion to welcome the newest member to the TIBCO Board, David West. Dave comes to us with an impressive background, including executive experience at multibillion dollar companies such Big Heart Pet Brands, Del Monte Foods, The Hershey Company and Nabisco Holdings. He brings a valuable new perspective and will be a great complement to our Board.

I also want to express my deep appreciation through Dr. Naren Gupta, who has been a valuable resource for TIBCO and contributed greatly to our Board of Directors. Naren will be stepping down at our upcoming annual shareholders meeting in April. We thank Naren for his time and service to the Company and wish him the best of luck in the future endeavors.

With that, we'll be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Jason Maynard with Wells Fargo.

Jason A. Maynard – Wells Fargo Securities LLC

New guys, I mean congratulations on the strong bookings growth. I had two questions. The first one was that, can we talk a little bit more about the analytics business and really kind of – sort of following up on Murray's comments, what do you think the two or three things you need to do to see that business not only grow but really start to generate the revenue growth rates that I think we're seeing across some of the other companies in the industry and frankly, just the natural way to grow that we should be seeing in a valuable segment like that? And then I've got a follow-up for Matt on the maintenance line.

Vivek Ranadivé

Yes, so Jason, great question. We strongly believe and you can do your independent research and it will show that Spotfire is the class of the field. Now if you look at the pyramid of opportunities, the top end of the pyramid, we've been very good at. The middle of the pyramid, QlikTech came in and we've now done a good job of actually pushing QlikTech out and we're increasingly in QlikTech replacement cycle and then Tableau came in to the bottom of the pyramid. So what we as a company have to do is, we have to make it much, much easier to consume our products.

It's not just ease of use that's given, but it's also ease of consumption and it's a little bit of an apples to oranges comparison because we have been doing primarily these term type licenses. So what we're very, very focused on right now is driving growth in the bottom of the pyramid and we launched the cloud version. We are very excited with the results that we saw from that. So we believe just as we did with QlikTech that over the next 12 months, we are going to crush the competition in that segment.

Operator

The next question comes from the line of Albert Chi with JP Morgan.

Albert Chi – JP Morgan Chase & Co.

How are you doing guys? This is Albert Chi on for John DiFucci and great quarter. So I just want to get an update on, I know last quarter, you mentioned that there was a small contribution from the host and SaaS revenues, and I know you mentioned a strong start to Spotfire Cloud, but could you give us an update on how that's progressing, and at what point do you think it might have an effect on things like seasonality going forward? Thanks.

Vivek Ranadivé

Yes. So we're very excited with what we are doing. Of course, our intent has always been that we want to make it possible for our customers in all segments to consume our offerings in whatever manner is easiest for them. We had a four-fold increase in bookings on the cloud subscription side. So I think it's entirely possible that in the not too distant future, I could actually get Murray and Matt to look at that as a separate line item, because we're starting to see our momentum build up in that. So I don’t know, Murray if you want to comment on it.

Murray Rode

Yes. I think that’s exactly, that once it reaches a certain run rate, and I'll let Matt add his comments to that if he would want to highlight it on the P&L.

Matt Langdon

Yes, Albert, what I'd say there is, as our subscription revenues consistently approach $10 million to $15 million, let's say, on a quarterly basis, we'll look to break that out.

Albert Chi – JP Morgan Chase & Co.

Okay, sounds good. And just one more follow-up. I noticed that the large deals over $1 million actually grew pretty substantially and, from my calculations, it grew 50% year-over-year. Could you kind of give us some color around that and maybe if that’s the trend going forward?

Matt Langdon

Yes, so what we are seeing is that customers are really focused and doubling down on needle-moving efforts, and the general theme is, every company has customers and they think of that as a social network and then every company has some kind of inventory and it tends to be perishable. And so what do you do in order to marry that social network to the perishable inventory and that's become the TIBCO value proposition. So customers are doubling down on needle moving projects and so we’re not surprised that our bigger deals grew at 50%.

Albert Chi – JP Morgan Chase & Co,

Got it. Thanks, guys.

Operator

Our next question comes from the line of Brent Thill with UBS.

Brent Thill – UBS Investment Bank

Thanks. Good afternoon. Vivek, on Spotfire, I didn’t catch the actual growth rate. I’m curious if you can give us a sense of what that business did in Q1?

Vivek Ranadivé

We didn’t breakout Spotfire’s numbers specifically, Brent. The category we’re now calling event processing and analytics, was down 7% for the quarter.

Brent Thill – UBS Investment Bank

Okay.

Vivek Ranadivé

Brent, let’s just say that we did really badly on Spotfire. Let’s just be honest.

Brent Thill – UBS Investment Bank

And Vivek, from an execution perspective, what are the things that you think you can improve? The product is obviously getting very strong reviews, but it seems like this is – correct me if I’m wrong, this is more a go-to-market issue than a product issue?

Vivek Ranadivé

Yes, so basically we look at the pyramid of opportunity, and so at the top end of the pyramid is kind of the bigger enterprise opportunities and so what we need to do on that end is, we have an outstanding infrastructure sales force and so we need to completely eliminate friction, so that the infrastructure sales force can sell it, because we win 10 out of 10 times at the top end. So at the very top end of the pyramid we need to eliminate that.

Middle of the pyramid, we also need to eliminate some friction and we also need to do a better job of sales enablement and making it easier to purchase. And so we still do cumbersome term licenses and so on. And then, really the new growth for us is at the bottom of the pyramid, which is where Tableau has been growing, where we need to make our product much easier to consume and also we need to do things we haven’t done in the past.

We now have the cloud offering, which is growing. We’re very excited about that. We’re investing in inside sales and viral marketing. So those are all things that we’re doing at that bottom end of the pyramid. So for us it’s all the new stuff. So we’re going to go attack markets where other people are right now, and we have the product to do that. It’s a lot easier to take a product and change the pricing on it than it is to try to build the product. We have the product, we are putting in place the pricing and the consumption models and the inside sales to go with it, and we feel very, very confident that over the next three to six months we’re going to be very strong in all those categories.

Brent Thill – UBS Investment Bank

Okay. That’s helpful and just a quick follow-up on the go-to-market. When you talk about the reallocation of the buckets of the products, is there any change that you’ve implemented in Q1 around how you go to market, or is this just more a financial allocation versus a go-to-market?

Vivek Ranadivé

Both. That is a financial allocation, but Murray is getting rid of all of the friction, so that the infrastructure sales people and the Spotfire sales people are working much more hand-in-hand in terms of how we tackle big customer opportunities. So I would say, Murray a little bit of both?

Murray Rode

Yes. In terms of the presentation in the quarter, it was just a re-categorization of the categories.

Matt Langdon

Yes, Brent, what I’d say there, this is Matt. I’d say look this is really an effort to simplify the story, and have it better reflect the reality of our business. Basically we have two categories now, core infrastructure, which is fundamentally around, it’s about integration of systems. It’s about integration of systems and about integration of people through process. And secondly, event processing and analytics, which is really all about analytics and patterns, and those are going to be the two categories that we report license revenue against going forward.

Brent Thill – UBS Investment Bank

Terrific. Thank you.

Operator

Our next question comes from the line of Jesse Hulsing with Pacific Crest.

Jesse Hulsing – Pacific Crest Securities, Inc.

Hey, guys. Thanks for taking my question. Murray, you talked about strength in BusinessWorks, MDM and BPM. I think saying that all grew 60% or greater year-over-year, if I wrote that down right. A couple of questions there. First, can you give us a sense of where those three products stand as a percentage of your core infrastructure segment that you’ve newly created? Is it close to half, is it over half? And second, within that BusinessWorks strength, can you talk about the trends that are driving that, and how those compare versus last year at the same time? Thanks.

Murray Rode

So they are, the three products we called out, they are over half of the category and they’re the core products within that category in terms of defining it and what our sales force focuses on selling. And I think as a general matter on the trends, we have been really doubling down on, around the core areas within our infrastructure offering, particularly around integration because we do see a lot of new opportunity in the market, kind of a new cycle of integration as companies effectively start to create new silos with cloud apps. So we feel very bullish about the continued future of the integration products.

Jesse Hulsing – Pacific Crest Securities, Inc.

And to follow-up on that around the cloud integration, you’ve launched some products recently around cloud integration and API management. How are those trending, is it an option within customers, as you’d expect?

Murray Rode

Yes, we’re very, very excited about that. So, basically now we’re making it possible with Cloud Bus integrated into cloud. We are having great interest and success with that. And our Open API, we implemented it for one customer, it went live. They showcased it at South by Southwest. It’s garnered tremendous, tremendous interest and every company is going to get some version of the Cloud Bus and Open API. So we’re very excited about those areas.

Operator

Our next question comes from the line of Aaron Schwartz with Jefferies.

Aaron M. Schwartz – Jefferies LLC

Good afternoon. I had two questions on the go-to-market. I know on this call and the last call you sort of alluded to the fact that quota-carrying growth has been down, but you’ve invested in other areas of the organization there. Can you walk through what you may be doing different in order to get better penetration around the cloud products? Is that sort of a different go-to-market or sales model?

And then the second question I have is, have you seen any sort of change in buying behavior or anything with your installed base? And the reason I ask that is that this has been a very consistent company historically, and it seems over the last year or two, you’ve had areas that have underperformed and you fix. So the infrastructure business and now Spotfire slipped and the Americas and Europe have sort of gone back and forth, but it seems like you haven’t been able to sort of get your arms around everything after a period of very good execution quarter-to-quarter. I’m just wondering if there’s something you’ve seen changed from the buying behavior or anything, sort of bigger of why the inconsistency seems to shift around within your business?

Vivek Ranadivé

I think we’ve kind of went through and we were like a few years ago, when we’re getting $0.40 EPS and we were like a $5, $6 stock and we had to regroup for the next layer of growth and we did, and then we hit kind of the $1 billion mark. And there were people that we had in place. They’ve been there for a while. We had to kind of make tweaks to the leadership. Europe was a little slow and we had to adjust for that. But we believe that we just have the richest portfolio of products and we’re in the best cycle of those products than we’ve ever been in the company. And so there’s no single different areas or different things we’ll have to do. And so I believe that our approach has always been to not to do it like a quick fix, but to do something that is good over periods of time and we are very, very close to being in that position right now.

We are satisfied with the results. We had strong growth in the areas that we were fixing and had fixed. The area that we had weakness, Spotfire, there have been challenges from the low end of the market and we haven’t been fast in moving to that low end of the pyramid. So now we are making those fixes. We make it easier to consume. We’ve got the cloud product out. We’re investing in inside sales. We’re eliminating the friction that existed at the top end of the pyramid between the infrastructure and the Spotfire sales people. So there is many, many – it’s not just one silver bullet, there’s many things that we’re doing and so we feel very, very good about where we are.

The other thing is that our approach historically has been that we build the best architected, most scalable, most real time product. Then it’s kind of the first layer of the cake and then we put it in the second layer, which is let’s make sure it integrates with everything and then we put the third layer of the cake, which is let’s make it easier to consume and this has served us well.

Historically that served us well, because people often come in with the top layer of the cake and then there’s nothing below it, and we’ve crushed all those companies, the 10, 15 companies that we’ve eliminated from the landscape. Now the same is true on the Spotfire side that people come in with a low-end product and it is easier to consume. And we do believe that perhaps the one change that is there now is that it is possible that ease of use can trump just the scale and the real-time there is an – and the enterprise readiness of a product and customers will sometimes take something without actually looking at those two layers of the cake.

So, we – we’ll say hey, that’s fine. We are going to investment in the top layer and make sure that we are better than anyone else in the top layer. We are already better at the bottom layer, we are already better at the middle layer, and we are now going to be the best at the top layer. So, that’s a long explanation Aaron, but that’s where we are at.

Operator

Our next question comes from the line of Derrick Wood with Susquehanna International.

James Derrick Wood – Susquehanna Financial Group, LLLP

Great, thanks. Vivek, you mentioned the term fast data and I think that’s coming up a little more in the industry. I mean, is that messaging already driving large deal growth for you or is that more on the comm, and how do you plan to kind of better leverage the SI channel to drive that messaging in the market?

Matt Langdon

Yeah, so without question that’s what customers are latching on to. That when they look at what’s different about TIBCO from the 20th century companies like an Oracle or an SAP or even for that matter our sales force, they look at us and it’s you want to make the offer at the moment, what they call the moment of truth. And in order to do that it can’t be fitting in a file cabinet and the database somewhere. In order to do that you need that fast data.

So, more and more customers are seeing that business as a social network on the one hand with customers and whole bunch of perishable inventory on the other hand. And how do you marry those two, and it can only be done if you have fast data. So, our differentiation in a world, where everybody tends to say the same things. Everybody says big data, social, mobile, cloud so in that world of jargon, who can actually do it at the moment of truth and that’s, there is only one company that can do that and that’s TIBCO.

So, we are trying to train our SIs and our other partners in this, and we are seeing that customers get it and they are getting it in every industry that we are serving right now.

James Derrick Wood – Susquehanna Financial Group, LLLP

Great, thanks. And then Murray, on your comment about diversifying deal size focus with more inside sales. Is that mostly on the Spotfire side or you doing something on the infrastructure side as well?

Murray Rode

No, it really is across the business. I think it has the most immediate traction in some ways with things like Spotfire or Tiber, but it applies across the board.

James Derrick Wood – Susquehanna Financial Group, LLLP

Okay, thanks.

Operator

Our next question comes from the line of Abhey Lamba with Mizuho Securities.

Abhey Lamba – Mizuho Securities USA Inc.,

Yes, thanks. Vivek, I think in answering to Brent’s question you mentioned that we should see improvements in Spotfire in three to six months, if I heard it right? Now, a lot of the changes you're talking about you need to make for that are go-to-market changes so maybe you can talk a little bit specific steps you're taking to fix those issues and what gives you confidence that we could see turnaround so quickly?

And Matt, if you can give color on significant jump in deferred revenue, any license component in there, or any one-off elements in that?

Vivek Ranadivé

You want to go first?

Matt Langdon

Sure, deferred behavior was healthy this quarter. The renewal behavior would drove most of that movements and then I just would point back to what Murray pointed out that we had a fourfold increase in our cloud subscriptions. It really tells the story of deferred.

Murray Rode

Yes, and so in regard to Spotfire again we look at it, one size doesn’t fit all and we look at how did we serve all of the segments that we believe Spotfire will be the dominant product in, the top end of the segment and the middle, we really want to do a much better job of leveraging the sales people that we have in the infrastructure group. And so we are finding ways to eliminate friction and just make it much easier to sell over there.

In the lower parts of the pyramid, we have invested in the cloud version. We are making it much easier to consume the product. We are investing in inside sales. We are investing in viral marketing techniques. So there’s different investments that serve different parts of that pyramid.

We see that the demand is unquestionably there. Any customer who looks at our products versus the others, immediately says that our customer is better. So our product is better. So we just need to make it easy to consume. We have a cumbersome pricing model right now and we have a cumbersome way of getting the product, and we just want to eliminate all of that friction. We want to have a completely frictionless way of consuming that product. Murray, do you want to add anything?

Murray Rode

No, I think that covers the spectrum.

Matt Langdon

Yes.

Abhey Lamba – Mizuho Securities USA Inc.,

Thank you.

Operator

Our next question comes from the line of Keith Weiss with Morgan Stanley.

Keith E. Weiss – Morgan Stanley & Co. LLC

Thank you guys for taking my question. Shifting gears a little bit to the expense side of the equation. It looks like you brought in the expense growth pretty nicely in Q1, and really exceeded on operating margins, and looking for some operating margin expansion into Q2 as well, at the midpoint of your guidance range. Could you just give us an update on your current thinking on investment versus margins? At this point of are you looking more to sort of press on the gas here in terms of the investment profile for 2014 or is it time to get yields over the current investments, and should be more of a margin-building year?

Matt Langdon

Yes, what I’d say in short to that is that the focus is growth firstly, and the growth with profitability. We think we can get better returns on those investments that we made, but we are continuing to hire and we’re continuing to invest for growth as was described in prepared remarks.

Keith E. Weiss – Morgan Stanley & Co. LLC

Got it. So, I mean if we look at total expenses in the first quarter, I mean total expenses are like 6%, the mid point of guidance seems like it’s up 7%. Is that the, I mean high single-digit growth in total expenses, is that the kind of investment profile that we are talking about?

Matt Langdon

That’s the detail we provided for Q2 and so I think the answer is yes.

Keith E. Weiss – Morgan Stanley & Co. LLC

Okay, got it. And then in terms of the large deals, was it in first quarter a 15% margin. Any particularly significant deals or notable deals that we should be aware of that might move needle a bit in Q1?

Matt Langdon

So, I think the beauty of this quarter Keith is that, it was really spread out. And so there wasn’t one huge deal. We actually had I think it was our top customers represented 16% of our revenue versus plenty historically. And so we are seeing great mix here and great diversity of revenue from many different sectors and we are very, very pleased with how this stock data value proposition is being adopted for many different industries.

Keith E. Weiss – Morgan Stanley & Co. LLC

Okay. One of the industries that you guys have called out in the past two quarters and seen really good growth is transportation and logistics. Any particular solution set that you guys see really resonating in that industry group?

Vivek Ranadivé

Yes, that’s another classic example of social network meets perishable inventory and so in order to make that happen you need a real-time, start with the real-time integration backbone. And so there's no industry that has more perishable inventory than the transportation and logistics industry. And how do you leverage and get the most out of that perishable inventory.

So, our value proposition is very, very applicable there as it is in other sectors, but for them, the alternative is to transport air. They need to fill those seats and they need to optimize their supply chain, and they need to forward chain and they need everything we talk about in order to compete and what is becoming a more and more competitive business to each of them.

Keith E. Weiss – Morgan Stanley & Co. LLC

Excellent. Thank you for taking my question guys.

Operator

Our next question comes from the line of Greg Dunham with Goldman Sachs.

Gregory Dunham – Goldman Sachs Group Inc.

Hi, thanks for taking my question as well. I want to follow-up on the inside sales effort, as well. You hit on earlier, you mentioned the 16 hires, which is I think was across inside sales, sales management and a couple of different areas. But I guess the first question, Murray, can you give us a sense of scale of the size of the inside sales organization today, and where you see it going over the next year? And then perhaps a follow-up to Vivek, more of a longer term question is, what do you think the optimal mix of the business from versus direct sales versus inside sales is, three to five years out? Thanks.

Murray Rode

So, scale of the inside sales and kind of similar functions with TIBCO is about right now we have about 3 to 1 ratio of – say, well a little more than that 4 to 1 ratio I guess of quarter hedge to inside sales and that we would like to see, shift over time to be probably more or like 3 or even 2 to 1 in some segments of the business.

Vivek Ranadivé

Yes, and I think the way we look at it is what's the best way for our customers to consume our technology and what is the best model. And so I look at it a little differently, I'd say, this whole notion of time-based revenue versus one-time revenue, and so I see our time-based revenue, which is maintenance and subscription, cloud, hosted revenue, some services revenue. I see that becoming bigger and bigger portion of our total revenue.

So I see – maybe it's, I don't know, 60% to 65% now. I see that becoming – in the next three years, I expect it to be about 75%, 80% of our revenue. So in 5 years to 10 years, I would expect it to be 90% of our revenue.

Gregory Dunham – Goldman Sachs Group Inc.

Okay, that’s helpful. Thanks guys.

Operator

Our next question comes from the Steve Koenig with Wedbush Morgan Securities.

Steven R. Koenig – Wedbush Securities Inc.

Hi gentlemen, thanks for taking my questions here. I wanted to ask you a little bit about TIBCO in the cloud, especially on your core infrastructure and ESP products. Traditionally, I think about you selling your on-premise infrastructure to anyone from the Applications Director up to the CIO, and kind of my stereotypical use case is the integration of a large new application initiative to existing systems. So now as you're talking about cloud for your infrastructure products, and you're talking about the volume channel, can you give me an example of a prototypical use case, and who the buyer is, as you move to the cloud here?

Vivek Ranadivé

In some ways what we – TIBCO is a beneficiary of entropy, so every time something new pops out, it needs to be integrated. And so now we live in a world where customers have their own internally developed apps, they have ERP apps they might have purchased, and then they have apps that they are getting as cloud apps. And so how you tie all that together, and you might want to tie that together in the cloud, or you might want to tie it together on-premise. And so what I'm describing is every customer. And so one of the things we're doing is, we are making it really easy by cloud – so these are Cloud Bus for them to actually do this in a very simple fashion, so that their cloud service can integrate with their on-premise service or with their custom-built software and have that all be done in the cloud. So I don't know, Murray, if you want to add to that, but that's kind of the prototypical customer now, right?

Murray Rode

Yes, I think what the cloud does do is just expand the accessibility of integration to a broader audience, so where on-prem integration tends to be almost exclusively in the domain of the IP department to implement. Cloud integration opens up a whole new set of consumers where you can have for example, a marketing analyst who wants to do a very simple, maybe even just kind of episodic integration between a couple of marketing applications. And that’s the kind of range of integration capabilities we want to make available through the clouds such that you can access the most technical industrial strength, integration as well as the simple kind of one-off integration.

Vivek Ranadivé

Yes, I think in your examples, I’ve seen situations where you have customer that wants to take customer data and tie that to their marketing app.

Murray Rode

Exactly.

Vivek Ranadivé

And do that in a very simple fashion. and so that and the marketing analysts does that?

Murray Rode

Right, exactly.

Vivek Ranadivé

Yes.

Steven R. Koenig – Wedbush Securities Inc.

So if I may ask one follow-up on that. Does that sort of scenario imply that there is more prepackaging of the integration with some of the popular SaaS applications? Is there a partnership angle through this sort of initiative?

Matt Langdon

I think it’s – I mean, it could be. But I think more it’s just having some of those connectors ready as part of the service.

Murray Rode

Well, our approach Steve, there has always been to be neural and so we work with everybody, and so we make it possible. So we have as you know an adapter factory with every adapter, possible out there. And so we are not really close to any one vendor, we make it equally easy to integrate whether it’s Oracle or SAP or some specialized vendor in manufacturing. So we have good ties with all of them, but we are not closer to anyone of them.

Steven R. Koenig – Wedbush Securities Inc.

Got it. Great, thanks a lot guys. I appreciate it.

Operator

Our next question comes from the line of Mark Murphy with Piper Jaffray.

Pinjalim Bora – Piper Jaffray & Co

Thank you. This is Pinjalim on behalf of Mark. Just wanted to ask you about the sales headcount, I think you alluded to a near-term target of 300. Could you please update us on that or and if there is any year-end new targets et cetera. And also, if you could please talk on LogLogic and StreamBase, and give us an idea of how is that business doing and what is the scale of that business. Thanks?

Murray Rode

So the 300 target is still roughly our target for the year. As I talked about in my prepared remarks, we are very focused on getting the right candidates. So we’d still set that as the near-term target. In terms of LogLogic and StreamBase, they are both doing well, still small contributors, but a couple of very interesting deals in the quarter which suggest to us again that there is a lot of opportunity with those products.

Operator

And our last question comes from the line of Karl Keirstead with Deutsche Bank.

Karl E. Keirstead – Deutsche Bank Securities, Inc.

Okay, there are two actually, one for Murry and then one for Matt. Murray, can you just continue the conversation around the apps integration front. That seems to be the highlight of your infrastructure sales which were better than expected. Assuming that the cloud integration stuff is still a small portion of it, it would imply that your on-premise integration business did very well this last quarter. You talked a little bit about a new cycle of demand. So I’m wondering if you can just go a little deeper and what would have driven the on-prem integration business, I guess you are taking active matrix business works, who have done so well. So that was the question I wanted to ask you.

And then Matt, I saw the 8-K recently where some of the performance bonuses for senior executives are tied a $2 non-GAAP EPS number, a couple of years from now. I know that’s part of your stretch target, but it’s so much higher than what the earnings run rate is now. Is there anything in terms of out year margin improvement worth calling out that would enable you to get there? Thank you.

Murray Rode

So on the first question Karl, I think actually a lot of what we’ve talked about and Vivek has talked about is what’s driving – as core driving that success with integration in the quarter. So these types of fast data solutions do rely on integration to bring together the various systems and data streams that participate in automating those fast data decisions. So that’s a big driver. I think that it’s also important to point out that our license numbers don’t have any of the cloud elements of integration into them at all. So to your point, the integration with on-premise software was all the strength in the quarter.

I think the other thing that’s important though as we look to the future is just the new cycle of integration we talk about is partly that fast data scenario, but it’s also as customers have more of a hybrid model of systems, they have some in the cloud and some on-prem. They are recreating silos that they may have tried to eliminate over the past 10 years or 15 years. So in fact it is introducing a whole new set of integration news.

Matt Langdon

Yes, Karl on the question around the long-term incentive program and the $2 target, there is not a lot I can say what are your margin target, but I would say is, really the focus now is growth and it’s investing for growth. Obviously and clearly we have levers still that are available to drive earnings per share. We won’t hesitate to use those levers but those levers right now are being deployed towards investment and towards an investment towards driving growth and we are not going to cut our way to $2.

Vivek Ranadivé

Okay, well thank you all for joining us today. We look forward to talking to you again next quarter. Thank you.

Operator

Ladies and gentlemen, this concludes today’s conference call. We thank you for your participation. You may all disconnect.

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