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BMC Software (NASDAQ:BMC)

F1Q11 (Qtr End 06/30/2010) Earnings Call

July 28, 2010 5:00 pm ET

Executives

Derrick Vializ - Vice President of Investor Relations

Stephen Solcher - Chief Financial Officer and Senior Vice President

Robert Beauchamp - Chairman, Chief Executive Officer and President

Analysts

Sitikantha Panigrahi

Derek Bingham - Goldman Sachs Group Inc.

Matthew Hedberg - RBC Capital Markets Corporation

Michael Turits - Raymond James & Associates

Operator

Good day, everyone. Welcome to today's BMC Software First Quarter Fiscal Year 2011 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 of 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 our first quarter performance of our company and business units and update you on recent initiatives. After that, Steve Solcher, our CFO, will provide additional financial and operational details. Bob will then provide an update on 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 results are described in today's earnings press release 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'll turn the call over to Bob.

Robert Beauchamp

Thanks, Derrick. Good afternoon, and thank you for joining us on today's call. I'm very pleased to say that BMC Software is starting out fiscal 2011 with robust year-over-year growth and a solid overall performance. We grew total bookings by 14%. We had the highest percentage increase in total license bookings in the past six quarters. We grew ESM license bookings by 40%, the highest percentage increase in the past six quarters, a strong leading indicator of customer adoption and market growth.

MSM total annualized bookings for the trailing 12 months increased 8%. Cash flow from operations was $167 million, an increase of 8%. Total revenue for the quarter was $461 million, up 2%. Non-GAAP operating margin was 34%, up one percentage point. And non-GAAP diluted EPS increased 5% to $0.62 per share.

Our financial position remains strong as evidenced by our solid balance sheet. We had $1.5 billion in cash and investments and $1.8 billion in deferred revenue at the end of the quarter. That's a snapshot of our overall performance. Given our solid first quarter results and our current outlook, we are on track to achieve our fiscal 2011 expectations.

Let me turn next to discuss key developments in our ESM and MSM business units during the quarter. First and foremost, ESM license bookings increased 40% from the year-ago quarter. We continue to see momentum in ESM license bookings, which over the past nine months have grown 13% over the respective period of a year ago.

We had a number of significant wins during the quarter that demonstrated our continued strength in selling the BSM platform. In fact, we had 14 ESM license transactions with over $1 million in bookings, up from 11 license transactions a year ago. We had a number of large ESM platform wins, including Computer Sciences Corporation, Sanofi-Aventis Group, Servicio de Administracion Tributaria of Mexico and Tata Consulting Services.

We saw multiple wins in the U.S. federal sector. These include the Marine Corps Systems Command, the Defense Threat Reduction Agency and the United States Central Command.

It's not only the growth in large deals, but the mix of our ESM wins that underscores our momentum. The number of ESM license transactions between $500,000 and $1 million increased by over 50% compared to a year ago. That's the fourth straight quarter in which we have seen deals in this range increase by double-digit percentage. And we also saw our average selling price continue to grow.

Looking at our global performance, we generated solid double-digit ESM license bookings growth in all major geographies. Not only did we have strong geographic performance, but we also had strong double-digit license bookings growth across all of our product disciplines within the ESM business. Six of the top 10 license deals were multi-disciplined license transactions, while five of those included all product disciplines. This reflects the success of our ongoing realignment of our ESM sales team.

Our Service Automation and Atrium Configuration Management Database solutions continue to lead the way for us. Our Automation offerings had a particularly strong quarter and continue to be a significant advantage that differentiates us from the competition. This demonstrates our ability to successfully integrate and leverage key technologies that we acquire. I'm referring in particular to BladeLogic. But this also holds true for our three largest transactions over the past two years, which have performed extremely well by fueling strong growth within our ESM business unit. We're continuing to see robust demand for our Atrium CMDB, which we believe is a leading indicator of the opportunity ahead to drive larger more strategic platform wins. We also had strong growth in our Service Assurance and Service Support product disciplines.

BMC has been focused on leveraging the strength of its unified, integrated management platform, investing in extending and enhancing it to enable the management of next-generation IT environments and speed the adoption of cloud computing. Unlike other vendors, BMC's cloud strategy allows customers to achieve the benefits of Cloud, reduced cost and improved efficiency, without introducing new silos, disrupting IT operations or forcing a vendor lock-in for hardware, services or a virtualization platform.

Looking at the number of companies that visited our Executive Briefing Center over the past year, it is evident that our customers are choosing to standardize on our IT management platform as they look to IT to strategically enable their business growth. Our partner ecosystem around the BSM platform also continues to develop. We're increasingly teaming with industry leaders such as Accenture, Cisco, Dell and salesforce.com in comprehensive cloud and BSM platform sales opportunities and implementations. These strong partnerships underscore the strength of BMC's competitive advantage in the IT Management Software business for both enterprise and service providers.

In terms of cloud solutions, I'm very proud to say that over the past year, BMC has won 25 large proof of concept and technical design shootouts for virtualization and cloud management at some of the largest enterprises in the world. BMC also has been selected by five of the top 20 telecom companies as their standard platform for virtualization and cloud management. And in the last two quarters, two of the top systems integrators have selected BMC Software as their strategic management provider for their hosted services.

We believe that significant potential lies ahead of us in this area. We're continuing to invest in and launch new offerings to capture that opportunity. Our BMC Cloud Lifecycle Management solution is now available globally. This solution is part of our Cloud Service Management portfolio, which unlike other offerings from other IT vendors, manages a broad combination of hardware, software and virtualization offerings. This enables customers to rapidly achieve success with their cloud initiatives, gives them choices about which current and future technologies to use and allows them to continue to derive value from their existing IT environments. This strategic approach has been validated by numerous enterprises and service provider customers, affirming that our approach is sound. As the market for cloud solutions grows, we anticipate seeing increased demand for our solutions in the area of Cloud Planning, Cloud Lifecycle Management, Cloud Operations and Cloud Governance, especially IT Service Costing.

One thing in particular that I'd like to highlight is that our customers frequently view cloud computing as a catalyst for improving their IT maturity; that the introduction of new technology brings with it the requirement to also transform their IT operations along the principles of Business Service Management.

This is why we were so excited about the cloud market, and about how BMC can really shine. To augment these cloud solutions, we also plan on enhancing our Software-as-a-Service offerings over the next several quarters, capitalizing on customer interest in this expanding market. Our platform is winning significant support from customers, partners and service providers. For example, we gained 51 new customers for our IT Service Management offerings this past quarter. This reflects in part our efforts to broaden our footprint and distribution capabilities.

We're also very encouraged that we had 15 wins for our SaaS offerings during the first quarter of general availability. Our SaaS initiatives include both our BMC Remedy On Demand solution, which enables customers to access our industry-leading service management offering as a service, and our BMC ServiceDesk on Force.com solution. Key BMC Remedy On Demand wins included Citrix Online, St. Jude's Medical, Children's National Medical Center, Moffitt Cancer Center and Health Care Partners. Our strategic partnership with salesforce.com is off to a great start as we see customers rapidly adopting BMC's ServiceDesk on Force.com.

During the quarter, we added a number of new companies through this offering, including Advanced Infrastructure Management, Emmanuel College and Creative Information Technologies, Incorporated. Further strengthening the strategic alliance between the two companies, salesforce.com will begin this quarter reselling BMC's ServiceDesk on Force.com to accelerate the momentum for cloud-based IT service management integrated with their Sales Cloud 2, Service Cloud 2 and Chatter Collaboration Cloud. Through our resell agreement with salesforce.com, we are making it easier than ever to customers to simplify and automate their IT operations.

In addition to having the best technology, another way in which we're determined to gain a competitive advantage is by helping enterprise customers get the most value out of our offerings. That's why we're working to strengthen and expand our Professional Services organization. We began this current initiative in fiscal 2010, and it will remain a priority during fiscal 2011. While it's still early in the process, we're pleased with the results in the first quarter. Professional Services bookings and revenue increased significantly. Utilization rates rose, and our Professional Services business returned to profitability.

We're also seeing a positive impact from our efforts to strengthen our ESM sales organization. Our goal here is to broaden our footprint and our ability to build C-level relationships. The evidence indicates that our strategy is working. During the quarter, the average number of tenured sales reps increased from the prior year. At the same time, these tenured reps increased their productivity on a year-over-year basis. We are ahead of plan on the number of productive heads, and we expect the average number of tenured reps to increase over 20% in fiscal 2011 compared to fiscal 2010.

Let me turn now to our MSM business. As you know, this business can be lumpy from a booking standpoint because of the timing of renewals. Total MSM bookings on a trailing 12-month basis increased 15%, up from a 10% increase last quarter. It's also important to look at MSM bookings on a trailing 12-month basis after normalizing for differences in contract length. On that basis, MSM annualized bookings increased 8%. During the quarter, we increased the MSM install base by adding 15 new customers. We also saw 54 existing customers renew and increase their relationship with us by adding new products to their existing portfolio. Some of these major MSM wins include Federal Express, Federal Reserve, JPMorgan Chase, Aurora Healthcare and Telefonica de Espana.

Once again, we had a solid increase in the annual run rate for our top 15 MSM transactions, driven by significant competitive wins at key accounts. This is the 13th consecutive quarter where we have seen an increase in the run rate of our largest transactions. Our MSM business continues to lead the mainframe management market in terms of innovation and execution.

During the first quarter, we announced new mainframe cost-optimization capabilities. We also recently released a new mainframe product for IMS, the leading transactional and hierarchical database management system for the IBM System z mainframe.

BMC has been providing innovative IMS solutions since 1982 and has hundreds of IMS customers worldwide, including some of the world's largest financial and IT service providers.

So to summarize our fiscal 2011 first quarter, we had robust bookings growth across key product offerings and geographies. We're continue to lead our market in terms of both vision and technology. The technology trends driving our markets, such as cloud computing, virtualization and Software-as-a-Service, represent a strengthening tailwind that is propelling BMC forward. I'll talk more about our current outlook for fiscal 2011 later in the call.

Before I turn the call over to Steve Solcher, I would like to highlight two additions to our team. Steve James and Mark Hawkins joined BMC's Board of Directors in May. Both Steve and Mark bring years of senior executive experience in the technology industry to our board.

Now Steve Solcher will provide more insight into our financial results. Steve?

Stephen Solcher

Thanks, Bob, and good afternoon to all of you. Before I take you through our financial results, there are a few points I'd like to underscore about our performance. I'm pleased with our solid first quarter performance and start to our fiscal year. We had strong total bookings growth in ESM license bookings growth. Our ESM business demonstrated significant broad-based growth across key product lines and geographies, while increasing its operating margin year-over-year by seven percentage points.

We grew revenue and non-GAAP earnings per share despite the negative impact of a significant year-over-year increase in the deferral rate of our license bookings, which I will discuss later, and we grew our cash flow from operations by 8%. Our financial position remains strong as demonstrated by our solid balance sheet and recent ratings upgrades by both Standard & Poor's and Moody's.

It's important to point out that license revenues were negatively impacted by an unusual year-over-year difference in the ratable rate of our license bookings. You can see this difference on Slide 9 of our conference call presentation where we provide additional visibility on ratability by license bookings overall and for each of our business units. License bookings ratability increased from an unusually low 26% in the year-ago quarter to 44% in the first quarter of fiscal 2011. On a business unit basis, license bookings deferral rate increased 10 percentage points for our ESM business and 45 percentage points for our MSM business.

We are pleased that our key business initiatives which we have discussed with you in recent quarters are proving successful. Our efforts to strengthen and expand our sales force are showing progress and momentum. Although still early, we are now seeing signs of traction in our Professional Services organization, and we remain committed to maintaining our customary financial discipline. All of these initiatives reflect our strategy to invest in our business in a disciplined way to build value for customers and shareholders.

With that, let me turn to our financial results for the quarter.

In the first quarter, non-GAAP operating income increased by 6% from $148 million to $157 million. Non-GAAP operating margin increased to 34% this quarter, up one percentage point over the last year.

Please refer to Slide 5 for our highlights of our ESM and MSM business unit operating results. In the first quarter, operating income of our ESM business unit increased 55% to $66 million from $42 million in the year-ago period. ESM's operating margin increased year-over-year by seven percentage points to 23%. We remain pleased with the continued improvement and profitability of our ESM business.

MSM's operating income decreased by 14% to $91 million from $106 million, and its operating margin decreased by four percentage points to 52%. MSM's financial performance on a year-over-year basis reflects the significant increase in MSM's license bookings deferral rate.

Our non-GAAP net earnings for the first quarter were $114 million, an increase of 3% from $111 million in the year-ago period. Non-GAAP diluted EPS for the period was $0.62, up 5% from $0.59 in the year-ago period. This reflects a non-GAAP effective tax rate for the quarter of 25%. These non-GAAP results reflect diluted shares outstanding in the first quarter of $184 million versus $188 million in the year-ago period.

GAAP operating income in the first quarter of fiscal 2011 was $108 million, flat compared to the year-ago period. GAAP net income and diluted EPS were $93 million and $0.50 compared to $82 million and $0.44 in the first quarter of fiscal 2010. First quarter GAAP net earnings were positively impacted by a $14 million income tax benefit recorded in connection with the settlement with a taxing authority related to prior years' tax matters. This benefit was excluded from our non-GAAP results.

Turning now to bookings. In the first quarter, total bookings of $443 million were up 14% from $390 million in the year-ago period. On a constant currency basis, first quarter bookings increased 16%. Total license bookings for the quarter increased 27% year-over-year to $135 million. On a constant currency basis, first quarter license bookings increased 31%.

Total bookings on a trailing 12-month basis were $2 billion, up 12% compared to the year-ago period. The weighted-average contract length for total bookings on a trailing 12-month basis was 2.19 years, up 7% from 2.05 years in the year-ago period.

After normalizing for contract length, trailing 12-month annualized bookings for the first quarter were $911 million, up 4% from the year-ago period. Please refer to Slide 7 in our presentation.

Now let me turn to the performance of each of our business units. For our ESM business unit, growth in license bookings is the best measure of performance. ESM license bookings were $101 million in the first quarter, up 40% from $73 million in the year-ago period. I'm pleased to highlight the strong broad-based ESM license bookings performance across all major geographies and product disciplines.

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. As Bob mentioned before, MSM remains a lumpy business. Since bookings for our MSM business are tied largely to the timing and size of renewals, MSM bookings can vary widely from quarter to quarter. Total MSM bookings on a trailing 12-month basis increased 15% to $794 million. The average contract length of 3.03 years increased 6%. After normalizing for contract length, total annualized MSM bookings for the trailing 12 months were $262 million, up 8% from the year-ago period. For fiscal 2011, we expect low to mid-single digit growth in MSM total bookings on a constant currency basis.

Turning to revenue. Total revenue for the quarter was $461 million, up 2% from $450 million in the first quarter of fiscal 2010 on both a reported and constant currency basis.

License revenue in the first quarter was $171 million, an increase of 3% from $167 million a year ago. During the quarter, the large increase in the license bookings deferral rate negatively impacted license revenue by approximately $24 million compared to the deferral rate a year ago. ESM license revenue was $113 million, up 18% from $96 million in the year-ago period. The ESM license bookings deferral rate was 32%, a 10 percentage point increase over the last year.

MSM license revenue decreased by 18% from $71 million to $58 million. This is mainly due to a 45 percentage point increase in MSM's license bookings deferral rate, which was driven by an increase in the percentage of time-based or term transactions. The first quarter of fiscal 2011 is more reflective of our typical seasonality for license bookings deferral rate as we had an abnormally low deferral rate in the first quarter of fiscal 2010.

For the first quarter, maintenance revenue was $254 million, an increase of 1% from the year-ago period. ESM maintenance revenue was $137 million, up 2%, and MSM maintenance revenue was $117 million, relatively flat compared to the first quarter of fiscal 2010.

We expect maintenance revenue to grow sequentially in the second quarter. As Bob mentioned, we continue to make improvements in our Professional Services organization. Professional services revenue, which is included in our ESM business unit, increased 13% to $36 million and our professional services operating margin generated a profit of $1 million versus a loss a year ago.

Moving next to operating expenses. We remain committed to our disciplined approach to managing our expense structure, focusing on ways to maximize our efficiency and leverage our infrastructure. During the first quarter, non-GAAP operating expenses were $304 million, up 1% from $302 million in the year-ago period. It is important to note that we capitalized more software development costs than in the year-ago period.

Looking at our business units, ESM's operating expenses were $221 million, flat compared to the year-ago period. MSM operating expenses were $84 million, up 3% from $81 million in the year-ago period.

As for other income, we had a $5.5 million loss in other income compared to a $0.7 million loss a year ago. On a year-over-year basis, this negatively impacted non-GAAP EPS by approximately $0.02.

Turning now to the balance sheet. Total deferred license revenue at the end of the first quarter was $588 million, down 6% sequentially from $624 million as of March 31, 2010. The sequential change follows our typical seasonality. During the quarter, we deferred $59 million of license revenue, or 44% of license bookings, and recognized $94 million of deferred license revenue from the balance sheet. Total deferred revenue decreased by $18 million sequentially to $1.8 billion. The current portion of deferred revenue now stands at 55% of total deferred revenue.

Our software development costs were $160 million, up 10% compared to the fourth quarter of fiscal 2010, as we capitalized $32 million and amortized $18 million. This increase was driven by the scope and timing of several key product releases expected in the September quarter.

At the end of the quarter, cash and investments totaled $1.5 billion, and our net cash position was $1.1 billion. For the quarter, cash flow from operations was $167 million, up 8% from $155 million in the year-ago period. Cash flow from operations was negatively impacted by $6 million due to the year-over-year change and finance payables on the balance sheet. DSOs in the quarter dropped sequentially to 47 days, down from 60 days in March.

During the quarter, we remained committed to our existing share repurchase program. We repurchased 4 million shares of our stock for a total cost of $149 million. We now have $921 million remaining in our current share repurchase program.

Finally, as further validation of our strong financial position, both Standard & Poor's and Moody's upgraded their ratings on BMC last week. Standard & Poor's raised BMC's corporate credit and senior unsecured rating to BBB+ from BBB. As rationale, they cited BMC's good operating performance during the recent IT downturn, our conservative leverage and strong free cash flow generation. Moody's upgraded BMC to Baa2 from Baa3 and cited BMC's strong operating and financial performance throughout the recent downturn, our success in growing and improving the profitability of our non-mainframe business and Moody's view that the outlook for our IT management software products is favorable.

With that, I'll turn the call back over to Bob for his concluding remarks.

Robert Beauchamp

Thank you, Steve. Given our first quarter results, we are on track to meet our fiscal 2011 expectations. The combination of an improving economy, better prospects for IT spending, strong market demand, our leading market position and our solid start to fiscal 2011 underlie our view. To reiterate what we provided in May, for the full year, we expect non-GAAP diluted earnings per share in the range of $2.84 to $2.94. At the midpoint, this would represent a 9% increase over last fiscal year.

Our non-GAAP diluted EPS estimate excludes an estimated range of $0.71 to $0.76 per share for non-GAAP adjustments, including share-based compensation, the amortization of intangible assets, severance, exit costs and related charges, as well as the related tax impacts of these items and certain discrete tax items.

The assumptions underlying this full year fiscal 2011 estimate include: total bookings and revenue growth in the mid-single digits; continued improvement in our non-GAAP operating margin; a slight increase in the license bookings deferral rate; slight bookings hurt due to currency that negatively impacts growth rate by one point more than what we assumed in May; other income estimated to be $10 million lower than a year ago, reflecting current market conditions; weighted shares outstanding similar to the prior year; and a non-GAAP tax rate of 26% to 27%.

We expect full year fiscal 2011 cash flow from operations to be between $660 million and $710 million. With that, we'll now turn the call over to questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] We'll go first to Kirk Materne with Rafferty Capital Markets.

Matthew Hedberg - RBC Capital Markets Corporation

It's actually Matt in for Kirk. Just two quick questions. Just kind of looking for some commentary around the mainframe sales. Did you guys see much of an impact due to the upcoming IBM rollout there?

Robert Beauchamp

Matt, the way I would say is a couple things. First is we did -- by the way, we did get to participate in IBM's launch. Our President of our MSM business unit was actually on stage with the IBM executives the day of the launch in London. And we were one of the few vendors that were there actually as part of that rollout. So we're excited about the machine and about the impact it will have on the market. And we look at ourselves and we do think that it probably had a little bit of a stalling effect on some mainframe transactions. Not so much for any negative reason, just that customers wanted to see -- they're assuming they're going to get a new box. They want to know what the capacity of the new box will be before they negotiate a new agreement, so that they make sure that they have in the negotiation the proper number of NIPS and the proper capacity. So I think that the -- kind of the overhang of the announcement caused a little more slowing of transactions than we typically would have seen. But it was not a big number, but we did see that. But on the whole, we think it will be a positive now that the machine is starting to ship.

Matthew Hedberg - RBC Capital Markets Corporation

That kind of leads to my next follow-up question. Just in terms of kind of what your thoughts are, if there's going to be any real sort of positive impact on potential mainframe renewals as they come up with the launch of the IBM platform later this year?

Robert Beauchamp

I think we anticipated that when we said guidance, so it was part of our thinking. So nothing materially different than we previously anticipated on that. It's always good when the new box ships. It always -- if it's a good machine, and we believe it is, if it's a good machine, we see customer adoption. It creates transactions. It creates an event where the customer will call us to let us know and we -- the number of -- the pipeline grows because of it. You just have a lot of activity. And then it also hopefully delivers on its promises of performance. And if does that, it would continue to secure the mainframe platform for many, many years to come as a very strong and cost-effective platform.

Operator

[Operator Instructions] We'll move next to Derek Bingham with Goldman Sachs.

Derek Bingham - Goldman Sachs Group Inc.

Question on the macro environment, just curious, just some peers in the enterprise had referenced some signs of slowing late in the quarter. And we've heard a lot about Europe. We've heard a lot about government spending, both overseas and in the federal space. Domestically, just curious, for starters, if you would add anything to that.

Robert Beauchamp

No, I don't know that we saw anything remarkable. We didn't see anything particularly slow at the end of the quarter or accelerated. Business has been fairly consistent. We did very well in EMEA again. We did another quarter of double-digit growth in EMEA, coming off a really great quarter last quarter in EMEA. So I think that as hokey as it may sound, and as often as people say it, the reality is I think we're selling products that have very short ROIs that appeal to both those customers who are trying to take cost out now and those customers who are preparing for scale-up of improvement. And we're selling to both. We've certainly done well in federal. You heard in our prepared remarks of some specific DOD wins, and we have more coming. And so, no, we did not see any real deterioration at the end of the quarter.

Derek Bingham - Goldman Sachs Group Inc.

Last quarter you talked about the average tenured distributor reps expected to be up 20% this year. That means it's a pretty, pretty lofty goal, but can you get anywhere close to that in terms of what you can see right now in terms of their ability to bring license bookings home at a similar rate?

Robert Beauchamp

Yes, we're ahead of plan right now. We're actually -- the attrition numbers that we had budgeted for in Q1, because that's always typically your biggest turnover because that's when you end the quarter. If anybody was going to leave, quit. They will typically do it after the end of the year. And if also if you're going to exit sales people, it's usually done at the first quarter. So that quarter did not spike. We actually saw a very solid long-term number we can live with there that was better than our internal plan. And we saw our productivity continue to really -- if you look at those booking numbers, the license bookings of ESM soaring 40% year-over-year, obviously the bookings, and the license bookings productivity per head is up significantly. And the headcount, we do expect to achieve our 20% growth in productive tenured sales people, which means they're already on board and the incremental are coming into the productive part of their tenure with the company.

Derek Bingham - Goldman Sachs Group Inc.

And Steve, do you still expect to see an uptick in op margins for the two separate businesses on both sides of the house?

Stephen Solcher

We do. The expectation hasn't changed in the growth, or the improvement is not only at the percentage level but at the absolute level.

Operator

Moving on to Michael Turits with Raymond James.

Michael Turits - Raymond James & Associates

You had nice growth in bookings of 14%, but revenues growing at 2%, so below your target for the year in the mid-single digits. How much of an impact to revenue growth came from the change in ratable rate? If you'd seen it, I don't know, say, as you might have expected to go into the quarter, what might that revenue growth been? And then I have a follow-up question on the bookings.

Stephen Solcher

But Michael, I would say that the ratable rate came in a little bit higher than our expectation which dampened revenue growth, but again, we reguided to our full-year outlook. So we feel pretty comfortable that we're going to be able to achieve mid-single digit growth. I think in bookings, the only fairness that I would caution you on is just think about it on a per annum basis, so adjusted for contract length. So on a per annum basis, when you start looking at it, especially if you kind of stretch the period out a little bit, you're going to get to growth rates on a TTM basis per annum that are going to approximate revenue growth.

Michael Turits - Raymond James & Associates

So that's my other question. It seems the bookings growth trailing 12 months, I guess, is on an annualized basis, that's in the mid-single digit. Is that correct?

Stephen Solcher

That's correct.

Michael Turits - Raymond James & Associates

And would it be about the same just for total bookings in the quarter?

Stephen Solcher

In the quarter, you're going to have a little bit of variability. And I prefer not to give you quarterly numbers because we think TTM is really the way to look at this business on a per annum basis.

Michael Turits - Raymond James & Associates

Then last question. Maybe I missed it, Steve, but did you give the actual FX impact in the quarter to revenues?

Stephen Solcher

We did. There was really no impact to revenue growth and really no impact to OpEx. So we had very little impact to the income statement. A little bit of help to cash flow. And for the full year, we're looking really for FX not to have any impact to the income statement, and to have really no impact to cash flow, and then to have about two points of hurt to bookings.

Michael Turits - Raymond James & Associates

And then last question on mainframe capacity. Where are we in terms of mainframe capacity increases? Are those starting to come back at all?

Robert Beauchamp

Well, the number of transactions are ramping now. So the number of customer events that we'll be engaged in with the customers is coming up. We will see the capacity when we engage in those contracts. So I think we definitely are seeing customers add some capacity, but I don't know if I have any generic guidance for you in terms of what we're seeing at this point, nothing notable.

Stephen Solcher

Michael, the only thing I would add to that is our top 15 customers continue to grow run rate or yields, customers that three years ago had a contract that are now renewing are renewing for more. And I think that's helpful. Now some of that is additional capacity. The other piece of that is, is that they're adding new products as we displace the competition in those accounts.

Michael Turits - Raymond James & Associates

But no change, because you said the capacity increases have been a little bit lower than in prior cycles. I was just wondering if that had picked up at all.

Stephen Solcher

No. No change right now. And again, we're optimistic that hopefully with the new box that there will be some upside in the numbers just as people start renewing better capacity.

Operator

Moving on to Phil Winslow with Credit Suisse.

Sitikantha Panigrahi

This is Siti Panigrahi for Phil Winslow. So going back to the new IBM mainframe platform, you mentioned you kind of saw a bit of slowdown on the new mainframe launch. But just wondering if you guys could comment on the mainframe pricing environment, and if you have seen any changes in the launch of the new platform.

Robert Beauchamp

I think the question was about whether we've seen any change in the mainframe pricing environment. No, there's nothing material that we've seen there. I think it continues to be kind of the same environment that we've operated in for a number of years in that. I mean, I do think the fact, like Steve mentioned, that I think it's now the 13th quarter where we've seen growth of the annual spin the customers are signing up for us on our top 15 transactions bodes well that we are doing well competitively. We're doing well being able to maintain our price points. But no material change in the competitive landscape as it relates to pricing.

Operator

Moving onto Matt Hedberg with RBC Capital Markets.

Matthew Hedberg - RBC Capital Markets Corporation

As a follow-up to Michael's question earlier, you know you guys have talked about a mainframe refresh cycle here for your guys this year. I guess I'm wondering, when you think about your upcoming quarter, the Renewal portfolio, how does that compare on a sort of a sequential basis to the Renewal portfolio that you guys had in the Q1 period. Is it -- and then specifically as it relates then to -- on a year-over-year perspective?

Stephen Solcher

So let me make sure I understood the question. Is the question Q2 compared to Q1 or Q4 compared to Q1?

Matthew Hedberg - RBC Capital Markets Corporation

Well, it's kind of sequential. I guess I'm wondering sequentially more importantly. As you kind of move into this refresh cycle, do you have a stronger portfolio to renew this coming Q2?

Stephen Solcher

Well, what we've said on the last several calls is that when we looked at fiscal year '11, what we saw as a percent -- now I'm going to not talk about quarters, I'm going to talk in general about the fiscal year -- that our renewal opportunity was larger as a percent than we've seen in relation to fiscal year '10. And we actually felt comfortable and said that we thought there was strength going in. Previously we had said that was really second half of '10, first half of '11. We've refreshed that to say all of '11, and actually included '12 in that. So when we look at just the sheer renewal opportunity, we feel pretty comfortable that it's there to go renew. Now that is not the entire balance that we go get. We still have to grow capacity in these customers. We sell them new product. It's the lion's share of that gross number that we're after, but it's not all of it.

Matthew Hedberg - RBC Capital Markets Corporation

And I guess I'm wondering, I appreciate the full year look. Can you think about the linearity of that? Or can you give us a sense for should things continue to improve in that linearity? Or should it be pretty steady throughout the full year in the next year?

Stephen Solcher

Well, I think it should continue to improve. The only hesitation that I have is this business, as we say in the call, is so lumpy, and customers can come negotiate before the end of contract. They then will cause that lumpiness. So it's just so hard to predict, and that's why we really would rather guide you to looking at this on a longer-term view TTM basis, just to take a little bit of the lump out. But this is a business, as we've said, is going to grow somewhere in the low- to mid-single digits on a constant currency basis. And that's consistent with what it's done over the past several years.

Matthew Hedberg - RBC Capital Markets Corporation

A question on the Cisco ECS. Oftentimes, we wait to hear news from them first and then some news from you guys. Do you have any update on how that's progressing?

Robert Beauchamp

Just a little, just that it's basically continuing nicely. We're now over 100 customers through that OEM relationship, which if you kind of take their numbers and ours, it shows a reasonable attach rate, particularly considering the fact that it's such a large number of the boxes that are shipping, are shipping are proof of concepts. There's also a lot of mid-market being shipped too, et cetera. And what we really offer are industrial-strength automation for a production environment. So we're going to be a lagging indicator of success for that platform, not a leading indicator. We're going to be brought in once the proof of concepts go into production, once the production goes to scale. So I think you can say that where we are is a reasonable success. Now what I'll add is that what that's really though created is a significant change in the relationship of how we work together on large transactions, how we work together on cloud transactions, on much more than just the OEM agreement of the particular product, but really almost the entire Cloud Lifecycle Management product from BMC are now being brought into many, many deals, some of which we would have not been in at all had it not been for our relationship and others we've helped them into. So I think that the relationship is continuing to improve and the opportunity expands well beyond the OEM agreement. One thing I just mention is that, and I certainly understand the many questions we had today on the mainframe, today mainframe represents about 1/3 of BMC. Our growth engines are the BSM initiative, the virtualization and the cloud initiatives, the Software-as-a-Service initiatives that we have been and that the employees of this company have been working on so diligently now since 2003 when we announced it, which is now the other 2/3 of our business, really just put in some phenomenal growth. This 40% year-over-year license growth in ESM is really something exceptional. And I just want to just pause a second and congratulate the ESM organization for that. Double-digit growth across all product lines, across all geographies, a doubling in the number of transactions, $500,000 to $1 million in increase in the ASPs, being ahead in sales capacity, seeing strong growth in productivity and seeing 15 brand new Software-as-a-Service customers with products that we didn't even have 90 days ago are all really good indicators of our core growth engine that is our BSM strategy. And our ESM sales team and R&D teams and support teams deserve a lot of credit. So I'd just like to end with that as I believe, if I'm not mistaken, Kelly, we have no further questions.

Operator

We do not have any further questions at this time.

Robert Beauchamp

Well, thank you all for joining us today. We look forward to visiting with you throughout the quarter and the year.

Operator

That concludes today's conference. Thank you all for joining us.

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Source: BMC Software F1Q11 (Qtr End 06/30/2010) Earnings Call Transcript
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