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Executives

Vivek Ranadive – Chairman and CEO

Murray Rode – COO

Sydney Carey – EVP and CFO

Analysts

Yun Kim – Gleacher & Company

Derek Bingham – Goldman Sachs

Giuseppe Incitti – JP Morgan

Nabil Elsheshai – Pacific Crest Securities

Tim Klasell – Stifel Nicolaus

Bob [ph] – Macquarie Securities

TIBCO Software Inc. (TIBX) F3Q2010 Earnings Call Transcript September 23, 2010 4:30 PM ET

Operator

Good afternoon, ladies and gentlemen. I am Shannel; your conference operator. Welcome to TIBCO’s third quarter 2010 conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. You can also listen to this call via the internet at www.tibco.com.

Today’s call is being recorded and will be available for playback from TIBCO Software website at www.tibco.com. In addition, replay will be available through Intercall for one month following today’s call by dialing 800-642-1687 from the U.S. or 706-645-9291 internationally. The confirmation code is 98141391.

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

Our actual results could differ materially from those projected in such forward-looking statements. Additional information regarding the factors that could cause actual results to differ materially are discussed in the risk factor section of TIBCO’s most recent reports on Forms 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 has not been prepared in accordance with Generally Accepted Accounting Principles, as we believe that such information is useful for understanding our financial condition and results of operations. For a presentation of the most 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 presenters on the call are Vivek Ranadive, TIBCO’s Chairman and CEO; Murray Rode, Chief Operating Officer; and Sydney Carey, Chief Financial Officer.

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

Vivek Ranadive

Hello, Shannel. Thank you all for joining us today. I’ll begin with summary remarks on our third quarter performance, comment generally upon the state of our business, and then turn it over to Murray and Sydney to discuss the details.

Q3 was another strong quarter for TIBCO. I have said before that we have hit the proverbial tipping point in our business, and the evidence and support of this fact continues to mount. We booked new quarterly records for a non-Q4 [ph] in license revenue, total revenue, operating profit, and EPS, while we once again broke new all time records in services revenue and maintenance and support revenue. We continue to see the mainstream appeal of our software platform with double-digit growth rates across each of our major regions in the Americas, Europe and Asia Pacific, Seven different verticals contributing 5% or more of our business and a healthy mix of deals this quarter, big and small.

Highlights for Q3 include total revenue grew by 23% over the third quarter of 2009 to $184.5 million, which represents the fourth quarter in a row of accelerating growth. License revenue grew by a healthy 23% to $70.6 million. Non-GAAP operating margins came in at 24.4% for an expansion of 280 basis points over last year, and non-GAAP EPS of $0.17, grew by $0.04 over the third quarter of last year.

Year-to-date and through three quarters, total revenue is up over 20%, license revenue is up over 22%, operating income is up over 40% and EPS is up over 36% versus the same period a year ago. In addition, we recently closed two small acquisitions in Proginet, which was previously announced; and OpenSpirit announced this afternoon. These deals fit into our acquisition strategy of buying good technologies in core or adjacent markets, and when possible deepening our presence in key verticals such as healthcare, telco, or energy.

For much of the last year, I have been talking about the Two-Second Advantage that TIBCO brings to its customers, and the related shift in the marketplace towards event-driven platforms and in-memory technology. The Two-Second Advantage is real, whether it is two seconds, two minutes or two hours it is far more worthwhile to have just a little bit of the right information in the right hands and in the right context ahead of time than all of the information in the world after the fact. After all what is the point of knowing that you have lost a customer after the customer has already gone.

What is the point of knowing that you have a power outage after the power fails. And if you are a retailer, how much money are you leaving on the table if you don’t know your customers and what they are shopping for at this exact moment in time. The indicators in support of this shift to event-driven systems continue to add up and TIBCO continues to be in pole position to go after this exciting opportunity.

We have pioneered the very concepts of real-time event-driven and in-memory architectures. With our years of focused cutting edge development we have done the hard part in building a stable of products and solutions for the 21st century. We have proven our mettle in the most demanding environments on earth, we have earned the trust of global leaders in business and government with building an ecosystem of partners who are rallying around this cause, and we are executing consistently and responsibly to capture the opportunity both for today and tomorrow.

With that I will turn it over to Murray.

Murray Rode

Thanks, Vivek. I will focus my remarks on Q3 operational metrics and some key activities in the quarter before turning it over to Sydney. In terms of deal activity, we saw a broad mix of demand this quarter. For non-Q4, we had a record number of license deals with 112 over $100,000 as compared to 85 such deals a year ago. Also this quarter we had 13 deals over 1 million in licenses versus 17 a year ago, with two of those 13 representing deals over 5 million. Our average deal size for transactions over $100,000 in license was $577,000, and our top ten deals comprised 21% of our total revenue, same as last year and consistent with past quarters.

As the numbers show, we had a very diverse mix of deals this quarter both big and small and fundamentally just more volume. The mix and variety of deals demonstrates that our value proposition is strong and the Two-Second Advantage is impactful to our customers across a range of industries and deal sizes.

In terms of geographic mix, total revenue was as follows, Americas came in at north of 100 million this quarter, an all time record and representing 56% of the mix; Europe, Middle East, Africa came in at 34% of the mix, and Asia-Pacific and Japan came in at 10%. These numbers show Asia-Pacific up 59%, Americas up 26%, and Europe up 11% over the same period a year ago.

From a vertical market perspective, total revenue broke down as follows. Financial services 34%, telecommunications 9%, manufacturing 8%, energy 7%, government 6%, transportation and logistics 6%, and life sciences 5%. Also, while not yet a 5% contributor we continue to see some very interesting opportunity in the retail industry, where we believe the value of what we sell translates directly to the bottom line, especially in areas such as customer loyalty solutions.

From a product perspective, the breakdown of license revenue among our major product families was SOA 59%, business optimization 31% and BPM 10%. Our business optimization portfolio grew 70% over last year, driven by both business events and Spotfire. BPM was up 33% over last year, driven in large part by a strong out of the starting gate [ph] success with ActiveMatrix BPM. Our SOA family was up 7% over the same quarter a year ago, and continues to have a very strong year, up 22% year-to-date. Overall, we see building pipelines across the board for all three product families.

I would also like to mention that our cloud offerings continue to grow and represent new opportunity in our future. We added a Spotfire cloud offering mid quarter, as part of our broader Silver brand of cloud-based solutions. The cloud is still a nascent opportunity for us, but is an important part of our overall vision. Our platform is now characterized by 4 key functional components that we describe as connect, automate, optimize and scale with the cloud and grid falling into the last category.

On the marketing front, we followed up on our successful TUCON customer conference of Q2 with a series of regional events. These are called NOW [ph] events, and are targeted one day programs occurring in 40 cities around the globe. This outreach program will continue through the end of October, and when complete will expect will have touched over 3000 customers, partners and prospects. We believe we have a powerful and timely message, and we are doing everything we can to tell our story across the globe.

With that, I will turn it over to Sydney.

Sydney Carey

Thank you, Murray. I will provide details on our financial performance in Q3, and then provide comments on our financial outlook for Q4. I’ll review our financials on both a GAAP and non-GAAP. A full reconciliation was included with our press release along with an explanation of our non-GAAP measures.

Once again we delivered healthy growth and leverage this quarter, and key performance data on our third quarter results are as follows.

Total revenue was $184.5 million, up 23% year-over-year and approximately the same on a constant currency basis. License revenue was $70.6 million, up 23% year-over-year or closer to 24% on a constant currency basis.

Services revenue was $113.9 million, up 22% from last year and about the same on a constant currency basis. Non-GAAP gross margin for Q3 was 75.4%; non-GAAP operating income was $45 million, up $12.5 million or 39% from the same period a year ago. This resulted in an operating margin of 24.4% versus 21.6% a year ago. Q3 cash flow from operations totaled $32 million. Non-GAAP EPS was $0.17 versus $0.13 a year ago.

Now turning to our balance sheet, we ended the quarter with approximately $289 million in cash and short-term investments. Deferred revenue, including both long and short-term components totaled $190 million, up $33 million from Q3 of last year. Cash collections for the quarter were strong, with DSOs at 61 days compared to 60 days in Q3 of last year. Also during the quarter, we repurchased approximately 2.7 million shares at an average price of $12.45.

As we look forward to Q4, our pipeline has strengthened across all product segments and the demand for our professional services has never been better. However, we continue to acknowledge some uncertainty in the macroeconomic environment and have factored that into our guidance.

For Q4, our outlook is as follows. We expect total revenue to be in the range of $225 to $230 million. We expect license revenue to range between $105 and $110 million.

The non-GAAP operating margin is expected to be between 30% and 31%. Non-GAAP EPS for the quarter we estimate at $0.27 to $0.28 with an assumed tax rate of 31%. Regarding currency, we expect license revenue to have a currency headwind of approximately 5% and total revenue to have a currency headwind of approximately 3%.

We expect the net impact to earnings to be approximately 5%. GAAP EPS should range from $0.19 to $0.20 with an assumed tax rate of 33%. We expect cash flow from operations to range from $20 to $30 million.

For the full year 2010, this guidance implies 19% to 20% growth in total revenue, 18% to 20% growth in license revenue, and approximately 30% growth in non-GAAP EPS for the year.

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

Question-and-Answer Session

Operator

(Operator instructions) Your first question is from the line of Yun Kim with Gleacher & Company.

Yun Kim – Gleacher & Company

Thank you. So, congratulations on a good quarter. Question is obviously you guys are seen strengthening your services business, do you feel that you can ramp up your consulting organization faster than before, and also are you guys comfortable that you can ramp up your consulting headcount without impacting margins?

Vivek Ranadive

Yes, that is a good question Yun. One of the indicators we believe of the tipping point is the explosive demand that we are seeing for services. So we actually increased our offshore services personnel threefold, almost a threefold increase in that business. We are also seeing a rapid increase in the on-site services. We are opening a second center in offshore. We have one in Pune. We’re opening one in Hyderabad, so that we can actually recruit faster, and we’re also very aggressively recruiting over here and in Europe. So we believe that we can ramp up and we have very, very strong demand right now. Also we believe that we can do that without actually impacting our margins.

Yun Kim – Gleacher & Company

Are you also getting more interest from large service, system integrators about partnering with you guys on some of these engagements?

Vivek Ranadive

Yes, in fact we have – that again is yet another dynamic that we are seeing is that we recently carried out a set of events with some of these partners, and there was a tenfold increase in the number of people that they had at those events. So we are seeing growing, growing interest from them and they are also making big commitments to that. We are at Infosys, TCS, Wipro, HCL, on the offshore side, as well as people like Accenture and others over here.

Yun Kim – Gleacher & Company

Great, and in terms of geographic breakout, do you continue to see North America showing faster growth versus Europe?

Vivek Ranadive

Well, we are seeing strength across the board, and we had particularly strong showing in North America, but Europe is also continuing to execute very well. We have had just a long string of outstanding performance in Europe. We have very, very strong leadership both in Europe and North America. So do you want to add anything to that Murray?

Murray Rode

Only that Asia-Pacific continues to be – it represents a lot of upside for us.

Vivek Ranadive

And they have done very well as well.

Murray Rode

And they have done well.

Yun Kim – Gleacher & Company

Okay. And then Sydney, can you just remind us why the deferred revenue has typically dipped sequentially from Q2 to Q3?

Sydney Carey

Yes, our deferred revenue typically dipped Q2 to Q3 due to our renewal pattern of our maintenance contracts. So we are down about 4 million, 5 million and that wasn’t unexpected.

Yun Kim – Gleacher & Company

Okay, great. Thank you so much.

Vivek Ranadive

Thank you.

Operator

Your next question is from the line of Derek Bingham with Goldman Sachs.

Derek Bingham – Goldman Sachs

Hi guys, congratulations on the quarter. One question Murray, just following up on your comment about Asia, you mentioned it represents a lot of upside. Wonder if you could just add some color? Is that kind of rolling out new geographies or headcount or partners or anything you could add there?

Murray Rode

Well, I think it pretty fundamentally relates to the fact that Asia, the broader Asian market is growing fast generally, and we're still pretty lightly penetrated. So I think it boils down to us just having more scale there or more coverage and to access that opportunity.

Vivek Ranadive

I think some of it is also that our product has become – the products that we have now they lend themselves to that market, and they fit well with – we're able to go to a lower end market there. We're able to get up and running very quickly. The products are much more packaged, better for partners, and so it's all of those things, Derek.

Derek Bingham – Goldman Sachs

Are there any countries that you'd call out that you're particularly excited about that are really jumping right now?

Murray Rode

It's really across the board. I mean even markets like Australia and Japan for us represent opportunity. So I think it's across the board.

Derek Bingham – Goldman Sachs

That includes China?

Vivek Ranadive

China, yes.

Derek Bingham – Goldman Sachs

Okay. And then on verticals, if I heard it correctly, financial is 34%. It's the biggest ever I think that I can see if I have that number right. Anything kind of unique that's happening there, particular product set that's really taking off in that vertical?

Vivek Ranadive

Yes, the financial institutions, our historical strength was on the capital market side, and what we're starting to see is that the banks are in a race to move to becoming real time. They're getting away from the 20th century CRM to the 21st century inbound marketing, loyalty programs. All of these things are real time where the offers are made on the spot. So huge, huge opportunities for us across the board in that and so we're having a lot of success with these 21st century types of applications.

Derek Bingham – Goldman Sachs

Fantastic, just one more if I could. How are you thinking about the balance right now between the rapid growth that you're seeing and what you're doing and what you want to be doing on the margin side in terms of is there any kind of planned spend ramp into fourth-quarter, just if you could talk about how you're thinking about that balance right now?

Vivek Ranadive

Yes, I think we said that we'll continue as our revenues expand, we'll continue to see margin expansion. But we are also – we haven't compromised on our R&D investment. We haven't compromised on our sales capacity, which we're continuing to increase. As one of the earlier questions, we're continuing to staff up on services. We're investing in training. We're also investing in things like enablement, which we historically have not done a good job with. So the balance there is, we'll still end up with – we're saying with the three handles in terms of the margin, 30%. So that's kind of – Sydney, do you want to add to that?

Sydney Carey

Yes, again, as we approach a 1 billion in sales, we should see our margins expand; our operating margins expand to close to 30%. We're pleased with the margin expansion that we've seen to date this year, and with that being able to make the investments, as Vivek had said, with the focus on enablement, marketing programs with the NOW road show. So we feel good about where our spend is.

Derek Bingham – Goldman Sachs

Thanks, everybody.

Vivek Ranadive

Thanks, Derek.

Operator

(Operator instructions) Your next question is from the line of John DiFucci with JP Morgan.

Giuseppe Incitti – JP Morgan

Hi guys, this is Giuseppe in for John. Most of our questions have already been answered, but I was wondering if you could just maybe discuss the larger deals in the quarter, and which verticals those were in, and if there was anything particularly larger that stood out and maybe as far as the outlook any more color by vertical? Thanks.

Murray Rode

So the big deal mix I think as we pointed out was, our top ten deals were 21% of revenue in the quarter, which is pretty comparable to past quarters. The mix was also good actually if you are diverse in terms of regions and verticals. So you saw some significant deals in finance, of course, but also transportation & logistics, CPG space, telco, manufacturing, and even a vertical we call business services, so pretty good diversity across the board.

Giuseppe Incitti – JP Morgan

Was there any one particular one, I know last quarter you discussed deals that over 8 million at the start of the quarter?

Vivek Ranadive

Yeah, I think as we said in the script we had a couple over 5 and one of those was over 8, just over 8.

Giuseppe Incitti – JP Morgan

Great. Thanks, guys.

Vivek Ranadive

Thank you.

Operator

Your next question is from the line of Nabil Elsheshai with Pacific Crest Securities.

Nabil Elsheshai – Pacific Crest Securities

Hi guys, thank you for taking my question. First, I think on the last call you had given some numbers around the partner and directing influence business, is that a number you can give now. Could you talk a little bit where you think that number can get to over the next two to three years or so?

Murray Rode

Yes, I think last quarter Nabil, we talked about the partner revenue both directly from partners and sourced from partners being about 20% last quarter and it was up over that number. So we saw roughly a 4% or 5% increase this quarter. We feel actually that this is getting to a pretty good mix. I think there is opportunity for that number to go higher and will continue to press on, because we do think partners offer real opportunity to scale the business.

Nabil Elsheshai – Pacific Crest Securities

Okay. And then did you give your sales headcount?

Sydney Carey

No we didn't. We ended the quarter with 184 quota-carrying head.

Nabil Elsheshai – Pacific Crest Securities

I think you had targeted 185 by the end of the year, is that correct?

Sydney Carey

We had and we're continuing to make investment in quota-carrying heads in Q4, and just also we commented last quarter that in addition to the quota-carrying we're focusing in on enablement and the channel sales organization as well and channel enablement.

Nabil Elsheshai – Pacific Crest Securities

Okay. Then the growth in optimization was pretty amazing. Could you talk a little bit about was that weighted more towards Spotfire or CEP and what was the – a little more detail behind the drivers there?

Vivek Ranadive

We're seeing strong growth from both areas Nabil, and Spotfire is obviously very strong, but we saw very, very strong growth in CEP as well. The two of them are actually are starting to play well together and there isn't a customer on the planet, I don't care what industry you're in, but everybody is trying to create the next generation of customer loyalty programs, and you just can't do that with transactional database 20th century technology. So people want to be able look at events and then make offers on the spot based on those events. So this is a huge opportunity for both Spotfire and CEP.

Nabil Elsheshai – Pacific Crest Securities

There's a smaller company that's getting a lot of buzz it has an in-memory BI. Has that generated interest for you guys? Has that had a pull-through on Spotfire since you've a somewhat similar architecture?

Vivek Ranadive

No, we believe that architecture for Spotfire is far superior. That company is actually quite a bit older than TIBCO, and yet is a much smaller company. They're probably a fourth of our size and they're five, six years older than TIBCO. But as you know they have a multiple that I think that's double our multiple, but Spotfire – that company they do a lot of their business through channels and they don't really have an enterprise product, and TIBCO's Spotfire strength has been in the enterprise.

Nabil Elsheshai – Pacific Crest Securities

Okay, great. Thank you guys for taking my question.

Vivek Ranadive

Thanks.

Operator

Your next question is from the line of Tim Klasell with Stifel Nicolaus.

Tim Klasell – Stifel Nicolaus

Yes, good afternoon everybody and congrats on a real nice quarter. So first on the product side, the other sector that did really well was the ActiveMatrix BPM product, was almost all of that product line now ActiveMatrix BPM or are you still selling some of the older products there?

Murray Rode

We're still selling them. The new sales and the growth is ActiveMatrix BPM driven, but iProcess is still on the pricelist.

Tim Klasell – Stifel Nicolaus

Okay. And then on the competitive side there, who do you bump into the most there? If you look at particularly the ActiveMatrix BPM, who do you compete with there?

Vivek Ranadive

Well, it continues to be IBM. So in general when we look at our competitive profile of who we see, I think 80% of the time it's IBM, 15% of the time it's Oracle, and then 5% of the time it's everyone else. Now it might deviate if it's for any particular area. So we might see up Pega if it’s a pure BPM thing or we might see some ESB from someone else, but in general 80% IBM, 15% Oracle, 5% everyone else.

Tim Klasell – Stifel Nicolaus

Very good. And then on the services line, what's happening with your renewal rate on the maintenance stream? As you're introducing these new products, has that ticked up at all or how should we be thinking about that going forward?

Sydney Carey

No, again we had another all-time record quarter for our maintenance revenue, and our renewals have stayed very strong.

Tim Klasell – Stifel Nicolaus

Okay. Okay, very good. And then one final thing on your guidance, your sequential guide is a little bit lower than what we've seen in prior years, axing out obviously '08. Are you putting a little bit more conservatism on your numbers or some of these deals close a little bit earlier than you thought, walk us through a little bit of your thinking around in the sequential guide?

Vivek Ranadive

Yes, we had a strong Q3. Q4 is still a big number, and we just don't want to get ahead of ourselves. We have now had I think a straight nine consecutive quarters of outperformance, and so while we are seeing the strongest pipeline we've ever seen entering a Q4, we just want to be conservative. There’s talk of – people are still talking about questions about the economy. So we just don't want to get ahead of ourselves. But Sydney, do you want to add to that?

Sydney Carey

Yes, I just can say, we saw good close rates in Q3 on our pipeline. As we go into Q4, we think we're being conservative on the close rates in our guidance? Again Q4 is still big number and on the year we're showing 18% to 20% growth on license.

Tim Klasell – Stifel Nicolaus

Okay, fair enough. (inaudible) Thank you.

Operator

Your next question is from the line of Brad Zelnick with Macquarie Capital.

Bob – Macquarie Securities

Hi guys, it's Bob [ph] in here for Brad. Can you guys provide some insight into the mix between services and maintenance?

Sydney Carey

Yes, our mix between services and maintenance has remained fairly constant at about two-third maintenance, one-third services.

Bob – Macquarie Securities

Got it, and going back to the maintenance question, did you guys change anything on the prices? I know you said renewals rates have been pretty steady.

Sydney Carey

No we haven't had any maintenance prices changing.

Bob – Macquarie Securities

Okay, and then finally just on the verticals. I know government was fairly strong last Q4, what are your expectations going forward? Do you have anything that changes from last year?

Vivek Ranadive

We are very excited about government, and we are seeing a lot of big opportunities. We were late entering this market. It's one of our fastest growing markets, and we continue to be optimistic about both Q4 and beyond. The other thing is we are starting to see huge opportunities with our services in government as well. So we need to just keep staffing up to execute.

Bob – Macquarie Securities

Great. Thanks a lot. Good quarter.

Vivek Ranadive

Thanks Bob.

Operator

(Operator instructions) There are no further questions at this time.

Vivek Ranadive

Okay, well, we’ll then conclude this call. Thank you all for joining and have a good day.

Operator

Thank you for joining us. We will now conclude TIBCO's Q3 2010 earning call.

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