BMC Software F4Q07 (Qtr End 3/31/07) Earnings Call Transcript

May.29.07 | About: BMC Software, (BMC)
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BMC Software, Inc. (NASDAQ:BMC)

F4Q07 Earnings Call

May 29, 2007 5:00 pm ET

Executives

Derrick Vializ - Investor Relations

Robert E. Beauchamp - President, Chief Executive Officer, Director

Stephen B. Solcher - Chief Financial Officer, Senior Vice President - Finance, Treasurer

Analysts

Tim Klasell - Thomas Weisel

Kevin Buttigieg - AG Edwards

Derek Bingham - Goldman Sachs

Walter Pritchard - Cowen & Company

Israel Hernandez - Lehman Brothers

Philip Winslow - Credit Suisse

Kirk Martene - Banc of America

Richard Sherman - MKM Partners

Brandon McKay - CIBC World Markets

Presentation

Operator

Good day, ladies and gentlemen and welcome to today’s BMC Software fourth quarter earnings results conference call. I would like to turn the conference 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. Today’s call is being webcast and is also being recorded. An archive of the recording will be available this evening on our website. In addition to today’s earnings press release, we have posted a presentation which we will refer to at various times during the call. Both of these documents are available on our investor relations website at bmc.com/investors.

During our call, Bob Beauchamp, our CEO, will provide an overview of our fourth quarter performance, an update on our Business Service Management strategy, and an update on our mainframe business. After that, Stephen Solcher, our CFO, will provide additional financial and operational details. Bob will then provide guidance for fiscal 2008 before we open the call to questions.

Before we continue, I would like to remind you that statements in this discussion, including statements made during the question-and-answer session regarding BMC’s future financial and operating results, the development of and demand for BMC's product, BMC's operating strategies, acquisitions, and other statements that are not statements of historical fact are considered forward-looking statements. These statements are subject to numerous important factors, risks and uncertainties which could cause actual results to differ from the results implied by these or any other forward-looking statements.

Cautionary statements relative to these forward-looking statements and BMC's operating results are described in today’s earnings press release and the financial presentation, and in our annual report on Form 10-K. All of these documents are available on our website. These forward-looking statements are made as of today based on certain expectations and we undertake no duty to update these forward-looking statements.

I would also like to point out that the company’s use of non-GAAP financial measures is explained in today’s earnings press release and a full reconciliation between each non-GAAP measure and the corresponding GAAP measure is provided in the tables accompanying the press release and in our GAAP to non-GAAP reconciliations found on our website at bmc.com/investors.

At this time I will turn the call over to Bob.

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Robert E. Beauchamp

Thanks, Derrick. Good afternoon and thank you all for joining us today. I am very encouraged by our fiscal fourth quarter results. We had another quarter of outstanding performance, with growth in bookings, growth in revenues, and growth in non-GAAP operating margin and earnings. It also marked a solid ending to a year of substantial progress for BMC.

During fiscal 2007, we generated unprecedented growth in our Business Service Management offerings, strengthened our mainframe service management business, and significantly increased operating efficiency. The combination of these factors drove profitability and shareholder value considerably higher. Steve is going to provide more detail, but I would like to highlight several key metrics for the quarter and for the year.

First, I am very encouraged by the growth we generated in bookings. Total bookings rose by 22% for the fourth quarter and by 13% for the year. The increase was driven by strong growth in both license and maintenance bookings. In addition, our core BSM license bookings were up 29% for the quarter and 25% for the year. Clearly we are gaining strong momentum and extending our leadership and share in the robust BSM market.

Revenues in the quarter increased 3%, consistent with our guidance. For the year, revenues rose 6%, with an 8% increase in license revenues. It is worth noting here that we achieved this increase in revenues even with a significantly higher ratable rate in fiscal 2007 compared to fiscal 2006.

Looking at our revenue performance across geographies, I am pleased to announce that we had strength in all our major geographies with revenues rising during the quarter and the year in North America, Europe, and Asia-Pacific.

In terms of revenues by business segment, BSM license revenues increased 16% for the quarter and the year. MSM total revenues were down slightly in the fourth quarter but increased for the full year.

Our non-GAAP operating margin was 21% for the quarter and 22% for the year, up from 17% and 16% in the 2006 fourth quarter and full year period. We clearly delivered on and exceeded our operating margin target during fiscal 2007.

We also delivered on our non-GAAP earnings per share guidance. This was the eighth consecutive quarter that the company has met or exceeded our revenue and non-GAAP EPS guidance. Non-GAAP diluted EPS for the period was $0.40, up 43% compared to the year-ago period. Non-GAAP diluted EPS for the year was $1.48, an increase of 44%.

Across all the key financial metrics, I am pleased with our results for the quarter and the year. We continue to improve both the level, consistency, and quality of our performance during fiscal 2007 and that is largely due to our focus on three key areas.

The first of these is enhancing our leadership in business service management. I have spoken to you in the past about the powerful trends driving the market for BSM. BSM offers customers a proven way to automate IT processes and strategically align IT with business priorities and this in turn helps customers to improve productivity, quality, and efficiency.

Industry analyst Forrester Research recently issued a report on BMC in which they highlighted our leadership in the BSM market. Quoting from the report, Forrester says that: “Over the years, BMC Software has evolved BSM from thought leadership to a successful business proposition through key acquisitions such as Remedy and IT Masters, and carefully orchestrated internal innovations such as the CMDB and a fresh marketing message.”

What’s more, Forrester also describes how BMC is leading the BSM strategy and solutions market, again quoting from the report: “BMC has developed BSM into a locomotive that is now in a position to pull the whole IT management software train of associated monitoring and IT management technologies.”

In the final analysis, of course, it is not what we say or what industry analysts say that matters. What matters is what customers and partners say and do and we are happy with the response we are seeing.

Last quarter, Accenture, the global consulting firm, purchased our entire suite of BSM solutions for us in its global outsourcing operations. So too did BBVA, one of Europe’s largest financial institutions. BBVA has also recently selected our BSM solutions as their standard.

Market leading customers like these are fueling demand for our BSM offerings. As I mentioned, core BSM license bookings were up 29% in the quarter. That’s three quarters in a row of greater than 25% growth in licensed bookings.

If BSM growth is our first key priority, then improving our mainframe business is a close second. We are very encouraged by the performance of our MSM unit during 2007. MSM total bookings rose for the quarter and for the full fiscal year. On an annualized basis, MSM total bookings were up slightly for the year, ahead of our expectations.

We are pleased that our MSM business outperformed our bookings guidance for the year. I would add, however, that our long-term expectations for the business have not change and remind you that it is a lumpy business in which bookings can vary from quarter to quarter.

We like the progress we are making with MSM and believe it reflects our dedicated focus to the business. We continue to win new customer accounts from the competition and increase our footprint with existing customers, which is important given the maturity of the mainframe market.

During the quarter, we signed important contracts with State Farm, United Health Care, the Federal Reserve system and retailing leader Target. A key part of our MSM strategy is to integrate the business into our BSM solution set. Our goal is to deliver BSM across both mainframe and distributed systems environments in a comprehensive, integrated approach that addresses high priority, customer IT management issues. This is how we intend to drive the MSM business forward.

Our third key area of priority is operating efficiency. Our progress here has been significant. Our non-GAAP operating expenses declined on a year-over-year basis for fiscal 2007 versus fiscal 2006. We are a leaner, more agile and more productive company today than ever before, one that’s better able to anticipate, respond to and address industry opportunities and challenges.

We expect to show continued improvement in operating efficiency in fiscal 2008. We still have work to do to standardize, simplify, automate and streamline our business operations and processes. We will stay focused on this in the year ahead.

Let me summarize: fiscal 2007 was another year of significant progress and improvement. We continue to enhance our leadership in the market we created. We further strengthened our solutions portfolio. We improved our business operations and we increased our efficiency and our profitability. We also continue to have a very strong balance sheet and focus on using our financial strength and cash flow to build value for our shareholders.

These results demonstrate that we’ve truly turned a corner, as we accelerate growth in our BSM business and strengthen our MSM business. For fiscal 2008, we remain focused on enhancing our strategic leadership, driving innovation, increasing efficiency and profitability and creating shareholder value.

I just returned from Europe attending BMC User World, and I walked away excited about what I saw and heard. Attendance far exceeded our original expectations. There were many customers and partners at the event and I had the opportunity to visit with many of them. The overwhelmingly positive response from customers, partners and industry analysts at this event is further evidence of the momentum BMC is building around our BSM portfolio in Europe and around the world. It was a great event that gets us off to a good start this year.

We are proud of our accomplishments to date and we are equally excited about the many opportunities that lie ahead. We addressed one such opportunity earlier today when we announced that we have reached a definitive agreement to acquire ProactiveNet. This acquisition will further lengthen our lead in the BSM marketplace, combining ProactiveNet’s early warning system for IT with our leading performance and event management solutions will help our customers ensure superior end-user experience in a BSM context.

Let me now turn the call over to Steve for a more detailed operational and financial review.

Stephen B. Solcher

Thanks, Bob. As you just heard, we’ve had another terrific quarter and year in terms of our business and financial performance. We are seeing very positive momentum in customers’ adoption of our BSM offerings. In addition, running our business in two segments is sharpening our focus and increasing accountability. As CFO, I am especially pleased with our continued success in the following areas: we’re delivering on our goals as revenues, earnings and cash flow from operations for the fourth quarter and year met our guidance. We also had strong fourth quarter growth in license bookings and total bookings, which positions us well for significant growth in cash flow from operations in fiscal 2008.

We’re doing a good job of controlling expenses and we will continue to control expenses in fiscal 2008 by further improving our key business processes. This will have the effect of making BMC faster, more agile and efficient, leading to greater competitive positioning, enhanced profitability, and value creation for shareholders.

With that, let me start off by reviewing our financial results for the quarter and fiscal year. In the fourth quarter, non-GAAP operating income increased by 28% from $71 million to $90 million. Non-GAAP operating margin increased to 21% from 17% in the year-ago quarter. For the full year, non-GAAP operating income increased by 40% to $346 million. Non-GAAP operating margin for fiscal 2007 was 22%, up 6 percentage points from fiscal 2006. We expect further improvement in our non-GAAP operating margin in fiscal 2008.

Non-GAAP net earnings for the fourth quarter were $84 million, an increase of 39% over fiscal 2006. Non-GAAP diluted EPS for the period was $0.40, up 43% compared to the year-ago period. This reflects a non-GAAP effective tax rate for the quarter of 26% compared to our guidance of 30%.

For fiscal year 2007, non-GAAP net earnings were $312 million compared to $226 million in fiscal 2006. This represents an increase of 38%. Non-GAAP diluted EPS for the year was $1.48, an increase of 44%. This reflects a non-GAAP effective tax rate for the year of 29%.

These non-GAAP results reflect diluted shares outstanding in the fourth quarter and full year of 208 million and 210 million respectively, versus 216 million and 219 million in the respected year-ago periods. During the year, we repurchased 21 million shares, which partially contributed to the reduction in the number of diluted shares outstanding.

GAAP operating income in the fourth quarter was $55 million, compared to $59 million in the year-ago period. GAAP net income and fully diluted EPS were $63 million and $0.30 compared to $52 million and $0.24 in the fourth quarter of fiscal 2006 respectively.

Turning now to bookings, as Bob noted, we saw continued strength in the quarter in relation to total bookings, license bookings, and core BSM license bookings. Total bookings of $565 million were up 22% compared to the year-ago period. This marks the third consecutive quarter of greater than 10% growth in total bookings. Particular strength in the fourth quarter came from license bookings, which rose 25% in the quarter and 16% for the full year.

Total bookings for fiscal 2007 were $1.68 billion, up $197 million or 13% compared to fiscal 2006. The weighted average contract length for total bookings for fiscal 2007 was 2.4 years, up from 2.3 years in fiscal 2006.

With the increase in bookings and after normalizing for contract length, annualized bookings for fiscal 2007 were $704 million, an 8% increase over the prior period. This is now the fifth consecutive quarter in which we have achieved annualized bookings growth on a trailing 12 month basis. 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, license bookings are the best measure of performance. Total ESM license bookings were $114 million in the fourth quarter, up 25% over the year-ago period. For fiscal 2007, ESM license bookings rose 19% over fiscal 2006.

Within our ESM business unit, license bookings of our core BSM product group are a key indicator of the success of our business service management strategy. Core BSM license bookings were up 29% in the fourth quarter. This marks the third quarter in a row in which core BSM license bookings growth exceeded 25%.

For fiscal 2007, core BSM license bookings rose 25%. See slide 8 of our presentation for historical license bookings growth.

We believe the MSM business unit is best evaluated on the basis of total and annualized bookings over the trailing 12 months. In the fourth quarter, total MSM bookings on a trailing 12 month basis increased 11% to $717 million, with an average contract of 3.2 years. In the year-ago period, total MSM bookings were $643 million, with an average contract length of 2.9 years.

Total annualized MSM bookings for the trailing 12 months were up 2% to $224 million. Our original goal was for fiscal 2007 total annualized MSM bookings to decline by no more than 5%. As Bob noted earlier, we are pleased that our MSM business outperformed our bookings guidance for the year. This is still a lumpy business in which bookings can vary quarter to quarter, thus our long-term expectations for the business have not changed.

Turning to revenues, total revenues for the quarter were $419 million, a 3% increase compared to the fourth quarter of fiscal 2006, in line with our guidance. Total revenues for the year were $1.58 billion, up 6%. License revenues in the fourth quarter were $166 million, an increase of 3% compared to the year-ago. I want to note that during the quarter, the percentage of license bookings that were deferred was 56%, which represents an historical high and was considerably higher than the 43% in the year-ago period. Obviously the higher ratable rate affects the amount of revenue we recognize in the current period at the same time it increases deferred license revenue and adds visibility into our revenue stream going forward.

In fact, if we had the same ratable percentage in the fourth quarter as we did in the year-ago, we would have recognized $28 million more of license revenue in the current period. If we look at all of fiscal 2007, our license bookings ratable rate was 49%, which is up 7 percentage points over the prior year. We expect the deferral rate to increase slightly in fiscal 2008.

We had an exceptionally strong license revenue performance in Europe and Asia-Pacific during the quarter. For fiscal 2007, license revenues rose 8% to $570 million, with growth in all major geographies. Maintenance revenues in the fourth quarter of 2007 were $230 million, an increase of 5% compared to the year-ago. For the full year, maintenance revenues were also up 5%, totaling $919 million.

Professional services revenues were $24 million in the fourth quarter, compared to $28 million in the year-ago period. For fiscal 2007, professional services revenues were flat at $92 million.

Moving next to operating expenses, we had another good quarter of controlling our expenses. This was the eighth consecutive quarter in which non-GAAP operating expenses have decreased or remained relatively flat on a year-over-year basis. Non-GAAP operating expenses were $329 million, about $8 million lower than in the year-ago period. Excluding the expenses from Identify Software, which we acquired last May, operating expenses were down 6%.

As Bob mentioned, there is additional room for improvement regarding our cost structure. Our focus continues to be on improving key business processes throughout the company. We have a number of initiatives underway in finance, HR, procurement, business operations, support and sales operations to simplify and standardize processes. We believe these initiatives will help make us a more efficient and profitable company.

Now turning to the balance sheet, total deferred license revenue at the end of the fourth quarter was $504 million, a record level and an increase of $51 million on a sequential basis. During the quarter, we deferred $122 million of license revenues, or 56% of license bookings and recognized $71 million of deferred license revenues from the balance sheet. Total deferred revenue increased by $145 million sequentially to $1.73 billion, a record high level.

Software development costs on the balance sheet were $104 million, $3 million less than the third quarter of 2007 as we capitalize $13 million and amortize $16 million. Cash and marketable securities at March 31st were also at a record level, totaling $1.5 billion, an increase of $92 million sequentially.

For the quarter, cash flow from operations was $224 million and for fiscal 2007, it was $420 million, and within our guidance range. Adjusted cash flow from operations for the fourth quarter of fiscal 2007 was $221 million, and for fiscal 2007 was $489 million.

See slide 10 in our presentation for a reconciliation of cash flow from operations to adjusted cash flow from operations.

During the fourth quarter, we repurchased 4.7 million shares for an aggregate value of $150 million. As of March 31st, we have $254 million remaining under our existing share repurchase program.

Let me summarize by saying that our performance in the fourth quarter and throughout fiscal 2007 underscores the progress we’ve made in driving growth, profitability and cash flow. We look forward to continuing this progress in fiscal 2008.

With that, I will turn the call back over to Bob for his concluding remarks and fiscal 2008 guidance.

Robert E. Beauchamp

Thank you, Steve. As I have mentioned, I am pleased with our performance in fiscal 2007. It is further proof that our hard work over the past few years is paying off, as we have transformed BMC from a provider of products to the technology leader and innovator in business service management.

Going forward in fiscal 2008, we see solid opportunities ahead in our three key focus areas: first, generating top line growth in business service management; second, managing our mainframe service management business to maintain its profitability and cash flow; and third, increasing efficiency and productivity across all areas of our company.

Let me move to guidance for fiscal 2008. For fiscal 2008, we expect non-GAAP EPS in the range of $1.64 to $1.74 per share. Non-GAAP EPS excludes an estimated $0.33 of special items related to expenses for amortization of acquired technology and intangibles, stock-based compensation, and restructuring. The assumptions underlying this full year fiscal 2008 estimate includes total bookings growth in the low single digits, revenue growth in the low to mid-single digits, a slightly higher license bookings ratable rate than last year, non-GAAP operating expenses that are essentially flat, and a non-GAAP effective tax rate of 30%.

We expect our cash flow from operations to improve to between $475 million and $525 million, and adjusted cash flow from operations to improve to between $500 million to $550 million.

Fiscal 2008 adjusted cash flow from operations excludes an estimated $25 million in cash restructuring payments.

So as you can see, we are targeting another year of solid performance in terms of all key financial metrics. Turning to our guidance for the first fiscal quarter, we anticipate first quarter revenues to range between $365 million and $380 million, and non-GAAP EPS to be in the range of $0.30 to $0.35. This reflects a non-GAAP effective tax rate of 30%.

Non-GAAP EPS excludes an estimated $0.09 of special items related to expenses for amortization of acquired technology and intangibles, stock-based compensation and restructuring.

With that, we will now turn the call over to questions. Operator.

Question-and-Answer Session

Operator

(Operator Instructions)

We’ll go first to Tim Klasell with Thomas Weisel Partners.

Tim Klasell - Thomas Weisel

My congratulations on the quarter. First question is on the guidance. Can you give us a flavor, particularly on the operating margins, what your MSM versus the BSM and the DSM divisions are doing? Are you going to give us any sort of color on that going forward?

Robert E. Beauchamp

I’m not sure I know exactly what you are asking me, but let me just take a few points I would think about on it. The ESM business continues to be a strong license growth business. The contracts are primarily current, very little term, very little deferred. Mainframe continues to be, in fact, you saw it in Q4, you saw that business continue to move towards a higher percentage of ratable or deferred contracts. That will continue and so you are seeing ESM become a bigger and bigger part of the income statement.

Tim Klasell - Thomas Weisel

Maybe if you could just give us some color on what the margins are on the mainframe division. Is it higher or lower than the rest of the business?

Stephen B. Solcher

MSM is higher. The margins are higher on the MSM business.

Robert E. Beauchamp

Tim, what I would say is that the ESM business, you should look for that to continue to improve, so the MSM has typically been, even though we externally report only the direct cost associated with that, you are going to see that the ESM side of it is going to continue to contribute a greater percentage of that margin.

Tim Klasell - Thomas Weisel

So the operating margin improvements that you are talking about are mostly going to come on the --

Robert E. Beauchamp

That’s correct. That’s correct. Look for it on the distributed side.

Stephen B. Solcher

Well, distributed and G&A.

Tim Klasell - Thomas Weisel

Okay, very good. And then my quick follow-up, you guys are hitting the really high cash flow era part of the year for you and you are running a little bit almost towards the end of your stock buy-back. Give it another quarter or two. Could we expect an update there of an upping of that?

Robert E. Beauchamp

Our cash is obviously pretty heavy. Our strategy there has not changed. We will look first to acquisitions that we believe fuel BMC's continued growth, like you’ve seen here with the strong numbers we just posted on ESM and that will be our first use. But short of that, we will continue to view shareholder buy-back as an important vehicle to get money back to the shareholders.

Tim Klasell - Thomas Weisel

Very good. Thank you very much, guys.

Operator

From AG Edwards, we’ll move on to Kevin Buttigieg.

Kevin Buttigieg - AG Edwards

Thank you. Looking at the DSM business, it looked like it had really bounced back nicely during the quarter. Could you talk a little bit about what’s been behind that? Is that -- do you believe that business is back on track?

Robert E. Beauchamp

Well, I believe that it certainly has put out some strong numbers. Just to highlight it, in Q4 license bookings were up 17% and total bookings was up 16% for DSM. The BMC performance manager upgrade, the major rewrite, the agentless version of Patrol combined with renewed focus in the field on Patrol and frankly the entire DSM message, all the ships rise and cede on that message, so yes we have seen renewed interest there. We’ve seen renewed excitement. I personally visited with some of our sales leaders that are driving it. They feel passionate that we’ve got the best product out there and they are out there driving the competitive win, so we’ve seen that.

You also saw the announcement today of ProactiveNet. That is a -- the sweet spot of that is in DSM, as it will -- I’ll give you an example. We have a large insurer that has been using products from three of our competitors and our products, but they use the ProactiveNet filtering as the center for all event management for the company, for the root cause in bringing all the events together. We view this will give us a better competitive footprint as well and the opportunity to go in and try to displace our competition as we continue to push for stronger DSM performance.

Kevin Buttigieg - AG Edwards

Okay, that was actually my next question then. Where does ProactiveNet and the agentless Patrol business start and stop in terms of functionalities?

Robert E. Beauchamp

Think about the BSM/Patrol, the old Patrol business as out there monitoring the infrastructure, watching all the events, watching the infrastructure, the servers, the databases, the middleware, the applications, et cetera. It sees problems and it wants to escalate those problems ultimately to a remedy trouble ticket. That’s one of the key functions of BSM is to have a close looped management environment where you see a problem and you can escalate that problem.

The issue is it is not uncommon when a problem -- when it rains, it pours. When you have a problem, you will get alarms from BSM. You might get alarms from a network management tool that maybe BMC doesn’t offer. You might get alarms from one of our service level management products and a series of these alarms together coming into the new ProactiveNet technology we just acquired, this product is intelligent enough to look through all of that and come down to root cause and determine exactly what the issue is. It does not require you to hard code it. The product actually learns and watches and begins to realize patterns and so it helps you filter through all those patterns and get directly to root cause.

So it raises us up higher, gives BMC a universal event filtering and root cause analysis architecture to pull together all of the alarming and event technologies of BMC into one universal place.

Kevin Buttigieg - AG Edwards

Okay, and then just on the financials of ProactiveNet, could you give any parameters as far as deal size or whether or not that ProactiveNet is included in your financial guidance for fiscal year ’08?

Stephen B. Solcher

Kevin, it is included in the guidance and the number, the total market value that we did was around 40, 37 on an add value.

Kevin Buttigieg - AG Edwards

Thank you very much.

Operator

Moving on to Derek Bingham from Goldman Sachs.

Derek Bingham - Goldman Sachs

A quick question first on MSM growth; you had a nice boost from the reorg that you did in terms of spurring growth rates this year or in recent quarters. Once that annualizes out and you look ahead to next year, any color on the expectations of how license bookings grow?

Robert E. Beauchamp

In general, we look at the business as a total bookings business, in general, and we have now for a while on MSM. It continues to move towards a higher ratable percentage, as we do see some increase in term agreements. It gives us the ability to offer more flexible terms of conditions without discounting. We are seeing some uptake on there. It is customer driven uptake there.

We do not see -- I’m trying to think -- ask me the question again.

Derek Bingham - Goldman Sachs

Do you expect any kind of significant growth, is flat the right way to think about it on a normalized basis?

Robert E. Beauchamp

Right. We’ve not changed our long-term guidance. We see that as a zero to single-digit decline business. We think this last year was a great year but we don’t think we deserve full credit for this anymore than we do that next year we don’t expect it to be so good. It’s more of a sign wave than a move towards a sideways access. This year was spectacular. Next year won’t be -- we don’t think it will be, although there are some transactions that we are working on that could have it do that again. We are not planning to have that same kind of performance next year.

Derek Bingham - Goldman Sachs

Perfect, and just one follow-up, if I could. On the ITSM side, I think you’ve had some benefits from an upgrade cycle there with version 7. Just curious in terms of that cycle, where you think we are in that cycle and if --

Robert E. Beauchamp

I think we’re pretty early into it still. We visited with some of the largest customers in the world for our competitions who are contemplating replacements. Because they are large and it’s complicated, these customers are moving relatively slowly. We also have a large number of mid-sized companies that are moving to it. I think we are quite early into the 7 conversion. We’ve seen, by the way, just as an aside, we’ve seen our ASPs move up about 20% in a year in our ESM business as we see more and more multi-product deals coming together and we see the impact of version 7 on the install base.

Derek Bingham - Goldman Sachs

Thanks, congratulations.

Operator

From Cowen & Company, we’ll go to Walter Pritchard.

Walter Pritchard - Cowen & Company

I just wanted some clarification on the ratable going forward. Maybe you could just go through -- I know you mentioned term licenses impacted this quarter. Going forward, what are your expectations there? I know it is going to be up a little bit, but is it that term continues to increase or is it something that customers are demanding that’s making the nature of those main term contracts change?

Stephen B. Solcher

Walter, what I would tell you when you are thinking about term, think about it as it is really customer-oriented. It is not something that we are pushing. What you saw this past year is you’ve seen an increase of term transactions primarily around the more mature business, MSM and DSM. The expectation next year is that that will continue to be a smaller piece of total bookings so the absolute level of deferral is not going to increase at the same percentage that it did in ’07, although we are expecting that to increase.

Walter Pritchard - Cowen & Company

Okay, and then just one question on the finance receivables. You’ve periodically given out the nine-month or the three-month amount of finance receivables sold. Can you give us that for the year or for the quarter?

Stephen B. Solcher

For the quarter it was 51 versus 48 a year ago, 172 for the year versus 163, so slightly up. That matches the increase in bookings, so what you should expect is that the amount of financings are going to equate to total bookings. We don’t really see a trend change there. So next year as bookings grow, we’ll see a slight increase in the amount that’s financed and correspondingly the amount that’s sold.

Walter Pritchard - Cowen & Company

Great. Thank you very much.

Operator

We’ll now move on to Israel Hernandez with Lehman Brothers.

Israel Hernandez - Lehman Brothers

Good afternoon, gentlemen. Just a question on the macro. There was a lot of concern during Q1 with respect to North America brought up by certain tech companies. I’m just kind of curious; what was your experience during the quarter? How was linearity relative to expectations? Now that we’re two-thirds of the way through the current quarter, what trends are you seeing there from a high level macro perspective? Thank you.

Robert E. Beauchamp

We did not see any real change, positive or negative, through Q4. The quarter remained constant. We didn’t see any anomalies on linearity, nor have we in Q1, although we are still a very back-end loaded company, less so than we used to be but nonetheless still back-end loaded. So I don’t have any crystal ball macro comments for you. I read the same articles that you guys write but we did not see anything, any early indicators of any changes in direction up or down.

Israel Hernandez - Lehman Brothers

Thank you.

Operator

We’ll move on to Philip Winslow with Credit Suisse.

Philip Winslow - Credit Suisse

I’m wondering if you could just categorize just what you are seeing out there in the mainframe space. Obviously you’ve had some good trends over the past three quarters. I’m wondering if you could talk about just demand as well as pricing environment.

Robert E. Beauchamp

We saw some very nice mainframe transactions and we continue to work with them. I visited with our mainframe advisory council two weeks ago in Europe. There’s still a lot of enthusiasm, a lot of commitment to the platform. I visited one of the largest mainframe customers in the world last month who have used it -- he’s at this point looking at 10 years, his planning horizon is 10 years and he sees no reduction in the next 10 for him in the mainframe area. In fact, this particular customer, who is one of the largest, will more than double their capacity in the next three years.

I don’t see any -- I don’t see a lot of new mainframe customers growing out there in the wild either so it’s basically the same group of people. If they were going to get off, most of them did. The larger ones continue to use it. There is some slow movement off the platform but it’s pretty slow, so no changes I’d say in the last year that I’ve noticed on that.

Philip Winslow - Credit Suisse

Great, thanks.

Operator

Your next question will come from Kirk Martene with Banc of America.

Kirk Martene - Banc of America

Thanks very much. Bob, you might have answered this earlier but on the expansion of margins around the ESM business, I assume that’s going to be more just leverage off your existing sales capabilities rather than any sort of cost restructuring in that part of the business? I assume this is simply driving higher ASPs or getting a little bit more leverage out of your existing --

Robert E. Beauchamp

Your assumption is correct, although I would tell you I think that we still have pockets of inefficiency in some of our processes but our engineering group is doing a great job and we are not looking to take any big cost actions out of R&D in that group. They are staying very focused, doing a good job. But we can always -- I think every year we are going to look to every organization to do a little more in the area of efficiency.

Kirk Martene - Banc of America

Okay, and just on the sales front around the ESM business, where do you see that going right now in terms of the direct/indirect split? Could you give us some color on where it is and where you think that will transition to?

Robert E. Beauchamp

I don’t see any big changes. I think we did have some wonderful wins with system integrators and outsourcers and we’re working on some other ones -- really the Accenture win and some other -- the trends in that were very positive and we’ll continue to see companies that traditionally had partnered with some of our competitors because of the acquisitions that those competitors have done and some of the moves they are making, they are viewing us as the partner of choice. And frankly, because BSM is such a solid message and they see it as a strong revenue opportunity, we are really starting to see the partner community come around us.

But I don’t think we’ll see the mix shift too much more than it is, probably around the 25% to 30% range. I don’t know that we’re going to want to change that too much at this point.

Kirk Martene - Banc of America

Thanks very much.

Operator

We’ll move on to Richard Sherman with MKM Partners.

Richard Sherman - MKM Partners

Good afternoon. Just a comment Bob had made earlier about Asia-Pacific having some nice wins. I was wondering if you could give us some insights into what is going on in the far east these days for the BMC business.

Robert E. Beauchamp

Well, in the far east we had some, we had nice performance out of Asia-Pacific. The -- if I drop down and include Australia/New Zealand, we particularly had nice performance there. We are seeing strong top line growth in China and in other -- we are still not doing as well in Japan as we would like, although we do see some light at the end of the tunnel in Japan there with some opportunities we are working on that we feel we are very excited about.

But I don’t know that I have anything remarkable to state there. We had some great wins in the last six months, including a seven-figure transaction in China for one of the largest banks in China, so we are getting a strong footprint. By the way, that was a mainframe transaction of an existing customer that brought us into the mainframe because of the relationship with [RIMY], so we saw a good cross-selling opportunity there.

So in general, we are seeing solid growth there although the numbers are not as big as we would like, particularly in northern Asia.

Richard Sherman - MKM Partners

Are the [DSIs] more influential, the regional integrators, are they more influential in Asia for you or less so as you look at your overall business?

Robert E. Beauchamp

They are -- the resellers, yes. The [DSIs], I don’t think so. I don’t know that I’ve noticed any material shift in importance on the partners over there. We’ve done a lot of business with partners but I don’t think that it’s much different than it is in other regions.

Richard Sherman - MKM Partners

Okay, great, and then maybe one more, Steve, I’m sorry if I missed this, but did you give the CapEx number for the quarter?

Stephen B. Solcher

For the quarter, CapEx was 15, and so far cap was 13.

Richard Sherman - MKM Partners

Great, sorry if I missed that. Those are my questions. Thank you.

Operator

(Operator Instructions) We’ll now move on to Brandon McKay with CIBC World Markets.

Brandon McKay - CIBC World Markets

Just a quick question on the buy-backs and acquisitions. On buy-backs, should we assume that when acquisitions are not being conducted that you would continue with your current trend that we see in your buy-backs? Would you at least go back to the Board and get an authorization, since you are getting pretty close to finishing the current one out?

Lastly, as it relates to the acquisitions, can you just remind us again of your criteria when you are looking at that from both a strategic and financial point of view?

Stephen B. Solcher

I’m going to take the first one, and that is with the -- like the acquisition we announced today and similar acquisitions of that size, I would probably tell you that that would not defer us from doing the same level of activity that you have seen in the past year. Probably 100 to 150 a quarter, I think it’s safe to say in the next two quarters at that current course and speed, we’re going to have to go back and seek additional authorization. I would tell you that we anticipate doing that. It’s just when is probably the key question there.

Robert E. Beauchamp

On the acquisitions, you just saw a typical acquisition that we would do. It’s a piece of technology that drives to a very specific roadmap. Give me just 20 seconds here of history, BSM was built off a single roadmap of a vision for changing the industry that the Board of Directors of BMC saw in July of 2002.

We now have developed a very clear roadmap for where we continue to take this to its next evolution, so our acquisitions are very specific, they are architecturally driven, they are designed to plug in to where we see the future of really delivering an ERP for IT, and we will continue down this very deliberate road for building against that architecture. So we are not -- occasionally you might find a piece of technology or an opportunistic acquisition, but our strong bias is towards very specific technologies with very specific function to bring this architecture to the next level.

Brandon McKay - CIBC World Markets

So we shouldn’t expect any large acquisitions any time soon?

Robert E. Beauchamp

I didn’t say that. I don’t know. You don’t know. You work them, you look at the opportunities as they come available. You check the price and if it is smart, we’ve been pretty smart in our acquisitions, I would assert, and we continue to view acquisitions as an important part of our strategy but something we think very, very carefully about before we invest your money.

Brandon McKay - CIBC World Markets

Great. Thank you.

Operator

There are no further questions at this time. Mr. Beauchamp, I’ll turn the conference back over to you.

Robert E. Beauchamp

All right. With that, I want to thank you all very much for joining us. Again, we are very excited about the results. We are excited about fiscal ’08. We’ve got our worldwide sales force trained and out there, comp plans rolled out, territories assigned, and all of the momentum that we ended last year in is staying with us as we start fiscal ’08. I’m excited about the team and excited about continuing to deliver solid numbers to you throughout the year. We’ll talk to you in the next days and weeks. If you have any questions, please feel free to give us a call. Thank you.

Operator

Ladies and gentlemen, that does conclude our conference today. We thank you for your participation. Have a great day.

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