|TRANSCRIPT SPONSOR |
BEA Systems, Inc. (BEAS)
F2Q08 Earnings Call
August 16, 2007 5:00 pm ET
Kevin Faulkner - VP of IR
Alfred Chuang - Founder, Chairman & CEO
Mark Dentinger - CFO
Katherine Egbert - Jefferies
John Walsh - Citi
Derek Bingham - Goldman Sachs
John DiFucci - Bear Stearns
Nitin Doke – JP Morgan
Keith Weiss - Morgan Stanley
I would like to welcome everyone to the BEA second quarter results conference call. (Operator Instructions) Mr. Faulkner, you may begin your conference.
Good afternoon, ladies and gentlemen and thank you for joining us as we discuss BEA Systems, Inc. results for the second quarter ended July 31, 2007. Please note we have posted our earnings press release on our website at bea.com.
Statements made in the course of this conference call that are not of historical fact are forward-looking statements, including any statements regarding the plans, goals, strategies, opportunities and objectives for our business. In addition, statements that include the use of terminology such as may, will, expects, plans, estimates, continue, predict, growth or other comparable terminology are forward-looking statements. Forward-looking statements also include statements regarding our financial guidance, including expected revenues in our third quarter and any statements that could be construed as guidance regarding our future financial performance, potential improved results due to sales process changes, potential effect of our stock option investigation, momentum in future adoption of SOA, BEA's positioning in the SOA market, future customer results or implementations of our products, future product releases and any statement of assumptions underlying any of the foregoing.
Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those contemplated by the forward-looking statements. Such factors include those factors to be discussed by Mr. Dentinger today and those detailed in item 1(a) risk factors, on pages 47 through 62 of BEA's report on Form 10-Q for the fiscal quarter ended April 30, 2006 and similar disclosures in subsequent SEC filings. The forward-looking statements and risks stated in this conference call are based on information available to BEA today. BEA assumes no obligation to update them.
Now, I would like to introduce, from BEA, Alfred Chuang, who is Founder, Chairman and Chief Executive Officer; and Mark Dentinger, Chief Financial Officer. Alfred and Mark will make some opening remarks, and then we will take your questions.
With that, I'm pleased to introduce and turn the call over to Alfred Chuang. Go ahead, Alfred.
Thanks, Kevin, and good afternoon, everyone. Our focus during Q2 was to significantly improve our operations and performance around deal execution. Applying a focused, disciplined approach consistently throughout the entire quarter, we were able to improve the deal execution process and also improve the close rates.
As a result of that, bookings returned to the range we expected coming into the year, enabling us to report results above the midpoint of our guidance and also to improve our visibility going into Q3. We will continue to work hard to sustain these. The team deserves congratulations for an outstanding job improving execution in Q2.
But there's a whole lot more to be done, and we will continue our rigorous focus on deal execution. In Q3, we will also focus on the next steps in improving sales operations, performance and pipeline expansion. We continue to be encouraged by our positioning in the market and our products. With sustained focus on process and execution, I believe we will continue to improve our results.
Before I go into the details on those points, let me just first give you some details of our Q2 performance. Total revenue was $365 million, up 7% from a year ago. License revenue was $123 million, down 9% from a year ago. Services revenue was $241 million, including $190 million of that in maintenance revenue, up 18% from a year ago.
Customers buying from BEA technology in Q2 included Chevron, China Mobile, eBay, Monsanto, SuperValu Store and Wachovia. In Q2, we signed 18 $1 million plus license transactions; compare that to 17 a year ago and 11 in Q1.Deferred revenue stands at $408 million, up $52 million compared to last year. Operating cash flow was $61 million, up $12 million compared to last year. BEA ended the quarter with $1.1 billion in cash.
Based on current business conditions, we forecast Q3 total revenue to be in the range of $368 million to $382 million. Later on in this call, Mark Dentinger, our CFO, will give you more details on the financial performance and also about the guidance.
Now, let me first give you my thoughts on the Q2 results, and then we'll talk about some of the new things. We saw improvement in some of the territories that we talked about last year. There's still work to be done in some of the territories. Asia Pacific continued its stellar performance, with 40% year-to-year growth in license orders. Asia Pacific beat this Q2 target by a significant margin. Performance in Asia Pacific was balanced, with every region hitting their goal. We had noteworthy performances in Japan, China, Australia and India. Japan grew by more than 40% and appears to be back on the right track. The Asia Pacific pipeline continues to look very strong.
EMEA had a strong performance, led by the Nordics, Germany and France.
The Americas also made improvements in Q2. The Americas was led by our federal business, Latin America, Canada, our ISV business and also the West. As I noted on our last quarter call, a lot of my focus in Q2 was on the Americas. So let's talk about the process improvements that we have made in Q2 and our plans for Q3. In Q2, we clearly refocused ourselves on shaping the deal execution process. As a result, we had better linearity and a much more methodical approach to managing deal execution and pipeline generation.
The process changes also improved visibility and accountability. The team implemented the new process very quickly, and it had an immediate effect on the results. In Q2, we improved the close rate of our pipeline, and we improved linearity dramatically. Compared to Q1, both transaction count and license booking grew in every deal size. The next steps are to bring the same level of focus and discipline to other areas of the sales management process. These sales process changes are the company's tactical focus. Now, let's shift gears a little bit and talk about the company's strategic focus, and here's how we see the market evolving.
BEA is embarking on a new next-generation infrastructure software. It's a new set of breakthrough software that builds on and extends beyond our SOA suite. We are on the cusp of a new era in enterprise computing. This shift will be every bit, we believe, as disruptive as Java. The way people access and use information at home and in the office is changing at such unprecedented rates. Shortly, we will be introducing a new infrastructure product line to support the next generation of our customers' needs.
In particular, this product line will focus on unlocking business process that are now deeply embedded in application code. Our customers want to be able to quickly and easily build and change their differentiated business process. The requirement to upgrade and integrate applications is happening at an astonishing rate. In the past, implementing and integrating packaged applications has been way too difficult. Customers want implementation and integration of next-generation applications to be much easier and much, much faster.
An example of this shift is a term that we have seen a lot now called mash-ups. Generally, mash-ups are Web-based applications that leverage consumer-oriented sites for external-facing audiences. But now, some organizations are moving mash-ups onto enterprise platforms and using a service-oriented architecture approach to build composite applications. Mash-ups are a great example of how the world is changing. It's on-the-fly, lightweight and very personal. It gives the user exactly what they want, when they want it and how they want to see it.
This new dynamic landscape presents real challenges for business. Suddenly, every business process in the enterprise must be reconsidered to make it more productive and audience-focused. Our customers must examine how we pay, how we trade, how we audit, how we provide governance. Our customers must innovate to meet these business challenges. Our customers cannot win rapidly changing markets by operating within information silos. The world is simply moving too fast for traditional packaged applications.
So at BEA, we see a new generation of flexible, dynamic and real-time composite apps built on service-oriented architectures, enabling businesses to respond to market conditions very quickly. These new composite applications are made possible by combining user-friendly and user-based access with managed business process and data services. BEA provides audience-based tools and access to services wherever they exist. This approach creates a federated network of shared services that enables knowledge workers as well as IT to build applications that generate instant productivity.
AquaLogic is BEA's market-leading product set that addresses this opportunity. AquaLogic represented 24% of license revenue in Q2, and AquaLogic BPM continued its strong year-over-year growth, and Enterprise Service Bus also had a very strong Q2. In addition, our SOA governance products began to emerge. The growth in AquaLogic Enterprise Repository is very similar to last year's BPM results. SOA governance is on top of our customers' minds. It is recognized as the key challenge in SOA implementation. SOA governance becomes more important as customers move from siloed projects to departments and enterprise-wide deployments. More and more of our customers are now making this leap, and are now recognizing the critical need to incorporate governance in their SOA environments.
As we predicted two years ago, as our customers' SOA environments become broader and more comprehensive, they will need to adopt an entirely new product categories. The pipeline for AquaLogic Enterprise Repository continues to look very strong, and it has the potential to do this year what BPM did a year ago. So our new AquaLogic Pathways, Ensemble and Pages products directly address the user.
In the consumer space, millions of pieces of content are being unleashed through Web 2.0 technology. Now, Web 2.0 is moving into the enterprise space, driven by end users' needs for immediate, real-time information. Demand is increasing for Web 2.0 technologies such as demand linking, social tagging and real-time collaboration, all to be incorporated as a standard part of our users' everyday working environment. Our goal is to bring the collaborative power of Web 2.0 together with the agility of SOA to build flexible composite user-driven applications. Our new Pathways, Ensemble and Pages products directly address the market opportunity.
We continue to focus on the leading technology in our core products. WebLogic Portal integration delivered significant growth in Q2. WebLogic Server continues to lead the market in performance, and holds the top three spots in the SPECj AppServer benchmarks. The market-leading performance of WebLogic Server is setting the stage for the next leg of growth, represented by WebLogic Real Time, Event and Virtualization Edition of the server.
WebLogic Real Time brings zero latency capabilities to distributed systems, and it's already in use on Wall Street trading floors. For the first time, this product enables Java to cover all of our customers' applications needs, especially in real-time environments. Also, as SOA becomes more widely adopted, customers have used BPM tools to automate business flows. The next step is to enable customers to automatically trigger those business flows based on events. One example is input from sensors that are embedded in electrical grids, like what Pacific Gas & Electricity, PG&E, discussed at our recent analyst day. AT&T is hosting a new service space on our WebLogic Event Server, mainly for conference calls. At eBay, we will be presenting the Event Server use case at BEAWorld in San Francisco next month. So these technologies definitely picking up pace.
Virtualization is on the mind of all of our customers. During Q2, BEA shipped our WebLogic Server Virtual Edition. This product expands the hypervisor market. A hypervisor is a technology that improves hardware utilization, but sometimes at the cost of performance. Our technology, working with the hypervisor, provides an additional performance boost and does so with no decrease in performance. As a result, we believe customers will expand from their merely virtualizing departmental level application into virtualizing their mission-critical applications. This can have a much bigger effect on customers' hardware environments and cost structures. BEA is working closely with our partners, VMWare and Intel, in bringing our virtualized environments to our common customers. We have recently won VMware's 2007 Virtual Vanguard Award for the category of Most Successful Virtual Appliance deployed by an ISV.
WebLogic Communication Platform continues this momentum. We received orders from more than a dozen customers in Q2, but revenue contribution was still fairly small. We are seeing enough signs of business activities to convince us to keep our investment going. We continue to make progress with our network equipment provider partners, in particular, folks like Huawei, NEC and Samsung. Accenture and HP continue to work with us and build out their skills. More than 50 telco ISVs have committed to porting applications to our platform. There are a lot of customer opportunities in the pipeline, particularly for the second half of the year.
Let me give you some examples how BEA products are helping our customers in their businesses. AT&T is working with key partners on a number of transformational technologies, including solutions based on event-driven architectures at SOA. Among some of these initiatives is an asset tracking solution that uses AT&T hosted and managed services, Intel expertise and also BEA WebLogic and AquaLogic software; particularly, our new WebLogic time and event-driven of the server. Companies across industry like retail, consumer packaged goods, transportation and logistics, manufacturing, healthcare can improve efficiency and accuracy of the business process by tracking assets like products, inventory, shipments, tools critical to their business.
Vivo, the largest mobile operator in Brazil, has closed a multi-quarter deal with BEA to implement enterprise-wide SOA strategy. This SOA program includes the WebLogic and AquaLogic product families, products like Service Bus, Enterprise Repository, BPM, Portal and Integration. This new SOA environment will help Vivo vastly improve front-office applications to be deployed in thousands of locations and thousands of stores throughout the country.
The American Cancer Society purchased our new AquaLogic Pathways, Ensemble, and Pages products this quarter to create a collaborative environment for participants in their organizations' primary fundraising activities, including a new program called Relay for Life. This quarter, Monsanto, a brand-new BEA customer, standardized on BEA's WebLogic and AquaLogic platform, for all of their SOA initiatives.
Before I turn it over to Mark, let me summarize. Here's what I see as the key themes of the quarter. First, with a disciplined focus on operational excellence, we improved pipeline yield, linearity and total license bookings. Second, while the team sustains these improvements, our next focus is bringing the same level of focus and discipline to other areas of sales management process.
Third, while we continue our leadership in SOA by focusing on the problems our customers are trying to solve, we're also expanding our core business by supporting real-time applications, event-driven architectures and virtualized applications. These represent a transition to a new generation of BEA technologies. There are disruptions as you work through a transition like that. But the transition is similar to other transitions BEA has seen.
Now, let me turn the call over to Mark, our CFO, for more details on our Q2 performance and also our guidance.
Thank you, Alfred. As previously discussed, the restatement work arising from our stock option review is not complete, and we will not be publishing full financial statements until the accounting impact on the current period and prior period statements is quantified. Thus, we are limiting today's discussion to financial measures which are unlikely to change as a result of the restatement. Additionally, our forward-looking guidance will be limited mostly to revenue measures until the restatement is complete.
Revenue for the quarter was $364.6 million, up 7% year over year. License revenue was $123.1 million or 34% of total revenue, and services revenue was $241.5 million or 66% of total revenue. License revenue decreased by 9% from last year's Q2, and services revenue increased 19% from last year. The largest component of services revenue, customer support, was $189.9 million, an 18% increase compared to last year's Q2. Consulting and education revenues were $51.6 million in Q2, up 20% from last year.
Geographically, the Americas region generated 47% of our Q2 revenue, and our international business contributed 53% of total revenue. Americas contribution was down 7 percentage points from last year's Q2. Internationally, our EMEA business contributed 34% of total revenues, a 4 percentage point improvement from a year ago, and Asia-Pacific was 18% of revenues, a 3 point improvement from last year.
From a product distribution perspective, the AquaLogic products contributed 24% of our Q2 license revenue, and the WebLogic and Tuxedo families contributed 76% of our license revenue. Q2 total license transaction count of 2,466 increased approximately 2% from last year, and our average transaction size decreased by approximately 11% compared to last year.
For Q2, industry vertical performance was as follows. Telecommunications was 24% of license revenue, government was 19%, banking and finance was 13% and services was 10%. Other verticals were individually less than 10% of license revenues for the quarter. Our Q2 revenue would have been approximately 2% lower if we had translated this quarter's results at currency exchange rates in effect last year.
Now, let me address our balance sheet. We ended the quarter with total cash and investments of $1.2 billion, which includes $53 million in long-term investments, and we generated $61.4 million in cash flow from operations during Q2. In the same quarter last year, our operating cash flow was $50 million. During the quarter, we also repaid all outstanding borrowings under our $500 million line of credit facility, and we do not expect to borrow under this facility until our restatement is complete.
DSO at the end of Q2 was 73 days, an increase of five days from last year. Deferred revenue increased by $52 million from last year and now stands at $408 million. Consistent with our prior experience, the largest component of deferred revenue, deferred support, historically has tended to sequentially decrease during our first three fiscal quarters and increase significantly during Q4, principally as a result of the timing of support contract renewals. Changes in deferred license revenue and other deferred services are less predictable, and the balance fluctuates as a function of the timing and terms of transactions.
Without addressing our overall costs and expenses, I will discuss certain expense measures and other phenomena from Q2 to assist in your modeling. Non-GAAP other income and expense or OIE was $13.3 million in Q2 versus $8.6 million in Q2 of last year and $13.4 million in Q1 of this year. The year-over-year improvement was largely the result of reduced interest expense on our lower average debt balances.
Total headcount decreased by 33 during Q2, and we exited the quarter with 4,288 employees. We anticipate that the total headcount will be down slightly during Q3 in conjunction with continuing to realign resources towards the growth areas of our business.
There are also several phenomena affecting our GAAP costs and expenses that I will address, principally to allow you to model the business more accurately when our financial statements are filed. We incurred approximately $4 million in Q2 for external expenses associated with the options review. We have also absorbed additional non-cash charges of about $1 million in Q2 associated with modifying stock option awards for departing employees and employees with expiring options. Because award modifications and external expenses will continue to be required until our restatement is complete, we expect additional charges in Q3.
During Q2, we made cash payments totaling $4.4 million to the IRS and the California Franchise Tax Board to pay our employees' 409-A tax liabilities associated with certain stock option transactions prior to January 1, 2007. These 409-A charges will be expensed in our Q1 GAAP financial statements. The company is also examining alternatives to remedy our employees' future exposure to these taxes, and most alternatives will require the company to make additional payments in future quarters. We will also record a GAAP restructuring charge in Q2 of about $2 million, mostly associated with the unexpired lease at the former headquarters of Plumtree in San Francisco.
I will now discuss our guidance for Q3. The following comments on guidance are forward-looking statements, as are any other comments about our future financial and product performance. You should review our Form 10-Q for the quarter ended April 30, 2006, which contains important risk factors that could cause actual results to differ from those contained in these forward-looking statements. Additionally, product transition, seasonality factors, uncertain customer buying patterns and concentration of large license transactions, especially towards the end of our quarter, add to our revenue volatility and make it hard to predict revenues in future quarters.
Our comments on guidance are based on current business conditions and information we have as of today's call, and we caution investors that numerous factors, such as the risk factors discussed above, could cause business conditions and customer buying patterns to change significantly. We assume no obligation, however, to update our guidance or comments on future performance. If we do update our comments on guidance, it is BEA's policy to do so through appropriate public disclosure.
In determining guidance, we are not assuming any significant change in the global economic climate or IT spending levels in the near term, nor are we projecting possible impacts on our business which might result from the recent turmoil in the US mortgage-backed securities markets. Finally, our comments on guidance do not address any additional costs and expenses which may have to be reflected in future financial statements when prior-period results are restated following completion of the options review.
Based on these factors and current business conditions, we anticipate that revenues in the third quarter of our fiscal 2008 will be within a range of $368 million to $382 million, and that the license component will be 34% to 36% of total revenue. As I previously mentioned, we also expect to incur additional expenses in Q3 for third-party fees associated with our restatement, non-cash charges resulting from modifying expiring stock option awards and possible payments associated with remedying our employees' future exposure to 409-A taxes.
Finally, I'll mention a couple of things about our SEC filing status. First, the primary issues previously disclosed about the nature of our restatement, the control issues identified and the estimated financial impacts have not materially changed. Second, we plan on submitting our restatement data to our public accounting firm's national office within a week. From there, it will go to the SEC for comment. While we don't know when these processes will be complete, we are doing all we can to get back on file, and we are anxious to update the market on our financial performance.
Thank you for joining us today. Now, let me turn it back to Alfred.
Thanks, Mark. BEA continues to expand SOA market opportunity with our AquaLogic product set. We saw significant revenue contributions from AquaLogic this past quarter, while expanding our core business by supporting real-time applications, event-driven architectures and virtualized applications. BEAWorld this year will focus on real customers telling their real stories. In addition, we will be making some announcements about our next-generation infrastructure software. We look forward to seeing you in San Francisco next month.
Now, I would like to open the call for questions.
We're ready to open the line for the question-and-answer session.
Your first question comes from Katherine Egbert - Jefferies.
Katherine Egbert - Jefferies
Your guidance for Q3 calls at the midpoint for about an 8% year-on-year revenue increase, which is about what you have been doing the last few quarters. Can you just comment on that, and especially in the context of what you mean by improved visibility for Q3?
So this is what we're seeing. There are a few things that we're doing at the company. We are doing a lot in improving our sales execution, particularly on the larger deals, and we saw a very meaningful improvement in the past quarter with implementing some of these new processes. It is our goal that as we see the business activities increase over time, we will continue to be working on improving our outlook. So that's really what we mean. So right now, I think we have seen an improvement, and I think it's reflected in our results and also in our guidance, and we look forward to continually work on that.
Katherine Egbert - Jefferies
It looks like your spending in the government vertical was strong this quarter, but financial services was down. Can you address each of those?
Yes. I think, obviously, there is always seasonality we are seeing with the market conditions. We saw a strong execution in our government business. If you line it up geographically, we actually saw pretty strong financial sector performance in both Asia-Pacific and also EMEA. But we saw a slightly weaker performance in the Americas, but yet other areas in the Americas we saw an improvement, particularly in services and also in telco. So those were very good for the quarter.
Katherine Egbert - Jefferies
SOA is obviously a platform shift, but it's also been a very slow platform shift. Can you talk about how much of AquaLogic sales are tied to maybe a discretionary spend?
So we actually did a little study in the company in the last few weeks to really understand how many of these AquaLogic deals are really true nationally demanded new applications being built from scratch, the kind of business growth that people are using it for integration or tying it to their existing WebLogic application. Surprising, we see more than 60% of these deals that we have been doing are truly organic, brand-new applications, or people building out really a new-generation application with the SOA model. So we are encouraged by that. I think we're seeing a solid increase in the marketplace of people adopting SOA as a set of technologies.
But one thing I do believe still, between us and our competitors, the majority of SOA adoption, by and large, are still using it for application integration. We have hinted at, in our earlier comments, that we will be introducing a new set of technologies. Specifically, we will be addressing building new generation of customer applications or application packages. I think our ISV has been looking for a new way of building much more flexible applications that don't have all of the business process embedded in the code like the way that most of the application packages are being built today.
So those are some of the things that we're working on. But we're encouraged by the results that we're seeing, how many of our customers are genuinely building new types of applications.
Your next question comes from John Walsh - Citi.
John Walsh - Citi
On the AquaLogic, 24% of revenue again this quarter. It seems to be flattening out over the last several quarters. Was that more due to the strength of the WebLogic that was a little weaker in Q1?
I think one of the things that we clearly are seeing, the business activities in AquaLogic was very strong. Our reported revenue was at about 24%, but the underlying strength of the AquaLogic business, particularly with the Enterprise Service Bus, the Registry product and BPM was actually very, very strong. So we are very encouraged by the data.
John Walsh - Citi
Anything on the competitive side? I know you talked about execution improving and your own focus there. But on pricing, are any dynamics going on in your core marketplace that maybe changed on a year-over-year basis or on a quarter-over-quarter basis?
The things that we're tracking the most right now are the larger deals and also the smallest deals. So smallest deals indicates, if our underlying core strengths of the number of applications being built is about the same or growing stronger. So we're encouraged by seeing, actually, a notable increase in transaction count in the last quarter, just compared to a year ago. So that was encouraging.
On the larger deals, we are still very much competing on the merits of our technology, the performance, because price performance was still really, really good in the marketplace. So we haven't seen any notable discount difference that we were anticipating. One element I think that is changing our pricing a little bit is the multi-core computing architecture. Clearly, I think it's something that we are adjusting ourselves to. Most of our customers are using dual or four CPU core kind of architecture now. So if there's any impact, it will be in that area, not really from discounts against competitors.
The competitive landscape remains to be about the same. Of the competitors, IBM, we continue to have success in penetrating into their installed base. We have taken away a couple of very notable customers in the last quarter that were never BEA customers before. So we're encouraged by that. There's always more work to be done in this area.
John Walsh - Citi
On the communication platform side, I know you touched upon it; you said it's still small, and you still see the ramp of the partnerships. Any guesstimate on timing? You had spoken before about specifically China market having some opportunities there. Maybe update us on your thoughts there.
On the WebLogic Communication Platform side, the balance and the debate that we have constantly in the company is, do we want to go get the revenue immediately, versus seeding as much technology as possible? Sometimes these are contradicting goals, very similar to what we are dealing with our independent software vendors; the more software that we give to them, we have more proliferation.
So we have decided over the last couple of quarters that it's more important to us as a company that we see WLCP to have more proliferation in the marketplace. I think it was a very successful quarter. In China, in particular, we practically had everyone, every single network equipment provider is embedding our technology. The deals that we're signing are becoming increasingly more significant. The very large, the largest network switch providers will be shipping with our technology embedded deeply inside their hardware. So we're encouraged by those, and it was a very notable quarter as a number of deals that we have signed to get those going. We're hoping to see more revenue coming in, starting in the second half, as these people ship products and we get, obviously, unit revenue from them. We'll see, but I'm encouraged to see the picture of how proliferated this technology is today.
We have also, in the quarter, shipped our Network Gatekeeper 3.0 technology that utilizes much of the functionality we have built in other products like Real Time, to enable some of the functionality that we needed for 24X7 nonstop type activities for voice applications. So that was encouraging as well.
Your next question comes from Derek Bingham- Goldman Sachs.
Derek Bingham- Goldman Sachs
Following up on the WLCP question, when you gave the 24% AquaLogic/76% Tuxedo and WebLogic split, does that 76% include WLCP? Or do we presume that it doesn't, and then it's kind of a negligible amount?
Actually, it's not negligible. It's still small, but it's embedded inside that 76%.
Derek Bingham- Goldman Sachs
Also curious if you could comment as to how Tuxedo performed in the quarter, either how it did sequentially year over year as a percentage of license? Any color you could give there?
Tuxedo was about stable at par with a very small increase. So it is about a $100 million business for the year, and right now the assumption in the company is it's a technology that we continue to invest modestly. It's not shrinking, and so it's not a big, growing product for us.
Derek Bingham- Goldman Sachs
You've had, obviously, fantastic maintenance growth for quarter after quarter after quarter. New license revenue has not kept up with that. I just want to make sure that we don't have our expectations too high looking forward. Can you give us any guidance or thoughts, it has been at this 20% year-over-year growth level. What ought we to expect going forward, and is there a way you can keep it at that level?
We have done plenty of studies inside the company around the maintenance stream and how stable that is. I think astonishment is an understatement of how sustainable this level is. Our penetration is still low into our installed base, so we still believe that there's plenty of room to grow.
I think sometimes, because of the way that we look at maintenance purely as a service and the reality is lots of the customers, they buy maintenance because they want all the upgrades, and that's really the primary reason is keeping up to date with the software, more so than getting support. This would not be my place to argue whether that should be looked upon as a form of license, but nevertheless it shows the strength of the deployment itself, of how dependent our customers are on the technology.
So it's our job, I think, one, is continue this growth in maintenance, which is obviously a highly profitable business for BEA, but also at the same time look at some of the things that we are doing as we're adjusting ourselves in the market, looking at what needs to be changed. Clearly, we believe this new generation of application infrastructure is needed to build these process-independent applications and highly composite format. So those are the things that we're hoping to use to stimulate the growth of the license revenue. I don't think this is done in any way, shape or form. I think there are opportunities right in front of us, that if we look at all the activities are in the consumer space. The enterprise needs to keep pace in terms of how they are going to have application development and deployment models that really matches up with that. That's what we're working on, and we are very encouraged with some of the work that we are doing.
Your next question comes from John DiFucci - Bear Stearns.
John DiFucci - Bear Stearns
Mark, this is the first quarter in four where cash flow grew year over year. Is there anything in there that's a little odd? Is there any major change in working capital somewhere in a line item? I realize you don't publish the balance sheet right now, because of the stock options issue.
Related to that question, the cash balance was down about $165 million, I think it was, even though cash flow from operations was up $61 million or was positive $61 million. Can you just explain that a little bit, please?
In the order that you asked them, on the cash flow from operations, it's a little difficult to measure that growth quarter to quarter, simply because of the timing of when you collect big bills. We've got several multi-million-dollar transactions to come in. So at the end of the quarter, we were down a little bet on the comparatives with the Q1, and we were up on the comparatives with Q2. So you really have to look at that as a multi-quarter phenomenon and a comparison with multi prior quarters, just because the inbound cash, in particular, it's hard to forecast exactly when we're going to bring it in.
The second phenomenon is that actually, that cash flow number was probably even stronger than it was published, because also embedded in the cash flow this quarter was almost $5 million worth of payments to the IRS on our 409(a) program, and an additional $5 million in the stock options investigation this year that were not in the number last year. So the Q2 number was really, really super-strong. It was up about 40% on an apples-to-apples comparison.
Now, one thing moving in our favor in all of that is that typically, if our employees were exercising and selling stock, we would have a small portion of that cash flow that's currently operating cash flow reclassified as an investment activity, because of the way that way that taxes and stock options work. But if you correct for all of that, it just happened to be a quarter when a lot moved in our favor on that thing. We would expect, again, that cash flow from operations will move and will correlate very, very consistently with the operating income growth in the company, in the long run.
On your second point, yes, the reason that the cash flow from operations was up but the overall cash balances were down is because we paid off the remaining $215 million on our line of credit in the quarter, and so we are now, as we speak, anyways, completely debt-free. So all of the cash that you see there is cash and investments on our balance sheet. So that's the reason for the decrease in the total cash balance.
Your next question comes from Nitin Doke – JP Morgan.
Nitin Doke - JP Morgan
Can you update us on the sales force in the US and how the turnover has been there and if you think you got all the right management in place?
Some of the things that we have done in the quarter purely are disciplinary kinds of things. We tracked our deals very, very aggressively, literally on a day-to-day basis so we know the shifts around the deal-closing process. Also, along the lines, we know which deals go out, which deals come in. So we had just tremendous visibility throughout the entire quarter knowing what got closed. It also is the most consistently executed quarter that we have seen since 2000. There have been quite a few years since we had this level of consistent execution in terms of deals. So it makes life a lot easier, and we are implementing very similar things in Europe as we speak, something that we have done in Asia previously. So some are new, some are old, and some of these processes we have used before, in the late '90s, and we're reapplying some of these things into our overall discipline, with a much larger sales force. It seems to be working well, and our salesforce tend to like this way of how we are managing it. I call it the engineer's way of managing a sales force. It seems to be working.
Nitin Doke - JP Morgan
For the maintenance revenue, have you seen any impact from the Guardian or the deal maintenance programs there? If you could talk a little bit about your [E&P] rates in the quarter?
I just want to remind everyone that Guardian actually is a piece of software that we sell to help our customers go discover the patches they may need in the future. Our Guardian is doing really well. But the way that we recognize the Guardian revenue is within the maintenance revenue so we do not see the level impact that it would have otherwise, if we actually saw it in license. So it was a product that has actually done really well for us.
As you would imagine, our customers, especially with selling so much real-time technology and also in replacing many of old apps on the mainframe in distributed systems, our customers are looking for these kind of technologies to do a lot of preemptive kind of maintenance. It's doing very well. The revenue is amortized, as the way that we have decided to recognize revenue. Otherwise, it would be an interesting to add to the license line. But at the end, it should be all the same. It's doing well.
Nitin Doke - JP Morgan
The renewal rates in the quarter for the maintenance contracts?
Oh, it was stunning. We grew that much, and it's astonishing Over 18%, and we just don't see it's going to stop.
Nitin Doke - JP Morgan
Were any of the $1 million plus deals exceptionally big, say greater than $5 million?
No deal was above $5 million. In fact, no deal was close to $5 million. So it was, I think, just the right amount of deals that we were predicting, at 19, and they are all just above $1 million.
Your final question comes from Keith Weiss - Morgan Stanley.
Keith Weiss - Morgan Stanley
In looking at AquaLogic, 24% of license revenues, by my estimate that is up about 18% year over year, or probably roughly somewhere in the high teens growth. Is that a kind of growth rate that you see for that business, for a longer term?
Then, on the flip side of that, if AquaLogic grows 24%, it seems like everything else was down about 16%, I would say. You've talked about integration, server doing well, you talked about Tuxedo being stable to slightly up. What was actually down in the quarter that led the rest of the business to be down?
Great questions. First of all, typically that's how it happens in our product line, in the past history. We see technology grow, new product line grow initially at a more modest rate, from single-digit going to double-digit and then it takes off much more dramatically, as the adoption clicks through. So we're still waiting for AquaLogic to do that, and I think we're doing a lot of innovative things internally to introduce a new set of products soon that will allow people to build brand-new set of applications in a new fashion with the ISVs that could build a new generation of application packages. So that's one thing that we're working on to accelerate that growth.
Now, what gave in the quarter is we saw some loss in WebLogic Server in terms of its growth, and it's something that we're addressing as a company. I think the thing that we have so far as our conclusion is our sales were somewhat dictated by their quota, so they managed within their context of how much they need to sell. If they sell more of AquaLogic they're focused on, they sell less of the old product. So we're doing a bunch of planning for making some changes to focus ourselves on growing and stopping this inconsistent growth around the WebLogic Server line.
We believe some of the things that we have done in the WebLogic Server product itself, deserve to see the product to grow again. There's no reason that we can see inside that more Java developers are not coming online to develop our technology. Our download rate is good. Our developers' community is growing. So some of the things that we're working on is working on some of the pricing for the multi-core CPU, and also continue to work on growing some of our new accounts into larger deals for WebLogic Server. So that's one of the things we definitely are working on.
Keith Weiss - Morgan Stanley
When you look at the ASPs, down 11% year over year, would you say that you're talking about multi-core CPUs, is that one of the biggest contributing factors to your ASPs going down, or is there other dynamics that are incorporated into that ASP decline?
I think the biggest contributor of that is we would have to amortize more of our deals through the lifespan than we have in the past. More of the deals that we are carving because of the way revenue recognition rules are changing. I think that actually is one of the factors. The multi-core CPU is another factor; I think, actually, is a smaller factor than the other one. There are other factors in it where we have a lot more product on our price list for the sales force to sell. Going through, in addition to the AquaLogic line and WebLogic line, we can do a better job in packaging the products to having other people to help us through the selling process.
One of the key initiatives in the Company is really to get our channel network to be working better. We just recently assigned one of our top executives in the company, actually, he has worked in operations and engineering to be heading up our new channels program. So we are encouraged to see some of the planning and some of the new initiatives we have going. We should see execution fairly soon, in the second half of the year.
So I appreciate everyone spending their time and listening to our call. I look forward to reporting our results in about three months from now. Thank you very much. All of you are welcome to attend BEAWorld in September in San Francisco, and we will have a great event for you, real customers speaking about their success stories and there also will be announcements of our new product. Thank you.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: firstname.lastname@example.org. Thank you!