BMC Software F3Q08 (Qtr End 12/31/07) Earnings Call Transcript

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 |  About: BMC Software, Inc. (BMC)
by: SA Transcripts

BMC Software, Inc. (NASDAQ:BMC)

F3Q08 Earnings Call

February 7, 2008 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

Analysts

Michael Turits - Raymond James

Derek Bingham - Goldman Sachs

Brendan McCabe - Oppenheimer

Richard Sherman - MKM Partners

Philip Winslow - Credit Suisse

Walter Pritchard - Cowen & Company

Kirk Materne - Banc of America

Tim Klasell - Thomas Weisel

Tom Curlin - RBC Capital

Operator

Good day, everyone and welcome to today’s BMC Software third quarter fiscal year 2008 earnings conference call. Today’s program is being recorded. At this time for opening remarks, I would like to turn things over to Mr. Derrick Vializ. Please go ahead, sir.

Derrick Vializ

Good afternoon, everyone. I’m Derrick Vializ, Vice President of Investor Relations and I would like to thank you for joining us today. On today’s call, Bob Beauchamp, our CEO, will provide an overview of our third 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 update our guidance for fiscal 2008 before we open the call to questions.

The prepared comments were previously recorded. In addition, this call is being webcast and a complete record of the call will be made and posted to our website. In addition to today’s earnings press release, we have posted a presentation which we will refer to at various times during the call. Both of these documents are available on our investor relations website at bmc.com/investors.

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

I would also like to point out that the company’s use of non-GAAP financial measures is explained in today’s earnings press release and a full reconciliation between 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.

Robert E. Beauchamp

Thank you, Derrick. Good afternoon, everyone and thank you for joining us for today’s call. BMC's third quarter results continue to demonstrate positive momentum in the execution of our strategy for growth in revenue, profitability, cash flow from operations, and leadership in the markets we serve.

This is the 11th consecutive quarter in which we’ve met or exceeded our revenue and non-GAAP EPS guidance, as we’ve seen yet again strong year-over-year performance in all our key metrics.

For example, we saw strong growth in licensed and total bookings. Revenue rose 11%, which exceeded the high end of the guidance range and grew across all major geographies. License revenue grew 17%. Our non-GAAP operating margin improved five points year over year, reaching 30% for the quarter.

Non-GAAP diluted EPS were $0.57, which represented an increase of 39% and exceeded the high end of the guidance range.

Year-to-date cash flow from operations almost doubled on a year-over-year basis.

With our improved performance in the third quarter, we are again raising our guidance for the full year. I will cover this at the end of our prepared remarks but first, I would like to spend a little time discussing how our two business units performed during the quarter.

Our ESM unit continued to ride the rising tide of interest in business service management as core BSM license bookings grew 11% during the third quarter with tough comparisons.

In the fourth quarter, we expect to see our core BSM license bookings growth rate doubling that of the current quarter. We pioneered this movement and we continue to be both the thought and market leader in business service management.

Indeed, our BSM software solutions have rapidly become the standard. Credit Suisse, Merrill Lynch, Unisys, EDS, Motorola, Tata Motors, MET Life -- these are just a few of the companies I’ve recently spoken to and they’ve all expressed how committed and excited they are to be standardizing on our BSM platform.

Tata Motors, India’s premiere auto maker and increasingly an important player on the international stage, offers an outstanding example. The company selected BMC's BSM platform to assist in shrinking the development cycle time of its newly unveiled low-cost automobile, the Nano.

Our solutions enabled the company to streamline its IT service delivery and align its IT infrastructure with its business needs. In fact, Probir Mitra, the CIO of Tata Motors, said: “the recent success of Nano happened with the assistance of BSM tools provided by BMC Software. During the development of the Nano, the BSM tools helped us in the simulation of various processes and reduction of product lifecycle times. All this led to heavy cost cutting and time efficiency.” He further added that he would recover Tata Motors’ substantial investment in our BSM software in less than one year.

Since implementing our software solutions, the company has seen its IT manpower requirements drop by 20%. Calls related to desktops and PCs dropped by 40% and perhaps most telling, help desk calls from suppliers have plummeted, where once its help desk fielded some 2,500 calls per month from a network of 1,700 suppliers. Tata Motors has reported a staggering 80% reduction since implementing our BSM solutions.

That these impressive benefits should accrue to such a large company in such a short period of time is very convincing evidence of the transformative power of our BSM platform.

It’s a message that’s been heard by major companies throughout the world. Just this past quarter, we’ve concluded deals with a top global consulting and systems integration firm, the largest municipal hospital and healthcare system in the United States, two major life insurers, one of the world’s leading pharmaceutical companies, and a preeminent global financial services firm.

What’s driving the success of BSM, in particular our BSM solutions?

The fact that distributed IT environments are becoming increasingly complex, compounding the difficulties in evolving and effectively managing IT processes. At its core, BSM provides the opportunity to align IT with business priorities, to reduce cost through automation across all of IT, so that budget can be recaptured or reallocated to growth the customer’s business.

It’s the platform leading CIOs are using to redesign and modernize all key IT processes.

Turning next to our DSM solutions, although license bookings were flat this quarter, we remain encouraged by year-to-date performance of our DSM product lines, as license bookings have grown 9% year over year. This segment of our business shares certain characteristics with the mainframe marketplace. The deals may be large and the cyclical timing of contract renewals make revenues lumpy.

Last quarter, we announced actions to improve our sales executions through increased incentives and by linking sales to BSM deals. These efforts, combined with our innovative vision and technology leadership, position us well for continued improvement.

We’ve also seen an impressive quarter from our mainframe service management unit. Thanks to outstanding execution and solid demand for our market leading mainframe systems and data management software tools, MSM performed well above our expectations in the third quarter. Total bookings exceeded expectations on both a quarterly and trailing 12-month basis.

We never forget that our large mainframe customers are running their most mission-critical systems, which rely on our technology to ensure a high level of performance and availability. Our innovative solutions have earned us loyalty from our existing clients, which has been instrumental in renewing contracts, increasing their run-rate of spend, and bringing new business in the door.

For example, in this quarter alone, we’ve continued to expand our customer base with 27 new MSM customers, as many enterprises choose our market-leading job scheduling solutions over those of our competitors.

We continue to innovate and drive revenue growth in segments many consider to be relatively mature. For example, we’ve recently gone GA with a new data and systems management tool for IMS. This new product helps out customers quickly pinpoint the root cause of problems and provide essential audit information. We’re not surprised that we saw sales for this new product within the first week of its release.

Our MSM business unit is in a healthy marketplace, characterized by a stabilizing pricing environment, ongoing demand for increased capacity, and by our position as a key player in the industry.

Let me next comment on the overall operating efficiencies and scale of our business. Two years ago, we launched a business process improvement program that focused on increasing the company’s operating margins. Our goal is to be among the top quartile in our peer group across all key functional areas.

Give the large margin improvement we saw this quarter with our non-GAAP operating margin reaching 30%, we feel we are right on track to meet this goal.

Finally, I would like to say a few words regarding our commitment to delivering shareholder value. Over the past years, we’ve worked to strengthen and improve our balance sheet, while pursuing an accelerated share repurchase program. We’ve also made smaller but strategic acquisitions that have helped enhance our competitive standing.

This approach has generated some encouraging early successes -- ProactiveNet, Imprezza, and Real Ops have all seen increasing customer acceptance of their technologies. In fact, run-book automation has quickly become one of the hottest technologies supporting the data center today. We’ve seen BSM customers mentioned on earlier calls, such as Lowe’s Home Improvement stores and MET Life, eagerly adopt our new solutions to their long-term BSM roadmaps.

We believe this approach to building shareholder value has been a successful way to make BMC a much stronger and more competitive company and it’s enabled us to achieve our strategic and financial goals.

We are pleased with the market recognition of our efforts. As we look ahead to the remainder of 2008, we see solid growth opportunities for BMC and in pursuit of that growth, we’ll continue to rely on the three pillars of our success -- to build greater value for our shareholders as we leverage the strength of our business model, the value that our proven solutions provide our customers, and the consistent improvement in our financial and operational performance.

With that, I will turn the call over to Steve for a more detailed operational and financial review. Afterward, I’ll return with some brief closing remarks. Steve.

Stephen B. Solcher

Thanks, Bob. Our solid third quarter results reflect the continued strength of our business model. Once again, we saw solid growth in our key financial metrics, including total bookings, revenue, non-GAAP operating margin, and non-GAAP earnings.

We have now met or exceeded our revenue and non-GAAP EPS guidance for 11 consecutive quarters. This also marks our seventh consecutive quarter of double-digit growth in our core BSM license bookings.

I am also pleased with our continued success in generating higher levels of revenue growth while maintaining our expense control focus. This quarter, we achieved double-digit quarterly revenue growth for the first time in over three years. Our non-GAAP operating margin continues to expand, now at 30%. Not since March of 2000 has our non-GAAP operating margin reached this level.

With that, let me begin by reviewing our financial results. In the third quarter, non-GAAP operating income increased by 37% to $140 million. Non-GAAP operating margin increased 5 percentage points from a year ago to 30%. Non-GAAP net earnings for the third quarter were $112 million, an increase of 31% over fiscal 2007. Non-GAAP diluted EPS for the period was $0.57, up 39% compared to the year-ago period. This reflects a non-GAAP effective tax rate for the quarter of 29%.

These non-GAAP results reflect diluted shares outstanding in the third quarter of $198 million versus $210 million in the year-ago period. GAAP operating income in the third quarter was $107 million compared to $74 million in the year-ago period. GAAP net income and fully diluted EPS were $89 million and $0.45 compared to $64 million and $0.30 in the third quarter of fiscal 2007.

Turning now to bookings -- total bookings were $452 million, up 4% compared to the year-ago period. Total bookings on a trailing 12-month basis were $1.8 billion, up 14% compared to the year-ago period. The weighted average contract length for total bookings on a trailing 12-month basis was 2.3 years, which was comparable to the year-ago period.

On an annualized basis, trailing 12-month bookings were $770 million, up 11% compared to the year-ago period. This marks the eighth consecutive quarter in which we’ve achieved annualized bookings growth on a trailing 12-month basis.

Please refer to slide seven 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 $117 million in the third quarter, up 8% over the year-ago period. Within our ESM business unit, license bookings of our core BSM product group were up 11% in the third quarter in comparison to a year ago.

As we’ve noted, this is the seventh consecutive quarter of double-digit growth in our core BSM license bookings.

Core BSM license bookings were particularly strong in North America, offsetting under-performance in Europe. Please see slide eight of our presentation for historical license bookings growth.

Turning to our mainframe unit, we believe the MSM business unit is best evaluated on the basis of total and annualized bookings over the trailing 12 months. In the third quarter, total MSM bookings on a trailing 12 month basis were $769 million with an average contract length of 3.1 years.

In the year-ago period, total MSM bookings were $660 million, with an average contract length of three years.

Normalizing for contract length, total annualized MSM bookings for the trailing 12 months were $247 million, a 12% increase compared to a year ago. As we’ve often said, this is a lumpy business in which bookings can vary quarter to quarter. We remain pleased with the solid performance in trends we’ve seen in our MSM business over the last calendar year. Our full year expectation for the business has improved once again.

We now expect MSM annualized bookings to be up compared to fiscal 2007.

Turning to revenue, total revenue for the quarter was $459 million, an 11% increase compared to fiscal 2007 third quarter. We have now seen acceleration in revenue growth over the last four quarters.

License revenue was $182 million, an increase of 17% compared to a year ago. This strong increase in license revenue resulted from license bookings growth in a lower ratable rate in comparison to the prior year.

During the quarter, the percentage of license bookings that was deferred was 49%. This is a decline of five percentage points from the prior year. Maintenance revenue in the third quarter of 2008 was $246 million, an increase of 6% compared to a year ago and a $5 million increase on a sequential basis.

From a geographic perspective, total revenue growth was reported in all major regions with the U.S. increasing 10% and international increasing 13%. Professional services revenue was $31 million in the third quarter, up 27% compared to $25 million in the year-ago period.

Moving next to operating expenses, I continue to be very pleased with our ability to control operating expenses. Non-GAAP operating expenses were $319 million, up 3% from the prior year but were down slightly after adjusting for the negative impact of currency movements.

There are a few key drivers underlying our ability to hold down costs that should continue to trend well for us going forward. These have included continuing our expansion into low cost locations, eliminating redundancies in systems and applications, re-engineering core processes. For example, as a result of our efforts to standardize, simplify, and automate order services in our Houston and Amsterdam processing centers, nearly all of our support orders and more than half of our license orders are now processed electronically. As a result, we have seen efficiency gains of 25%.

We expect to see improvement in other key functional areas beyond fiscal 2008, as a result of ongoing initiatives to control costs and improve the scalability of our business model.

I am going to move on now to the balance sheet. Total deferred license revenue at the end of the third quarter was $542 million, up $30 million or 6% sequentially. During the quarter, we deferred $104 million of license revenue or 49% of license bookings and recognized $74 million of deferred license revenue from the balance sheet.

Total deferred revenue at the end of the third quarter was $1.7 billion, flat sequentially.

Software development cost on the balance sheet were $113 million as we capitalized $17 million and amortized $16 million during the quarter.

Cash and marketable securities at December 31st were $1.4 billion.

For the quarter, cash flow from operations was $65 million, a decrease of $48 million from the year-ago period. This decrease was principally due to higher cash taxes and DSOs reverting back to historical norms.

During the quarter, we repurchased 5.5 million shares for an aggregate value of $186 million. We now have slightly under $785 million remaining in our stock repurchase program.

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

Robert E. Beauchamp

Thank you, Steve. As you can see, it’s been a very successful quarter for BMC and we feel that the months ahead hold new opportunities to prove the strength of our business model, the value of our software offerings, and our commitment to improved financial and operational performance.

Let me now update you on our guidance for fiscal 2008.

We are raising our guidance and now expect non-GAAP EPS for the year to be in the range of $1.90 to $1.94 per share. Non-GAAP EPS excludes an estimated $0.38 of special items related to expenses for amortization of intangible assets, in-process research and development, share-based compensation and restructuring activity.

Underlying this full year fiscal 2008 non-GAAP EPS estimates are the following assumptions: we are raising our guidance for revenue and now expect the annual revenue growth rate to be in the high-single-digits; we are raising our guidance for total bookings and now expect the annual bookings growth rate to be in the mid-single-digits; we expect the license bookings ratable rate to be slightly higher than last year’s; we expect non-GAAP operating expenses to be essentially flat; and we expect non-GAAP effective tax rate of 30%.

As a result of our strong year-to-date performance, we are increasing our expectations for cash flow from operations. We now expect cash flow from operations to improve to between $550 million and $590 million.

Turning to our guidance for the fourth fiscal quarter, we anticipate fourth quarter revenue to range between $450 million and $465 million, and non-GAAP EPS to be in the range of $0.48 to $0.52. This reflects a non-GAAP effective tax rate of 31.5%.

Non-GAAP EPS for the fourth quarter excludes an estimated $0.09 of special items related to expenses of amortization of intangible assets, in-process research and development, share-based compensation and restructuring activity.

Finally, I want to remind you that we recently changed the date of our annual investor day to March 11th. We hope you have already made the change in your calendars and will be able to join us at our headquarters here in Houston.

With that, we’ll turn the call over to questions. Operator.

Question-and-Answer Session

Operator

(Operator Instructions) Michael Turits, Raymond James.

Michael Turits - Raymond James

Just a little question on the BSM license bookings rate. It looked a little bit lighter than trend, it had been trending up, it was a little light I know on tough compares. Are you still expecting it to be at the same rate of growth as last year? What do you think the full year ends up at?

Robert E. Beauchamp

Yes, we actually reiterated our position and we believe that we’ll see it move into the high teens for the full year. The level of growth at 11%, while it was strong, was lower than our long-term expectations. That primarily had to do with a few countries in Europe. And as you mentioned in your question, we came off a 29%, 28% year-over-year growth rate last year, so we had a very tough compare.

But as we look forward into Q4, we’re quite encouraged and we see that growth rate will move up into the 20s. So when that all settles, we’ll be up into the high teens as we though we’d be.

Michael Turits - Raymond James

Sorry for the -- but it was -- you corrected me on that. That’s fine. And then also on the cash flow, which is at $65 million, a little bit less than in my model, down pretty significantly quarter over quarter and somewhat year over year. You gave us some insight into that but still, you raise guidance, cash flow guidance going into the -- for the full year, so what was -- was this quarter what you expected and if it wasn’t, it was lighter, what really drove the upside for the full year?

Stephen B. Solcher

The full year number is strictly driven from the strong bookings that we had in the third quarter, so we have visibility right now on how cash is going to fall out for the most part into Q4. So seasonally, the fourth quarter is typically our strongest quarter. We don’t think that there’s going to be any real change there. I would say other than the cash taxes that we expected in the quarter, and DSOs reverting back to their historical norm, so we had about a 10-day move in DSOs, third quarter cash flow for us came in as expected.

Michael Turits - Raymond James

Okay, that’s good. And then if you just give me one more -- on the BSM core license bookings, you’ve always been able to give pretty specific guidance on that in terms of bookings going forward and now -- so is there -- can you give us some sense for how you get that visibility and how do we get comfortable with that?

Robert E. Beauchamp

First is just the sales pipeline. We just look at the -- what we see coming in from our sales forecasting and we believe we are getting better at that each quarter. And it gets us a range that we can get fairly comfortable in.

Michael Turits - Raymond James

Okay, great, guys. Thanks very much.

Robert E. Beauchamp

I’ll just add on one thing about the -- about as we move forward. We have -- in Europe, which is the only place where we had a problem with a core BSM and it was actually only a few countries in Europe, we’ve already made some changes there. We think we’ve addressed those issues. It was quite strong in North America and around the world. It was really just localized to a few countries, just a handful of countries in Europe which we think we’ve got our arms around.

Michael Turits - Raymond James

Appreciate it.

Operator

Derek Bingham, Goldman Sachs.

Derek Bingham - Goldman Sachs

Congrats on the quarter. You mentioned the ratable rate, you expect it to be slightly higher for the full year FY08, is that right?

Robert E. Beauchamp

That’s correct.

Derek Bingham - Goldman Sachs

And then any sense for where that ought to trend next year?

Stephen B. Solcher

You know, long-term I think it continues to trend where there is going to be more deferral, and I think it is strictly driven that the MSM business is going to continue to see it go what I would say closer to full subscription, 100% deferral and I think that will trend just on the way that customers are buying product there.

And I think long-term, I think you are going to see more perpetual deferral with the remainder of the business. So I think long-term, you are going to continue to see the deferral rate creep up over time.

Derek Bingham - Goldman Sachs

What would be driving deferral of perpetual licenses?

Stephen B. Solcher

Typically it’s driven by -- I’m going to use an accounting term -- co-mingling, which is selling multiple types of product within one transaction. So different pricing models will cause transactions to get co-mingled.

Derek Bingham - Goldman Sachs

You mean co-mingling with mainframe contracts?

Stephen B. Solcher

It could be co-mingling with mainframe, it could be co-mingling with the DSM product line, it could be co-mingling within its own self, so it’s all of the above. And then it’s just Ts and Cs itself, so terms and conditions that are being inserted into contracts will cause deferral.

Derek Bingham - Goldman Sachs

Okay, got it. And then if I could just ask, I think we had had tougher bookings compares for the back half of this year. Could you talk about what the bookings compare, or what we might expect for total bookings and deferred revenue next quarter?

Stephen B. Solcher

Next quarter again I think it is a very tough compare. We are looking for total bookings to actually be slightly down. I think in general, I look at it and believe that one of the surprising things that occurred in this quarter is just the strength of the mainframe bookings that we had. We’ve actually continued to refine our outlook in the gross number where that number at the beginning of the year we were thinking was going to decline in the high single digits. We are now believing that that business is probably in the low single digit decline and maybe even could exit the year flat.

If you even adjust for term length on a per annum basis, the thing that we said in the call was that on an annualized basis, we believe their bookings are actually going to be up over ’07, so we are going to see growth in annualized bookings on that piece too.

Derek Bingham - Goldman Sachs

Okay, but you are choosing to -- you’re being conservative on down year over year?

Stephen B. Solcher

On the mainframe side?

Derek Bingham - Goldman Sachs

Well, on total, but I guess you’re saying it’s driven by the mainframe.

Stephen B. Solcher

Yeah, I just -- I would say within the number probably is a degree of conservatism but we’ve got some work to do left in the quarter. But it’s no change -- that’s what we’ve been saying all year.

Derek Bingham - Goldman Sachs

Got it. All right, perfect. Thank you so much.

Operator

Brendan McCabe, Oppenheimer.

Brendan McCabe - Oppenheimer

I’ve got two questions -- one is on buy-backs. With interest rates going down, you know, you don’t get as much kind of foregone interest income if you use the cash to buy back shares. Have you thought about increasing that at all? That’s the one financial question.

And then the one business question is more and more people are talking about CMDBs and some of your competitors have very similar sounding acronyms, like BSM and initiatives like that. So seeing if you noticed any changes in the field or how you have to approach customers.

Stephen B. Solcher

On the buy-back, I think your analysis is right spot on. I think the accretion that we get through buying the shares back today is more attractive than it has been just because the interest rate that we are earning on the cash is less so.

Robert E. Beauchamp

On the second question, I think it’s wonderful news because in my experience in 20 years in this business, when you adopt a strategy and your the leader in it, you’ve got the market share and the technology and then all your competitors begin to say the same message, there’s a sort of a wave effect that essentially helps validate the strategy even further, and we’re seeing that with really all of our competitors saying whatever CMDB is, we’re going to write one of those too.

I will tell you that we have not -- we have no fear as I stand here right now of a competitive CMDB functionally being highly competitive. We still -- we do have -- for instance, we have one customer I know of in Germany that is one of IBM’s best customers in the world and they have now for months been working with large teams of technicians attempting to implement their CMDB.

We on the other hand are winning account after account of the names in the industry, in the largest industries who have standardized on us. Virtually every major systems integrator and outsourcer that I can think of, the large -- the telecommunications, manufacturing. Just talking to Dell Computers yesterday. They are in -- I mean, it’s just around the world, we’re seeing BMC winning that battle.

I do expect more competitive pressure as they realize just how incredibly strategic that piece of technology is but the reality is our market share is already so large, in so many of the world’s largest accounts, we have a very strong strategic advantage and I haven’t seen the technology threaten us yet.

It is -- so far, it is pure marketing or relationship-based that we have competition on in that product area.

Brendan McCabe - Oppenheimer

And then just one last follow-up on the European BSM localized weakness that you talked about, was that an internal issue or was that a localized demand issue?

Robert E. Beauchamp

We don’t think it was localized demand. We dug into it pretty deep and the answer came back with a finger pointing back at us. It was really some operational execution problems and we wanted to try to really look through that and we’ve become quite convinced that was the issue and the action has already been taken.

Operator

Richard Sherman, MKM Partners.

Richard Sherman - MKM Partners

On the European issue, it sounds like it might be a U.K., southern Europe issue. Is that correct?

Robert E. Beauchamp

Well, I don’t know if we want to break out the -- it was not the U.K. It wasn’t Germany, so it wasn’t our biggest markets, put it that way. In fact, I was just recently in Germany and some wonderful BSM victories for us there with some of the larger enterprises in Germany and a sales organization that knows how to sell it.

So I think we are in pretty good shape in our largest countries. We had some weaknesses in some of the smaller countries.

Richard Sherman - MKM Partners

And then on the headcount, your OpEx was up about 3%, as Steve said, I guess due to mainly currency. What percentage of employees are now overseas and what was the total headcount in the quarter end?

Stephen B. Solcher

Total headcount is 5,983, about 20% are what we would characterize as low-cost jurisdictions, just something that -- you know, locations that would be India and what we would consider northern Israel, Telhi.

Richard Sherman - MKM Partners

Okay, great. Thank you very much.

Operator

Philip Winslow, Credit Suisse.

Philip Winslow - Credit Suisse

I just wanted to touch on the mainframe business again. Obviously strong year-over-year growth, despite a reasonably tough comp during the quarter. I’m just wondering if you could give us a sense for what the pricing trends you are seeing out there and when you do think about licensed bookings growth, the mainframe obviously you talked about, the renewal base dragging down overall bookings next quarter, but when you do look at the licensed bookings going forward, what would be your expectation there?

Robert E. Beauchamp

On the first part of the question, which just has to do with -- I took the question as why are we doing well? It is -- but besides the obvious things, that our products are great and all that other stuff that you know I’m going to say, I’ll tell you one thing that is also somewhat different, is that really every quarter now for the past two years we have been improving that organization operationally by the fact that as you know, we’ve separated into a dedicated business unit, it has its own general manager, its own sales force, its own pre-sales, its own post-sales organization, own marketing initiatives, its own customer councils, et cetera.

And what we’ve seen is a significant improvement in our customer faith and customer focus and operating skills.

One other point on that is that we’ve also -- they’ve also been able to develop intelligence reports, business analytics where we have a very clear picture of the business that’s coming up in front of us, of the pricing trends. And by the way, to answer your question directly, the pricing has been holding nicely. In fact, we’ve seen our run-rate increase in I believe all but three of our largest, of our top 15 transactions last quarter. We saw our annualized run-rate with the customers signed up to commit to us to pay us over divided by the number of years, we’ve seen that increase in all but three transactions and across the business unit.

So that’s a sign that we are -- of a stable business and improving business.

Philip Winslow - Credit Suisse

Great. Thanks.

Operator

Walter Pritchard, Cowen & Company.

Walter Pritchard - Cowen & Company

Just on professional services, that business is up quite a bit over the last couple of quarters and I know you’ve been hiring there, you put a new head of the business and so forth. Maybe you could just help us out understanding how big that business gets over the next 12 months or 24 months as a percentage of revenue or as a growth rate?

Robert E. Beauchamp

Let me just take it generically for a second and then Steve will give you a view of the numbers, but from our standpoint, I’m actually quite optimistic about professional services frankly for the first time in a while for a number of reasons. One is we’ve just seen an across the board revenue pipeline build, the revenue growth 27%. I just got back from a trip to India and into Europe where I visited with our offices there and with customers, and actually the reason that their profitability was weak, particularly in Europe, was that demand was higher than they expected, that they had to sub-contract some of the agreements at rates that were less profitable than we would have liked, so we are seeing continued strength in demand.

We’ve also brought in the new head of professional services, a very experienced services executive, David Levantee, who is quite optimistic that he knows how to run this business more profitably and continue with a revenue trajectory in this sort of strong growth.

Ultimately, we don’t expect to see the business get more than 20% of our business in the long-term. It’s not our goal to be a large professional services organization. It is to use our services organization to ensure that we have both the consulting capability and the delivery capability of our solutions.

Case in point -- one of the largest banks in the world that we’ve used as a reference before recently, who standardized on BSM, invited us up to New York. In fact, I’ll be up there visiting them next week, I believe, in New York, and told us that our professional services organization implementing BSM was one of the best IT projects that they have had in many, many years and it was in their view, a strong success and they’ve asked us to now expand our relationship and begin to bid on other areas where BMC has solutions that we can offer integrated services.

So I’m feeling much better about services. We still have a ways to go before it’s officially in great shape, but the trajectory just feels very good right now.

Walter Pritchard - Cowen & Company

And then just on mainframe as a follow-up, I think you talked about in the release, 27 new customers in mainframe. I’m just trying to get a sense of how big of a factor you think share gains or competitive displacements are in your performance around the mainframe, especially in the last couple of quarters?

Robert E. Beauchamp

I wouldn’t overplay it. I think that we are excited about the 27 new customers with the bulk of that being in our enterprise job scheduling, which by the way is a combination of mainframe and distribute. That’s an enterprise class product, a product that runs on all servers in the enterprise, or can depending on how the customer implements it, with mainframe being the centerpiece server in most of those large instances.

But we do see competitive wins. That is part of our run-rate expansion we’ve talked about. We are winning some customers over to us and replacing competition, but I wouldn’t overplay it as a very large percentage of our success right now. It is [part of it].

Walter Pritchard - Cowen & Company

And then just Steve, quickly on the finance receivables, can you just give us a number for what the balance was that was sold during the quarter?

Stephen B. Solcher

About $30 million.

Walter Pritchard - Cowen & Company

Great, and where do you expect that next quarter?

Stephen B. Solcher

Less than that.

Walter Pritchard - Cowen & Company

Okay, great. Thanks a lot.

Operator

Kirk Materne, Banc of America.

Kirk Materne - Banc of America

Thanks very much. Bob, can you talk a little bit about just the trends you are seeing in sort of the ASPs around the BSM products? I know for a while a lot of your customers were buying these more on a modular basis. Are you seeing them take them on in the full suite now -- is that a trend you continue to see?

Robert E. Beauchamp

Actually -- go ahead, I’m sorry.

Kirk Materne - Banc of America

I was going to say and for some of the bigger deals you referenced, were those customers that had been playing with maybe one or two products and then decided to take on a full suite? Just any trends, that would be great.

Robert E. Beauchamp

Right. Actually, really an interesting question there because we’ve been looking at this. What’s happened recently -- as a matter of fact, this quarter was a good example of it, is we’ve really seen what I internally refer to as the BSM effect happens, where we see the modules that surround core BSM beginning to rise so that all the ships are rising with the tide around BSM. Let me give you some examples.

We saw solid growth in AR system, which is the base platform that Remedy is based upon but many of our applications are based upon, it’s our core development platform around BSM. We saw the AR system and platform have solid growth. We saw our customer support application have solid growth. We saw our asset management solution have solid double-digit growth. We saw change management have solid digit growth. By the way, that is now if not the largest one of the largest solution sets in the company in ESM today. We saw help desk, which is by the way not one of our fastest growing areas, grow nicely as well.

We saw our knowledge management suite grow very strong as well. So just keep going down the list -- Atrium, solid growth; our service impact and event management, solid growth; service desk express, solid growth; service automation, solid growth; it just goes -- identify management.

So really, as you look across the product line, kind of the suites that make up core BSM we saw all of those ships basically or most of them, at least, rising with the tide and we think that’s a very good sign of what happens when platform strategy works.

Kirk Materne - Banc of America

Okay, great and then maybe along those lines with BSM, can you talk about some of the leverage you are maybe starting to get from some of your system integrator partners in that part of the business as well? And maybe Steve, if you could just chime in in terms of what is that -- is that really what needs to happen to allow you guys to continue to push margins up even from these levels, maybe getting better leverage from the direct channel over time?

Robert E. Beauchamp

Well, the systems integrator leverage is something we’re very keen on. We have, as you know, it’s the only -- systems integration and outsourcing is the only sales organization we have that is actually petitioned as a vertical. Something we kicked off about a year ago, maybe a year-and-a-half ago we kicked that off and that’s been paying dividends as that group continues to perform well.

The fact that most of them have adopted our platform or at least very key parts of our platform, and I believe -- I can’t think of one, frankly, that’s not looking to spread out with us as their operating platform.

It is very important to our strategy. We see it in leverage -- I was in Australia recently and I met with one of the large system integrators there who is very keen on some large transactions. In fact, I met with the senior executives of that firm about some large contracts that they are planning on competing against and the fact that they have strong relationships there. This is a vertical in Australia, although we’re strong in Australia we are very weak in one particular vertical that years ago one of our competitors made roads in. This systems integrator is working with us on a coordinated strategy to go after that vertical and they really bring the relationship to that customer.

So we do those sort of opportunities. We just -- you also just see the mass of out-sourcers with some really exciting math around it. In fact, some of the largest transactions that we are currently working for the next few quarters are integrators and outsourcers.

Kirk Materne - Banc of America

Thanks very much. Congrats on the quarter.

Operator

Tim Klasell, Thomas Weisel.

Tim Klasell - Thomas Weisel

Just a couple of quick ones here -- first, on the cash collection, Steve, in your guidance, how much of those receivables have you already collected on the quarter? Did you already front-run the quarter just a little bit? On the Q4, that is?

Stephen B. Solcher

Help me with the question.

Tim Klasell - Thomas Weisel

Sorry. How have the receivables from Q3 been collected so far this quarter? Did you get an early run on your cash flow guidance for Q4?

Stephen B. Solcher

No, that doesn’t give me -- our increase is not driven from cash that we’ve collected so far. It’s really driven from the strength of the opportunity that’s in front of us. So from gross bookings to be up 4% year over year makes me feel more comfortable about where we’re going to end up in the quarter. It’s not the level of cash collections. We’re using our historical trends of DSOs to back into the cash collection side, so I wouldn’t look at early collections as a metric.

Tim Klasell - Thomas Weisel

Okay, very good. And then, the weighted average contract length has been growing for a while but this quarter it seems like it’s beginning to taper off, particularly on the MSM side. Do you think 3.1, 3.2, is that where things are tapering off or was this a little bit of an abnormality?

Stephen B. Solcher

It’s some tough compares in ’07 that are falling off. We will actually end the year close to 3 than 3.1. Again, you know -- that we’re excited about the business is we are seeing a shrinking of length and still seeing gross bookings increase. So gross bookings are up and again we’ve guided net single digit on an annualized basis, so adjusted for contract length, we’re seeing double-digit growth in annualized bookings.

Tim Klasell - Thomas Weisel

Okay, and then one final one on the MSM -- IBM is entering a new product cycle. I know historically there is very little if no correlation, but have you seen any of your customers holding up in front of that?

Robert E. Beauchamp

I’ll answer that. I’m not aware of anybody stalling as a result of that. We certainly haven’t heard that.

I will tell you that I am in the next few weeks going to be speaking with one of our customers about a capacity growth that they have, which is by far the largest single mainframe shop I have ever seen. And they are a large customer of ours and the discussion is a dramatic increase in their capacity.

And so we are -- you see some very large mainframe shops out there planning on getting larger, so that’s encouraging. And I think it’s more of an all ships rise with the tide. We think long-term, IBM shipping more MIPs is great for our business. It’s just difficult to land it one quarter at a time as to when we actually have the impact.

Did that answer your question?

Tim Klasell - Thomas Weisel

Absolutely. And then just sort of one follow-on that -- you mentioned that some of these data centers are getting very large and the hosting providers are in your pipeline. Are there any large renewals in Q4 that you are feeling fairly confident in, or are these large renewals just going to get a little bit lumpier?

Robert E. Beauchamp

I don’t know how to answer that question. I’m not sure I understand it exactly.

Tim Klasell - Thomas Weisel

I should just say are they going to get a little bit more random because they get larger and --

Robert E. Beauchamp

No, they don’t get more random. I wasn’t suggesting that our deals are going to get bigger and bigger. I’m saying that our customers are getting bigger and bigger so I’m not seeing the mainframe atrophy out of some of these big accounts. I’m seeing the customer saying next year we’re going to be 30% more mainframe MIPs or 40% or 50% -- in one customer’s case, 80% more mainframe MIPs.

So I don’t think we’re going to see any sort of a return of the killer whales in the mainframe business come back anytime soon. I think the business actually right now, while it is very much of a lumpy business, I don’t see that going away. I don’t think it’s getting lumpier and I think our ability to forecast them and see them coming is greater than it’s ever been in our history, frankly.

Tim Klasell - Thomas Weisel

Okay, very good. That’s very helpful. Thank you.

Robert E. Beauchamp

Operator, let’s take one more call.

Operator

Tom Curlin, RBC.

Tom Curlin - RBC Capital

Just on the mainframe side, which seems to be a theme for this call, can we dig in a little deeper on what’s driving these capacity increases? I mean, it’s not as if we’re in a super hot environment for IT spending in aggregate. I mean, if you get down to an architectural level, what’s happening in the mainframe environment that necessitates the increase? Is it a blanket statement that these customers simply haven’t increased capacity in a long time? Or can we point to application requirements changing? What’s happening?

Robert E. Beauchamp

Well, okay, I’ll take a shot at it. I think that it has to do with, from my discussions with customers who’ve taken this position, it’s just a great platform and the price points of that platform have come down, some of it at our expense and our competitors’ expense and IBM’s expense, in terms of the pricing of the mainframe space and it’s finally reached a point I think of it’s much closer to equilibrium so that there’s not the [hue and cry] there once was of I’ve got to get off the mainframe because the price points are too high.

It’s a very competitive platform. It is, by the way, still the most reliable, scalable, high performance platform in the world and you see -- I mean, if you go up and down the streets of New York, I defy you to find a large financial services outfit that’s not running its most critical apps on it. It is still running most of the financial services in the world.

You also see consolidation around the outsourcers and some of the outsourcers that specialize in verticals getting larger as they do consolidation and take more of that away from smaller companies who want to host it.

So I don’t think there is anything dramatic other than just the platform is quite competitive. IBM has done some good things with their technology from the hardware standpoint and the price points on the software have become very competitive with any other platform.

Tom Curlin - RBC Capital

And how would you rate the, from your perspective, the coming product cycle at IBM? Is it a minor upgrade or a big-time, significant --

Robert E. Beauchamp

We don’t know. It’s going to depend a little bit on IBM and how greedy they get with their pricing on the software. They have consolidated their market share on the mainframe so that they are again the only game in town. The [AMDOCS] of the world are gone, the Hitachis are gone -- all of their competitors essentially are gone out of that space, so it will be interesting to see if they are able to maintain their pricing competitiveness in that market.

If they hold the price points as competitive to the platform, then I think we will see it be a strong cycle. But frankly, we’re not building models on that and I wouldn’t encourage you to if you are looking at us that way. We just don’t know.

Tom Curlin - RBC Capital

All right, and then just housekeeping -- you gave us a metric on the receivables for this quarter. Do you mind giving us last quarter? I think we’re missing that.

Stephen B. Solcher

I don’t have that number right in front of me. I could probably pull that for you. I wanted to say it was about $90 million, if I can remember, but I can give you that --

Robert E. Beauchamp

If you want to give us a call, we’ll get you the exact number.

Tom Curlin - RBC Capital

Thank you.

Robert E. Beauchamp

Okay. All right, let me just wrap it up with just a couple of quick stories. One of them is next week I am going to be the keynote speaker at one of our large BSM customers, one of the world’s largest high-tech manufacturers, as the only vendor asked to speak this year or last year. They’ve gone through and are going through a major cost restructuring to be more efficient and competitive and to drive cost out of their organization and they have standardized on BSM from BMC to do that and they are well, well on their way into production with our platform and they’ve asked me to speak on this revolution that is business service management and I’m looking forward to that. That’s the sort of thing that just did not happen at BMC and the CIO and I were speaking about it just yesterday on the phone, as we were reviewing that meeting.

Another one is a large firm that is in Asia, a very large firm in Asia, one we’ve not mentioned on this call, that has recently notified their employees that all acquisitions of software must be cleared through the BSM roadmap to ensure that it fits to the roadmap that is BSM before any software will be acquired, and that we are the de facto standard for acquisition. In fact, they were one of the customers, one of the first customers to acquire our run-book automation product as soon as it hit the market.

And those sorts of stories -- and that was Tata Motors, are what we are seeing happening right now in the marketplace. We’re excited about it. We look forward to helping our customers reduce their costs and run more efficiently through automation which frankly has become even more important in the last 90 days than it was just a year ago as customers focus on process cost reduction.

So we’ll be helping them with that. We look forward to working with you and look forward to talking with many of you later on this afternoon and the days to come. Thank you very much for joining us and see you at investor day.

Operator

That concludes the BMC Software teleconference. Have a pleasant day.

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