BMC Software F3Q06 (Qtr Ending Dec 31, 2005) Earnings Conference Call Transcript (BMC)

BMC Software (BMC)
Q3 2006 Earnings Conference Call
February 7th 2006, 5:00 PM.

Executives:

Derrick Vializ, Vice President of Investor Relations
Robert Beauchamp, CEO
Stephen Solcher, CFO

Analysts:

Tom Coleman, RBC Capital Market
Kirk Materne, Banc Of America Securities
Sarah Friar, Goldman Sachs.
Michael Turits, Prudential Equity Group.

Presentation

Operator

Good day everyone and welcome today’s BMC Software’s Third Quarter Earnings Result Conference Call. Today’s program is being recorded. At this time for opening remarks and introductions I would like to turn the program over Mr. Derrick Vializ, Vice President of Investor Relations. Please go ahead sir.

Derrick Vializ, Vice President of Investor Relations

Thank you, operator and afternoon. I am Derrick Vializ, Vice President of Investor Relations. I would like to thank you for joining us today. During our call Bob Beauchamp our CEO will provide an overview of our third quarter performance and then provide you with an update on our Business Service Management strategy, after that Steve Solcher, our CFO will provide additional financial details. Bob will then provide guidance for the fourth quarter and 2006 fiscal year, before we open the call to your questions.

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 the BMC’s products. BMC’s operating strategies, acquisitions and other statements that are not statements of historical facts are considered forward-looking statements.

I’ll remind you also, that numerous important factors; risks, uncertainties affect BMC’s operating results and could cause actual results to differ from the results implied by these or any other forward-looking statements. Cautionary statements relative to these forward-looking statements and BMC’s operating results are described in today’s earnings press release and the financial presentation available on our website at bmc.com/investors, and in our SEC filings.

At this time let now turn the call over to Bob.

Robert Beauchamp, Chief Executive Officer

Thank you, Derrick and good afternoon everyone thanks for joining our call. In the third fiscal quarter we continue to deliver on our key goals. We increased profitability, grew our Business Service Management offerings, generated solid cash flow and continued our accelerated share repurchases. Let me walk you through each of these.

First improved profitability; non-GAAP operating income, Operating Margin and EPS all increased on the year-over-year basis. Non-GAAP operating income was $71 million versus $41 million a year ago and $62 million in the second quarter. Non-GAAP operating margin was 19% up from 11% in the third quarter last year and 17% last quarter. Non-GAAP, EPS was $0.30 compared with $0.22 a year ago and $0.27 in the second quarter. This marks the third consecutive quarter we have increased non-GAAP earnings on a year-over-year basis.

For the first nine months of this fiscal year, non-GAAP EPS has increased by approximately 50% from $0.52 in fiscal 2005, to $0.76 this year. Our sharp focus on Expense Management and the successful completion of our restructuring initiatives have reduced operating expenses year-over-year and lead to improved profitability, another key goal for this year’s gross sales of our Business Service Management offerings. We told you last quarter that we saw momentum building in pipeline for this business and this momentum carried through into our third quarter fiscal 2006 results.

Service Management License Bookings were up 13% compared to the third quarter of last year. For the first nine months of fiscal 2006, service management license bookings are up 6%. Identity Management License Bookings while down for the quarter are up 24% on a fiscal year-to-date basis. This demonstrates that our BSM strategy is gaining traction and resonating strongly with customers around the world.

Finally, we are also focus this year on generating solid, higher quality Operating Cash Flow. To enable us to reinvest in our business and to fund share repurchases. Cash flow from operations for the quarter was $67 million. For the first nine months of fiscal 2006, cash flow from operations was $152 million and adjusted to exclude restructuring payments and tax payments related to repatriating foreign earnings, it was $219 million. During the third quarter, we repurchased 4.9 million shares at an aggregate purchase price of $100 million.

So to summarize, we are delivering on our key goals for the year with increased profitability, improved operating margin, growth in business service management license bookings, solid operating cash flow and an aggressive share repurchase program.

Let me now review business activity, and revenues during the quarter. Overall we are pleased with the growth we generated in Service Management License Bookings, as mentioned, they were up 13% compared to the year ago period. However, due largely to decline in mainframe and BSM license bookings, total license bookings were down to 11% compared to the year ago period. It’s worth noting that license bookings for of a Patrol Product family were down 8% compared to the third quarter of fiscal 2005.

On a geographic basis, the decline was due largely to a lower level of license bookings in EMEA, as you may know we are strengthening our sales team in EMEA and recently named a new head of sales in the region. I will provide more information on this in few minutes. License bookings were up in the US and in Americas International and down slightly in Asia-Pacific. I would like to point out that in the third quarter, a much higher percentage of License Bookings were term contracts, while this negatively impacted revenues for the third – for the quarter. In particular, license revenues it increased differed license revenues to an all time high.

On an as reported basis, third quarter revenues were down slightly at $380 million compared to the year ago period. On a constant currency basis, third quarter revenues were $385 million. While license revenues overall declined service management license revenues rose 17%. Maintenance revenues were up 11% and increased in all four business segments. Revenues overall were up in the US and Americas International and declined in EMEA and Asia-Pacific.

Year to date, total revenues were up 2% compared to the first nine months of fiscal 2005. Service Management and Identity Management license revenues were up by 9% and 6% respectively, overall, total license revenues decline by 7%, Increased Maintenance revenues more than offsets decline in license revenues. On a geographic basis, for the first nine months of fiscal 2006, total revenues were up in US and in Americas International and flat in EMEA, while Asia-Pacific declined.

As far of our focus on BSM, we are fundamentally transforming our Company. Developing and launching new offerings, executing strategic acquisitions, a compliment and hope complete our offerings. We are aligning our operations in sales force as well as reshaping our go to market strategy. We continue to see evidence that our strategy in gaining traction in the market with positive response from customers and prospects. We’ve picked up a number of important customer wins during the quarter; Cingular Wireless, Vodafone, Volvo, UBS, Cisco, US Bancorp, named about a few.

Today, we announced that a long time BMC customer Mutual of Omaha is standardizing on a BSM Solution that incorporate multiple element that the BMC portfolio including the new BMC Performance Manager and our Identity Management suite. They are implementing this solution to cut cost, improve performance, increase service levels and most importantly manage their IT environment from a business perspective.

In addition to the increase, we are seeing in service license bookings, we continue to see positive momentum in our pipeline. The pipeline is well above the level it was at the same point in time a year ago and in the previous quarter. During the third quarter our briefings interactivity activity is up significantly from the beginning of this year. We are increasing the number of BSM briefings to meet the demand. BSM is also a critical element to some key new alliances including, EDS and our newly announced alliance with IBM. IBM global services is trying many of their consultants in implementation of our BMC Remedy and BMC Magic Service Desk Solutions into which IBM typically is integrating its solutions. We believe this new alliance will enable us to deliver integrated solutions and significant value to our customers and the market at large.

With EDS in the third quarter, we executed a significant multimillion dollars agreement under which EDS will license and standardize globally on the BMC Atrium Configuration Management Database or CMDB, a heart of BSM within its leverage service-delivering model. Following the realignment of our sales teams, earlier this year to better support BSM, we have put the majority of our teams to extensive BSM training in ITIL Testing and Certification programs.

On the R&D front, we continue to make great progress on delivering new elements for BSM. For example, our launched Identity Managements suite delivers a critical integration between, an Identity Management Solution and a Configuration Management Database, it stepped us apart by having the unique ability to leverage Identity Data across the IT infrastructure. To allow our customers to better manage the impact of changes in process and technology on the people.

We also entered into a new high growth market segment, with the introduction of our Service Oriented Resources Management Solutions, including the BMC Virtualizer. Service Oriented Resources Management enables just in time delivery of computing resource capacity to business services based on business requirements, this includes Server Provisioning Capability for virtual machines based on changing business conditions and enables customers to share computing resources across applications rather than dedicating them in files.

We continue to see strong support from the industry analyst community for BSM and its underlying elements. Kason Point, Forester recently published a report entitled “BSM is coming of Age