TIBCO Software Management Discusses Q2 2012 Results - Earnings Call Transcript

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


Good afternoon, ladies and gentlemen. I'm Jamaria. Welcome to TIBCO's Second Quarter 2012 Conference Call. [Operator Instructions] Today's call is being recorded and will be available for playback from TIBCO Software's website at www.tibco.com. In addition, replay will be available through InterCall for one month following today's call by dialing (800) 585-8367 or (404) 537-3406 internationally. The confirmation code is 88581564.

The following conference call includes forward-looking statements which represent TIBCO Software's outlook and guidance only as of today and which are subject to risk and uncertainties. These forward-looking statements include, but are not limited to, forecasts of revenues, operating margins, operating expenses, outstanding shares and earnings per share for future periods. Our actual results could differ materially from those projected in such forward-looking statements. Additional information regarding the factors that could cause actual results to differ materially are discussed in the risk factors section of TIBCO's most recent reports on Form 10-K and 10-Q filed with the Securities and Exchange Commission. TIBCO assumes no obligation to update the forward-looking statements included in this call, whether as a result of new developments or otherwise. This conference call also includes certain financial information that has not been prepared in accordance with Generally Accepted Accounting Principles, as we believe that such information is useful for understanding our financial condition and results of operations. For a presentation of the most directly comparable financial measures calculated in accordance with GAAP and a reconciliation of the differences between the non-GAAP and GAAP financial information, please see our website at www.tibco.com.

The presenters on the call are Vivek Ranadivé, TIBCO's Chairman and CEO; Murray Rode, Chief Operating Officer; and Sydney Carey, Chief Financial Officer.

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

Vivek Y. Ranadivé

Thanks. Hello, everyone, for joining us today. I'll begin with a brief discussion of our Q2 performance and provide some remarks on the broader environment we're seeing before turning it over to Murray and Sydney to discuss details.

We delivered another quarter of strong growth in Q2, with total revenue increasing 20% and license revenue increasing 17%, respectively on a constant currency basis. Sydney will describe the currency effects in further detail later in the call.

As reported, total revenue came in at $247 million. License revenue was $93 million. Non-GAAP operating margins were 25%, and our non-GAAP EPS was $0.26. This now marks 4 straight years, 16 consecutive quarters, where we have beaten consensus EPS estimates. This will also be the 10th consecutive quarter of growing EPS by more than 20% over the prior year.

It was a busy quarter for TIBCO. We met or exceeded all of our guidance metrics. We acquired a great company and exciting technology in LogLogic. We signed some terrific new logos and partners. We shored up our balance sheet and domestic cash. We held a number of regional marketing events that saw truly impressive attendance and demand. A lot of people are wondering what are we seeing in the broader environment, and how is it that we are continuing to grow at 20%. Here is my perspective.

Firstly, any volatility in this time should be sharply contrasted with 2008 and 2009. We do not see what was then a shutdown in spending. We do not see big deals drying up. In fact, companies are willing to fund large technology buys when the value is clearly demonstrable. Ironically, I might argue that it's actually easier to justify a big deal than a small deal in the current environment because the big one can actually move the needle on the company's performance.

Secondly, marketing is really emerging as a larger and larger influence in corporate budgets, and CMOs are making more important technology decisions. I believe this is because companies are looking to marketing to figure out how to expand, how to engage and how to monetize the social network that is inherent in every company. And this involves more than just setting up a Facebook page. If a company really wants to see the exponential value of its social network, it needs the platform, the application and the tools that enable it to understand and exploit all the information flows, that is the big data that makes up that social network. This plays right into TIBCO's strengths.

And finally, the demand for our event-driven infrastructure applications has never been greater. While the 20th century players are tied to the database and most of the smaller players are one-product companies focused only on one segment, TIBCO offers a powerful, integrated assembly of pearls, everything needed for delivering event-driven application and the two-second advantage.

Consider just one of those pearls: TIBCO Loyalty Lab, our cloud-based loyalty platform. Today, Loyalty Lab has 260 million loyalty members under management. This is up 120% in the past 12 months and up 40 million in Q2 alone. In the past year, we added 8 different retail categories, including sports retail, beauty, hardware, pet supplies, travel, restaurant retail, and this quarter, kiosks and coffee. Now by adding other pearls such as Spotfire, BusinessEvents and master data management to TIBCO Loyalty Lab, we're working to deliver next-generation real-time intelligence platforms for some of the fastest-growing retailers in the country.

Our same infrastructure platform is event-enabling global supply chains, delivering significant improvements in risk management and fraud and doing so across a wide range of industries. We have the platform that customers need to tackle 21st century challenges and opportunities.

Still, I am not satisfied. My guys don't like me saying this, but we could be doing better. Given that our value proposition, our competitive position and our brand have never been stronger, we should be doing even better. I believe our execution in certain markets can get better, we can improve our ability to articulate the extreme value we bring to the table, and we will.

This is a market of haves and have-nots. For some companies, it is the best of times. For others, it is the worst of times. For us and for our clients, I believe it is the best of times.

Now I'll turn it over to Murray.

Murray D. Rode

Thanks, Vivek. I'll cover some key operating metrics for the quarter and then turn it over to Sydney. Please bear in mind that when I speak of regional or product growth rates, that I'm presenting them in actual dollar terms and not adjusted for constant currency.

I'll start with our license transaction numbers. During Q2, we had a good range of business with 137 deals over $100,000 in license revenue, up from 119 a year ago. We also had 20 deals over $1 million in license revenue, which is 1 less than a year ago. Our average deal size this quarter was approximately $620,000 versus about $630,000 last Q2. And our top 10 customers comprised approximately 19% of our total revenue versus 21% a year ago.

Looking at the geographic mix of total revenue, it was as follows: Americas at 53%; Europe, Middle East Africa at 34%; and Asia-Pacific and Japan at 13%. Asia-Pacific/Japan was the standout performer this quarter, growing 40% over the same period a year ago with contributions across the region. Many of our customers there are facing increasingly competitive markets, so they are looking for a platform like ours that helps them break down functional silos, create new service models and streamline processes end-to-end. The notion of becoming event-driven to be able to cross-sell more and better service customers is very relevant to the competitive dynamics in the region. For the rest of the world, the Americas grew 17% and Europe grew 4%. On a year-to-date basis, Americas is up 13%; Europe, 22%; and Asia about 27%.

In terms of our sales capacity, we grew quota carrying headcount to 276, on target with our goals for midyear. We've also increased our services organization to over 1,000 people, an increase of 36% year-over-year. I would also point to a couple of organizational changes we made recently. First, we have arranged much of our regional and technical organizations for pre and post-sales to more of a global organization to better support multiproduct or platform-style implementations. And second, we are modifying our approach to the Americas business to better capture the opportunity and better support our platform sales strategy. So we have changed the leadership and the role of SVP Americas for core infrastructure sales. Longer term, we will look to replace this role, but for now, the regional sales VPs in the Americas will report directly to Murat Sonmez, our Executive Vice President of Global Sales and Services.

Shifting to vertical markets, we had 8 industries deliver 5% or more of total revenue as follows: Financial services comprised 22% of total revenue; communications, 11%; manufacturing, 9%; energy, 8%; life sciences, 8%; healthcare, 7%; retail, 7%; and government, 6%. Healthcare was way up this quarter, increasing to almost 4x last year's attainment. Manufacturing and life sciences grew 92% and 57%, respectively, and other particularly strong growth verticals included CPG and retail, which grew 50% and 21%, respectively.

From a product segment perspective, Q2 was all about business process management, and this was the strongest growth quarter for BPM and collaborative technologies that we've seen in many quarters. The breakdown of license revenue among our major product families was: SOA, 55%; business optimization, 31%; and BPM, 14%. BPM grew 80% year-over-year in the quarter, driven by increasing AMX BPM sales. Year-to-date, the BPM category is up by 48%, while AMX BPM specifically is up by 80% over the first half of last year. SOA was up just over 14%, with key product drivers in core infrastructure, connectivity and our cloud middleware, Silver Fabric, which had another particularly strong quarter, up severalfold from last Q2.

Business optimization was up only marginally, but remained a key factor in most of our larger deals. Coming off a string of growth quarters and an especially strong Q1, Spotfire showed less growth this Q2, but continues to show strong pipeline growth and is up over 43% year-to-date. BusinessEvents was down on the quarter, but this belies its central role in enabling many of our infrastructure applications, and it remains a key differentiator for us. In fact, BusinessEvents was in 13 of our 20 license deals of $1 million or more. In general, we're seeing a trend toward more platform-oriented deals, which include BE, or BusinessEvents, as the event processing engine within a broader deployment as opposed to a discrete product sale.

Also this quarter, we added LogLogic, which brings TIBCO a powerful new ability to ingest and interpret log files for use in a range of risk, security, operational intelligence and fraud applications. It contributed only modestly on the quarter, and we're still in the process of normalizing contracts and processes into our business. So we don't expect this business to fully hit its stride before the start of next year.

The last comment I'd make on products is, we had some notable partner-related sales in the quarter, the 37% of license revenue influenced by partners. This was higher than our normal rate, but still reflects the overall positive trend we're seeing with partners.

So at the halfway point in our fiscal year, total revenues are up over 21% on a constant currency basis over the first half of last year. At the same time, we've continued to expand our operating margin and grown our non-GAAP EPS 26% year-to-date. We also continue to see vertical market diversification and increasing traction for our platform story. For the second half of the year, we will continue to invest for growth while optimizing operations for best leverage and sales effectiveness.

With that, I'll turn it over to Sydney.

Sydney L. Carey

Thank you, Murray. I will provide additional details on our financial performance in Q2, and then I'll provide comments on our financial outlook for Q3. I'll review our financials on both a GAAP and non-GAAP basis. A full reconciliation was included with our press release, along with an explanation of our non-GAAP measure. As Vivek mentioned, U.S. dollar strengthened compared to foreign currency and impacted our results materially this quarter. I'll be sure to highlight the impact of these movements on revenue and earnings.

Some key performance data on our second quarter results are as follows: Total revenue was $247.4 million, up 14% year-over-year on an actual basis, but up 20% on a constant currency basis. License revenue was $92.6 million, up 13% year-over-year on an actual basis, but up 17% on a constant currency basis. Services revenue was $154.8 million, up 15% year-over-year on an actual basis, but up 21% on a constant currency basis. Non-GAAP gross margin for Q2 was 74% in line with last year. Non-GAAP operating income was $61.8 million, up $11 million or 22% from the same period a year ago, which resulted in an operating margin of 25%. On a constant currency basis, operating income grew by over 35% versus the same period a year ago. Non-GAAP EPS was $0.26 versus $0.21 a year ago. We estimate the currency impact to earnings to be a negative $0.03.

Q2 cash flow from operations totaled $75.8 million and on a year-to-date basis, totaled $116.9 million, which is an increase of 40% from the same period a year ago.

Moving down to the balance sheet. Deferred revenue, including both long and short-term components, totaled $254 million, up $27 million, which is an increase of 12% or 19% on a constant currency basis from Q2 of last year. DSOs for Q2 came in at 64 days, down from 71 days a year ago. Also during the quarter and largely in conjunction with our convertible debt offering, we spent over $121 million in share repurchases, buying back approximately 3.6 million shares.

As we look forward to Q3, we continue to see a 5% to 6% currency headwind on revenue with a larger impact to earnings. Our guidance for Q3 is as follows: We expect total revenue to range from $255 million to $265 million. On a constant currency basis, this represents growth of 17% to 22%. We expect license revenue to range from $98 million to $106 million. On a constant currency basis, this represents growth of 13% to 22%. The non-GAAP operating margin is expected to be 25% to 26%. The non-GAAP EPS for the quarter should range between $0.25 and $0.27. We are estimating the impact of currency on earnings to be a negative $0.03. Note that this guidance assumes a 27% tax rate, however this can vary depending on the mix of foreign versus domestic profits. GAAP EPS should range from $0.12 to $0.14 with an assumed tax rate of 23%.

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

Question-and-Answer Session


[Operator Instructions] Our first question will come from Brent Thill with UBS.

Brent Thill - UBS Investment Bank, Research Division

Vivek, you mentioned the U.S. growth rate. Can you just give us a sense of, is this more execution-related or competitive-related? And how long do you think it will take to get it back to where you'd like to see it?

Vivek Y. Ranadivé

Well, it's really execution-related, Brent. We haven't been executing well in the United States. And so we think we'll get back to where we'd like to be by -- we hope to do it very quickly. So we hope that this quarter or next we'll again be firing on all the cylinders that we'd like to be.


Our next question is from John DiFucci with JPMorgan.

John S. DiFucci - JP Morgan Chase & Co, Research Division

I guess, Vivek, you said you're not seeing a shutdown in spending. You're not seeing deals dry up like you did in 2008, 2009. But even during that period -- and we all know, though, that there is sort of some softness out there, and we're hearing from a lot of people, things about Europe, things about financial services, and you have a lot of exposure to them as you did in 2008 and 2009. But during that period, I think you surprised a lot of people by putting up numbers -- even if license might have been a little bit light in certain quarters, you actually put up bottom lines that were really strong and solid throughout. I guess if things do change and get materially more difficult as far as the environment -- forget -- taking your execution out of it for a second, how committed are you to the operations of the company and just making sure you continue to execute on a financial perspective? And maybe that's a question for Sydney also.

Vivek Y. Ranadivé

Well, now, I think, John, that's a good question. So we've had 16 consecutive quarters where we've beaten consensus. And we've been hitting the ball right down the middle of the fairway every single time in good times and bad. We made a commitment to you 4 years ago that we're going to keep growing our earnings per share, and we had said that we will grow our EPS 15% to 20%. And now for 10 consecutive quarters, we've grown it at more than 20%. So you're going to see us being very, very disciplined in terms of continuing to grow our EPS at 15% to 20%. And -- but right now, what we're seeing is opportunity, John. So we need to make sure that we keep investing in that opportunity. And what we're seeing right now is, it seems kind of counterintuitive, but actually companies are willing to spend big money if you can demonstrate value to them. So we just need to do a better job. I think we're leaving money on the table right now, and I want to go pick it up. So if there is a dramatic change in the environment, we're still going to give you the 15% to 20% EPS growth that we promised, as we did in past years, as you pointed out.


Our next question is from Derrick Wood with Susquehanna International.

James Derrick Wood - Susquehanna Financial Group, LLLP, Research Division

There seems to be a lot of questions around what the run rate was on LogLogic and what the contribution should be going forward and maybe potential impacts, for maintenance -- the write-downs, I mean. Could you give us some color as to what the contribution is within your guidance for Q3?

Vivek Y. Ranadivé

We're not -- we'll be happy if we can have like a 1% or 2% impact, which would probably be more than drowned out by the currency impact. But we think that we'll actually start really hitting our stride next year as we fully integrate LogLogic with Spotfire and BusinessEvents. We think we're sitting on a potential gold mine. So we'll take our usual approach: We're going to integrate it, we'll get a few key wins and then come next year, we'll start blowing it out.


Our next question is from Brad Zelnick with Macquarie.

Brad A. Zelnick - Macquarie Research

Vivek, I was hoping you could maybe just expand on the go-to-market changes in North America. This -- it comes as a bit of a surprise after multiple quarters of strong execution. Just wanted to get a better understanding of what precipitated the change, especially your -- it sounds like you're swapping out an executive who has a very successful track record at TIBCO and just if you could expand on what the impact to the business might be from the change.

Vivek Y. Ranadivé

Yes, so we think that the business will be very positively impacted. And I was not happy with the way we were executing for the last 3 or 4 quarters. We felt that execution in other geographies like Europe and Asia was very strong. I felt we were leaving too much money on the table. We were not really capitalizing on the opportunity that we had. And I like to say at TIBCO that if you just do what is expected of you, you get a C, and you have to do more than that in order to get an A at TIBCO. And I just saw that we could be doing better. And so, I decided to make a change.


Our next question is from Kash Rangan with Merrill Lynch.

Kash G. Rangan - BofA Merrill Lynch, Research Division

It looks like your sales headcount hiring is still tracking very nicely, and it's ahead of the license growth. So if we are able to put this execution thing in the U.S. behind us, do you think we should be able to reaccelerate the licenses on a constant currency basis? And if you had some curious reason, Vivek, give us a little bit more color -- or maybe Murray -- on how do you expect the interim changes with the North American sales executives reporting directly to Murat -- how long do you think we should expect the transition to be and how smooth could that be?

Vivek Y. Ranadivé

So we had, I think, 17% constant currency growth. We think that with the changes that we are making -- whatever Murat focuses on, he does very, very well, and so, I've asked him to personally focus on the Americas. I personally have been in meetings all day with my Americas staff, and I feel very, very confident that we're going to be getting back to where I want to be as early as this quarter. And -- so that's number one. Number two, I -- Kash, we're seeing -- we just had a conference -- we're having these conferences where we're sharing what we're doing with customers, regional conferences. We had one in London yesterday. We were expecting a couple of hundred people. Then we were told that they were going to be like 500 and then after that, yet another 100 showed up on top of that who hadn't even registered. So literally, we had triple the attendance that we thought. And then this morning, I get a text from Paris that we thought we'd have 50 to 100 people, and we had 350 people show up in Paris. So what we're seeing is that there is very, very strong demand for what we do, and we need to execute. We haven't been executing to my satisfaction in the Americas, and this quarter, we will be very, very, very focused on doing just that. Murray, do you want to add anything?

Murray D. Rode

Well, the only thing I would add is just that this change doesn't affect all of the Americas sales organizations because we still have groups like our Spotfire sales group or the OEM partner group, which reports through a different reporting line. So those are groups that, that have been doing well, and we expect will continue to do well.

Vivek Y. Ranadivé

Yes, so the groups that reported outside of the infrastructure business, those groups continue to show the kind of growth that we had hoped to see.

Murray D. Rode

So that moderates the effect I think you were asking about, Kash.

Vivek Y. Ranadivé



Our next question is from Jason Maynard with Wells Fargo.

Jason Maynard - Wells Fargo Securities, LLC, Research Division

One question I want to follow up on, on Vivek's commentary around -- it sounded to me like you were sort of insinuating that you're going to protect earnings if things got a little trickier, dicier, however you want describe it. And I guess the thing I'm having trouble squaring up is that if there's so much opportunity and you're triple -- you're overbooked 3x in Paris and London and all these great data points that you're sharing with us, why would you worry about protecting EPS by a couple cents in the short term when it's clear you're probably under-distributed on a global basis relative to your competitors and you're perhaps, if you will, not as present in as many deals as you probably need to be to take advantage of this big opportunity that seems to be turning your way? So help me square this up.

Vivek Y. Ranadivé

Yes, so, Jason, this is a debate that we've had before, and we as a company, we stand for growth with leverage. That's been the promise that we've made. And so we'll grow, and we'll always create leverage. We said we would back off a little bit on that leverage so that our profitability won't be quite as high as we had said it would, but it would still be growing. And so from our perspective, we are continuing to make investments. We're continuing to hire in sales, we're continuing to invest in R&D, we're continuing to invest in our customer-facing organizations, so we're not really slowing that down. But we made a commitment to you guys that we'd keep going at 15% to 20% a year, and we'll keep doing that. Sydney, you wanted to add to that?

Sydney L. Carey

Yes, I was just going to say, we set out at the beginning of the year to be at 275 quota carrying reps midyear, which is up 25% over last year, and we hit that target. We look to continue to add during the second half and end the year somewhere between 300 and 310 quota carrying reps, again up 25% over where we ended last year. So we are making the investments. We're making the investments in field enablement, we're very focused on bringing those reps on board and getting them productive.


Our next question is from Karl Keirstead with BMO Capital Markets.

Karl Keirstead - BMO Capital Markets U.S.

My question has to do with the August quarter license guidance. It has a broader range than we're used to seeing, and I'm curious if you could sort of rank order what the variables out there that you're considering in setting a somewhat wider range. Is it uncertainty around how quickly you can execute better in the U.S.? Is it a reflection of the uncertainty in Europe? Maybe a little color there might help us.

Vivek Y. Ranadivé

Yes, it's -- if you look at our guidance range, it's actually more aggressive than it was a year ago at the same time, so -- on a sequential basis or even on a year-over-year basis -- so it's actually consistent with the type of guidance we've given in the past. There are more uncertainties this year in terms of things like currency headwinds. So we're just being -- we just want to -- for 16 consecutive quarters, we've underpromised and overdelivered, and we'd rather stay in that mode. Sydney, do you want to add to that?

Sydney L. Carey

Just, again, I think that currency is having an effect on it, as well as just going into our summer quarter, and we felt it was more appropriate to have a little bit broader range on license and total revenue in this period.


Our next question is from Aaron Schwartz with Jefferies.

Aaron Schwartz - Jefferies & Company, Inc., Research Division

I just had a follow up on the commentary you made about the structure of the sales organization in North America. You sort of said that Spotfire was somewhat segmented from where you thought execution wasn't great, but the Spotfire numbers seem like they were probably still a little below what you were expecting. So can you just walk through sort of why that was or why those deals would have gotten held up and sort of reconcile the -- your views on execution for Spotfire versus the rest of North America?

Vivek Y. Ranadivé

You know, the -- I think, Murray, you can talk more to this -- but we actually had a very strong quarter the previous quarter. And things that we thought would close in Q2 closed in Q1. And so we had a very, very strong showing. So I think there was some of that impact. So that really -- you want to add to that, Murray?

Murray D. Rode

Yes, which is part of the reason we called out the year-to-date number for Spotfire being up 43%. Spotfire also had a very strong fiscal 2011. So as Vivek said, we think there was a little bit of effect in Q2 just because we had such huge growth in Q1. I mean, we were up, I think, about 100% growth -- over 100% growth in Q1. So a little bit of a carryover effect, but the pipeline there continues to look great, and we just really like the prospects on that business.


Our next question is from Jesse Hulsing with Pacific Crest Securities.

Jesse Hulsing - Pacific Crest Securities, Inc., Research Division

Can you talk a little bit more about growth in your services headcount? Is there a concerted effort to take more consulting expertise in-house and lead with your services capabilities? And what impact is that having on your partner program?

Vivek Y. Ranadivé

Our partner program is the strongest it's ever been. But there is just a lot of money on the table right now in services. And so it's not one or the other. We actually, by doing what we do, we can actually expand the pie for our partners. So there is -- I think the shift is more that, what we're seeing is customers are really liking our pearl necklaces approach. So where we're selling these value propositions, so customer upsell and cross sell. And so our services organization is now more involved in being kind of that glue that knits together the different pearls that we have or selling operational efficiency or selling risk management. So what we do is, we take a number of different pearls and we knit them together and we sell them the solution. We target the chief marketing officer. And I think that's where our services organization steps in. Murray, do you want to comment on the headcount and so on?

Murray D. Rode

Only to reinforce the point that we think it's -- as Vivek said, it's expanding the pie. It's a reflection of demand in general, and we think it's -- it also reflects the increasing demand for our partners. So it makes us better capable to support them too.


Our final question comes from Mark Murphy with Piper Jaffray.

Matthew J. Coss - Piper Jaffray Companies, Research Division

This is Matt Coss calling in for Mark Murphy. Just a question on Europe, are you seeing any evidence or just anything that makes you worry over there? I mean, are sales cycles getting longer? Are deals getting harder to approve? Just anything that gets you either more or less worried about Europe right now.

Vivek Y. Ranadivé

Well, we don't see a change from a quarter ago. We think that as long as we show the value -- in a couple of the deals that I was involved in, they were very, very focused on getting what we had to offer done because they saw huge value. So we actually closed some large deals in Europe. And I think if you have the goods, and if you're able to show the value, you can move the needle. I think if you're prioritized high, then it's a good thing. And so I like to say, it's the best of times, it's the worst of times. And we just have to keep doing what we have to do to make it the best of times for us and for our clients.


At this time, I will turn it back over to Vivek for closing remarks.

Vivek Y. Ranadivé

Well, thank you, all, for joining us today. We hope to see many of you at our user conference TUCON. It's in Las Vegas, September 24 to 27. And with that, we will now conclude this call. Thank you.


Thank you for joining us. We will now conclude TIBCO's Q2 2012 earnings call.

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