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BMC Software (NASDAQ:BMC)

Q1 2013 Earnings Call

July 31, 2012 5:00 pm ET

Executives

Derrick Vializ - Vice President of Investor Relations

Robert E. Beauchamp - Chairman, Chief Executive Officer and President

Stephen B. Solcher - Chief Financial officer and Senior Vice President

Analysts

Philip Winslow - Crédit Suisse AG, Research Division

Stewart Materne - Evercore Partners Inc., Research Division

Walter H. Pritchard - Citigroup Inc, Research Division

Abhey Lamba - Mizuho Securities USA Inc., Research Division

Michael Turits - Raymond James & Associates, Inc., Research Division

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

Gregg Moskowitz - Cowen and Company, LLC, Research Division

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

Operator

Good day, everyone, and welcome to today's BMC Software First Quarter Fiscal Year 2013 Earnings Results Conference. Today's call is being recorded.

At this time for opening remarks, I'd 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. During our call, Bob Beauchamp, Chairman and CEO, will provide an overview of the first quarter fiscal 2013 performance of both our company and business units and update you on recent initiatives. After that, Steve Solcher, our CFO, will provide additional financial and operational details. Bob will then discuss and provide an update for our expectations for fiscal 2013 before we open the call to questions.

These prepared comments were previously recorded. 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 investors.bmc.com.

Before we continue, I'd 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, particularly statements and views regarding fiscal 2013, 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 earnings press release 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 non-GAAP measures and the corresponding GAAP measures is provided in the tables accompanying the press release and at investors.bmc.com.

Now, I'll turn the call over to Bob.

Robert E. Beauchamp

Good afternoon, everyone. Our first quarter performance was mixed. There were a number of positive aspects in the quarter. Our MSM business generated solid results in terms of total bookings margins and operating income.

In our ESM business, we continue to win more cloud, Software-as-a-Service and multi-disciplined projects. Our data center automation and professional services areas also generated solid growth. We did, however, encounter some adverse headwinds during the quarter that impacted our performance, resulting in disappointing ESM license bookings and other key metrics.

There were 2 external economic headwinds in particular to call out. The first relates to the change in foreign currency rates since our last earnings call. While we expected an adverse impact from a stronger dollar, the actual impact was roughly twice what we had anticipated in the quarter. We had expected, for example, that FX would negatively affect revenue growth by about 1%. The actual impact was 2%.

The same is true for the impact of FX on license bookings. We had anticipated that FX impact on ESM license bookings would be 2% in dollar terms. The actual negative FX impact was 5%.

The second macro factor that worked against us in the first quarter was the weakening economic environment. We expect these 2 macro headwinds to persist throughout the remainder of the year. In particular, we are cautious about the impact from the continuing economic uncertainty in Europe. As a result, I will accordingly be updating our expectations later in my prepared remarks.

In addition to these external factors, we were also affected during the quarter by our own ESM sales transition issues that we've discussed before. I'll go into this in more detail in a few minutes, but it's important to note up front that we are now at our planned ESM sales capacity. This represents a significant and positive change in the dynamics of our sales force as we now shift our full attention to the improvement of sales productivity. We should see productivity improve during fiscal 2013 and beyond as our recent new hires gain experience and reach increased traditional productivity levels.

With that overview, let me turn to discuss our 2 business units in more detail, beginning with ESM. ESM license bookings in the first quarter declined 12% compared to last year, as reported, and declined 6% on a constant currency basis. Despite this performance, we continued to see positive trends and strong growth in a number of our key strategic growth areas. This includes continued strong momentum in our cloud and SaaS businesses, improved trends in sales attrition and sales capacity and the positive impact of the Numara business.

We had another quarter of strong growth in our cloud business as cloud-related license bookings nearly doubled in the first quarter compared to a year ago. In fact, the first quarter was a record for our Cloud Lifecycle Management solution.

Cloud-related license bookings represented nearly 1/4 of our first quarter ESM license bookings. We had key cloud customer wins at Cerner, Vodafone, Ericsson Telecommunications, CSC, as well as a major security agency of the United States government. We were especially pleased with an important win during the quarter with an international outsourcer and service provider, which selected our cloud suite over other major competitors. The CEO of this customer told me that they're betting their whole cloud strategy on BMC, and that cloud is their #1 growth strategy.

Software-as-a-Service continues to be a key focus area for BMC. We were pleased to see continued strong growth in our SaaS offerings. Remedyforce and Remedy OnDemand both grew nicely. We added approximately 70 SaaS customers alone in the first quarter and saw sequential quarter increase of 20% in our SaaS install base to just under 400 customers.

Remedyforce has been successful primarily in small and medium-sized enterprise customers. But demand for this solution continues to grow and our win rate is building in the larger enterprises as well. We expect to see significant Remedyforce growth in the large enterprise market as our products and sales engine evolves over the year.

Remedy OnDemand continues to deliver strong growth, as our total number of active customers grew by 80% compared to the year-ago period. We had some great wins during the quarter, including one at a large public sector account that standardized on our offering and added 850 users. We also added several new customers who switched from a competitive SaaS offering to ours.

Finally, we continue to make steady progress as we develop our partnership with Capgemini, which we announced last quarter. The partnership with Capgemini will standardize them on the market-leading Remedy OnDemand solution.

In addition, BMC will leverage their state-of-the-art data centers. Both companies will participate in joint go-to-market activities. We're looking to this arrangement as a source of solid future growth, both domestically and in EMEA, and remain very excited about the long-term outlook of this partnership.

The acquisition of Numara and our focus in the medium-sized enterprise market also resulted in strong growth. The Numara acquisition has provided us with new sales and channel capabilities that are required to serve this market.

While there were many positives during the quarter, we did experience lower-than-expected ESM license bookings. I've already noted that our results were adversely impacted by FX rates, the overall economic environment and sales force transition issues.

I would now like to provide more detail on the progress we're making with regards to our sales force. During the quarter, we saw improvements in our sales attrition and sales capacity metrics. First quarter annualized sales attrition was better than planned at 24% compared to 43% a year ago. Introducing simplified sales compensation plans and aligning quotas to our new customer segmentation model has helped reduce attrition rates.

Total and productive sales capacity was at plan and grew in the mid-teens. While we're pleased with the progress here, this continues to be an area of intense focus for us. However, while we are on target for our total sales capacity, load tenured sales executives and sales management continue to negatively impact overall productivity.

Looking at our sales tenure, 38% of our sales reps have been with BMC for less than a year. This is up from 29% in the first quarter of last year, reflecting our prior higher attrition levels and related new hiring. We do expect this ratio to improve throughout the year as we continue to focus on reducing attrition and our newer hired reps gain tenure.

While we're making good progress on sales capacity, it takes time to build an experienced and highly productive sales team. We expect to see productivity improve with each quarter as we build tenure. Those regions with the least tenure had the lowest productivity levels. For example, the impact of tenure was most acute in the Northeastern United States, where attrition rates have been high and where we are rebuilding the sales management team.

In addition to the actions we've taken to address sales attrition mentioned earlier, we're taking a number of steps to address the transition in our sales force and improve sales force productivity. These steps include continuing to hire highly experienced sales reps and sales management, improving training and development and introducing new sales productivity tools.

Despite the uncertain macro conditions when factoring in the actions we're taking to increase sales productivity, we do expect ESM license bookings to increase throughout the year, including strong sequential improvement in the second quarter.

One of the important ways we will continue to work to drive growth in revenue and bookings is by maintaining our technology leadership. We will continue to invest organically and via acquisitions to broaden and deepen our portfolio. Toward that end, we have significant product releases planned for the near term.

We're very pleased that our solutions continue to gain attention and validation. Gartner, for example, presented new research at its recent infrastructure and operations summit. They rated BMC as strong in the cloud management platform category. And overall, we were the only vendor to achieve a strong rating in each of the following categories: service desk, cloud management platform, IT service view, CMDB and app release automation.

A report by 451 Research Group underscores the importance of managing heterogeneous environments. Let me share a quote from a recent 451 Research report. They said, "Where BMC shines is in offering automation and management across a broad spectrum of data center infrastructure, from modern cloud deployments, distributed and web applications, client server, legacy infrastructure through the mainframe. Because it's not tied to a particular hypervisor or hardware strategy, BMC is unusually well positioned to provide trusted third-party management services to enterprises that have built or inherited diverse on-premise equipment and want to make it play nicely with the private and public cloud."

Let me turn next to our MSM business. As noted, MSM bookings were in line with our expectations as we saw solid performance in our key metrics. In our top 15 deals this quarter, we once again saw an increase in the spin rate, largely due to our success in selling more new products into those relationships. During the quarter, we continued to add or expand our relationships with 98 new product placements.

In the first quarter, we expanded business with existing and new MSM customers, including Fidelity, Banco Bradesco, Bank of Beijing, Bendigo Adelaide Bank and the County of Los Angeles.

Our new MSM product placements are led primarily by Control-M workload automation. Control-M continues to see healthy, above-market growth rates and represents a growing percentage of our overall MSM business, currently approaching 40% of bookings and revenue. I'll remind you that Control-M is primarily a distributed systems product offering.

We are also very pleased with the performance of our MSM acquisitions, including I/O Concepts, MQ software and the IMS portfolio of NEON Enterprise Software, all of which are meeting or exceeding our performance expectations. These successful acquisitions have enabled us to broaden our mainframe management portfolio and extend and enhance our customer relationships.

Mainframe capacity trends remain stable, leading up to the next System z hardware release. We have not seen any incremental increase or drop in capacity trends from a historical perspective for the current mainframe platform.

Our Control-M capacity trends continue to grow at a healthy rate, allowing the MSM business to continue to expand its install base at existing customers.

It's also important to note that customer satisfaction levels with our MSM offerings remain at historically high levels. Excellent customer relationships, combined with our technology leadership, are an important competitive advantage for us. They provide a receptive market for us as we successfully broaden our mainframe management portfolio, both organically and via acquisition.

MSM operating discipline continues to yield encouraging results and leverage, as represented by our non-GAAP segment operating margin improving 2 percentage points year-over-year to 59%.

Combined with the new product placements, stable capacity trends and recent acquisition performance, MSM continues to be a stabilizing factor to our overall performance as we exit the trough of our mainframe renewal cycle.

Our professional services business had another strong quarter, delivering solid results with another double-digit increase in revenue, which was up 12% as reported and 17% on a constant currency basis. This is our 10th quarter in a row of positive year-over-year growth in our services revenue. We remain very pleased with the growth of this business in areas like cloud, where we are enabling our customers to achieve significant value from our solutions. In fact, successful cloud implementations have driven new license opportunities as customers have seen the value of our cloud solutions and want to progress to the next stage of maturity.

Recent implementations, at customers like Duke Energy, have resulted in millions of dollars of savings and dramatic reductions in time to provision business services. Successful service implementations this past quarter include Hartford and MetLife.

Let me turn now to a matter familiar to us all that arose during the first quarter. As we disclosed, our Board of Directors increased in size to 12 directors. Two experienced industry executives, John Dillon and Jim Schaper, had been added to the board after extensive discussions with one of our shareholders, Elliott Management. Mr. Dillon will serve as a member of the Mergers and Acquisitions Committee and Mr. Schaffer will serve as a member of the Compensation Committee. We believe this move is an excellent outcome that enables us to further direct our efforts and build an even stronger future for BMC.

So let me sum up the quarter for you. It was a difficult environment to start the new fiscal year, with currency and economic headwinds and ESM sales transition issues impacting our performance. Despite these challenges, our MSM business performed at plan. The key growth areas within ESM, such as cloud and SaaS, continued to do well, driven by our technology leadership.

With our ESM sales capacity at target, we now expect the increasing experience in tenure of our sales force to have a beneficial impact over the course of the year in sales productivity gains. We also expect that the progress we're making in many areas across our company will enable us to regain our momentum during fiscal 2013. We remain focused and committed to achieving our strategic goals and building value for our shareholders.

Steve Solcher will now provide a more detailed financial review of our quarter.

Stephen B. Solcher

Thank you, Bob. Although our first quarter financial results were mixed, I am pleased that our 2 key strategic initiatives and growth drivers, cloud and SaaS, remain strong and continue to gain momentum in the market.

Our MSM performance remained solid and the maintenance portion of our business reflected strong growth. We also delivered strong cash flow from operations during the quarter. However, we were negatively impacted by sales transition issues related to low tenure, a worsening macroeconomic climate and foreign currency headwinds. With the transition of our ESM sales force showing progress, we expect continued improvement over the remainder of the year.

With that, let me review our financial results for the first quarter in more detail.

Non-GAAP operating income was $148 million, down 13% from the first quarter of last year. Our first quarter non-GAAP operating margin was 29%, down 5 percentage points from the year-ago period. Please refer to Slide 5 in our presentation for selected non-GAAP financial information, which includes information on our ESM and MSM business units.

ESM's non-GAAP operating income in the first quarter declined to $32 million, down 47% from the year-ago period. ESM's non-GAAP operating margin decreased year-over-year by 9 percentage points to 10%. MSM's non-GAAP operating income in the first quarter was $116 million, up 5% from the year-ago period, and its non-GAAP operating margin increased 2 percentage points to 59%.

Our non-GAAP net earnings for the first quarter were $106 million, down 18% from the first quarter of fiscal 2012. Non-GAAP diluted EPS for the quarter was $0.65 per share. This reflects a non-GAAP effective tax rate for the quarter of 24%.

GAAP operating income in the first quarter was $74 million, a decline of 36% from the first quarter of fiscal 2012. GAAP net earnings and diluted EPS were $54 million and $0.33, down 43% and 38%, respectively, from the year-ago quarter.

Our non-GAAP results reflect diluted shares outstanding in the first quarter of $164 million versus $181 million in the respective prior-year period.

Turning now to bookings. Total bookings for the first quarter were $470 million, representing a decrease of 24% compared to the year-ago period. On a constant currency basis, first quarter bookings declined 20%.

The weighted average contract length for total bookings on a trailing 12-month basis was 2.05 years, down 15% from the year-ago period. After normalizing for contract length, trailing 12-month annualized bookings for the first quarter were $1 billion, up 2% from the year-ago period. Please refer to Slide 7 in our presentation.

We expect trailing 12-month annualized bookings to be up in the mid-teens for the full fiscal year.

Now let me turn to the performance of each of our business units. Total ESM license bookings were $89 million in the first quarter, down 12% from the year-ago period and down 6% on a constant currency basis.

Our SaaS business is best measured on monthly recurring revenue, or MRR, and on a total bookings basis. MRR represents the combined monthly value of subscription fees associated with our active customers. As of June 30, our SaaS MRR totaled $1.9 million, a 231% increase compared to the year-ago period, and total bookings increased 24% to $5.5 million. SaaS subscription revenue is reflected within maintenance revenue in our income statement.

Turning to the MSM business unit, trailing 12-month total MSM bookings decreased 22% to $775 million and had an average contract length of 2.95 years, down 10% compared to the year-ago period. After normalizing for contract length, total annualized MSM bookings for the trailing 12 months were $263 million, down 13%.

Turning to revenue. Total revenue for the quarter was $504 million, flat as reported and up 2% on a constant currency basis compared to the first quarter of fiscal 2012. ESM total revenue was $308 million, flat compared to the year-ago period, and MSM total revenue for the quarter increased 1% to $197 million.

License revenue in the first quarter was $172 million, down 9% from the year-ago as reported, and down 7% on a constant currency basis. ESM license revenue was $97 million, down 18%, while MSM license revenue was $75 million, up 5% from last year.

For the first quarter, maintenance revenue was $279 million, an increase of 5% compared to the year-ago period. ESM maintenance revenue was $157 million, up 11% and MSM maintenance revenue was $122 million, down 1% compared to the first quarter of fiscal 2012.

Professional services revenue, which is included in our ESM business unit, grew 12% from the year-ago period as reported, and was up 17% on a constant currency basis to $54 million in the first quarter.

Moving next to operating expenses. Non-GAAP operating expenses for the first quarter were $356 million, up 7% from the year-ago period. Looking at our business units, ESM's non-GAAP operating expenses for the first quarter were $276 million, up 11% from the year-ago period. MSM non-GAAP operating expenses were $80 million, down 3% from the year-ago period.

Other income in the first quarter was a loss of $8 million compared with a loss of $2 million in the year-ago period.

Now turning to the balance sheet. Total deferred license revenue at the end of the first quarter was $647 million, down 6% both sequentially and year-over-year. During the quarter, we deferred $54 million of license revenue or 42% of license bookings, and recorded $95 million of deferred license revenue from the balance sheet. Total deferred revenue decreased by $34 million sequentially to $2 billion. The current portion of deferred revenue now stands at 54%.

Our software development cost as of June 30, were $255 million as we capitalized $35 million and amortized $25 million during the quarter. Cash and investments totaled $1.6 billion, with 39% of our cash held domestically.

Our net cash position was $802 million at June 30, while the domestic portion was in a net debt position of $194 million at June 30.

For the quarter, cash flow from operations was $220 million. During the first quarter, we repurchased 3.5 million shares of our stock for a total cost of $150 million. We have $700 million remaining in our current share repurchase program as of June 30.

In summary, our quarter reflected positive results in strategic growth areas like cloud and SaaS, as well as the continued solid performance in our MSM business. While we're working through sales transition issues, we continue to generate significant cash flow from operations. We continue to be focused on enhancing shareholder value as demonstrated by returning 83% of free cash flow during the quarter and 127% on a trailing 12-month basis, via our stock buyback program.

With that, I'll turn the call back over to Bob for his concluding remarks and updated expectations for fiscal 2013.

Robert E. Beauchamp

Thanks, Steve. We are maintaining our current guidance for non-GAAP earnings per share. We expect non-GAAP diluted earnings per share in the range of $3.49 to $3.59 per share. At the midpoint, this would represent a 9% increase over fiscal 2012. This range excludes an estimated $1.11 to $1.16 per share for non-GAAP adjustments, including expenses related to the amortization of intangible assets, stock-based compensation, severance, exit costs and related charges and proxy contest costs.

We expect full year fiscal 2013 cash flow from operations to be between $785 million and $835 million, which represents a 1% increase over fiscal 2012 at the midpoint, including the adverse impact from foreign currency exchange rates.

We do, however, want to update our fiscal 2013 expectations to reflect 3 factors: FX impact, given today's rates; uncertainty surrounding the broader macroeconomic environment, especially around Europe; and continued efforts to improve the sales productivity and tenure of our ESM sales force.

The current assumptions underlying our full year fiscal 2013 expectations include: total bookings growth in the mid-single digits, with growth on a constant currency basis in the mid- to high-single digits; ESM license bookings growth in the mid-single digits, with growth on a constant currency basis in the high-single digits; MSM total bookings decline in the low-single digits and flat to up low single-digits growth in constant currency, with annualized bookings growth in the low-double digits; revenue growth in the mid-single digits with growth on a constant currency basis in the mid- to high-single digits; non-GAAP operating margin slightly lower than the prior year; other income at a loss of around $30 million; weighted shares outstanding down mid-single digits from the prior year; and a non-GAAP tax rate of 25%.

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

Question-and-Answer Session

Operator

[Operator Instructions] We'll move first to Phil Winslow with Credit Suisse.

Philip Winslow - Crédit Suisse AG, Research Division

I just got a couple of questions. First when you dig into that ESM line, I mean, obviously you used to break out sort of the 3 primary product families. I'm wondering if you gave us a sense of sort of what's doing better than sort of the segment average decline and what's maybe doing a little worse? And then also, Bob, you talked about a 24% annualized churn versus 43% a year ago. So a lot of improvement there. Wondering if you could give us a sense of what that number maybe looked like 2 or 3 years ago, just so we can see how sort of close or far we are away from being "back to normal".

Robert E. Beauchamp

Okay, Phil. Well first, on the ESM segment, in general this is -- what I think about is our cloud business is now 25% of ESM license bookings, which is approximately 0, 2 years ago. So very strong. Cloud Lifecycle Manager, as I mentioned had its -- a record quarter. And that business grew at 90 -- 95% year-over-year, so really, really strong there. And our sales people are excited about it. There's a lot of energy in it. There's a lot of attention in it, and it draws attention from the customers. And so that's where the activity is, and we're focused there. Our -- and if you go the other end of it, and you say what's doing the weakest, it's really the traditional monitoring and management tools, ala the PATROL business, et cetera. So that business is looking forward to a significant new product announcement, the release we will be coming out with this quarter, which is where we basically focus on cloud ops, cloud operations, and we'll be tuning that product for really focusing on the cloud monitoring performance and availability space. So -- but from a performance standpoint, CLM, cloud is red hot. The performance business has struggled the most. SaaS has been very hot as we reported in the numbers, really strong growth there. We're winning a lot of new customers. We're growing the business very nicely there. We're seeing the win rates improve there. So very encouraged by both Remedy OnDemand and Remedyforce on that. And in the middle you have our service support business. So if you think of the Remedy is the flagship on-prem product there, that total service support business growing low-single digits, so that's kind of book ends, the 3 major product groups. Yes, and then on the attrition. I think that if we get it to the high teens long term we're probably okay. We want to have an organization that is demanding performance, but that we can afford and that we can hold the tenure. I mean, the biggest challenge we have -- if you just look at what happened to us there, we had to get attrition down dramatically, and we did, and that's staying down. It's staying in line and actually better than planned. We have to get total capacity up, and we're performing well there. We're actually at or above our total capacity. But the lagging indicator, kind of the last thing we can address there, is productivity through tenure. And that just takes a little time. I mean, at our best -- if you go back in time, the best we probably ever were in sales force productivity in the modern era of BMC was when the sales reps -- the number of sales people who were, say, had been here between their first day and 1 year was in the 18% to 20% of the sales force. Right now, it's 38%. So we've got an awful lot of new people here. Those people traditionally are ballpark 50% productive compared to a more experienced rep. So we've got that big bubble of new sales people coming through the pipe. And as long as we can maintain, keep that attrition under control, we can build tenure, then -- and we should be -- we should see us return to more normal productivity. And this quarter, if we would have seen anything remotely close to normal productivity, we would have been bragging about the quarter instead of explaining it. So that's really our focus right now, is that sales force productivity.

Stephen B. Solcher

And, Phil, let me add one other historical data point. And that is typically Q1 is our highest attrition quarter in the year. So if we start out with a good Q1, it bodes well for the remainder of the year. If you go back last year, as Bob said in his prepared remarks, we had 43% attrition in Q1. That's an annualized number and it trailed down to 25% by the end of Q3. So if we can start with 24%, and so far what we've seen in July is still below plan, our expectation is, is we can hold the attrition levels down.

Operator

We'll hear next from Kirk Materne with Evercore Partners.

Stewart Materne - Evercore Partners Inc., Research Division

I guess just 2 quick ones. Bob, you talked about sort of the economic uncertainty, but you really didn't sort of quantify it. I was just kind of curious, could you get into a little bit more detail how that manifested itself during the quarter? Whether it was some bigger deal size getting shrunk down or deals getting pushed out? I was just trying to get a handle on how relevant that was to the performance relative to some of the other issues you guys had.

Robert E. Beauchamp

Yes. I would say that the macro factors, we saw some impact. For instance, we had some financial services company -- global financial services companies delay deals. We had one significant transaction where the customer said that the word had come down on high just to hold. We had a couple of deals in Europe where we were right on the lip of the cup, and then suddenly their CEOs were on the front page of the newspaper, and lots of things going on. And they basically just stopped those transactions cold. So we saw some of that disruption. But I wouldn't -- I would say that the bigger impact is what we're forecasting in our guidance. We're putting the caution more toward the rest of the year than Q1. And I'll let Steve talk to that.

Stephen B. Solcher

I think Bob was right. So if you kind of think about how we're guiding FX, where the dollar has strengthened recently since the last time we guided, is having a big impact. The second piece is what Bob alluded to, is the macroeconomic conditions. And that centers around Europe, but it's really the implication about what's happening in Europe, to some of these global national firms. And then finally, it's the sales transition that we discussed earlier. And all 3 of those combined led us to lower our outlook.

Stewart Materne - Evercore Partners Inc., Research Division

Okay. And just maybe one follow-up. I think on the last quarter, you guys mentioned Numara would be about a 4 percentage point help to license bookings in the year. I guess, is there any change to that? I realize probably had to adjust that for FX. But I guess is that still sort of what your expectations would be, adjusting for FX?

Stephen B. Solcher

Yes, it is still roughly in that line, I'd say somewhere in the 5 percentage points for the full year would be our current view. And that's a license bookings statement.

Robert E. Beauchamp

And by the way they had a nice performance this quarter. And the commercial market where -- had a nice performance. We're excited about that engine, that growth engine as well.

Operator

Moving onto Walter Pritchard with Citi.

Walter H. Pritchard - Citigroup Inc, Research Division

Steve, I'm wondering on the bookings, it looks like you took the range by about $50 million. It looks like you took the cash flow range down by about $15 million. Is there -- were you guys able to cut more costs? Or were you overly conservative on the cash flow? Just trying to kind of reconcile those 2.

Stephen B. Solcher

Well, it's -- so the booking side, you're right. It's a little bit higher than that, about half of that came from FX and the other half is just the lower outlook on the ESM side. We do get the benefit on OpEx for the same FX, maybe not dollar for dollar, but that helped. And some of those bookings are calendar year versus fiscal year. So we get a little bit of impact or help that we don't get the full brunt of that $50 million in what I would say our typical collections cycle. You need the tax effect, that change, and that's how we came up to the $15 million.

Walter H. Pritchard - Citigroup Inc, Research Division

Got it. And then, Bob, maybe ask the proxy question a little bit differently from earlier. You guys went through a lengthy process there, where on the road and came to a conclusion. Just wondering as you're in the boardroom, how is the board thinking differently about the operations of the business, the strategy or the capital allocation? Is there any -- has there been any result of that? Or is it too early to think about that in terms of new members that have been added?

Robert E. Beauchamp

Yes. I mean, we just had our first board meeting and both Mr. Dillon and Mr. Schaper were very additive to the meeting. We -- they brought their experience and their talents to it. I was -- give you a little insight into this, I was very pleased with just how the entire board is working together. And what I'd say is in general, there's -- everybody on the board believes that this company has the opportunity to be the leader in enterprise management in a very, very profound way. But beyond that, I think it would be inappropriate for me to comment on what the board is discussing in the boardroom.

Operator

Abhey Lamba with Mizuho Securities has our next question.

Abhey Lamba - Mizuho Securities USA Inc., Research Division

Bob, you mentioned about the sales force and we hear you, that productivity is the next thing you need to address. Maybe you can tell us when do you expect productivity to normalize? And also as part of that, maybe you can comment on the pipeline going into the September quarter. Do we need the sales force productivity to go up for the pipeline to become bigger and more in line with where it should be going into the quarter? Or it's already there?

Robert E. Beauchamp

Yes. So on the productivity, what we expect is to see -- obviously, our business is a little too lumpy to make any precise, direct, absolute statements on productivity. But I believe that we should expect -- all the math, all the history of this industry suggests that we should see productivity grow every quarter. So it's probably -- at full capacity, if we're at full capacity and we get back to historical productivity levels, we're going to be posting some very, very nice numbers. But we believe we can make the plan without being back to historical productivity numbers, but delivering on the kind of productivity we've been -- we just saw with modest improvement throughout the year. And then Steve may comment on it.

Stephen B. Solcher

No. Abhey, the way I would look at it is, when Bob talked about productivity, it's really sequential improvement in productivity more than it is year-over-year. So we've got capacity today and we are looking for, I'd say, large sequential increases in license bookings in ESM through Q2, 3 and 4, very typical to what we saw in the previous 2 years. So that level with capacity being roughly flat during that period of time, you're going to see it translate into higher productivity per quarter.

Abhey Lamba - Mizuho Securities USA Inc., Research Division

Got it. And secondly, Steve, if you can just talk about what gives you confidence in the EPS guidance given revenues are coming down, margins in this quarter were lowest since 2008 and EPS in first quarter was -- basically is calling for seasonality, which is pretty back-end loaded as compared to your last couple of years performance?

Stephen B. Solcher

Well, we have -- some of it is, is we do expect ESM to deliver more license bookings, is one. So some of the confidence comes as this sequential improvement. Q1 is, historically, our weakest earnings per share quarter, it's our lowest revenue quarter. We kind of indicated when we set expectations that we were front-end loading some of the costs, especially around capacity, what you see. Numara is in, I would say, in these quarters and they were not in the first 3 quarters of last year. So that as we burn through some of that deferred revenue write-down that we did, at least in Q4 and Q1, that gives us a little bit more confidence. Nothing is for sure. But so far, we've been able to keep the outlook, and I think some of that came from a lower share count that we got the benefit of and we're aggressive in the market buying stock in a lower tax rate.

Operator

Moving next to Michael Turits with Raymond James.

Michael Turits - Raymond James & Associates, Inc., Research Division

A couple of questions. First of all, can you just talk about the MSM bookings decline rate? How do you true up what was down 22% trailing total and down 13% annualized with the targets, which are for growth? And -- but you guys felt like it was on track. So was it a tough comp? Or what was the issue there?

Stephen B. Solcher

Yes, Michael, last year we did one of our largest transactions in the company's history. We had a 9 figure deal, although that doesn't really impact the trailing number. But if you kind of go back, it really has to do with some really large transactions falling off in the comparer. And what you will find is, is through the year, we expect to be flat on constant currency, down slightly, low single-digits I believe is what we guided to, where the term length is really the benefit that we're picking up. So we're back to a normalized 3-year term length for MSM business. And flat with the 3 years is where you're going to get the annualized growth in the low-double digits for the year. And even in Bob's prepared remarks we talked about a trough. What you're seeing is, is we're coming into the second half of the year and into '14 where we're seeing some strength in the MSM renewal base.

Michael Turits - Raymond James & Associates, Inc., Research Division

Okay. So we're troughing about now in the renewal portfolio, and that starts to pick up?

Stephen B. Solcher

That's correct.

Robert E. Beauchamp

It begins to pick up now and is really in its height in 2014, fiscal '14.

Michael Turits - Raymond James & Associates, Inc., Research Division

And then maybe you comment a little bit on the on-premise Remedy business which had been in decline. And it sounds like, obviously, the SaaS version is growing. Where are we in terms of the on-premise business? Is it flat, growing, improving?

Robert E. Beauchamp

One thing just to go back a little bit to something I mentioned earlier, I'll expand on it a little bit. Our SaaS business, as we talked about, is growing very nicely. And one fact we wanted to maybe share with you today is that only about 20% of the total SaaS customers that we have -- we've contracted with were BMC Remedy customers in advance or BMC Magic, or any of the BMC on-prem products. Of that customers that have converted from on-prem to SaaS, our average annual spend with that customer on that product line is up between 1.5x and 2.5x. So they're converting generally from what was, say, some AR system-type older Remedy implementations, where they weren't paying us significant maintenance. They weren't necessarily -- hadn't bought the applications on top of it, and they're now moving to our newest state-of-the-art code that's offered as a service. And our actual annual spend is going up significantly. Really we're kind of thinking of it in terms of doubling when they do it. So we're not seeing that sort of cannibalization there. There is -- in fact, it's the opposite. On-prem, we don't -- we're not breaking out Remedy as an individual product. For one thing, it's got individual components inside of it. But the service support business is growing flat to low-single digits and Remedy is the lion's share of that.

Operator

Aaron Schwartz with Jefferies has our next question.

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

I sort of had a follow-up question on the SaaS business. But as that gains further scale, I think you both had mentioned that, that will be reported -- or is being reported on the maintenance line. So how would you expect that over time, if it gains scale, to impact that ESM license bookings number? It doesn't seem like that sort of is captured in that number. I'm just sort of wondering how -- what's the best way to sort of measure that when it doesn't seem like it is captured in the most-watched metric on your ESM business.

Stephen B. Solcher

So what we're trying to do, Aaron, is give you the -- I mean the total bookings number for SaaS, and that's in my prepared remarks. I told you the number 5.5 was the number in the quarter. I would encourage you to add that to the license bookings number to get the real impact of what's happening on some of, what I'd say, are leading metrics for ESM.

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

Okay. And then sort of maybe switching gears a little bit to the services business, specifically the gross margin. I think in the past you've talked about you had some maybe upfront services costs surrounding some cloud-based deals or implementations. Can you update us there? Is that still ongoing, where you still have a lot of costs front-running some of the deals there and sort of your outlook on the services margin?

Stephen B. Solcher

No, the services profitability in the quarter was really driven -- or the lack of profitability was really driven by some deferral that happened, so the work got done and it was milestone-driven, which got hung up on the balance sheet rather than getting into the income statement, and that's primarily a timing issue for us. Our outlook has not changed. We expect that gross margin to get close to doubling as the year progresses. So by the end of the year, instead of last year doing, I think it was 3.4% gross margins, we're looking north of 6% for the year.

Robert E. Beauchamp

And I just would mention that some of the very early services engagements we got into were rough. And we -- 2 of the least profitable services engagements, multi-year services engagements, that we engaged in are just completed this last quarter, so that will begin to give us some relief as well.

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

And did you have sort of some consultants or duplicative costs there? I mean, have those sort of rolled off yet? Or is that still ongoing?

Robert E. Beauchamp

You mean the CSP costs where we would have third parties and the people that are not utilized? I mean, I would say in the aggregate we're always trying to use third parties where we don't have the skill set. But we're really mindful about utilization rates. Both economic is where we would bill the customer, and then what we would say is just total utilization, which is on a project, whether we're billing for it or not.

Operator

Moving on to Gregg Moskowitz with Cowen.

Gregg Moskowitz - Cowen and Company, LLC, Research Division

Bob, you seem excited about your upcoming cloud ops product. Assuming you remain at full sales capacity, how do you think about your traditional monetary management business going forward? Do you think that declines at a lower rate? Can that business actually grow potentially? What do you expect to see going forward?

Robert E. Beauchamp

Yes. I hesitate to -- until I see it heading in the right direction, I hesitate to expect it to become a growth engine. I want to see it recover into a growth trajectory. I want to see if the functionality that the early indications that we looked at on this product are as good as it appears before we get overly excited about it. So no, I wouldn't -- we're not guiding by sector, I don't think. But that business, I expect, will continue to be our most difficult product group. I think we're doing the right things with the product, this cloud version that is coming out this quarter. We should make real improvement. I think our sales people, who have the ability to basically sell through the portfolio will -- once we have the cloud management aura around this product, we'll -- they will begin to turn their attention to it and be introducing that at a higher rate. The kind of the old monitoring business is not the sexiest thing in the world to be talking about when you got Cloud Lifecycle Manager and SaaS and some of the newer things to sell. So I think this will hopefully polish it up for our sales engine as well, to take advantage of it. But I expect for the rest of the year it will continue to be the laggard product set.

Gregg Moskowitz - Cowen and Company, LLC, Research Division

Bob, you also did talk about some of the macro-related issues on some larger deals during the quarter. Can you just sort of elaborate on how you sort of view the large deal pipe going forward?

Robert E. Beauchamp

Well, on the -- we've got a number of -- I don't know that I can compare it -- if I've got anything meaningful to compare it to. But we've got a number of very large transactions that we're working in the next 2 quarters, just like we usually do, both MSM and ESM. Some of the wins we just picked up with Vodafone for cloud and some of these other are really positioning us well for people that are making large strategic decisions. We have large renewals coming up for ESM renewals with some of our largest customers. So I don't know how to quantify it for you. I don't really have any numbers I can give you, other than to tell you that just like every year, our performance -- if we close the larger transactions within, we'll be posting some very solid numbers. And if we close none of them, we won't. But that would be the first time we've ever done that. Any other questions for you before we...

Gregg Moskowitz - Cowen and Company, LLC, Research Division

Just actually one quick one. Initially when you SaaS-enabled your IT service management products, I believe the thinking was that Remedyforce would appeal to SMBs and larger companies that embrace the cloud would deploy Remedy OnDemand. So it's interesting to hear that Remedyforce is now really starting to attract interest from larger enterprises. Just wondering kind of what has changed there?

Robert E. Beauchamp

Well what we're doing with Remedyforce is we're not holding the development team back at all. We're telling the development team to add functionality to that product, to make that -- don't worry about any internal competition, to add functionality. I mean, Remedyforce is really the only true multi-tenancy SaaS product in the industry out there today. I mean, Remedy OnDemand is similar to our largest competitor in the space in many respects, in that we set up virtual instances for these individual customers. There's some difference in the architecture that's not important there. But Remedy OnDemand is really targeted towards our Remedy install base. It's targeted to some of the large ITIL, sophisticated ITIL customers who are really trying to do integrations with CMDB, do integrations with change management, configuration management and asset management. Some of the ITIL capabilities that many customers who built Remedy as the core of their ITIL environment came to depend upon, and Remedy OnDemand was square into that. Remedyforce was built first as a help desk, as a service desk, and now it's moving up stack and adding more functionality. And as it grows, we'll be -- we closed a couple of deals now that are 1,000-plus seats for Remedyforce. And I was talking to the General Manager of Remedyforce over at salesforce.com, he was here in my office last week. And I think it took Salesforce somewhere in the neighborhood of 5-plus years to close those first 4 figure deals, and we've done it in 2. So there's a lot of good momentum there and we're going to keep adding functionality and we're not afraid to move it up stack.

Operator

That will be from Derrick Wood with Susquehanna.

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

I was hoping to get a sense for how the CLM product is being received in the market. Is that an area where you're seeing more pushback in budgets just because of the size of the deal? Or is that something that's a bit more strategic and holding up, and just curious if you're engaging with any different types of customers or seen any different types of competitors with respect to that product?

Robert E. Beauchamp

No. CLM is probably the hottest product we have. I mean, it is winning consistently in the bake-offs. In fact, let me -- if you'll just bear with me and let me tell you, we mentioned on the earnings call the name of an outsourcers and systems integrators. The CEO of one of those companies called me and we kind of -- after the deal was done and we were just discussing how -- in fact, he's coming in here, I think, in 2 weeks with his sales leadership to visit with us. This is an international outsourcer and systems integrator. And he said that he had a team of 25 experts evaluate all the different cloud management tools on the market. And he told me that after a fairly brief period of time, his people came to him and said, "We can keep doing this, if what you want is us to figure out who is the second and third best. But it's not even close. BMC is clearly the best product on the market." And that was a very, very positive thing to hear from the Chief Executive Officer of a company larger than BMC who just standardized on our CLM product. So our CLM product is a powerful product that is winning in the market. It's probably the highest win rates of any product that I remember seeing in our distributed business, maybe ever in a long, long time. It -- we are working to offer entry points to smaller enterprises. We're typically hitting the larger enterprises with it. The NBC Universal is standardized on us. Those sort of things, we're hitting those and we're winning those. We'd like to increase the number of customers. We've got big ones, and we're winning all the big ones. We'd like to get a higher volume at lower price points. And we've got programs underway to offer customers fast starts, lower price points for those customers who want to enter into the cloud space, enterprise cloud space or the enterprise -- or the service provider cloud space and do it in a faster, lighter way.

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

Great, that's good color. And one other question on the Numara business and just trying to get a sense for your positioning with this acquisition, maybe an update into how it's integrated into the core Remedy business. And kind of what you're thinking out of growth rates in the mid-market with respect to how much opportunity there is with the Numara product and the channel business that you buy?

Robert E. Beauchamp

Yes. So we think about it in terms of growing, call it, 15%, in that ballpark, okay? It's -- in terms of integration, there's -- we are wanting to integrate it -- we are integrating it into our integration infrastructure, our configuration management database, those sort of things, and into certain products like BladeLogic and others, so that we can add more products into it. But at the same time, we think it's important to let our commercial unit run as a commercial unit. This is really -- not only did we pick up technology here, but we picked up a sales pipe that we can put other products in. And so what we're not doing with it is just kind of blending it into the middle of the sales pyramid. It is -- we've got a pyramided sales model, showcase accounts at the top, say, call it, the top 50, and then the commercial at the bottom of the pyramid, large volume, indirect sales, partners. And we are protecting that organization so that it cannot kind of just dissolve into the enterprise sales force. It has its own leader, its own general manager, its own head of sales and their own sales motions at lower cost than a heavy direct sales organization. And so we're going to protect that and continue to invest in it and try to grow it, like I said, in the mid-teens.

Okay. Well, thank you all again for joining us. I will be visiting with each of you -- many of you on the phone and face-to-face in the weeks ahead. We appreciate your time, and talk to you soon. Thank you.

Operator

That concludes today's conference. Thank you all for joining us.

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