BMC Software F4Q08 (Qtr End 3/31/08) Earnings Call Transcript

May.16.08 | About: BMC Software, (BMC)

BMC Software, Inc. (NASDAQ:BMC)

F4Q08 Earnings Call

May 15, 2008 5:00 pm ET

Executives

Derrick Vializ - Investor Relations

Robert E. Beauchamp - President, Chief Executive Officer, Director

Stephen B. Solcher - Chief Financial Officer, Senior Vice President

Analysts

Philip Winslow - Credit Suisse

Israel Hernandez - Lehman Brothers

Michael Turits - Raymond James

Walter Pritchard - Cowen & Company

Richard Sherman - MKM Partners

Derek Bingham - Goldman Sachs

Tim Klasell - Thomas Weisel Partners

Operator

Good day, everyone. Welcome to today’s BMC Software fourth quarter earnings results conference call. As a reminder, today’s program is being recorded. At this time for opening remarks, I would like to turn the program 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, our CEO, will provide an overview of our fourth quarter performance, an update on our business service management strategy, and an update on our mainframe business. After that, Stephen Solcher, our CFO, will provide additional financial and operational details. Bob will then provide our expectations for fiscal 2009 before we open the call to questions.

The 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 bmc.com/investors.

Before we continue, I would like to remind you that the statements in this discussion, including statements made during the question-and-answer session regarding BMC's future financial and operating results, the development of and demand for BMC's products, BMC's operating strategies, acquisitions, and other statements that are not statements of historical fact are considered forward-looking statements. These statements are subject to numerous important factors, risks and uncertainties which could cause actual results to differ from the results implied by these or any other forward-looking statements. Cautionary statements relative to these forward-looking statements and BMC's operating results are described in today’s earnings press release and the financial presentation, and in our annual report on Form 10-K.

All of these documents are available on our website. These forward-looking statements are made as of today based on certain expectations and we undertake no obligation to update these forward-looking statements.

I would also like to point out that the company’s use of non-GAAP financial measures is explained in today’s earnings press release and a full reconciliation between each non-GAAP measure and the corresponding GAAP measure is provided in the tables accompanying the press release and in our GAAP to non-GAAP reconciliations found on our website at bmc.com/investors.

At this time, I will turn the call over to Bob.

Robert E. Beauchamp

Thank you, Derrick. Good afternoon and thank you for joining our call. In fiscal 2008, BMC Software had another terrific year across every metric of our business. Bookings, revenue, earnings and cash flow from operations demonstrated strong growth and were above all of our original target ranges. In fact, in fiscal 2008 BMC Software set an all time high for total revenues at $1.73 billion.

I’m very proud of these results. I’m proud of the strength and the consistency of performance that our team continues to deliver. We see this reflected in how we’re building strategic relationships with customers, in how we’re continuing to innovate, in how our sales team is converting mindshare into market share, and in how we’re operating more efficiently. We’re making real strides in every area of our business, and our 2008 fiscal year was another milestone in our progression.

Besides that record revenue number I noted, we’ve got other strong results to report for the year. Total bookings and annualized bookings for the year increased 6% and 16% respectively. For the second year in a row, our non-GAAP operating income for the year increased by 40%. Our non-GAAP operating margin has increased by 6 percentage points in each of the last two years. Non-GAAP diluted net earnings per share for the year increased 35% to $2.00. And our full year cash flow from operations was $594 million, which represents the highest level in the past five years.

Specifically looking at the fourth quarter, we can also see the progress we’re making across the board. Core BSM license bookings were up 16% for the fourth quarter. Total revenue in the quarter increased significantly by 11% with growth in all major geographies. This represents the second straight quarter of double digit revenue growth.

Our non-GAAP operating margin was 29% for the quarter, 8 percentage points over the prior year. The fourth quarter marked the twelfth consecutive quarter in which we’ve met or exceeded our revenue and non-GAAP EPS guidance. Non-GAAP diluted EPS for the quarter was $0.63, up 58% compared to the year ago period.

Our record of bookings growth reflects the strong demand in the market for our solutions. BSM has now become main stream and we continued to strengthen our leadership position in this rapidly growing space. More and more enterprises are adopting our solutions as they seek to automate, align and standardize their IT operations.

Industry experts have long noted the importance of aligning IT operations with business priorities. Increasingly, businesses looking to pare back costs, increase efficiencies, and make their operations more nimble, find BSM to be a powerful ally. To help our customers achieve these goals, we've adopted three disciplines, which you heard us describe at our Investor Day conference here in Houston in March.

Our Service Support offerings improve customer services as perceived by the end users and help drive efficiency improvements. Next, our Service Assurance offerings help customers find, prioritize and fix issues before they can impact their business and finally, our Service Automation offerings help IT support rapidly changing business needs, especially through the automation of provisioning and compliance-related functions and processes across servers, networks and clients. We were the first to automate the delivery of complete services, not just technology components.

A look at the BSM marketplace today shows that not one of our competitors are even close to delivering this complete range of capabilities; and no one can offer them through a platform such as BMC Atrium. BMC Atrium, built on a next-generation architecture, provides a shared view of how IT supports business priorities as well as centralizes coordination and execution of IT processes.

Our architecture provides customers with a completely unified and integrated management view, which fundamentally differentiates us in the marketplace. It's clear that this is a primary reason so many customers have chosen to standardize on our platform and we're confident this approach will be an asset to us going forward.

Furthermore, a strategic trend we've noticed in the marketplace is that customers are gravitating towards a strategic management platform focused around Business Service Management, where previously they may have made tactical decisions around particular point solutions. Given our clear leadership position in BSM, this is a change we welcome and something that is clearly evident in some of our recent sales wins.

Take for example Bank of New York Mellon, one of the nation's premier financial-services firms. We've had a long-standing relationship with the firm. As our solutions have broadened, we've been able to become a strategic partner. Given the breadth of our BSM portfolio, our strong track record in delivering quick time-to-value and compelling market momentum, Bank of New York Mellon has chosen to standardize on our BSM platform, replacing a competitor’s system with our superior suite of solutions.

We see that many of our other clients are beginning to look at us in the same way. Indeed, it's been a busy quarter for our ESM unit, as we've collaborated on BSM projects with firms such as State Street Bank and Trust, Italy's ENEL, and Sweden's global icon IKEA. Like Bank of New York Mellon, IKEA has also standardized on our complete BSM platform and replaced a long-standing competitor.

Let me change direction for a moment to emphasize what's going on in Service Automation. It's no secret that IT costs are skyrocketing. Today, it is far more expensive to manage computing infrastructure than it is to buy that infrastructure. Businesses have tried to keep these management costs in check through outsourcing and offshoring. But even after these options are tapped, companies still face inefficient and brittle IT processes. Automation represents a significant opportunity for businesses to rein in IT spending while still meeting the reliability and responsiveness requirements of the business.

We recently completed the acquisition of BladeLogic, the leading and fastest growing data center automation company. By combining BMC’s BSM platform with BladeLogic’s data center automation solutions, we are clearly the new market leader in IT Service Automation.

This is a landmark acquisition for BMC and for the industry. BladeLogic's automation solutions are complementary to our other BSM and Service Automation offerings; as a result, BMC is now able to offer the most complete spectrum of BSM tools on the market today.

Furthermore, BMC and BladeLogic’s solution portfolios are already integrated and many customers have embraced the combined solutions. And we're also pleased to report that members of BladeLogic’s impressive senior management team agree with the opportunity as we see it and have decided to join BMC’s executive ranks, something that will enhance the future potential of our company.

We are confident that the BladeLogic acquisition will provide an additional growth engine for top-line bookings and revenue in fiscal 2009 and well beyond.

Turning now to our MSM unit, we are pleased to report that the mainframe market continues to be healthy. In fact, the mainframe market is experiencing something of a renaissance. More web applications are tied into the mainframe, data volumes are exploding, and the distributed work is making its way onto the mainframe.

Of the many reasons behind this trend, three stand out: mainframe capacity scales well, switching costs to move off of the mainframe are high, and customers rely on their high performance and availability. Indeed, what we are seeing is a tapering off of customer migration to distributed systems. Most businesses that have chosen to move off of the mainframe have already done so.

We expect that the size of the mainframe software marketplace will be flat to slightly growing in the near term and our innovative solutions have helped us generate bookings growth in this key area.

Looking forward, we expect continued stability in our bookings trends, as well as annualized bookings growth and increasing customer run rates. In this way, we'll be able to get the most out of this mature market by maintaining our share, margins and cash flow.

There's no question that BMC ended fiscal 2008 in a strong position. We're offering the right technology in the right place at the right time, and combined with our strong and improving management, we have achieved accelerated growth.

Our ESM unit has been energized by its tighter focus on Service Support, Assurance, and Automation, and looks to accelerate growth in bookings and revenue in fiscal 2009. Our MSM unit is capitalizing on the continued stabilization of the Mainframe market and is geared toward optimizing profitability and cash flow, and our focus and discipline in how we run the business will continue to yield greater business process efficiencies.

Given the strength of our business model, the breadth of our product portfolio, and our ability to execute, we're excited about fiscal 2009 and beyond. We're now well-positioned for long-term growth.

We’ll talk more about our outlook for fiscal 2009 later on in the call. But let me first turn the call over to Steve Solcher, who will provide more insight into our financial results. Steve.

Stephen B. Solcher

Thanks, Bob. The fourth quarter and fiscal 2008 demonstrated solid financial results. All of our key metrics -- bookings, revenue, non-GAAP operating margin, non-GAAP EPS and cash flow from operations -- improved significantly. Throughout the year, we’ve gained customer acceptance of our solutions, maintained our cost discipline, and optimized our capital structure. With that, let me start off by reviewing our financial results for the quarter and fiscal year.

Non-GAAP operating income increased by 53% from $90 million to $137 million in the fourth quarter. Our fourth quarter non-GAAP operating margin was 29%, up from 21% in the year-ago quarter. For the full year, non-GAAP operating income increased by 40% to $485 million. Non-GAAP operating margin for fiscal 2008 was 28%, up six percentage points from fiscal 2007.

Our Non-GAAP net earnings for the fourth quarter were $123 million, an increase of 47% over fiscal 2007. Non-GAAP diluted EPS for the period was $0.63, up 58% compared to the year ago period. This reflects a non-GAAP effective tax rate for the quarter of 21%, which included a favorable impact associated with guidance issued by a taxing authority in the fourth quarter related to certain deductions that the company is entitled to.

For fiscal year 2008, non-GAAP net earnings were $400 million compared to $312 million in fiscal 2007. This represents an increase of 28%. Non-GAAP diluted EPS for the year was $2.00, up 35% compared to $1.48 in the prior year. This reflects a non-GAAP effective tax rate for fiscal 2008 of 29%.

These non-GAAP results reflect diluted shares outstanding in the fourth quarter and for the full year of 195 million and 200 million respectively, versus 208 million and 210 million in the respective year ago periods.

GAAP operating income in the fourth quarter was $98 million, compared with $55 million in the year-ago period. GAAP net income and fully diluted EPS were $97 million and $0.50, compared to $63 million and $0.30 in the fourth quarter of fiscal 2007 respectively.

Turning now to bookings, total bookings for fiscal 2008 were $1.78 billion, up $101 million, or 6% compared to fiscal 2007. The weighted average contract length for total bookings for fiscal 2008 was 2.2 years, down from 2.4 years in fiscal 2007. Total bookings adjusted for contract length resulted in annualized bookings for fiscal 2008 of $816 million, a 16% increase over last year.

This is now the ninth consecutive quarter in which we’ve achieved annualized bookings growth on a trailing 12-month basis. Please see slide 7 in our presentation.

Total bookings for the fourth quarter were $552 million, representing a decline of 2% compared to the year-ago period. Despite a tough comparison to the prior year, annualized bookings for the fourth quarter increased 19%.

Now let me turn to the performance of each of our business units. In the fourth quarter, total ESM bookings, which includes professional services, were $327 million, up 8%. Total ESM bookings for fiscal 2008 were $1.05 billion, up 9%. Total ESM license bookings in the fourth quarter were $115 million, up 1% over the year-ago period. For fiscal 2008, ESM license bookings were $387 million, an 8% increase over fiscal 2007.

Within our ESM business unit, growth of our core BSM license bookings is a key indicator of the success of our Business Service Management strategy. Core BSM license bookings were up 16% in the fourth quarter, marking the eighth consecutive quarter of double-digit growth. For fiscal 2008, core BSM license bookings rose 13%. Please see slide eight of our presentation of historical license bookings growth.

Turning to the MSM business unit, we believe that MSM is best evaluated on the basis of total and annualized bookings over the trailing 12-months. In the fourth quarter, total MSM bookings on a trailing 12-month basis increased 2% to $731 million with an average contract length of 2.9 years. In the year-ago period, total MSM bookings were $718 million with an average contract length of 3.2 years. After normalizing for contract length, total annualized MSM bookings for the trailing 12-months were up 13% to $253 million.

Turning to revenue, total revenue for the quarter was $467 million, an 11% increase compared to the fourth quarter of fiscal 2007. This was above the high-end of our guidance for the quarter and the second quarter in a row with double-digit total revenue growth.

License revenue in the fourth quarter was $189 million, an increase of 14% compared to a year ago. During the quarter, the percentage of license bookings that were deferred was 48%, in line with the third quarter and eight percentage points lower than in the year-ago period when the ratable rate for license bookings was at a historical high.

For the fourth quarter, maintenance revenue was $245 million, an increase of 7% compared to a year ago. Professional services revenue increased 37% to $33 million.

Total revenue for the year was $1.73 billion, up 10%.

From a geographic perspective, total revenue growth was reported in all major regions for both the quarter and the year with particular strength in EMEA. For fiscal 2008, license revenue rose 14% to $648 million. We saw solid license revenue performance in the U.S., EMEA and Latin America. For the year our ratable rate was 50%, which was in line with the prior year.

For fiscal 2008, maintenance revenue increased 5% to $968 million. Professional services revenue in fiscal 2008 increased by 27% to $116 million.

Moving next to operating expenses, we had another good quarter of controlling our expenses. Non-GAAP operating expenses were $330 million, flat with the year-ago period. Our operating expenses included increased costs from acquisitions and the negative impact of currency movements.

We remain pleased with our ability to maintain our financial discipline. During fiscal 2008, we focused on improving key business processes throughout the company. We continued to expand into lower cost locations, eliminated redundancies in systems and applications, and reengineered core processes.

Looking forward, we continue to believe we can further simplify and standardize our key business processes and we have a number of initiatives currently underway. We believe these initiatives will continue to help make us a more efficient and more profitable company.

Now turning to the balance sheet, total deferred license revenue at the end of the fourth quarter was $555 million, a record level, and up 3% sequentially and 10% year-over-year. During the quarter, we deferred $97 million of license revenue, or 48% of license bookings, and recognized $83 million of deferred license revenue from the balance sheet.

Total deferred revenue increased by $85 million sequentially to $1.78 billion. Our capitalized software development costs were $113 million, flat with the third quarter of 2008 as we capitalized $14 million and amortized $15 million. Cash and marketable securities at March 31st totaled $1.48 billion, an increase of $110 million sequentially.

For the quarter, cash flow from operations was $210 million. For fiscal 2008, cash flow from operations was $594 million, up 41% from the prior year and above the high-end of our guidance range.

During the fourth quarter, we repurchased 3.3 million shares for an aggregate value of $110 million. For fiscal 2008, we repurchased 18 million shares at a cost of $580 million. As of March 31st, we have approximately $675 million remaining under our existing share repurchase program.

Finally, with the completion of our year-end income tax accounting procedures, we identified and corrected immaterial errors in our original calculation of the cumulative effect of adopting FIN 48 and in the calculation of the provision for income taxes for the first three quarters of fiscal 2008. We have included a table in our earnings release which summarizes the income statement impact of these corrections to the first three quarters of the year.

Let me summarize by saying that our performance in the fourth quarter and throughout fiscal 2008 underscores the significant progress we’ve made in achieving our goals of driving growth, profitability and cash flow. We look forward to continuing this progress in fiscal 2009.

With that, I’ll turn the call back over to Bob for his concluding remarks and fiscal 2009 expectations.

Robert E. Beauchamp

Thank you, Steve. As I mentioned, I am especially pleased with the company’s performance in fiscal 2008. We have an even stronger position today as the leader and innovator in Business Service Management. Looking ahead into fiscal 2009, we see solid opportunities to further the company’s position and improve its performance in three key focus areas.

First, to accelerate the top-line growth of our ESM unit by maintaining a more focused approach in service support, assurance, and automation. Second, to enable our MSM unit to capitalize on the continued stabilization of the mainframe market and optimize its profitability and cash flow. Third, to maintain the discipline in how we run our business in order to yield greater business process efficiencies to support long-term growth.

Let me now move to our expectations for fiscal 2009. For fiscal 2009, we expect non-GAAP earnings per share in the range of $2.10 to $2.20 per share, with a seasonal pattern similar to prior years. This range also assumes an effective tax rate of 30% and excludes an estimated $0.89 of special items, including expenses related to the amortization of acquired technology and intangibles, in-process research and development associated with our acquisition of BladeLogic, stock-based compensation and restructuring activity.

The assumptions underlying this full year fiscal 2009 estimate include: total bookings and total revenue growth in the low double digits; a license bookings ratable rate slightly higher than last year’s; a continued improvement in non-GAAP operating margin; $0.10 dilution due to the BladeLogic acquisition, with $0.06 of dilution due to the write down of deferred revenue and retention and integration costs; other income that reflects the current interest rate environment.

We expect our cash flow from operations to improve to between $620 million to $670 million, seasonally skewed to the second-half of the fiscal year. So as you can see, we are expecting a year of accelerated performance across all key financial metrics.

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

Question-and-Answer Session

Operator

(Operator Instructions) We’ll go first to Phil Winslow with Credit Suisse.

Philip Winslow - Credit Suisse

Great quarter. Just spending a little bit of time on the mainframe side of your business, obviously you had a very tough comp in bookings this quarter and you have another next quarter but when you do look out over the course of fiscal 2009, how should we think about mainframe bookings? And I wonder if you also would just comment on the mainframe release out of IBM , just sort of what you are seeing there and what the feedback has been from customers.

Robert E. Beauchamp

Okay. In terms of just the assumption for growth, we look at it as being flat next year. A couple of factors there -- one is that the amount of renewals that we have coming out in ’09, fiscal ’09 are not quite as much as they were in ’07 and ’08, and then we look for them to come back in ‘010 and improve somewhat in ‘010. So generally flat.

In terms of the new release, there’s -- we are seeing some activities with customers moving to new processors. We are seeing some conversations around significant upgrades. I’d just remind you that definitely benefits BMC but it doesn’t necessarily benefit us immediately that we need to wait until the contract renewals in general or to our usual renewal patterns, which usually happen prior to the actual expiration of the contract. So I guess what I’d say is we’re excited about it and we will see the benefit of it. I don’t think it’s going to be any sort of a dramatic shift. We’ve just seen that, the mainframe market in general continue to just be a good solid market.

Philip Winslow - Credit Suisse

Great. Thanks, guys.

Operator

We’ll go next to Israel Hernandez with Lehman Brothers.

Israel Hernandez - Lehman Brothers

Congratulations on a good quarter. My question is with respect to just first on the macro environment. As you guild out your fiscal ’09 plan, what assumptions are you using there? And do you think you’ve got enough momentum within the business to sustain the growth that you’ve been seeing?

And second, with respect to BSM, the number came in a little bit below where I was modeling for, so maybe you could talk about some of the specific trends that you are seeing there and how does the business look looking out over the next couple of quarters.

Robert E. Beauchamp

Sure. Okay, on the macro environment, we are assuming that it stays essentially like it is, like it has been the last several quarters. We haven’t seen any material impact to the economy. We’ve seen customers talk to us about that they are cutting budgets in their corporations but it is not reflected in either delayed, lost, or declined deals -- delayed deals, rather. In fact, we actually had a pretty strong quarter in financial services this last quarter with many household names standardizing on BMC for both our BSM solution suite and the mainframes as well, so really solid.

I would say that we are maybe a little lucky in that the, as I mentioned the renewal cycle that we have for our contracts is actually less in financial services, more than other sectors for us next year, so we are somewhat less exposed to financial services in fiscal ’09 than usual. And some of those agreements then return back in ‘010 and ’11.

In terms of the core BSM, 16% year over year growth was solid. It was a few million dollars, maybe $5 million or so under kind of where we had thought but let me just say -- very pleased with 16% and it is growing faster than the market, so we believe we are gaining share. At those rates, it’s accelerated from the previous quarter.

And then the other thing I would tell you is that while it was only a few million dollars, by the first week in April we had more than exceeded that number, so we are off to a very strong April. So I view the few million dollars as unimportant.

Israel Hernandez - Lehman Brothers

Thank you.

Operator

We’ll hear now from Michael Turits with Raymond James.

Michael Turits - Raymond James

A couple of questions; first, Steve, what about the -- or Bob, what about annualized bookings growth for next year?

Stephen B. Solcher

Michael, annualized, you’ve seen it. You are going to see annualized continue to be -- grow faster than the absolute number and that’s typically a mix calculation, that as the mix of BSM becomes a bigger piece of the pie, you are going to see the annualized number outpace the absolute bookings growth by a couple of percentage points.

Michael Turits - Raymond James

So we’ve got low double-digits on the total bookings growth and annualized --

Stephen B. Solcher

I would think somewhere in the mid-teens for annualized next year.

Michael Turits - Raymond James

Okay, and then any thoughts on BSM license growth for next year?

Stephen B. Solcher

On BSM what, I’m sorry?

Michael Turits - Raymond James

BSM license bookings growth?

Stephen B. Solcher

License bookings growth -- BSM is going to be very similar to this year without Blade. You know, if you put Blade on top of that, you are going to see some really strong growth. You are probably going to see growth rates in the low 30s. Think about growth rates for BSM probably in the mid-teens again this year.

Michael Turits - Raymond James

Okay. And then on the guidance and the dilution for Blade, what are the assumptions there essentially around the restructuring costs -- you mentioned that you are excluding restructuring costs, so what’s -- how much of that $0.89 of the restructuring costs is around Blade? And then any thoughts in terms of what you are assuming in terms of revenues from Blade or the amount of [inaudible] from Blade?

Stephen B. Solcher

I think I’m hearing you say restructuring. What we have is we have retention and integration being captured as part of that dilution, as well as the deferred write-down of revenue. That’s about $0.06 in total. We are looking for the opportunity cost of the $800 million that we spent to be another $0.07, so that’s how you pick up to the total 10.

You know, if you wouldn’t have had the integration cost or the write-down, we were looking to have the business about $0.03 profitable.

Michael Turits - Raymond James

You had mentioned that there were restructuring costs, I’m trying to understand -- that were excluded from the dilution. I’m trying to understand what those --

Stephen B. Solcher

No, I don’t think --

Robert E. Beauchamp

It was included. It was included.

Michael Turits - Raymond James

Okay. All right, and anything in terms of your estimates for revenue or operating expenses on [inaudible]?

Stephen B. Solcher

Say that again, Michael? You’re cutting out. We can’t hear you.

Michael Turits - Raymond James

Sorry about that. Anything in terms of your expected revenue or operating expenses from Blades?

Stephen B. Solcher

You know, revenues is probably going to be, and operating expenses including the retention, you are probably looking at revenue next year in the $100 million range. And OpEx, including that retention, is going to be a little north of that.

Michael Turits - Raymond James

Okay, great. Thanks.

Robert E. Beauchamp

By the way, Blade, Michael, Blade had an excellent quarter on top line and profit.

Michael Turits - Raymond James

All right. Thanks very much, fellas.

Operator

We’ll hear now from Walter Pritchard with Cowen & Company.

Walter Pritchard - Cowen & Company

Just wondering, kind of follow-up on the BladeLogic side, I know part of the recipe there, the success was on the sales management side as well as on the sales compensation side. I’m just wondering, are you leaving that standalone through the end of your entire fiscal ’09? Are you going to make changes at the end of their fiscal year? Just any comments on kind of the integration, especially around sales with BladeLogic.

Robert E. Beauchamp

Sure. We’ve rolled out the compensation plan for the entire fiscal year to that team and it is essentially -- I mean, there are obviously some modifications because they have more products to sell but as it relates to the BladeLogic products and the BladeLogic sales force, it’s the same compensation system basically divided into two half years instead of one full year. But it’s business as usual for them. They don’t have to -- in fact, you could argue it’s slightly better for them.

Walter Pritchard - Cowen & Company

And then just relative -- just to be clear on the cash flow guidance, that is including restructuring and everything, the 720 to 770 -- or 620 to 670?

Robert E. Beauchamp

That’s correct.

Walter Pritchard - Cowen & Company

Okay, great. Thank you very much.

Operator

Richard Sherman with MKM Partners has our next question.

Richard Sherman - MKM Partners

The question may be a little bit DSM business and what kind of restructuring or work you are doing underneath that to try to get that going in the right direction. And the second question as about Europe looked like they were strong again here. Have you resolved your Southern European issues and what should we expect there? Thank you.

Robert E. Beauchamp

Okay, so in Europe, Europe had obviously a much better quarter. We called that out specifically as doing better. I think we will continue to make improvements. We have made a few changes there. We’ve taken advantage of some of the talented people at BladeLogic to add into the sales management mix there, and I believe that we’ll continue to see improvement in that organization, but they had a solid quarter so that was nice to see.

As it relates to DSM, thanks for asking the question. Let me walk you through that a little bit. First, if you look at the performance of DSM, I think it’s important to try to compare apples-to-apples on it a little bit. We had the most difficult compare we’ve had in years on it, so last Q4 was the highest in four years. So we knew we were going to have a tough compare. If you adjust it and look at it on an annualized bookings basis, which is the way that we recommend you look at that business, it was actually only down 3%, so not good but certainly improving.

And the other thing, as you look at the portfolio mix, inside DSM you have a lot of legacy products. You have some of our oldest products and distributed systems. Most specifically, you have our distributed system database management tools business, a part of our business you had not heard us talk about really in a long time. It’s not core to our BSM strategy and that business has really been the primary culprit of decline. In fact, if you were to pull that out, we would have had growth of 8% on an annualized basis on DSM if we had not -- if the old DSM tools business were not in there, because obviously it is.

On the other side of that, if you look at our newer products like ProactiveNet, you’ve seen that business actually grew 50% from last year and we think it will be well above that in terms of the growth rate for the next year. So you’ve got the old products becoming less meaningful every single quarter that goes by; you’ve got the new products becoming more meaningful and growing fast, and the math will just get better.

To your specific question, organizationally our sales force going this year is when we made the big switch of focus around this area, where we have a large sales force of both the client sales reps around the world all being paid on the DSM product line, as well as a large specialist group focused on it -- essentially a product line general manager and head of sales for that product area that are going to be attacking that space very aggressively.

So we think this is the right time to add a lot of muscle behind the sales force as we see the new products coming online, excitement around the space building, customers that -- who have bought Atrium and some of the other elements of BSM now saying that they want to look at replacing the old systems management architecture that was built in the client server era, and we are ready to go.

So a combination of all those factors. I wish it was a little more simple to explain but clearly the old products are becoming less material, the new products becoming more material and with better execution. Toward the end of the second half of next year, we expect to see some nice numbers and some nice growth.

Richard Sherman - MKM Partners

Okay. Great quarter. Thanks, Bob.

Operator

(Operator Instructions) We’ll hear now from Derek Bingham with Goldman Sachs.

Derek Bingham - Goldman Sachs

Congratulations on the quarter. One thing on the cash flow guidance I wanted to check to make sure I understood -- guidance for low double-digit revenue growth and then to kind of get to the EPS range and some of the lost interest income, I have margins up a little bit but it kind of implies net income in kind of the low single digit percent growth and the midpoint of your cash flow guidance is stronger than that, something like 9% at the midpoint. Is there a reason why cash flow should outpace net income growth next year? Throwing a lot of numbers at you, but --

Stephen B. Solcher

You know, Derek, I don’t think it should. I think you’ve got to incorporate Blade in your calculation, so Blade’s got about a $20 million impact in cash flow next year. The other thing is some incremental cash taxes that sometimes are not directly related to the rate, the non-GAAP rate. So what we are looking at is interest income that is going to be -- you know, the rate environment itself is hurting us. You are talking about probably $40 million alone just in lost interest income year over year due to the rate. You are having about the same amount of incremental cash taxes that we plan to pay. So good question. I think growth-wise, we are probably pretty close or in line with what you are thinking.

Derek Bingham - Goldman Sachs

Okay, so a $20 million positive impact to cash flow from Blade?

Stephen B. Solcher

Right. Negative impact -- negative.

Derek Bingham - Goldman Sachs

Negative -- that’s good to know. Okay. On the back-end loadedness of the cash flows, could you just give a little more color on kind of what’s driving that? I know it kind of jumps around but I think it was a little more front-loaded in FY08, a little back-end loaded in FY07.

Stephen B. Solcher

It’s really going to be driven more from how bookings fall. So you are going to see bookings continue to accelerate through the year, just the sheer size of the absolute number of bookings. And again, it’s these cash taxes that are going to move around within the year. So when we say back-end loaded, I wouldn’t overly weight. Our typical fourth quarter is where we historically do the bulk of our cash flow. That’s very similar. You know, you are looking at maybe 40%, 45% in the first half, or 55%, 60% in the second half. So not too terribly different than we’ve seen other than last year.

Derek Bingham - Goldman Sachs

Okay, got it. And then my last one was just if you could give us an update kind of now that you are through the March quarter on the margins by the two segments of the business -- has that changed materially from what you talked about at the analyst day and what are you looking for this year?

Stephen B. Solcher

It hadn’t changed much. You know, the growth in the consolidated margin next year is all going to be driven from ESM, so expect the MSM business to remain fairly constant year over year and what you are seeing is the continued improvement in the ESM margin over time, and we expect that to continue even beyond next year.

Derek Bingham - Goldman Sachs

Okay, got it. Thanks very much.

Derrick Vializ

Operator, we have time I think for one more caller.

Operator

Thank you. That will come from Tim Klasell with Thomas Weisel Partners.

Tim Klasell - Thomas Weisel Partners

Good afternoon, everybody. A really quick question -- headcount, or excuse me, just an accounting question here; you didn’t mention the large deal profile during the quarter. Can you walk us through that?

Stephen B. Solcher

Large deal profile? That’s not in our historical sheet that got posted?

Tim Klasell - Thomas Weisel Partners

And then the second question comes from EDS and HP -- EDS, HP, and Opsware are it looks like to become all one entity. Now how does that change the landscape for you? Do you think that opens up more opportunity, do you think that closes things down?

Robert E. Beauchamp

Okay. Steve, do you want to --

Stephen B. Solcher

Tim, let me give you the large deal -- it was 32 deals over $1 million this quarter. That compared to 31 last quarter.

Robert E. Beauchamp

Okay. Tim, on the HP/EDS news, first I believe that HP is buying their largest customer, so that’s one aspect of it. They have traditionally been a very strong HP shop. In the last couple of years, we have been making progress on replacing HP as a preferred provider of the solutions that compete with HP’s product line. If you’ll recall, our CMDB press announcement of a couple of years ago when they switched out the competitor’s product and went with ours in production. And we’ve been making additional progress, so the way I would summarize the announcement, the impact to us is that there is probably three aspects of it. Probably one of them that’s negative, one of them that’s neutral to positive, and one of them that is positive.

The negative impact is that we are probably now not going to be successful at replacing Peregrine and Opsware inside of EDS, and those were efforts that we were working on, efforts that I actually was fairly optimistic about, given the evaluations that they had done and the statements that they had made publicly about our software there. But I think that that obviously stalls out. That’s not a big number, by the way, for us.

The neutral to positive aspect of it is in the mainframe area. Clearly HP, one of the biggest gaps in their portfolio is that 70% of enterprise data is still kept last time, last report I saw on the mainframe and they really offer no software for the mainframe and EDS, just as like IBM Global Services, will need to buy those mainframe tools from someone. In the case of IBM, they have traditionally bought quite a bit of software from BMC in multiple areas but they have their own mainframe tools. In the case of HP, they are going to need to acquire mainframe software of the type BMC sells. We’ve had a good relationship with them. In fact, over the last several years, our mainframe revenues at EDS have been quite a bit above our distributed revenues at EDS, and so they will need to either maintain the relationship with us or go buy software from IBM or possibly CA. And I think we’ve got a good relationship where I’m optimistic that that might shift revenue from IBM or CA toward BMC and if so, we’ll do a good job of being a provider of mainframe tools to them.

On the upside, I believe that this move has really polarized the ecosystem. They’ve essentially declared war, or at least hostility, towards all of their ecosystem, and the outsourcers and the integrators that historically were a key part of HP’s software strategy. If you look at most of the systems integrators and outsourcers websites, in fact I was doing a little of that today, you’ll see HP software listed on there as being a key partner.

I in the last 24 hours have spoken with very senior executives, either level one or level two executives, of four of the largest technology companies in the world who view that this move by HP changes their opinion of HP and moves them definitely towards a more hostile, more less friendly partner as they attempt to build a mirror image to IBM and build a fully integrated and proprietary stack.

I think that positions BMC in a very good place to take advantage of that with closer partnerships with many of the ecosystem partners out there that traditionally were somewhat ambivalent and would work with BMC or HP. I think it will move the ball towards us.

Tim Klasell - Thomas Weisel Partners

Okay, great. Thank you very much.

Robert E. Beauchamp

You bet. All right, with that, Operator, I believe -- let me just wrap it up and thank you all for joining us today. Let me thank -- as we wrap up 2008, let me thank the BMC employees, including the new BladeLogic employees, welcome them -- 10% revenue growth, 35% EPS growth, record highs, strong cash flows, well done and thank you all for working with us. We look forward to working with you in fiscal 2009.

Operator

That will conclude today’s BMC Software teleconference. Thank you for joining us. Have a pleasant day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!